"... By Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate professor of economics and law at the University of Missouri-Kansas City, and co-founder of Bank Whistleblowers United. Originally published at New Economic Perspectives ..."
"... A dilettante is a person who cultivates an area of interest, such as the arts, without real commitment or knowledge. The Dilettante Doctrine takes modern macro's arrogance to a new pinnacle. Only their model is legitimate, and it is illegitimate to criticize their DSGE models, even though they repeatedly fail. Instead, we must all "like" their models. We cannot make any statements about macroeconomics unless we "like [DSGE] models." The Dilettante Doctrine is a sure-fire means of winning academic disputes. You demand that your critics endorse your views, or you dismiss them as dilettantes unworthy of respect. ..."
"... Readers may recall that the scientific method works in the opposite direction of the Dilettante Doctrine. Modern macro proposes a theory (DSGE) and tests its predictive ability. The DSGE models fail recurrently, on the most important macro events, and the failures are massive. The scientific method requires the theorist of the failed model to declare it falsified. Economists who "like" repeatedly falsified DSGE models are, as Paul Romer famously declared, engaged in "pseudoscience." ..."
"... BTW, one of the best takes of macroeconomics I've encountered is Steve Keen's work, which I gratefully acknowledge I first read here on NC. Keen's critique of DSGE models is utterly spot-on and mathematically sophisticated. Part of the problem with economics is that it has been afflicted with 'math envy' since its earliest days, and the ADM results were proved with Banach Space methods, so they just *had* to be right. Google the phrase "spherical cow" for more on this mindset, not to mention one of the few really funny math jokes I know. ..."
By Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate
professor of economics and law at the University of Missouri-Kansas City, and co-founder of
Bank Whistleblowers United. Originally published at New
Economic Perspectives
The truly exceptional thing about 'modern macroeconomics' devotees is not that they are so
consistently and horrifically wrong or that they persist in their errors – but their
exceptional combination of arrogance and disdain for those who have dramatically better records
and broader and more relevant expertise. Kartik Athreya, the Richmond Fed's Research Director,
led the modern macro parade on June 17, 2010 with his blog
(which he later withdrew in embarrassment) when he announced the Athreya Axiom of Absolute
Arrogance.
So far, I've claimed something a bit obnoxious-sounding: that writers who have not taken a
year of PhD coursework in a decent economics department (and passed their PhD qualifying
exams), cannot meaningfully advance the discussion on economic policy. Taken literally, I am
almost certainly wrong. Some of them have great ideas, for sure. But this is irrelevant. The
real issue is that there is extremely low likelihood that the speculations of the untrained,
on a topic almost pathologically riddled by dynamic considerations and feedback effects, will
offer anything new. Moreover, there is a substantial likelihood that it will instead offer
something incoherent or misleading.
Modern macro devotees suffered far worse substantive embarrassment than Athreya's personal
embarrassment. After Athreya (briefly) published his Axiom, a flurry of the world's top
economists issued devastating critiques of modern macro's foundational myths in their dynamic
stochastic general equilibrium (DSGE) models. The takedowns enraged and humiliated modern macro
devotees, and because they are incapable of staying embarrassed, they doubled-down on Athreya's
Axiom by announcing the Dilettante
Doctrine .
People who don't like dynamic stochastic general equilibrium (DSGE) models are
dilettantes. By this we mean they aren't serious about policy analysis.
Lawrence J. Christiano, Martin S. Eichenbaum, and Mathias Trabandt, authored "On DSGE Models
on November 9, 2017. Christiano and Eichenbaum are freshwater modern macro devotees trained
largely at the University of Minnesota, and now holding prominent positions at Northwestern.
Trabandt is a German modern macro devotee.
A dilettante is a person who cultivates an area of interest, such as the arts, without
real commitment or knowledge. The Dilettante Doctrine takes modern macro's arrogance to a new
pinnacle. Only their model is legitimate, and it is illegitimate to criticize their DSGE
models, even though they repeatedly fail. Instead, we must all "like" their models. We cannot
make any statements about macroeconomics unless we "like [DSGE] models." The Dilettante
Doctrine is a sure-fire means of winning academic disputes. You demand that your critics
endorse your views, or you dismiss them as dilettantes unworthy of respect.
Readers may recall that the scientific method works in the opposite direction of the
Dilettante Doctrine. Modern macro proposes a theory (DSGE) and tests its predictive ability.
The DSGE models fail recurrently, on the most important macro events, and the failures are
massive. The scientific method requires the theorist of the failed model to declare it
falsified. Economists who "like" repeatedly falsified DSGE models are, as Paul Romer famously
declared, engaged in "pseudoscience."
Athreya then inadvertently compounded modern macro's failures by putting in writing a bit
too many of modern macro's darker secrets in his 2013
book about macroeconomics. Athreya confirmed many of the most fundamental criticisms of
modern macro devotees, revealed additional failures that were even more devastating, and
illustrated perfectly the blindness of modern macro's devotees to their dogmas and logic.
Athreya did recognize clearly one dogma that made modern macro devotees unable to spot even the
world's largest bubble – but treated that failure as if it were a virtue. Modern macro
devotees train macroeconomists to be unable to identify warn against, or take action to end
even the most destructive bubbles. This is like training surgeons to believe that shock cannot
occur and they should ignore shock in treating patients.
I will return to these errors in subsequent columns, but in this initial column, I introduce
Athreya's most embarrassing and devastating admission. Athreya goes on for over 100 pages on
how wondrous his fellow modern macro devotees are. They are brilliant specialists who are the
world's top practitioners of ultra-rigorous logic and ultra-sophisticated mathematics skills
that make it impossible for them to be anything other than transparent and scrupulously honest.
In particular, Athreya tells the reader that the paramount problem in macro and microeconomics
is recognizing, understanding, and countering deceit, the defining element at law of fraud.
(Actually, he does that only in an exceptionally opaque manner.) On p.103, however, Athreya
admits that modern macro devotees know that their vaunted DSGE models rest on a fatal premise
that is so preposterous and embarrassing that they dare not state it. "A silent assumption of
the ADM model" is that "the ADM God" perfectly prevents all crimes, predation, and deceit
– at no cost. Note that this means that modern macro devotees (silently) designed their
DSGE models to be incapable of recognizing, understanding, measuring, or countering deceit,
which they admit is their paramount and fatal failure.
It is never good to be arrogant. It is always dangerous and limiting to be (proudly)
ignorant of fields that are likely to have superior understanding of issues such as deceit,
fraud, and predation. Athreya's book displays his pride in both of these faults.
The authors of the Dilettante Doctrine inadvertently revealed another embarrassing modern
macro failure of great importance. It is the combination of repeated, devastating failure and
unfailing arrogance that defines (and dooms) modern macro as pseudoscientists. In fairness to
the authors, they announced their Dilettante Doctrine in the context of an article admitting
catastrophic errors in modern macro. They also unintentionally admit the non-scientific nature
of their enterprise. Consider this passage:
For [IMF's leader] to take DSGE model-based recommendations seriously, the economic
intuition underlying those recommendations has to be made in compelling and intuitive
ways.
Yes, they actually wrote that for anyone to take DSGE models "seriously" their "economic
intuition" must "be made intuitive." Wow, who knew science could be so 'intuitive?' Not
satisfied with announcing their new "intuitive method" as a substitute for the scientific
method, the authors double-down on the concept that 'intuition' is the secret sauce of
economics declaring that the super-secret is to keep that 'intuition' "simple."
To be convincing, it is critical for a DSGE modeler to understand and convey the economic
intuition behind the model's implications in simple and intuitive terms.
Notice that the authors are not stating the conditions required to make the DSGE models
'correct.' They are only interested in what practices will make the models' results
"convincing" to the bosses.
The bosses decide "actual policymaking." The Dilettante Doctrine authors declare
policymaking to be even less scientific than relying on 'simple' 'intuition' to convey DSGE
model results. It turns out that DSGE models are the 'canvas' on which modern macro devotees
"see the combined effect of the different colors" of their "art."
Inevitably, actual policymaking will always be to some extent an art. But even an artist
needs a canvas to see the combined effect of the different colors. A DSGE model is that
canvas.
These passages are not simply embarrassing, they are revealing. DSGE is a substantive farce
that repeatedly fails because modern macro devotees shaped their models from the beginning to
embrace laissez faire dogmas. The 'simple' 'intuitions' underlying DSGE models are the
most destructive laissez faire dogmas.
Narayana Kocherlakota's sly use of the word "almost" reveals his agreement with this
point.
[A]lmost coincidentally -- in these [early DSGE] models, all government interventions
(including all forms of stabilization policy) are undesirable.
The authors of the Dilettante Doctrine agree with Kocherlakota's observation about the
original DSGE models.
The associated policy implications are clear: there was no need for any form of government
intervention. In fact, government policies aimed at stabilizing the business cycle are
welfare-reducing.
Modern macro is proud that its 'freshwater' and 'saltwater' factions have achieved a grand
fusion. The saltwater types agreed to use DSGE models and the freshwater types agreed that the
freshwater types could add 'frictions' to the DSGE models that would allow the models to at
least purport to address some of the actual macroeconomic problems. There is a misleading view
that because the 'saltwater' types often call themselves "New Keynesians" they must have views
sympathetic to Keynesian thought. The Dilettante Doctrine authors make the useful point that
"New Keynesian" dogma is actually Milton Friedman's core laissez faire dogmas.
Prototypical pre-crisis DSGE models built upon the chassis of the RBC model to allow for
nominal frictions, both in labor and goods markets. These models are often referred to as New
Keynesian (NK) DSGE models. But, it would be just as appropriate to refer to them as
Friedmanite DSGE models. The reason is that they embody the fundamental world view
articulated in Friedman's seminal Presidential Address .
The Dilettante Doctrine authors admit that DSGE models failed at the most fundamental level
– they could not even spot that the economy was becoming progressively more dangerous and
harmful.
Pre-crisis DSGE models didn't predict the increasing vulnerability of the US economy to a
financial crisis.
The authors go badly wrong in multiple ways when they attempt to explain the DSGE models
failures and their implications for economic theory and policy.
There is still an ongoing debate about the causes of the financial crisis. Our view,
shared by Bernanke (2009) and many others, is that the financial crisis was precipitated by a
rollover crisis in a very large and highly levered shadow-banking sector that relied on
short-term debt to fund long-term assets.19
The trigger for the rollover crisis was developments in the housing sector. U.S. housing
prices had risen rapidly in the 1990's with the S&P/Case-Shiller U.S. National Home Price
Index rising by a factor of roughly 2.5 between 1991 and 2006. The precise role played by
expectations, the subprime market, declining lending standards in mortgage markets, and
overly-loose monetary policy is not critical for our purposes. What is critical is that
housing prices began to decline in mid-2006, causing a fall in the value of the assets of
shadow banks that had heavily invested in mortgage-backed securities. The Fed's willingness
to provide a safety net for the shadow banking system was at best implicit, creating the
conditions under which a roll-over crisis was possible. In fact a rollover crisis did occur
and shadow banks had to sell their asset-backed securities at fire-sale prices, precipitating
the Great Recession.
In sum, the pre-crisis mainstream DSGE models failed to forecast the financial crisis
because they did not integrate the shadow banking system into their analysis.
I begin with the most fundamental failure – the failure to ask the right questions.
Two prominent examples are why didn't the DSGE models warn us decades ago that the economy was
systematically misallocating assets and creating the largest bubble in world history and what
should we do to change the perverse incentives harming the economy and economic stability?
Kocherlakota, in the same article from which I quoted above, emphasized that modern macro
failed to warn about the coming financial crisis and the Great Recession and failed to provide
effective policies to respond to them.
The dilettante article only uses the word 'bubble' once – to describe the tech bubble.
It never labels the vastly larger housing bubble a 'bubble.' The dilettante article's authors
claim it is not relevant for their purposes to know how the bubble arose, why it continued to
inflate for over a decade, why it burst, or why it triggered the global financial crisis and
the Great Recession. Only a dilettante could make or believe that claim.
Recall that Athreya emphasizes that deceit is the key factor that screws up economies
– and that DSGE models "silently" assume "the ADM God" makes deceit impossible. I have
explained in scores of columns why deceit, fraud, and predation were the central causes of the
housing bubble hyper-inflating, the financial crisis, and the creation of the Great Recession.
The dilettante authors refusal to call the housing bubble a bubble does not change the fact
that they claim that the dramatic fall in housing values after 2005 was the paramount "trigger"
of the financial crisis and the Great Recession.
The dilettante authors create a fiction about what "precipitat[ed] the Great Recession.
In fact a rollover crisis did occur and shadow banks had to sell their asset-backed
securities at fire-sale prices, precipitating the Great Recession.
The dilettante authors then make their twin ' mea culpa ' on behalf of modern
macro.
Against this background, we turn to the first of the two criticisms of DSGE models
mentioned above, namely their failure to signal the increasing vulnerability of the U.S.
economy to a financial crisis. This criticism is correct. The failure reflected a broader
failure of the economics community.
The failure was to allow a small shadow-banking system to metastasize into a massive,
poorly-regulated wild west-like sector that was not protected by deposit insurance or
lender-of-last-resort backstops.
We now turn to the second criticism of DSGE models, namely that they did not sufficiently
emphasize financial frictions. One reason why modelers did not emphasize financial frictions
in DSGE models is that until the recent crisis, post-war recessions in the U.S. and Western
Europe did not seem closely tied to disturbances in financial markets. The Savings and Loans
crisis in the US was a localized affair that did not grow into anything like the Great
Recession. Similarly, the stock market meltdown in the late 1980's and the bursting of the
tech-bubble in 2001 only had minor effects on aggregate economic activity.
At the same time, the financial frictions that were included in DSGE models did not seem
to have very big effects.
The dilettante authors have no idea how important their concessions are. Their premise is
that it was government regulation, deposit insurance, and the central bank's 'lender of last
resort' function that prevented prior epidemics of accounting control fraud from causing
anything worse than "minor effects on aggregate economic activity." The obvious problem is that
since its inception 30 years ago modern macro ideologues have claimed the opposite is true
– that governmental action is unnecessary and harmful. They constructed their DSGE models
to valorize their Friedmanite dogmas.
The less obvious problem is that freshwater modern macro has claimed that the lesson of the
financial crisis is the opposite. Athreya and the Richmond Fed have
preached for years that the federal safety net caused the housing problem, the financial
crisis, and the Great Recession. The Richmond Fed claims that the key policy response to future
financial crises is allowing the shadow sector to collapse in an orgy of "rollover
cris[e]s."
The broader problem is why the dilettante authors are so wedded to their failed models,
which at their core assume out of existence the institutions and events they say are most
critical to explaining the catastrophic failures of their models. Why, for example, start with
a general equilibrium model based on absurdly utopian assumptions (stated and unstated) that
invariably produces equilibrium when the things we most need to study involve the failure of
markets to function? It is nonsensical to make contradictory assumptions in different parts of
your model about human behavior. Modern macro models keep failing and their devotees' response
is to add (over time) dozens of fudges that posit that humans typically act in a manner that
contradicts to the explicit and unstated assumptions of the DSGE model about human behavior.
DSGE models increasingly resemble Borg constructs. The Borg also claim that there is no
alternative to assimilation into their collective.
Excellent points. Helps to explain how you get a supposedly serious site covering real
estate falling for ridiculous tripe about the root cause of the housing crisis (aka Great
Recession). Take a careful look at the bombshell "working paper" and the new "narrative"
cited, and you can see the groupstink of the Fed written all over it
https://betterdwelling.com/forget-subprime-canadian-real-estate-buyers-investors-crashed-the-us-market/
Modern mainstream macro is like a police detective whose model of the world states that
people are nice and the body heals itself, and that therefore we will all live happily ever
after. When confronted by a murder victim lying in a pool of their own blood, and that fact's
apparent incompatibility with their model of the world, they respond, "My model is correct
only, you see, it failed to account for sudden massive blood loss. How that loss of blood
happened is beyond the scope of my investigation, the important thing is that I've now
incorporated that knowledge in my new improved model, which proves that we will all live
happily ever after -- except in cases of a sudden, massive loss of blood ."
There has not been a big mea-culpa from neoliberal economists after the 2008 Financial
Crisis. I don't think there will be. Many are essentially the equal of religious
fundamentalists.
However, we should also remember that the very wealthy have backed the neoliberal
economists against the general public. Neolibe3ralism provides a pseudoscientific economic
excuse for what amounts to turning society into a plutocracy, which is precisely what the
rich want.
The GFC worked out very well for the neoliberal agenda. What you can't predict, you don't
need to prevent or protect against. If the result happens to be a massive transfer of funds
from states to speculators that eases the path to austerity and asset stripping, what's to
apologize for?
Lack of higher math skills precludes citizen involvement in economics.
Blame it on the math card in PCs that makes doing it by hand and thus learning and
understanding how numbers work.
Most economists lack higher math skills too, but that doesn't seem to be obstacle for
them. It's spherical chickens in a vacuum, models that are supposedly related to real world
but are simplified beyond recognition because most economists are ignorant of even
rudimentary statistics.
and you don't need math to discover that the holy Models rely on downright silly
assumptions about Human Beings.
"rational actors with perfect information".
lol.
Most of the economic actors I know do not even remotely resemble that.
and whomever said that modern econ is akin to fundamentalist religion is right on.
I can't read "Money" or watch CNBC without thinking about Pat Robertson or Billy Graham.
It's just a different god they worship.
With this in mind, I think it's hilarious that the current hyperventilation about
"cryptocurrency" could possibly be the bubble that, in popping, brings the whole mess
down.
"Masters of the Universe", indeed.
Personally I believe economic as practiced is an example of telling the boss (the King)
what they want to hear.
Economist appear descended form a long line of Court Magicians, telling the futures from
the entrails of an animal, consulting the spirits for guidance, or using a Chrystal ball.
Of more pointedly Bullshit, baffles brains.
Prof Black make the point that he DSGE models assume away fraud. They also assume people
are "rational actors, driven only by logic," that is: we are all Vulcans from Star Trek.
A simple view of women's fashions (high heels) with regard to comfort or safety would
demolish any theory of people as "rational actors." Or men's behavior over their "sports
teams."
To assume away human behavior and emotion, and thus chaos or catastrophe theory, would put
economists at odds with their masters, and cut their income, by the nearly always fatal, or
career limiting "telling truth to power."
It's interesting to speculate what would be the scope or size of common ground in a dialog
between anthropologists and economists. Null set perhaps?
Just a quick note for those who were initially confused by Bill Black's use of "modern
macroeconomic theory" and thought "modern monetary theory". (I know I did, and was initially
really confused by his take, and had to re-read the first three paragraphs a few times to
re-set my mental pointers). As far as I know (and I did a year of Ph.D economics at Stanford,
so I pass Arthreya's first test) I haven't heard of "modern" applied to DSGE macro but that
probably reflects my choice of reading material more than anything else. In short, "modern
macro" is bad, "modern monetary" is good.
BTW, one of the best takes of macroeconomics I've encountered is Steve Keen's work,
which I gratefully acknowledge I first read here on NC. Keen's critique of DSGE models is
utterly spot-on and mathematically sophisticated. Part of the problem with economics is that
it has been afflicted with 'math envy' since its earliest days, and the ADM results were
proved with Banach Space methods, so they just *had* to be right. Google the phrase
"spherical cow" for more on this mindset, not to mention one of the few really funny math
jokes I know.
Adj. 1. dilettantish - showing frivolous or superficial interest; amateurish; "his dilettantish efforts at painting" -- superficial
- concerned with or comprehending only what is apparent or obvious; not deep or penetrating emotionally or intellectually; "superficial
similarities"; "a superficial mind"; "his thinking was superficial and fuzzy"; "superficial knowledge"; "the superficial report didn't
give the true picture"; "only superficial differences"
Notable quotes:
"... A dilettante is a person who cultivates an area of interest, such as the arts, without real commitment or knowledge. The Dilettante Doctrine takes modern macro's arrogance to a new pinnacle. Only their model is legitimate, and it is illegitimate to criticize their DSGE models, even though they repeatedly fail. Instead, we must all "like" their models. We cannot make any statements about macroeconomics unless we "like [DSGE] models." The Dilettante Doctrine is a sure-fire means of winning academic disputes. You demand that your critics endorse your views, or you dismiss them as dilettantes unworthy of respect. ..."
"... Readers may recall that the scientific method works in the opposite direction of the Dilettante Doctrine. Modern macro proposes a theory (DSGE) and tests its predictive ability. The DSGE models fail recurrently, on the most important macro events, and the failures are massive. The scientific method requires the theorist of the failed model to declare it falsified. Economists who "like" repeatedly falsified DSGE models are, as Paul Romer famously declared, engaged in "pseudoscience." ..."
"... There has not been a big mea-culpa from neoliberal economists after the 2008 Financial Crisis. I don't think there will be. Many are essentially the equal of religious fundamentalists. ..."
"... Personally I believe economic as practiced is an example of telling the boss (the King) what they want to hear. Economist appear descended form a long line of Court Magicians, telling the futures from the entrails of an animal, consulting the spirits for guidance, or using a Chrystal ball. Of more pointedly Bullshit, baffles brains. ..."
"... A simple view of women's fashions (high heels) with regard to comfort or safety would demolish any theory of people as "rational actors." Or men's behavior over their "sports teams." ..."
A dilettante is a person who cultivates an area of interest, such as the arts, without real commitment or knowledge. The Dilettante
Doctrine takes modern macro's arrogance to a new pinnacle. Only their model is legitimate, and it is illegitimate to criticize their
DSGE models, even though they repeatedly fail. Instead, we must all "like" their models. We cannot make any statements about macroeconomics
unless we "like [DSGE] models." The Dilettante Doctrine is a sure-fire means of winning academic disputes. You demand that your critics
endorse your views, or you dismiss them as dilettantes unworthy of respect.
Readers may recall that the scientific method works in the opposite direction of the Dilettante Doctrine. Modern macro proposes
a theory (DSGE) and tests its predictive ability. The DSGE models fail recurrently, on the most important macro events, and the failures
are massive. The scientific method requires the theorist of the failed model to declare it falsified. Economists who "like" repeatedly
falsified DSGE models are, as Paul Romer famously declared, engaged in "pseudoscience."
Athreya then inadvertently compounded modern macro's failures by putting in writing a bit too many of modern macro's darker secrets
in his 2013
book about macroeconomics. Athreya confirmed many of the most fundamental criticisms of modern macro devotees, revealed additional
failures that were even more devastating, and illustrated perfectly the blindness of modern macro's devotees to their dogmas and
logic. Athreya did recognize clearly one dogma that made modern macro devotees unable to spot even the world's largest bubble – but
treated that failure as if it were a virtue. Modern macro devotees train macroeconomists to be unable to identify warn against, or
take action to end even the most destructive bubbles. This is like training surgeons to believe that shock cannot occur and they
should ignore shock in treating patients.
There has not been a big mea-culpa from neoliberal economists after the 2008 Financial Crisis. I don't think there will
be. Many are essentially the equal of religious fundamentalists.
However, we should also remember that the very wealthy have backed the neoliberal economists against the general public. Neolibe3ralism
provides a pseudoscientific economic excuse for what amounts to turning society into a plutocracy, which is precisely what the
rich want.
Personally I believe economic as practiced is an example of telling the boss (the King) what they want to hear. Economist
appear descended form a long line of Court Magicians, telling the futures from the entrails of an animal, consulting the spirits
for guidance, or using a Chrystal ball. Of more pointedly Bullshit, baffles brains.
Prof Black make the point that he DSGE models assume away fraud. They also assume people are "rational actors, driven only
by logic," that is: we are all Vulcans from Star Trek.
A simple view of women's fashions (high heels) with regard to comfort or safety would demolish any theory of people as
"rational actors." Or men's behavior over their "sports teams."
To assume away human behavior and emotion, and thus chaos or catastrophe theory, would put economists at odds with their masters,
and cut their income, by the nearly always fatal, or career limiting "telling truth to power."
It's interesting to speculate what would be the scope or size of common ground in a dialog between anthropologists and economists.
Null set perhaps?
Nice illustration of ideologically based ostrakism as practiced in Academia: "Larry [Summers] leaned back in his chair and offered me some advice. I had a choice. I could be an insider or I could
be an outsider. Outsiders can say whatever they want. But people on the inside don't listen to them. Insiders, however, get lots of access and a chance to push their ideas. People
- powerful people - listen to what they have to say. But insiders also understand one unbreakable rule: they don't criticize
other insiders."
Notable quotes:
"... A more probable school of thought is that this game was created as a con and a cover for the status quo capitalist establishment to indulge themselves in their hard money and liquidity fetishes, consequences be damned. ..."
"... The arguments over internal and external consistency of models is just a convenient misdirection from what policy makers are willing to risk and whose interests they are willing to risk policy decisions for ..."
"... Mathematical masturbations are just a smoke screen used to conceal a simple fact that those "economists" are simply banking oligarchy stooges. Hired for the specific purpose to provide a theoretical foundation for revanschism of financial oligarchy after New Deal run into problems. Revanschism that occurred in a form of installing neoliberal ideology in the USA in exactly the same role which Marxism was installed in the USSR. With "iron hand in velvet gloves" type of repressive apparatus to enforce it on each and every university student and thus to ensure the continues, recurrent brainwashing much like with Marxism on the USSR universities. ..."
"... To ensure continuation of power of "nomenklatura" in the first case and banking oligarchy in the second. Connections with reality be damned. Money does not smell. ..."
"... Economic departments fifth column of neoliberal stooges is paid very good money for their service of promoting and sustaining this edifice of neoliberal propaganda. Just look at Greg Mankiw and Rubin's boys. ..."
"... "Larry [Summers] leaned back in his chair and offered me some advice. I had a choice. I could be an insider or I could be an outsider. Outsiders can say whatever they want. But people on the inside don't listen to them. Insiders, however, get lots of access and a chance to push their ideas. People - powerful people - listen to what they have to say. But insiders also understand one unbreakable rule: they don't criticize other insiders." ..."
At the risk of oversimplifying might it not be as simple as stronger leanings towards IS-LM and kind are indicative of a bias
towards full employment and stronger leanings towards DSGE, microfoundations, and kind are indicative of a bias towards low inflation?
IN general I consider over-simplification a fault, if and only if, it is a rigidly adhered to final position. This is to say
that over-simplification is always a good starting point and never a good ending point. If in the end your problem was simple
to begin with, then the simplified answer would not be OVER-simplified anyway. It is just as bad to over-complicate a simple problem
as it is to over-simplify a complex problem. It is easier to build complexity on top of a simple foundation than it is to extract
simplicity from a complex foundation.
A lot of the Chicago School initiative into microfoundations and DSGE may have been motivated by a desire to bind Keynes in
a NAIRU straight-jacket. Even though economic policy making is largely done just one step at a time then that is still one step
too much if it might violate rentier interests.
Darryl FKA Ron -> Barry...
There are two possible (but unlikely) schools of (generously attributed to as) thought for which internal consistency might
take precedence over external consistency. One such school wants to consider what would be best in a perfect world full of perfect
people and then just assume that is best for the real world just to let the chips fall where they may according to the faults
and imperfections of the real world. The second such school is the one whose eyes just glaze over mesmerized by how over their
heads they are and remain affraid to ask any question lest they appear stupid.
A more probable school of thought is that this game was created as a con and a cover for the status quo capitalist establishment
to indulge themselves in their hard money and liquidity fetishes, consequences be damned.
Richard H. Serlin
Consistency sounds so good, Oh, of course we want consistency, who wouldn't?! But consistent in what way? What exactly do you
mean? Consistent with reality, or consistent with people all being superhumans? Which concept is usually more useful, or more
useful for the task at hand?
Essentially, they want models that are consistent with only certain things, and often because this
makes their preferred ideology look far better. They want models, typically, that are consistent with everyone in the world having
perfect expertise in every subject there is, from finance to medicine to engineering, perfect public information, and perfect
self-discipline, and usually on top, frictionless and perfectly complete markets, often perfectly competitive too.
But a big thing to note is that perfectly consistent people means a level of perfection in expertise, public information, self-discipline,
and "rationality", that's extremely at odds with how people actually are. And as a result, this can make the model extremely misleading
if it's interpreted very literally (as so often it is, especially by freshwater economists), or taken as The Truth, as Paul Krugman
puts it.
You get things like the equity premium "puzzle", which involves why people don't invest more in stocks when the risk-adjusted
return appears to usually be so abnormally good, and this "puzzle" can only be answered with "consistency", that people are all
perfectly expert in finance, with perfect information, so they must have some mysterious hidden good reason. It can't be at all
that it's because 65% of people answered incorrectly when asked how many reindeer would remain if Santa had to lay off 25% of
his eight reindeer ( http://richardhserlin.blogspot.com/2013/12/surveys-showing-massive-ignorance-and.html ).
Yes, these perfect optimizer consistency models can give useful insights, and help to see what is best, what we can do better,
and they can, in some cases, be good as approximations. But to say they should be used only, and interpreted literally, is, well,
inconsistent with optimal, rational behavior -- of the economist using them.
Richard H. Serlin -> Richard H. Serlin...
Of course, unless the economist using them is doing so to mislead people into supporting his libertarian/plutocratic ideology.
dilbert dogbert
As an old broken down mech engineer, I wonder why all the pissing and moaning about micro foundations vs aggregation. In strength
of materials equations that aggregate properties work quite well within the boundaries of the questions to be answered. We all
know that at the level of crystals, materials have much complexity. Even within crystals there is deeper complexities down to
the molecular levels. However, the addition of quantum mechanics adds no usable information about what materials to build a bridge
with.
But, when working at the scale of the most advanced computer chips quantum mechanics is required. WTF! I guess in economics
there is no quantum mechanics theories or even reliable aggregation theories.
Poor economists, doomed to argue, forever, over how many micro foundations can dance on the head of a pin.
RGC -> dilbert dogbert...
Endless discussions about how quantum effects aggregate to produce a material suitable for bridge building crowd out discussions
about where and when to build bridges. And if plutocrats fund the endless discussions, we get the prominent economists we have
today.
Darryl FKA Ron -> dilbert dogbert...
"...I guess in economics there is no quantum mechanics theories or even reliable aggregation theories..."
[I guess it depends upon what your acceptable confidence interval on reliability is. Most important difference that controls
all the domain differences between physical science and economics is that underlying physical sciences there is a deterministic
methodology for which probable error is merely a function of the inaccuracy in input metrics WHEREAS economics models are incomplete
probabilistic estimating models with no ability to provide a complete system model in a full range of circumstances.
YOu can design and build a bridge to your load and span requirements with alternative models for various designs with confidence
and highly effective accuracy repeatedly. No ecomomic theory, model, or combination of models and theories was ever intended to
be used as the blueprint for building an economy from the foundation up.
With all the formal trappings of economics the only effective usage is to decide what should be done in a given set of predetermined
circumstance to reach some modest desired effect. Even that modest goal is exposed to all kinds of risks inherent in assumptions,
incomplete information, externalities, and so on that can produce errors of uncertain potential bounds.
Nonetheless, well done economics can greatly reduce the risks encountered in the random walk of economics policy making. So
much so is this true, that the bigger questions in macro-economics policy making is what one is willing to risk and for whom.
The arguments over internal and external consistency of models is just a convenient misdirection from what policy makers
are willing to risk and whose interests they are willing to risk policy decisions for.]
Darryl FKA Ron -> Peter K....
unless you have a model which maps the real world fairly closely like quantum mechanics.
[You set a bar too high. Macro models at best will tell you what to do to move the economy in the direction that you seek to
go. They do not even ocme close to the notion of a theory of everything that you have in physics, even the theory of every little
thing that is provided by quantum mechanics. Physics is an empty metaphor for economics. Step one is to forgo physics envy in
pursuit of understanding suitable applications and domain constraints for economics models.
THe point is to reach a decision and to understand cause and effect directions. All precision is in the past and present. The
future is both imprecise and all that there is that is available to change.
For the most part an ounce of common sense and some simple narrative models are all that are essential for making those policy
decisions in and of themselves. HOWEVER, nation states are not ruled by economist philosopher kings and in the process of concensus
decision making by (little r)republican governments then human language is a very imprecise vehicle for communicating logic and
reason with respect to the management of complex systems. OTOH, mathematics has given us a universal language for communicating
logic and reason that is understood the same by everyone that really understands that language at all. Hence mathematical models
were born for the economists to write down their own thinking in clear precise terms and check their own work first and then share
it with others so equipped to understand the language of mathematics. Krugman has said as much many times and so has any and every
economist worth their salt.]
likbez -> Syaloch...
I agree with Pgl and PeterK. Certain commenters like Darryl seem convinced that the Chicago School (if not all of econ) is driven
by sinister, class-based motives to come up justifications for favoring the power elite over the masses. But based on what I've
read, it seems pretty obvious that the microfoundation guys just got caught up in their fancy math and their desire to produce
more elegant, internally consistent models and lost sight of the fact that their models didn't track reality.
That's completely wrong line of thinking, IMHO.
Mathematical masturbations are just a smoke screen used to conceal a simple fact that those "economists" are simply banking
oligarchy stooges. Hired for the specific purpose to provide a theoretical foundation for revanschism of financial oligarchy after
New Deal run into problems. Revanschism that occurred in a form of installing neoliberal ideology in the USA in exactly the same
role which Marxism was installed in the USSR.
With "iron hand in velvet gloves" type of repressive apparatus to enforce it on each and every university student and thus to
ensure the continues, recurrent brainwashing much like with Marxism on the USSR universities.
To ensure continuation of power of "nomenklatura" in the first case and banking oligarchy in the second. Connections with reality
be damned. Money does not smell.
Economic departments fifth column of neoliberal stooges is paid very good money for their service of promoting and sustaining
this edifice of neoliberal propaganda. Just look at Greg Mankiw and Rubin's boys.
But the key problem with neoliberalism is that the cure is worse then disease. And here mathematical masturbations are very
handy as a smoke screen to hide this simple fact.
likbez -> likbez...
Here is how Rubin's neoliberal boy Larry explained the situation to Elizabeth Warren:
"Larry [Summers] leaned back in his chair and offered me some advice. I had a choice. I could be an insider or I could
be an outsider. Outsiders can say whatever they want. But people on the inside don't listen to them. Insiders, however, get lots of access and a chance to push their ideas. People
- powerful people - listen to what they have to say. But insiders also understand one unbreakable rule: they don't criticize
other insiders."
Actually Marx's "labor theory of value" should be properly called the "theory of surplus value".
Notable quotes:
"... For Marx, value was socially-necessary labour time: David Harvey is good on this. From this perspective, exploitation and alienation are linked. Workers are exploited because they must work longer than necessary to get their consumption bundle. And they are alienated because this work is unsatisfying and a source of unfreedom. Now, I'll concede that many people hate the labour theory of value. One reason for this is that many discussions of it quickly become obscurantist – as if "value" is some mystical entity embodied in commodities. ..."
"... This, though, certainly was not Marx's intention. Quite the opposite. He intended his theory to be a demystification. He wanted to show how what looked like relations between things – the exchange of money for goods or labour-time – were in fact relations between people. And unequal ones at that. ..."
"... I suspect that some of the animosity to Marx's use of LTV arises because of a resistance to the inference that Marx drew from it – that workers are exploited. This issue, however, is independent of the validity of not of the LTV. For example, Roemer thinks workers are exploited without believing in the LTV, and Smith believed the LTV without arguing that workers were exploited. ..."
"... * He seems to be recovering now. The vet is also expected to make a full recovery eventually. ..."
"... Further understanding, which evolved after Marx, is that the LTV is just special case of the principle that what produces a surplus of usefulness is not labour per se, but the energy used in the transformation of a larger quantity of something into a smaller quantity of something else, and muscle power is just one way, even if it was the main one for a very long time, to obtain energy to transform a large quantity of less useful commodities into a smaller quantity of more useful commodities. ..."
"... And this follows into the impression that I have derived from various authors that our high standards of living depend not on the high "productivity" of labour, but on the high "productivity" of fossil fuels, which are the product of the fertility of land ..."
"... the complex process of differentiation in the economy (aka the division of labor) obscures the relationship between the creation of the surplus (work time above that necessary to reproduce consumption bundle) and its utilization by capitalists via investment. Investment is not possible without exploitation of workers, but that relationship is occluded by the mechanics of employment, markets, and property. ..."
"... My impression is that your bearded friend Karl does not use "alienation" in that sense at all, in an economic sense, but in a humanist sense: that by being separated from the means of production proletarians are alienated from the meaning of their work, from work as a human activity, as distinct from an economic activity ..."
"... Practically every "Dilbert" strip is about "alienation". This is my favourite ..."
"... Placing a high value on the frivolous and "useless" has always been the hallmark of those most able to decide the value of anything, because they have no use for economic use (so to speak), but rather social signaling. Broad social respect is an extremely expensive thing to buy with money alone. ..."
Lucius has been poorly recently, which has required some trips to the vet and therefore a bill of a size that only David Davis
could negotiate*. This has made me wonder: is there more to be said for the labour theory of
value than we like to think?
For a long time, I've not really cared about this theory one way or the other. This is partly because I've not bothered much with
questions of value; partly because, as John Roemer has shown, we don't
need (pdf)
a labour theory of value to suggest workers are exploited; and partly because the main Marxian charges against capitalism – for
example that it entails relationships of
domination – hold
true (or not!) independently of the theory.
As I approach retirement, however, I've begun to change my mind. I think of major expenses in terms of labour-time because they
mean I have to work longer. A trip to the vet is an extra fortnight of work; a good guitar an extra month, a car an extra year, and
so on.
When I consider my spending, I ask: what must I give up in order to get that? And the answer is my time and freedom. My labour-time
is the measure of value.
This is a reasonable basis for the claim that workers are exploited. To buy a bundle of goods and services, we must work a number
of hours a week. But taking all workers together, the hours we work are greater than the hours needed to produce those bundles because
we must also work to provide a profit for the capitalist. As Marx
put it:
We have seen that the labourer, during one portion of the labour-process, produces only the value of his labour-power, that
is, the value of his means of subsistence During the second period of the labour-process, that in which his labour is no longer
necessary labour, the workman, it is true, labours, expends labour-power; but his labour, being no longer necessary labour, he
creates no value for himself. He creates surplus-value which, for the capitalist, has all the charms of a creation out of nothing.
This portion of the working-day, I name surplus labour-time.
For Marx, value was socially-necessary labour time: David Harvey is
good on this. From this
perspective, exploitation and alienation are linked. Workers are exploited because they must work longer than necessary to get their
consumption bundle. And they are alienated because this work is unsatisfying and a source of unfreedom. Now, I'll concede that many
people hate the labour theory of value. One reason for this is that many discussions of it quickly become obscurantist – as if "value"
is some mystical entity embodied in commodities.
This, though, certainly was not Marx's intention. Quite the opposite. He intended his theory to be a demystification. He wanted
to show how what looked like relations between things – the exchange of money for goods or labour-time – were in fact relations between
people. And unequal ones at that.
What's more, the charge of obscurantism against Marx is an especially weak one when it comes from orthodox economics. Much of
this invokes unobservable concepts such as the natural rate of unemployment, marginal productivity, utility, the marginal product
of
capital and natural rate of interest – ideas which,
in the last two cases, might not even be theoretically coherent.
In fact, the LTV is reasonably successful by the standards of conventional economics: we have empirical evidence to suggest that
it does (pdf) a
decent (pdf) job of
explaining (pdf) relative prices – not that this was
how Marx intended it to be used.
You can of course, think of counter-examples to the theory. But so what? in the social sciences, no substantial theory is 100%
true.
I suspect that some of the animosity to Marx's use of LTV arises because of a resistance to the inference that Marx drew from
it – that workers are exploited. This issue, however, is independent of the validity of not of the LTV. For example, Roemer thinks
workers are exploited without believing in the LTV, and Smith believed the LTV without arguing that workers were exploited.
By the (low) standards of economic theories, perhaps the LTV
isn't so bad.
* He seems to be recovering now. The vet is also expected to make a full recovery eventually.
But the LTV says more than the output of the economy is divided between the workers and the (suppliers and) owners of capital
goods, doesn't it? I mean, mainstream econ says that too. And unless ownership of capital inputs to production is distributed
equally across society, then some people consume things that other's labour has produced, which means workers must produce more
than they consume. But again, that's basic mainstream stuff, not LVT. You end by saying you can believe in exploitation but not
LVT, and vice versa, but the main body of this blog seems to be connecting the two. I am confused.
Of course if you have the ability to vary your labour supply, and labour is how you earn your money, then you ask yourself
how much you need to work to purchase whatever. But again that's mainstream not LVT.
"Smith believed the LTV without arguing that workers were exploited."
The Marxian approach was interested in, as other commenters have said, in the specific capitalist case, where "capitalism"
for him means strictly "labour for hire" by workers alienated from the means of production by their ownership by capitalists.
But the labour theory of value, as understood by what Marx called "classicals", applies also to all labour, and he used it
in that sense.
My understanding of the classicals and the LTV is reduced to a minimum this:
By "value" we mean "surplus".
The "physiocrats" correctly identified "land" (mines, farms, the sea) as a producer of physical surplus: once corn seed
produces a whole corn cob. The quantity of physical output appears to be greater than the quantity of physical input, a phenomenon
that used to be called "fertility".
However the "classicals" recognized that there is surplus also when the quantity of output is physically smaller than the
quantity of input: a larger quantity of iron ore and coal gets turned into a much smaller quantity of metal called "spoon",
and that generates surplus too.
Since the surplus is not quantitative they called it a surplus of "ofelimity", of usefulness. A spoon is more useful than
the physically larger quantity of iron ore and coal used to make it, in most contexts.
So the question is what creates a surplus of ofelimity even if quantity shrinks drastically.
The classicals observed that while quantitative surplus may be spontaneous, as in apple trees just produce apples by themselves,
all cases involving a surplus of ofelimity involved the application of labour.
The LTV is simply that observation: that the whole chain of surpluses of ofelimity always goes back to the application
of labour, from the first people who chipped obsidian blocks into blades onwards.
As such the LTV is not really a "theory": it is a generic principle. It would be more properly a theory if there was some
kind of "law" that related the quantity of labour embedded in a commodity to the surplus of usefulness it seems to have. But
any such law cannot be universal, because usefulness is strictly context dependent. Sraffa wrote some preliminary booklet about
that :-).
Further understanding, which evolved after Marx, is that the LTV is just special case of the principle that what produces
a surplus of usefulness is not labour per se, but the energy used in the transformation of a larger quantity of something into
a smaller quantity of something else, and muscle power is just one way, even if it was the main one for a very long time, to obtain
energy to transform a large quantity of less useful commodities into a smaller quantity of more useful commodities.
And this follows into the impression that I have derived from various authors that our high standards of living depend
not on the high "productivity" of labour, but on the high "productivity" of fossil fuels, which are the product of the fertility
of land.
"value, in terms of risk among others, that the employers put in starting a new business?"
If the business produces a surplus, that is value added, than the surplus is the product of the energy/labour expended by all
participants
How it is accounted for is one issue, especially over multiple time periods, and how it is shared out is a social relationship.
As to risk, everybody in the business runs the risk of not getting paid at the end of the month, and the opportunity cost of
not doing something else, whichever labour they put in.
How risk and opportunity cost are accounted for, especially over multiple time periods, is another issue, and how they are
shared is another social relationship.
"the surplus is the product of the energy/labour expended by all participants"
I'll perhaps further diminish the reputation of my "contributions" this way: perhaps all social relationships of production
(at least among males) map closely onto (cursorial) group hunts.
"a very long winded way of saying that making stuff requires labour"
Well, that's obvious, but what the classicals thought of as the LTV was not entirely obvious: that "surplus" (rather than "stuff")
comes from the fertility of land and the transformation achieved with labour, and that nothing else is needed to achieve "surplus".
Because for example capital goods are themselves surplus from fertility or labour, again back to the first blades made from chipping
lumps of obsidian.
That's quite a bit more insightful, never mind also controversial, than "making stuff requires labour".
Love this post. But, being a fellow marxist, I can't help but to disagree with this bit: "And they are alienated because this
work is unsatisfying and a source of unfreedom." This is a colloquial use of alienation, and its not wrong.
But Marx is getting at something else: the complex process of differentiation in the economy (aka the division of labor)
obscures the relationship between the creation of the surplus (work time above that necessary to reproduce consumption bundle)
and its utilization by capitalists via investment. Investment is not possible without exploitation of workers, but that relationship
is occluded by the mechanics of employment, markets, and property.
That's the sense in which workers are alienated under capitalism. Socialism could still have boring work, but, in so far as
the investment function is brought under collective democratic control, workers would not be alienated in the special sense Marx
is using.
"Where else could stuff come from?" Well, assuming by "stuff" we mean objects of value, nowhere. But the reasons for which
we value them are not dependent upon their natural origins or the labor required for their production. I don't value a computer
because it's made of plastic and silicon and so forth, nor because of the labor required to produce it. It's useful because of
what it does, not what it is; it's sort of Kant's definition of art versus the general conception of tools.
As for the relationship between production functions and the LTV, that seems (at least prima facie) pretty straightforward.
If there is a high olefimity ascribed to the surplus provided by the product created by X, Y, then those production functions
will, themselves, be assigned greater value, i.e., be worthy of more labor-time to attain. E.g., even if I'm not very good at
fishing, if I really like the flavor of fish over other protein sources, I'll spend more time increasing my labor efficiency (be
a better fisherman).
"Everything ultimately derives from nature and the labour of humans. Where else could stuff come from? That's all there
is."
Then in theory the cost (not the price) of everything can be measured in terms of physical quantities of primary inputs and
of hours of work.
"What's controversial about it?"
What is controversial is that written like that you sound like a Marxist: the alternative approach is to say that *property*
creates surplus.
In the standard neoclassical approach "property" is the often forgotten "initial endowments" of the single representative agent.
Anyhow the "narrative" is: as Mr. Moneybags owns the iron mine and the coal mine and the smelter and the ingot roller and spoon
press, then he is entitled to the surplus because without his property it is impossible to make spoons. Labour on its own is worthless,
wastes away, while property is "valuable" capital.
"And how one gets from a production function (stuff is made from X, Y and Z) to LTV"
Production functions are just not very elaborate scams to pretend that property is the factor of production, rather then the
fertility of land and the energy of labour, and land does not exist (after JB Clark "disappeared" it) and labour is just an accessory.
Part of the scam is that "X, Y and Z" are denominated in money, not physical quantities.
As I wrote in another answer accounting for the output of land fertility and labour energy and how it is shared are the difficult
bits. Welcome to the institutional approach to the political economy. :-)
"the reasons for which we value them are not dependent upon their natural origins or the labor required for their production"
And here be dragons. Your old bearded acquaintance Karl has something to say about this :-).
"It's useful because of what it does, not what it is"
So cleaning floors which is very useful should have a high value, while Leonardo paintings, that are merely scarce, should
have a low value :-).
I though that most people reckoned that "value" depends on scarcity: so there is a scarcity of even not very good promoters
of torysm, so G Osborne is entitled to £600,000 a year to edit the "Evening Standard", but there is no scarcity of excellent cleaners,
so cleaners gets minimum wage if they are lucky.
counting hours of worked is not a measure of cost, it is a tally of hours worked. In mainstream econ, production functions
describe a physical production process (to make 1 unit of Y, you combine inputs like so) and are not not denominated in money.
e.g. You multiply L by w to get cost.
Economies are zero sum. GDP must be paid for, otherwise it won't be produced. The only source of money comes from labor costs,
the money paid to workers to work producing GDP. As conservatives note, all taxes fall on workers by directly taking their pay,
or by hiking the prices of what workers buy.
Taxes pay workers, e.g. teachers, and doctors with Medicare and Medicaid, weapons makers and warriors, or pay people to pay
workers, Social Security benefits and SNAP.
Capital has value because it is built by paying workers. It gets a cut to repay the payers of workers.
Monopoly rent seeking is unsustainable. If a monoplists takes more from workers than they pay workers, he eventually takes
so much money workers can no longer pay for GDP and it falls to zero as workers produce what they consume without buying from
the monopolist capital.
Tanstaafl
As Keynes put it:
"I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock
of capital up to a point where its marginal efficiency had fallen to a very low figure. This would not mean that the use of capital
instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion
by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate
return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour costs
of production plus an allowance for risk and the costs of skill and supervision.
"Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia
of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value
of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain
interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be
intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for
such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest,
would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character
that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so,
it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the
growth of capital up to the point where it ceases to be scarce."
Economies are zero sum. The value of goods and services must equal the labor costs in the long run. Tanstaaafl
"Socialism could still have boring work, but, in so far as the investment function is brought under collective democratic
control, workers would not be alienated in the special sense Marx is using."
My impression is that your bearded friend Karl does not use "alienation" in that sense at all, in an economic sense, but
in a humanist sense: that by being separated from the means of production proletarians are alienated from the meaning of their
work, from work as a human activity, as distinct from an economic activity.
Collective ownership does not change at all that kind of alienation: being a cog in the capitalist machinery is no less alienating
than being a cog in the collectivist machinery.
I think that our blogger when he talks about distributing control of the production process to workers is far closer to the
marxian ideal than a collectivist approach.
Practically every "Dilbert" strip is about "alienation". This is my favourite:
"counting hours of worked is not a measure of cost"
For a definition of "cost" that is made-up disregarding P Sraffa's work and in general the classics.
"multiply L by w to get cost."
As J Robinson and others pointed out that "w" depends on the distribution of income, on the interest rate, etc., so is an institutional
matter.
As I was saying, accounting for the surplus and how to share it is not so easily handwavable.
sorry, I meant for a money definition of cost that is not just counting inputs, but which is inputs multiplied by their prices.
nobody is hand waving. I think the mainstream view is that 'value' and 'surplus' are not meaningful terms, only prices and
profits and subjective value. A production function says nothing about prices, you have to explain them with other stuff, and
as you say, institutions and all manner of things could come in the play there.
You can say that that workers produce more in money terms than than they are paid, which is trivial (the wages paid by an employer
are less than its gross profits so long as there are non-zero returns to capital, interest on a loan or dividends or whatever)
and to my mind it's silly to define that as exploitation because it would apply in situations where the 'capitalist' is getting
a small return and workers rewarded handsomely by any standard. Better imo to define exploitation as when capitalists are earning
excess returns (and I'd fudge that by differentiating between workers' wages and salaries of top execs). Otherwise you lay yourself
open to "the only thing worse than being exploited by capitlists is not beingn exploited by capitalists" which is J Robinson too
I believe.
This is a genuine question: what you exposed above is related to or influenced by Steve Keen's ideas, yes? If so, I'd be interested
in reading about that in more detail.
I've always thought that defining value by scarcity was an absurd misdirection, in part because there is no reason that the
two should correlate at all. At any point in socioeconomic development beyond subsistence, value is to some extent socially defined,
not economically defined. Status ends up being the most "useful" resource, as we see among all those who've never had to worry
about their material conditions.
Placing a high value on the frivolous and "useless" has always been the hallmark of those most able to decide the value
of anything, because they have no use for economic use (so to speak), but rather social signaling. Broad social respect is an
extremely expensive thing to buy with money alone.
@Luis Enrique
Ah, but name for me a production process that doesn't take place over time. There's an infinite amount of time for all of us,
but for each of us only so much, and those who fail to value it die full of regret. Surely someone somewhere must have something
to say about this.
I don't know why I wrote the above. Surplus is also a mainstream term. See wages set by bargaing over a surplus. Presume it's
based on prices of outputs compared to inputs or if in model with real quantities not prices, then in subjective values.
Lukas production functions are defined over a period of time.
Ahem, I am trying to explain my understanding of Marx, who wrote both as economist and a philosopher, and a politial theorist.
Alienation, exploitation and inequality are technically distinct concepts, even if in the marxist (view (and that of every
business school, that are faithful to marxist political economy) capitalist control of the means of production leads to alienation
which leads to exploitation which leads to inequality. In the marxian political economy inequality can exist even with exploitation,
for example, and that makes it less objectionable.
"Surplus is also a mainstream term. See wages set by bargaing over a surplus."
Some Economists have not forgotten at least some terminology of political economy and some Departments of Business still have
surviving "history of economic thought" courses that some postgrads may still accidentally occasionally wander into and pick up
some terms from...
"are not meaningful terms, only prices and profits and subjective value."
But the mainstream focus on prices and profits etc. is the purest handwaving, because it begs the question...
"A production function says nothing about prices"
Ha! This is one of the best examples where mainstream theory handwaves furiously: mainstream production functions switch effortlessly
from "capital" as phusical quantities to aggregating "capital" by reckoning it in "numeraire". That is all about prices, and even
about future expected prices and future expected rates of discount. Therefore rational expectations, a grand feat of handwaving.
"defining value by scarcity was an absurd misdirection, in part because there is no reason that the two should correlate at
all."
Ahhhhhhh but this is a very political point and not quite agreeable because:
One of the conceits of "microfoundations" is to show that there are "laws" of Economics that are precise, so everybody get
exactly their just compensation, so for example demand-supply schedules are always presented, cleverly, as lines and static.
The view of political economists is that instead "everything" lies within boundaries of feasibility, which are dynamic, so
for example demand-supply schedules are ribbons that change over time and circumstances, and transactions happens not at uniquely
determined points of intersections, but in regions of feasibility, the precise point dependent on institutional arrangements.
So the LTV determines one boundary for "price" and desirability another boundary.
"exposed above is related to or influenced by Steve Keen's ideas"
Related and independently derived, but also a bit influenced. I had always suspected that the "classicals" used "labour" as
a synonym for "muscle power", but various later readings persuaded me that was indeed the case. Later post will have some hopefully
interesting detail. Then I looked into the literature and found that obviously this had been figured out before (centuries ago
in some cases, like B de Mandeville).
Blissex if you can come up with a better way of trying to describe total quantities of highly heterogeneous things (i.e. capital)
you have a Nobel awaiting. Everybody know that attempts to put a number on the real quantity of capital is always going to be
a rough and ready endeavour.
I don't see how working with prices and profits is 'handwaving'. What question does it beg? Much of economics is about trying
to explain these things. I would not say economics focuses on prices and profits because many economics models work with real
quantities that are high abstract and in theory are made commensurate using subjective value (utility) as the unit of account.
The Phillips Curve is back. In saying so, I do not mean to imply that being "back" refers to
a sudden reappearance of a stable empirical relationship between unemployment (or the output
gap) and inflation. The Phillips Curve is back in the same way that conspiracy theories about
the assassination of JFK are back after the recent release of government documents. In other
words, the Phillips Curve is something that people desperately want to believe in, despite the
lack of evidence.
The Phillips Curve is all the rage among central bankers. Since the Federal Reserve embarked
on quantitative easing, they have been ensuring the public that QE would not be inflationary
because of the slack in the economy. Until labor market conditions tighten, there would be
little threat of inflation. Then, as the labor market tightened, the Federal Reserve warned
that they might have to start raising interest rates to prevent these tightening conditions
from creating inflation.
What is remarkable about this period is that the Federal Reserve has undershot its target
rate of inflation throughout this entire period -- and continues to do so today. So what does
this tell us about the Phillips Curve and what can we learn about monetary policy?
If one looks at the data on unemployment and inflation (or even the output gap and
inflation), you could
more easily draw Orion the Hunter as you could a stable Phillips Curve. Fear not,
sophisticated advocates of the Phillips Curve will say. This is simply the Lucas Critique at
play here. If a Phillips Curve exists, and if the central bank tries to exploit it, then it
will not be evident in the data. In fact, if you take a really basic 3-equation-version of the
New Keynesian model, there is a New Keynesian Phillips Curve in the model. However, when you
solve for the equilibrium conditions, you find that inflation is a function of demand shocks,
technology shocks, and unexpected changes in interest rates. The output gap doesn't appear in
the solution. But fear not, this simply means that monetary policy is working properly. The
Phillips Curve is apparently like the observer effect in quantum mechanics in that when we try
to observe the Phillips Curve, we change the actual result (this is a joke, please do not leave
comments about why I've misunderstood the observer effect).
... ... ...
What all of this means is that even given the fact that the New Keynesian model features an
equation that resembles the Phillips curve, this does not imply that there is some predictive
power that comes from thinking about this equation in isolation. In addition, it certainly does
not imply that changes in the output gap cause changes in the rate of inflation. There
is no direction of causation implied by this one equilibrium condition.
"... During the two decades following the neoliberal economists' take-over of Western governments in the 1980s, many felt that the almost mystical terms of economics - such as derivatives, hedging, leverage, contangos, etc - were beyond the understanding of most ordinary people. ..."
"... They pursued them as a matter of faith in the market and its processes, despite the apparent warning signs of their imminent failure. ..."
"... as within many custom or belief systems, what economics enshrines is a social order. One where a dominant minority are able to take a small quantity of wealth from each member of the majority in order to maintain their higher status. ..."
"... idea of economics as an exploitative mechanism is echoed in the cover picture of the book, Bosch's The Conjurer ..."
"... Within its exposition of economics as a quasi-religious theory, Brian Davey's book helps us to understand why economic theory is driving us toward a global system failure - and why politics and economics are incapable of responding to the pressing ecological crisis which the pursuit of economic growth has spawned. ..."
Brian Davey's new book, Credo: Economic Beliefs in a World in Crisis, is an analysis of economic theory as if it were a system
of religious belief.
It's a timely book. The simplistic, perhaps 'supernatural' assumptions which underpin key parts of economic theory demand far
more attention. It's a debate we've failed to have as a society.
... ... ...
During the two decades following the neoliberal economists' take-over of Western governments in the 1980s, many felt that
the almost mystical terms of economics - such as derivatives, hedging, leverage, contangos, etc - were beyond the understanding of
most ordinary people.
And without understanding those terms, irrespective of our gut feeling that there was something wrong, how could we challenge
the political lobby those theories had put into power? In the end it took the
financial crash of 2007/8 to demonstrate
that those in charge of this system didn't understand the complexity and risk of those practices either.
They pursued them as a matter of faith in the market and its processes, despite the
apparent
warning signs of their imminent failure. Those outside 'orthodox' economics could already see where the economy
was heading in the longer-term.
Question is, did economists learn anything from that failure? Or,
through austerity, have they once again committed us to their dogmatic belief system, unchanged by that experience?
... ... ...
However, through simple hubris or optimism bias, the political
class has been convinced that 'fracking' is a solution to our economic woes
- even though there is a paucity of verifiable evidence to demonstrate those claims, and
it has already lost billions of investors money.
Economics is a reflection of power
Ultimately though, as within many custom or belief systems, what economics enshrines is a social order. One where a dominant
minority are able to take a small quantity of wealth from each member of the majority in order to maintain their higher status.
This idea of economics as an exploitative mechanism
is echoed in the cover picture of the book, Bosch's
The Conjurer - where a magician distracts
the public with a sleight of hand trick so that they can be more easily robbed by his associate.
Again, in a world where we're hitting the limits to human material growth, political models of well-being based upon wealth and
consumption are damaging to human society in the long-term. The evidence that we're heading for a longer-term failure is there, as
was the case with the warning signs before the 2007 crash. The problem is that those in positions of power
do not wish to see it.
... ... ...
Within its exposition of economics as a quasi-religious theory, Brian Davey's book helps us to understand why economic theory
is driving us toward a global system failure - and why politics and economics are incapable of responding to the pressing ecological
crisis which the pursuit of economic growth has spawned.
Contrary to the economic hubris of many world leaders, set alongside the reality of ecological limits humanity is not 'too big
to fail'.
"... An interview by Gordon T. Long of the Financial Repression Authority. Originally published at his website ..."
"... One of the most important distinctions that investors have to understand is the difference between secular and cyclical trends Let us begin with definitions from the Encarta® World English Dictionary: ..."
"... Secular – occurring only once in the course of an age or century; taking place over an extremely or indefinitely long period of time ..."
"... Cycle – a sequence of events that is repeated again and again, especially a causal sequence; a period of time between repetitions of an event or phenomenon that occurs regularly ..."
"... Secular stagnation is when the predators of finance have eaten too many sheeple. ..."
"... Real estate rents in this latest asset bubble, whether commercial or residential, appear to have been going up in many markets even if the increases are slowing. That rent inflation will likely turn into rent deflation, but that doesn't appear to have happened yet consistently. ..."
"... Barter has always existed and always will. Debt money expands and contracts the middle class, acting as a feedback signal, which never works over the long term, because the so encapsulated system can only implode, when natural resource liquidation cannot be accelerated. The whole point is to eliminate the initial requirement for capital, work. Debt fails because both sides of the same coin assume that labor can be replaced. The machines driven by dc technology are not replacing labor; neither the elites nor the middle class can fix the machines, which is why they keep accelerating debt, to replace one failed technology only to be followed by the next, netting extortion by whoever currently controls the debt machine, which the majority is always fighting over, expending more energy to avoid work, like the objective is to avoid sweating, unless you are dumb enough to run on asphalt with Nike gear. ..."
"... . . . The whole argument for privatization, for instance, is the opposite of what was taught in American business schools in the 19th century. The first professor of economics at the Wharton School of Business, which was the first business school, was Simon Patten. He said that public infrastructure is a fourth factor of production. But its role isn't to make a profit . It's to lower the cost of public services and basic inputs to lower the cost of living and lower the cost of doing business to make the economy more competitive. But privatization adds interest payments, dividends, managerial payments, stock buybacks, and merges and acquisitions . Obviously these financialized charges are factored into the price system and raise the cost of living and doing business . ..."
GORDON LONG: Thank you for joining us. I'm Gordon Long with the Financial Repression Authority. It's my pleasure to have with
me today Dr. Michael Hudson Professor Hudson's very well known in terms of the FIRE economy to-I think, to a lot of our listeners,
or at least he's recognized by many as fostering that concept. A well known author, he has published many, many books. Welcome, Professor
Hudson.
MICHAEL HUDSON: Yes.
LONG: Let's just jump into the subject. I mentioned the FIRE economy cause I know that I have always heard it coming from yourself-or,
indirectly, not directly, from yourself. Could you explain to our listeners what's meant by that terminology?
HUDSON: Well it's more than just people getting fired. FIRE is an acronym for Finance, Insurance and Real Estate. Basically that
sector is about assets, not production and consumption. And most people think of the economy as being producers making goods and
services and paying labor to produce them – and then, labour is going to buy these goods and services. But this production and consumption
economy is surrounded by the asset economy: the web of Finance, Insurance, and Real Estate of who owns assets, and who owes the debts,
and to whom.
LONG: How would you differentiate it (or would you) with what's often referred to as financialization, or the financialization
of our economy? Are they one and the same?
HUDSON: Pretty much. The Finance, Insurance, and Real Estate sector is dominated by finance. 70 to 80% of bank loans in North
America and Europe are mortgage loans against real estate. So instead of a landowner class owning property clean and clear, as they
did in the 19 th century, now you have a democratization of real estate. 2/3 or more of the population owns their own
home. But the only way to buy a home, or commercial real estate, is on credit. So the loan-to-value ratio goes up steadily. Banks
lend more and more money to the real estate sector. A home or piece of real estate, or a stock or bond, is worth whatever banks are
willing to lend against it
As banks loosen their credit terms, as they lower their interest rates, take lower down payments, and lower amortization rates
– by making interest-only loans – they are going to lend more and more against property. So real estate is bid up on credit. All
this rise in price is debt leverage. So a financialized economy is a debt-leveraged economy, whether it's real estate or insurance,
or buying an education, or just living. And debt leveraging means that a larger proportion of assets are represented by debt. So
debt equity ratios rise. But financialization also means that more and more of people's income and corporate and government tax revenue
is paid to creditors. There's a flow of revenue from the production-and-consumption economy to the financial sector.
LONG: I don't know if you know Richard Duncan. He was with the IMF, etc, and lives in Thailand. He argues right now that capitalism
is no longer functioning, and really what he refers to what we have now is "creditism." Because in capitalism we have savings that
are reinvested into productive assets that create productivity, which leads to a higher level of living. We're not doing that. We
have no savings and investments. Credit is high in the financial sector, but it's not being applied to productive assets. Is he valid
in that thinking?
HUDSON: Not as in your statement. It's confused.
LONG: Okay.
HUDSON: There's an enormous amount of savings. Gross savings. The savings we have that are mounting up are just about as large
as they've ever been – about, 18-19% of the US economy. They're counterpart is debt. Most savings are lent out to borrowers se debt.
Basically, you have savers at the top of the pyramid, the 1% lending out their savings to the 99%. The overall net savings may be
zero, and that's what your stupid person from the IMF meant. But gross savings are much higher. Now, the person, Mr. Duncan, obviously-I
don't know what to say when I hear this nonsense. Every economy is a credit economy.
Let's start in Ancient Mesopotamia. The group that I organized out of Harvard has done a 20-study of the origins of economic structuring
in the Bronze Age, even the Neolithic, and the Bronze Age economy – 3200 BC going back to about 1200 BC. Suppose you're a Babylonian
in the time of Hammurabi, about 1750 BC, and you're a cultivator. How do you buy things during the year? Well, if you go to the bar,
to an ale woman, what she'd do is write down the debt that you owe. It was to be paid on the threshing floor. The debts were basically
paid basically once a year when the income was there, on the threshing floor when the harvest was in. If the palace or the temples
would advance animals or inputs or other public services, this would be as a debt. It was all paid in grain, which was monetized
for paying debts to the palace, temples and other creditors.
The IMF has this Austrian theory that pretends that money began as barter and that capitalism basically operates on barter. This
always is a disinformation campaign. Nobody believed this in times past, and it is a very modern theory that basically is used to
say, "Oh, debt is bad." What they really mean is that public debt is bad. The government shouldn't create money, the government shouldn't
run budget deficits but should leave the economy to rely on the banks. So the banks should run and indebt the economy.
You're dealing with a public relations mythology that's used as a means of deception for most people. You can usually ignore just
about everything the IMF says. If you understand money you're not going to be hired by the IMF. The precondition for being hired
by the IMF is not to understand finance. If you do understand finance, you're fired and blacklisted. That's why they impose
austerity programs that they call "stabilization programs" that actually are destabilization programs almost wherever they're imposed.
LONG: Is this a lack of understanding and adherence to the wrong philosophy, or how did we get into this trap?
HUDSON: We have an actively erroneous view, not just a lack of understanding. This is not by accident. When you have an error
repeated year after year after year, decade after decade after decade, it's not really insanity doing the same thing thinking it'll
be different. It's sanity. It's doing the same thing thinking the result will be the same again and again and again. The result
will indeed be austerity programs, making budget deficits even worse, driving governments further into debt, further into reliance
on the IMF. So then the IMF turns them to the knuckle breakers of the World Bank and says, "Oh, now you have to pay your debts by
privatization". It's the success. The successful error of monetarism is to force countries to have such self-defeating policies that
they end up having to privatize their natural resources, their public domain, their public enterprises, their communications and
transportation, like you're seeing in Greece's selloffs. So when you find an error that is repeated, it's deliberate. It's not insane.
It's part of the program, not a bug.
LONG: Where does this lead us? What's the roadmap ahead of us here?
HUDSON: A thousand years ago, if you were a marauding gang and you wanted to take over a country's land and its natural resources
and public sector, you'd have to invade it with military troops. Now you use finance to take over countries. So it leads us into
a realm where everything that the classical economists saw and argued for – public investment, bringing costs in line with the actual
cost of production – that's all rejected in favor of a rentier class evolving into an oligarchy. Basically, financiers – the
1% – are going to pry away the public domain from the government. Pry away and privatize the public enterprises, land, natural resources,
so that bondholders and privatizers get all of the revenue for themselves. It's all sucked up to the top of the pyramid, impoverishing
the 99%.
LONG: Well I think most people, without understanding economics, would instinctively tell you they think that's what's happening
right now, in some way.
HUDSON: Right. As long as you can avoid studying economics you know what's happened. Once you take an economics course you step
into brainwashing. It's an Orwellian world.
LONG: I think you said it perfectly well there. Exactly. It gets you locked into the wrong way of thinking as opposed to just
basic common sense. Your book is Killing the Host . What was the essence of its message? Was it describing exactly what we're
talking about here?
HUDSON: Finance has taken over the industrial economy, so that instead of finance becoming what it was expected to be in the 19
th century, instead of the banks evolving from usurious organizations that leant to governments, mainly to wage war, finance
was going to be industrialized. They were going to mobilize savings and recycle it to finance the means of production, starting with
heavy industry. This was actually happening in Germany in the late 19 th century. You had the big banks working with government
and industry in a triangular process. But that's not what's happening now. After WW1 and especially after WW2, finance reverted to
its pre-industrial form. Instead of allying themselves with industry, as banks were expected to do, banks allied themselves with
real estate and monopolies, realizing that they can make more money off real estate.
The bank spokesman David Ricardo argued against the landed interest in 1817, against land rent. Now the banks are all in favor
of supporting land rent, knowing that today, when people buy and sell property, they need credit and pay interest for it. The banks
are going to get all the rent. So you have the banks merge with real estate against industry, against the economy as a whole. The
result is that they're part of the overhead process, not part of the production process.
LONG: There's a sense that there's a crisis lying ahead in the next year, two years, or three years. The mainstream economy's
so disconnected from Wall Street economy. What's your view on that?
HUDSON: It's not disconnected at all. The Wall Street economy has taken over the economy and is draining it. Under what economics
students are taught as Say's Law, the economy's workers are supposed to use their income to buy what they produce. That's why Henry
Ford paid them $5 a day, so that they could afford to buy the automobiles they were producing.
LONG: Exactly.
HUDSON: But Wall Street is interjecting itself into the economy, so that instead of the circular flow between producers and consumers,
you have more and more of the flow diverted to pay interest, insurance and rent. In other words, to pay the FIRE sector. It all ends
up with the financial sector, most of which is owned by the 1%. So, their way of formulating it is to distract attention from today's
debt quandary by saying it's just a cycle, or it's "secular stagnation." That removes the element of agency – active politicking
by the financial interests and Wall Street lobbyists to obtain all the growth of income and wealth for themselves. That's what happened
in America and Canada since the late 1970s.
LONG: What does an investor do today, or somebody who's looking for retirement, trying to save for the future, and they see some
of these things occurring. What should they be thinking about? Or how should they be protecting themselves?
HUDSON: What all the billionaires and the heavy investors do is simply try to preserve their wealth. They're not trying to make
money, they're not trying to speculate. If you're an investor, you're not going to outsmart Wall Street billionaires, because the
markets are basically fixed. It's the George Soros principle. If you have so much money, billions of dollars, you can break the Bank
of England. You don't follow the market, you don't anticipate it, you actually make the market and push it up, like the Plunge Protection
Team is doing with the stock market these days. You have to be able to control the prices. Insiders make money, but small investors
are not going to make money.
Since you're in Canada, I remember the beginning of the 1960s. I used to look at the Treasury Bulletin and Federal Reserve
Bulletin figures on foreign investment in the US stock market. We all used to laugh at Canada especially. The Canadians don't
buy stocks until they're up to the very top, and then they lose all the money by holding these stocks on the downturn. Finally, when
the market's all the way at the bottom, Canadians decide to begin selling because they finally can see a trend. So they miss the
upswing until they decide to buy at the top once again. It's hilarious to look at how Canada has performed in the US bond market,
and they did the same in the silver market. I remember when silver was going up to $50. The Canadians said, "Yes, we can see the
trend now!" and they began to buy it. They lost their shirts. So, basically, if you're a Canadian investor, move.
LONG: So the Canadian investors are a better contrarian indicator than the front page cover, you're saying.
HUDSON: I'd think so. Once they get in, you know the bubble's over.
LONG: Absolutely on that one. What are you currently writing? What is your current focus now?
HUDSON: Well, I just finished a book. You mentioned Killing the Host . My next book will be out in about three months:
J is for Junk Economics . It began as a dictionary of terms, so I can provide people with a vocabulary. As we got in the argument
at the beginning of your program today, our argument is about the vocabulary we're using and the words you're using. The vocabulary
taught to students today in economics – and used by the mass media and by government spokesmen – is basically a set of euphemisms.
If you look at the television reports on the market, they say that any loss in the stock market isn't a loss, it's "profit taking".
And when they talk about money. the stock market rises – "Oh that's good news." But it's awful news for the short sellers it wipes
out. Almost all the words we get are kind of euphemisms to conceal the actual dynamics that are happening. For instance, "secular
stagnation" means it's all a cycle. Even the idea of "business cycles": Nobody in the 19 th century used the word "business
cycle". They spoke about "crashes". They knew that things go up slowly and then they plunge very quickly. It was a crash. It's not
the sine curve that you have in Josef Schumpeter's book on Business Cycles . It's a ratchet effect: slow up, quick down. A
cycle is something that is automatic, and if it's a cycle and you have leading and lagging indicators as the National Bureau of Economic
Research has. Then you'd think "Oh, okay, everything that goes up will come down, and everything that goes down will come up, just
wait your turn." And that means governments should be passive.
Well, that is the opposite of everything that's said in classical economics and the Progressive Era, when they realized that economies
don't recover by themselves. You need a-the government to step in, you need something "exogenous," as economist say. You need something
from outside the system to revive it. The covert idea of this business cycle analysis is to leave out the role of government. If
you look at neoliberal and Austrian theory, there's no role for government spending, and no role of public investment. The whole
argument for privatization, for instance, is the opposite of what was taught in American business schools in the 19 th
century. The first professor of economics at the Wharton School of Business, which was the first business school, was Simon Patten.
He said that public infrastructure is a fourth factor of production. But its role isn't to make a profit. It's to lower the cost
of public services and basic inputs to lower the cost of living and lower the cost of doing business to make the economy more competitive.
But privatization adds interest payments, dividends, managerial payments, stock buybacks, and merges and acquisitions. Obviously
these financialized charges are factored into the price system and raise the cost of living and doing business.
LONG: Well, Michael, we're-I thank you for the time, and we're up against our hard line. I know we didn't have as much time as
we always like, so we have to break. Any overall comments you'd like to leave with our listeners who might be interested this school
of economics?
HUDSON: Regarding the downturn we're in, we're going into a debt deflation. The key of understanding the economy is to look at
debt. The economy has to spend more and more money on debt service. The reason the economy is not recovering isn't simply because
this is a normal cycle. And It's not because labour is paid too much. It's because people are diverting more and more of their income
to paying their debts, so they can't afford to buy goods. Markets are shrinking – and if markets are shrinking, then real estate
rents are shrinking, profits are shrinking. Instead of using their earnings to reinvest and hire more labour to increase production,
companies are using their earnings for stock buybacks and dividend payouts to raise the share price so that the managers can take
their revenue in the form of bonuses and stocks and live in the short run. They're leaving their companies as bankrupt shells, which
is pretty much what hedge funds do when they take over companies.
So the financialization of companies is the reverse of everything Adam Smith, John Stuart Mill, and everyone you think of as a
classical economist was saying. Banks wrap themselves in a cloak of classical economics by dropping history of economic thought from
the curriculum, which is pretty much what's happened. And Canada-I know since you're from Canada, my experience there was that the
banks have a huge lobbying power over government. In 1979, I wrote for the IRPP Institute there on Canada In the New Monetary
Order . At that time the provinces of Canada were borrowing money from Switzerland and Germany because they could borrow it at
much lower interest rates. I said that this was going to be a disaster, and one that was completely unnecessary. If Canadian provinces
borrow in Francs or any other foreign currency, this money goes into the central bank, which then creates Canadian dollars to spend.
Why not have the central bank simply create these dollars without having Swiss francs, without having German marks? It's unnecessary
to have an intermediary. But the more thuggish banks, like the Bank of Nova Scotia, said, "Oh, that way's the road to serfdom." It's
not. Following the banks and the Austrian School of the banks' philosophy, that's the road to serfdom. That's the road
to debt serfdom. It should not be taken now. It lets universities and the government be run by neoliberals. They're a travesty of
what real economics is all about.
LONG: Michael, thank you very much. I learned a lot, appreciate it; certainly appreciate how important it is for us to use the
right words on the right subject when we're talking about economics. Absolutely agree with you. Talk to you again?
Interesting, but after insulting Duncan, Hudson says the banks stopped partnering with industry and went into real estate,
which sounded like what Duncan said.
I mention this because for a non- expert like myself it is sometimes difficult to tell when an expert is disagreeing with someone
for good reasons or just going off half- cocked. I followed what Hudson said about the evils of the IMF, but didn't see where
Duncan had defended any of that, unless it was implicit in saying that capitalism used to function better.
"As we got in the argument at the beginning of your program today, our argument is about the vocabulary we're using and the
words you're using. The vocabulary taught to students today in economics – and used by the mass media and by government spokesmen
– is basically a set of euphemisms ."Almost all the words we get are kind of euphemisms to conceal the actual dynamics that are
happening."
May consider it's about recognizing and deciphering the "doublespeak", "newspeak", "fedspeak", "greenspeak" etc, whether willing
or unwitting using words for understanding and clarifying as opposed to misleading and confusing dialectic as opposed to sophistry.
What I objected to was the characterization of today's situation as "financialization." I explained that financialization is
the FIRST stage - when finance WORKS. We are now in the BREAKDOWN of financialization - toward the "barter" stage.
Treating "finance" as an end stage rather than as a beginning stage overlooks the dynamics of breakdown. It is debt deflation.
First profits fall, and as that occurs, rents on commercial property decline. This is already widespread here in New York, from
Manhattan (8th St. near NYU is half empty) to Queens (Austin St. in Forest Hills.).
I wrote an article you might be interested in reading. It outlines a tax policy which would help prevent what you are discussing
in your article. The abuse of credit to receive rents and long term capital gains.
Thank you for another eye-opening exposition. My political economy education was negative (counting a year of Monetarism and
Austrian Economics around 1980), so I appreciate your interviews as correctives.
From your interview answer to the question about what we, the 99+% should do,I gathered only that we should not try to beat
the market. Anything more than that?
From my understanding, post Plaza banking lost most of its traditional market to the shadow sector, as a result, expanded off
into C/RE and increasingly to Financialization of everything sundry.
Disheveled Marsupial interesting to note Mr. Hudson's statement about barter, risk factors – ?????
One of the most important distinctions that investors have to understand is the difference between secular and cyclical
trends Let us begin with definitions from the Encarta® World English Dictionary:
Secular – occurring only once in the course of an age or century; taking place over an extremely or indefinitely long period
of time
Cycle – a sequence of events that is repeated again and again, especially a causal sequence; a period of time between repetitions
of an event or phenomenon that occurs regularly
Secular stagnation is a condition of negligible or no economic growth in a market-based economy . When
per capita income stays at relatively high levels, the percentage of savings is likely to start exceeding the percentage of longer-term
investments in, for example, infrastructure and education, that are necessary to sustain future economic growth. The absence of
such investments (and consequently of the economic growth) leads to declining levels of per capita income (and consequently of
per capita savings). With the reduced percentage savings rate converging with the reduced investment rate, economic growth comes
to a standstill – ie, it stagnates. In a free economy, consumers anticipating secular stagnation, might transfer their savings
to more attractive-looking foreign countries. This would lead to a devaluation of their domestic currency, which would potentially
boost their exports, assuming that the country did have goods or services that could be exported.
Persistent low growth, especially in Europe, has been attributed by some to secular stagnation initiated by stronger European
economies, such as Germany, in the past few years.
Words. What they mean depends on who's talking.
Secular stagnation is when the predators of finance have eaten too many sheeple.
Markets are shrinking – and if markets are shrinking, then real estate rents are shrinking, profits are shrinking.
Real estate rents in this latest asset bubble, whether commercial or residential, appear to have been going up in many
markets even if the increases are slowing. That rent inflation will likely turn into rent deflation, but that doesn't appear to
have happened yet consistently.
Perhaps he meant to say that markets are going to shrink as the debt deflation becomes more evident?
Yes, I think we are into turnip country now. Figure 1 in
this
prior article looks clear enough – even if you don't like the analysis that went with it. Wealth inequality still climbs but
income inequality has plateaued since Clinton I. Whatever the reasons for that, the 1% should be concerned – where is the ROI?
Barter has always existed and always will. Debt money expands and contracts the middle class, acting as a feedback signal,
which never works over the long term, because the so encapsulated system can only implode, when natural resource liquidation cannot
be accelerated. The whole point is to eliminate the initial requirement for capital, work. Debt fails because both sides of the
same coin assume that labor can be replaced. The machines driven by dc technology are not replacing labor; neither the elites
nor the middle class can fix the machines, which is why they keep accelerating debt, to replace one failed technology only to
be followed by the next, netting extortion by whoever currently controls the debt machine, which the majority is always fighting
over, expending more energy to avoid work, like the objective is to avoid sweating, unless you are dumb enough to run on asphalt
with Nike gear.
Labor has no problem with multiwhatever presidents, geneticists, psychologists, or economists, trying to hunt down and replace
labor, in or out of turn, but none are going to be any more successful than the others. Trump is being employed to bypass the
middle class and cut a deal. There is no deal. Labor is always going to pay males to work and their wives to raise children. Obviously,
the majority will vote for a competing economy, and it is welcome to do so, but if debt works so well, why is the majority voting
to kidnap our kids with public healthcare and education policies.
I'm not sure I heard an answer to the question of what people, who might be trying to save for the future or plan for retirement,
can do? Is the point that there isn't anything? Because I'm definitely between rocks and hard places
Yeah, he basically said there is no good savings plan. Big-money interests have rigged the rules and are now manipulating the
market (this used to be the definition of what was NOT allowed). Thus, they use computer algorithms to squeeze small amounts out
of the market millions of times. This means that the "investments" are nothing of the sort. You don't "invest" in something for
milliseconds. He said that the 1% are mostly just trying to hold on to what they have. Very few trust the rigged markets.
Low rent & cheap energy are key to the arts & innovations. My model has to work for airports, starts at the fuel farm as the
CIA & MI6 Front Page Avjet did. Well before that was Air America. I wonder if now American Airlines itself is a Front.
All of America is a Front far as I can about tell. Hadn't heard that Manhattan rents were coming down. Come in from out of
town, how you going to know? Not supposed to I guess.
I got that textbook and I liked that guy John Commons. He says capitalism is great, but it always leads to Socialism because
of unbridled greed.
The frenzy to find another stable cash currency showing in Bit Coin and the discussion of Future Tax Credits while the Euro
is controlled by the rent takers demands change on both sides of the Atlantic.
We got shot dead protesting the war, and civil rights backlash is the gift that keeps giving to the Southerners looking up
every day in every courthouse town, County seat is all about spreading fear and desperation.
How to change it all without violence is going to be really tricky.
. . . So, basically, if you're a Canadian investor, move.
LONG: So the Canadian investors are a better contrarian indicator than the front page cover, you're saying.
HUDSON: I'd think so. Once they get in, you know the bubble's over.
When one reads the financial press in Canada, every dollar extracted by the lords of finance is a glorious taking by brilliant
people at the top of the financial food chain from the stupid little people at the bottom, but when it counts, there was silence,
in cooperation with Canada's one percent.
The story starts about five years ago, with smart meters. Everyone knows what they are, a method by which electrical power
use can be priced depending on the time of day, and day of the week.
To make this tasty, Ontario's local utilities at first kept the price the same for all the time, and then after all the meters
were installed, came the changes, phased in over time. Prices were increased substantially, but there was an out. If you changed
your living arrangements to live like a nocturnal rodent and washed your clothes in the middle of the night, had supper later
in the evening or waited for weekend power rates you could still get low power rates, from the three tier price structure.
The local utilities bought the power from the government of Ontario power generation utility, renamed to Hydro One, and this
is where Michael Hudson's talk becomes relevant.
The successful error of monetarism is to force countries to have such self-defeating policies that they end up having to
privatize their natural resources, their public domain, their public enterprises, their communications and transportation, like
you're seeing in Greece's selloffs. So when you find an error that is repeated, it's deliberate. It's not insane. It's
part of the program, not a bug .
LONG: Where does this lead us? What's the roadmap ahead of us here?
HUDSON: A thousand years ago, if you were a marauding gang and you wanted to take over a country's land and its natural
resources and public sector, you'd have to invade it with military troops. Now you use finance to take over countries. So it leads
us into a realm where everything that the classical economists saw and argued for – public investment, bringing costs
in line with the actual cost of production – that's all rejected in favor of a rentier class evolving into an oligarchy. Basically,
financiers – the 1% – are going to pry away the public domain from the government. Pry away and privatize the public enterprises,
land, natural resources, so that bondholders and privatizers get all of the revenue for themselves. It's all sucked up to the
top of the pyramid, impoverishing the 99% .
Eighteen months ago, there was an election in Ontario, and the press was on radio silence during the whole time leading up
to the election about the plans to "privatize" Hydro One. I cannot recall one instance of any mention that the new Premier, Kathleen
Wynne was planning on selling Hydro One to "investors".
Where did this come from? Did the little people rise up and say to the politicians "you should privatize Hydro One" for whatever
reason? No. This push came from the 1% and Hydro One was sold so fast it made my head spin, and is now trading on the Toronto
Stock exchange.
At first I though the premier was an economic ignoramus, because Hydro One was generating income for the province and there
was no other power supplier, so one couldn't even fire them if they raised their prices too high.
One of the arguments put forward by the 1% to privatize Hydro One was a classic divide and conquer strategy. They argued that
too many people at Hydro One were making too much money, and by privatizing, the employees wages would be beat down, and the resultant
savings would be passed on to customers.
Back to Michael Hudson
. . . The whole argument for privatization, for instance, is the opposite of what was taught in American business schools
in the 19th century. The first professor of economics at the Wharton School of Business, which was the first business school,
was Simon Patten. He said that public infrastructure is a fourth factor of production. But its role isn't to make a profit
. It's to lower the cost of public services and basic inputs to lower the cost of living and lower the cost of doing
business to make the economy more competitive. But privatization adds interest payments, dividends, managerial payments,
stock buybacks, and merges and acquisitions . Obviously these financialized charges are factored into the price system
and raise the cost of living and doing business .
Power prices have increased yet again in Ontario since privatization, and Canada's 1% are "making a killing" on it. There has
been another change as well. Instead of a three tier price structure, there are now two, really expensive and super expensive.
There is no longer a price break to living like a nocturnal rodent. The 1% took that for themselves.
I am so tired of seeing that old lie about Old Henry and the $5 a day. I realize it was just a tossed off reference to something
most people believe for the purpose of describing a discarded policy, but the fact is very, very few of Old Henry's employees
ever got that pay. See, there were strings attached.
Old Henry hired a lot of spies, too. He sent them around to the neighborhoods where his workers lived (it was convenient having
them all in Detroit). If the neighbors saw your kid bringing a bucket of beer home from the corner tavern for the family, you
didn't get the $5.
If your lawn wasn't mowed to their satisfaction, you didn't get the $5. If you were thought not to bathe as often as they liked,
you didn't get the $5. If you didn't go to a church on Sundays, you didn't get the $5. If you were an immigrant and not taking
English classes at night school, you didn't get the $5. There were quite a lot of strings attached. The whole story was a public
relations stunt, and Old Henry never intended to live up to it; he hated his workers.
"... Controlling inflation solely by focusing on workers wages since 1980 but allowing monopoly power and economic rents to skyrocket
since 1980 is the main reason for the extreme inequality that has developed ..."
"... Prima facie evidence of distorted labor market where buyers of labor have control. At the very least, the next democratic President
should use their weekly address to point out the metrics relating economic gains, net wealth gains, productivity gains, to wage gains.
The Presudent should remind employers to fairly share the gains. Once the metrics indicate distortion in the labor markets the President
will then introduce corrective legislation using the public communications weight behind this free market notion of a fair labor market,
using these metrics. Let us try this bully pulpit, public communications effort with the idea of building public momentum for correctives,
and maybe we will return to the 1960s future when gains were more proportionally shared. Perhaps we wont need much legislation at all,
afterall we had one generation comport with fairness, you know, rational expectations. ..."
"... if demand cannot be kept up by wages, then the only option is loans and we have seen in 2008 the catastrophic results of that
..."
non accelerating inflation rate of unemployment is a better term
there is nothing "natural" about that rate
there are many factors that play a role, but the most important are
1. monopoly power is the most important, without monopoly power, in a perfectly competitive market, excessive inflation is
not possible
2. factors that affect bargaining power OF workers
Controlling inflation solely by focusing on workers wages since 1980 but allowing monopoly power and economic rents to
skyrocket since 1980 is the main reason for the extreme inequality that has developed
Prima facie evidence of distorted labor market where buyers of labor have control.
At the very least, the next democratic President should use their weekly address to point out the metrics relating economic
gains, net wealth gains, productivity gains, to wage gains. The Presudent should remind employers to fairly share the gains.
Once the metrics indicate distortion in the labor markets the President will then introduce corrective legislation using the
public communications weight behind this free market notion of a fair labor market, using these metrics.
Let us try this bully pulpit, public communications effort with the idea of building public momentum for correctives, and
maybe we will return to the 1960s future when gains were more proportionally shared. Perhaps we wont need much legislation at
all, afterall we had one generation comport with fairness, you know, rational expectations.
We can expect to do that again, especially as all new economists will be trained on the why and on how to accomplish this metric
of shared gains. One can only hope.
if we don't allow median wages to go up to match production/productivity
and if economic rents continue to go up disproportionally then we need to do a redistribution, ideally by taxes, to get the
median wage to keep pace with production/productivity
otherwise demand for products will eventually falter, making us all poorer for it
if demand cannot be kept up by wages, then the only option is loans and we have seen in 2008 the catastrophic results of
that
Should
We Reject the Natural Rate Hypothesis?, by Olivier Blanchard, PIIE : Fifty years ago,
Milton Friedman articulated the natural rate hypothesis. It was composed of two
sub-hypotheses: First, the natural rate of unemployment is independent of monetary policy.
Second, there is no long-run tradeoff between the deviation of unemployment from the natural
rate and inflation. Both propositions have been challenged. Blanchard reviews the arguments
and the macro and micro evidence against each and concludes that, in each case, the evidence
is suggestive but not conclusive. Policymakers should keep the natural rate hypothesis as
their null hypothesis but keep an open mind and put some weight on the alternatives. [
paper ]
"there is a strong case, although not an overwhelming case, to allow U.S. output to exceed
potential for some time, so as to reintegrate some of the workers who left the labor force
during the last ten years."
Blanchard calls for exploring the unknown regions
of lower and lower unemployment
Lower UE rates
Instead of accelerating output price inflation
Or even wage inflation
Given possible productivity pick ups
We may discover
We get a return to higher and higher participation
Not an unhappy result after all
The parting of the ways with the likes of Blanchard and krugman might come
When at long last wage rates do begin to rise faster then
Say
labor productivity plus three percent
But if the acceleration of the expected rate of change
of the rate of output price change
accelerates slowly
We'll have plenty of policy means and time to moderate the expansion of demand
Given the political will
What is completely missed by looking at the impact of a slump on long run output capacity
Is the actual lost output out of existing capacity
And the misery this inflicts now
for many too many
Ten years of sub possible output
Contain How many weeks upon weeks
of reduced Welfare for too many souls ?
Blanchards uses the definition of potential output
That suggests over production has to be off set by under production
I.e. Potential output is not technical maximum output by any means
PO
Is more like a rate of output and consequent rate of existing factor utilization
That does not unduly
stress
the various institutional arrangements and practices
Or overly tax
the stability of existing social norms
Considered necessary
to sustaining the good of society
thru
It's gradual development over time
There is another set of conflicting visions
One of which
That any class pov might hatch
A vision
Perhaps too Faustian for most souls of that class
That is restless
to push faster
To Venture more
Face uncertainty with boldness even audacity
These tactics do not just suppress information. They enforce conformity at much
deeper level.
Notable quotes:
"... I am using the Orwellian verb "unperson" playfully, but I'm also trying to be precise. What's happening isn't censorship, technically, at least not in the majority of cases. While there are examples of classic censorship (e.g., in the UK, France, and Germany), apart from so-called "terrorist content," most governments aren't formally banning expressions of anti-corporatist dissent. This isn't Czechoslovakia, after all. This is global capitalism, where the repression of dissent is a little more subtle. The point of Google unpersoning CounterPunch (and probably many other publications) and Pulitzer Prize-winning journalists like Hedges is not to prevent them from publishing their work or otherwise render them invisible to readers. The goal is to delegitmize them, and thus decrease traffic to their websites and articles, and ultimately drive them out of business, if possible. ..."
"... Another objective of this non-censorship censorship is discouraging writers like myself from contributing to publications like CounterPunch, Truthdig, Alternet, Global Research, and any other publications the corporatocracy deems "illegitimate." Google unpersoning a writer like Hedges is a message to other non-ball-playing writers. The message is, "this could happen to you." This message is meant for other journalists, primarily, but it's also aimed at writers like myself who are making a living (to whatever degree) writing and selling what we think of as "literature." ..."
"... These tactics do not just suppress information. They enforce conformity at much deeper level. ..."
"... Chomsky explains how this system operates in What Makes Mainstream Media Mainstream . It isn't a question of censorship the system operates on rewards and punishments, financial and emotional coercion, and subtler forms of intimidation. Making examples of non-cooperators is a particularly effective tactic. Ask any one of the countless women whose careers have been destroyed by Harvey Weinstein, or anyone who's been to graduate school, or worked at a major corporation. ..."
"... C. J. Hopkins is an award-winning American playwright, novelist and satirist based in Berlin. His plays are published by Bloomsbury Publishing (UK) and Broadway Play Publishing (USA). His debut novel, ZONE 23 , is published by Snoggsworthy, Swaine & Cormorant. He can reached at cjhopkins.com or consentfactory.org . ..."
On November 30, 2016, presumably right at the stroke of midnight, Google Inc. unpersoned
CounterPunch. They didn't send out a press release or anything. They just quietly removed it
from the Google News aggregator. Not very many people noticed. This happened just as the "fake
news" hysteria was being unleashed by the corporate media, right around the time The Washington
Post ran
this neo-McCarthyite smear piece vicariously accusing CounterPunch, and a number of other
publications, of being "peddlers of Russian propaganda." As I'm sure you'll recall, that
astounding piece of "journalism" (which The Post was promptly forced to disavow with an absurd
disclaimer but has refused to retract) was based on the claims of an anonymous website
apparently staffed by a couple of teenagers and a formerly rabidly anti-Communist, now rabidly
anti-Putin think tank. Little did most people know at the time that these were just the opening
salvos in what has turned out to be an all-out crackdown on any and all forms of vocal
opposition to the global corporate ruling classes and their attempts to quash the ongoing
nationalist backlash against their neoliberal agenda.
Almost a year later, things are much clearer. If you haven't been following this story
closely, and you care at all about freedom of the press, freedom of speech, and that kind of
stuff, you may want to take an hour or two and catch up a bit on what's been happening. I
offered a few examples of some of the measures governments and corporations have been taking to
stifle expressions of dissent in my latest
piece in CounterPunch , and there are many more detailed articles online, like this one by Andre
Damon from July, and this follow-up he published last
week (which reports that Pulitzer Prize-winning journalist and author Chris Hedges has also
been unpersoned). Or, if you're the type of soul who only believes what corporations tell you,
and who automatically dismisses anything published by a Trotskyist website, here's
one from last December in The Guardian, and an
op-ed in The New York Times , both of which at least report what Google, Twitter, and
Facebook are up to. Or you could read this
piece by Robert Parry , who also has "legitimate" (i.e., corporate) credentials, and who
hasn't been unpersoned just yet, although I'm sure they'll get around to him eventually.
I am using the Orwellian verb "unperson" playfully, but I'm also trying to be precise.
What's happening isn't censorship, technically, at least not in the majority of cases. While
there are examples of classic censorship (e.g., in the UK, France, and Germany), apart from
so-called "terrorist content," most governments aren't formally banning expressions of
anti-corporatist dissent. This isn't Czechoslovakia, after all. This is global capitalism,
where the repression of dissent is a little more subtle. The point of Google unpersoning
CounterPunch (and probably many other publications) and Pulitzer Prize-winning journalists like
Hedges is not to prevent them from publishing their work or otherwise render them invisible to
readers. The goal is to delegitmize them, and thus decrease traffic to their websites and
articles, and ultimately drive them out of business, if possible.
Another objective of this non-censorship censorship is discouraging writers like myself
from contributing to publications like CounterPunch, Truthdig, Alternet, Global Research, and
any other publications the corporatocracy deems "illegitimate." Google unpersoning a writer
like Hedges is a message to other non-ball-playing writers. The message is, "this could happen
to you." This message is meant for other journalists, primarily, but it's also aimed at writers
like myself who are making a living (to whatever degree) writing and selling what we think of
as "literature."
Yes, as you've probably guessed by now, in addition to writing political satire, I am, as
rogue journalist Caitlin Johnstone so aptly put it once, an "elitist wanker." I've spent the
majority of my adult life writing stage plays and working in the theater, and it doesn't get
any more elitist than that. My plays are published by "establishment" publishers, have won a
few awards, and have been produced internationally. I recently published my "debut novel"
(which is what you call it if you're an elitist wanker) and am currently trying to promote and
sell it. I mention this, not to blow my little horn, but to the set the stage to try to
illustrate how these post-Orwellian intimidation tactics (i.e., unpersoning people from the
Internet) work. These tactics do not just suppress information. They enforce conformity at much
deeper level.
The depressing fact of the matter is, in our brave new Internet-dominated world,
corporations like Google, Twitter, and Facebook (not to mention Amazon), are, for elitist
wankers like me, in the immortal words of Colonel Kurz, "either friends or they are truly
enemies to be feared." If you are in the elitist wanker business, regardless of whether you're
Jonathan Franzen, Garth Risk Hallberg, Margaret Atwood, or some "mid-list" or "emerging"
author, there is no getting around these corporations. So it's kind of foolish, professionally
speaking, to write a bunch of essays that will piss them off, and then publish these essays in
CounterPunch. Literary agents advise against this. Other elitist literary wankers, once they
discover what you've been doing, will avoid you like the bubonic plague. Although it's
perfectly fine to write books and movies about fictional evil corporations, writing about how
real corporations are using their power to mold societies into self-policing virtual prisons of
politically-correct, authoritarian consumers is well, it's something that is just not done in
professional elitist wanker circles.
Normally, all this goes without saying, as these days most elitist wankers are trained how
to write, and read, and think, in MFA conformity factories, where they screen out any unstable
weirdos with unhealthy interests in political matters. This is to avoid embarrassing episodes
like Harold
Pinter's Nobel Prize lecture (which, if you haven't read it, you probably should), and is
why so much of contemporary literature is so well-behaved and instantly forgettable. This
institutionalized screening system is also why the majority of journalists employed by
mainstream media outlets understand, without having to be told, what they are, and are not,
allowed to report. Chomsky explains how this system operates in What Makes Mainstream Media Mainstream . It isn't a
question of censorship the system operates on rewards and punishments, financial and emotional
coercion, and subtler forms of intimidation. Making examples of non-cooperators is a
particularly effective tactic. Ask any one of the countless women whose careers have been
destroyed by Harvey Weinstein, or anyone who's been to graduate school, or worked at a major
corporation.
Or let me provide you with a personal example.
A couple weeks ago, I googled myself (which we elitist wankers are wont to do), and noticed
that two of my published books had disappeared from the "Knowledge Panel" that appears in the
upper right of the search results. I also noticed that the people "People Also Search For" in
the panel had changed. For years, consistently, the people you saw there had been a variety of
other elitist literary wankers and leftist types. Suddenly, they were all rather right-wing
types, people like Ilana Mercer and John Derbyshire, and other VDARE writers. So that was a
little disconcerting.
I set out to contact the Google Search specialists to inquire about this mysterious
development, and was directed to a series of unhelpful web pages directing me to other
unhelpful pages with little boxes where you can write and submit a complaint to Google, which
they will completely ignore. Being an elitist literary wanker, I also wrote to Google Books,
and exchanged a number of cordial emails with an entity (let's call her Ms. O'Brien) who
explained that, for "a variety of reasons," the "visibility" of my books (which had been
consistently visible for many years) was subject to change from day to day, and that,
regrettably, she couldn't assist me further, and that sending her additional cordial emails was
probably a pointless waste of time. Ms. O'Brien was also pleased to report that my books had
been restored to "visibility," which, of course, when I checked, they hadn't.
"Whatever," I told myself, "this is silly. It's probably just some IT thing, maybe Google
Books updating its records, or something." However, I was still perplexed by the "People Also
Search For" switcheroo, because it's kind of misleading to link my writing to that of a bunch
of serious right-wingers. Imagine, if you were a dystopian sci-fi fan, and you googled me to
check out my book and see what else I had written, and so on, and my Google "Knowledge Panel"
popped up and displayed all these far-right VDARE folks. Unless you're a far-right VDARE type
yourself, that might be a little bit of a turn-off.
At that point, I wondered if I was getting paranoid. Because Google Search runs on
algorithms, right? And my political satire and commentary is published, not only in
CounterPunch, but also in The Unz Review, where these far-right-wing types are also published.
Moreover, my pieces are often reposted by what appear to be "Russia-linked" websites, and
everyone knows that the Russians are all a bunch of white supremacists, right? On top of which,
it's not like I'm Stephen King here. I am hardly famous enough to warrant the attention of any
post-Orwellian corporate conspiracy to stigmatize anti-establishment dissent by manipulating
how authors are displayed on Google (i.e., subtly linking them to white supremacists,
anti-Semites, and others of that ilk).
So, okay, I reasoned, what probably happened was over the course of twenty-four hours, for
no logical reason whatsoever, all the folks who had been googling me (along with other leftist
and literary figures) suddenly stopped googling me, all at once, while, more or less at the
exact same time, hundreds of right-wingers started googling me (along with those white
supremacist types they had, theoretically, already been googling). That kind of makes sense
when you think about it, right? I mean, Google couldn't be doing this intentionally. It must
have been some sort of algorithm that detected this sudden, seismic shift in the demographic of
people googling me.
Or, I don't know, does that possibly sound like a desperate attempt to rationalize the
malicious behavior of an unaccountable, more or less god-like, global corporation that wields
the power of life and death over my book sales and profile on the Internet (a more or less
god-like global corporation that could do a lot of additional damage to my sales and reputation
with complete impunity once the piece you're reading is published)? Or am I simply getting
paranoid, and, in fact, I've developed a secret white supremacist fan base without my
knowledge? Only Google knows for sure.
Such are the conundrums elitist literary wankers have to face these days that is, those of
us wankers who haven't learned to keep our fucking mouths shut yet. Probably the safest course
of action, regardless of whether I'm being paranoid or Google does have me on some kind of
list, is to lay off the anti-corporatist essays, and definitely stop contributing to
CounterPunch, not to mention The Unz Review, and probably also give up the whole dystopian
satire novel thing, and ensure that my second novel conforms to the "normal" elitist wanker
rules (which every literary wanker knows, but which, technically, do not exist). Who knows, if
I play my cards right, maybe I can even sell the rights to Miramax, or okay, some other
corporation.
Once that happens, I assume that Google will want to restore me to normal personhood, and
return my books to visibility, and I will ride off into the Hollywood sunset with the Clintons,
Clooneys, and Pichais, and maybe even Barack Obama himself, if he isn't off jet skiing with
Richard Branson, or having dinner with Jeff and MacKenzie Bezos, who just happen to live right
down the street, or hawking the TPP on television. By that time, CounterPunch and all those
other "illegitimate" publications will have been forced onto the dark web anyway, so I won't be
giving up all that much. I know, that sounds pretty cold and cynical, but my liberal friends
will understand I just hope all my new white supremacist fans will find it in their hearts to
forgive me.
C. J. Hopkins is an award-winning American playwright, novelist and satirist based in
Berlin. His plays are published by Bloomsbury Publishing (UK) and Broadway Play Publishing
(USA). His debut novel, ZONE 23 , is
published by Snoggsworthy, Swaine & Cormorant. He can reached at cjhopkins.com or consentfactory.org .
Thank you for mustering the courage and then taking the time to spell out these outrages in a
straightforward, unemotional way. I've appreciated the humor that centers your other essays,
but there's not a damned thing funny about this.
But why are things as they are? With billions aplenty, our rulers must be driven by their
libido dominandi. We're left to wonder only whether they get off more on ostracizing the
Hopkinses, on buying the politicians, or on herding the sheep from bathrooms to statues to
flags.
"... What Whyte ran across was the sub-culture of the workplace as followed by those who set themselves upon a "career path" within a specific organization. The stereotypical examples are those, to quote Whyte , "who have left home spiritually as well as physically, to take the vows of organization life. [They adopt an ethic that] rationalizes the organization's demand for fealty and gives those who offer it wholeheartedly a sense of dedication." ..."
"... Today, some private-sector organizations have moved away from the most extreme demands of such conformity, but some other career lines have not, two examples being the military and career party politics. ..."
"... The Power Elite ..."
"... The Organization Man. ..."
"... hose who make their careers within these entities, especially the military and the government, are ideologically conditioned to identify their well-being with the specific goals of their chosen organizations. That means they must bind themselves not only to the goals, but also to the ethics of their workplace. ..."
"... Those who balk are eventually punished and cast out of the organizations. Those who guide these organizations, and essentially decide how rules and ethics will be interpreted and applied, are Mills's "power elite." ..."
"... It may come as a surprise to the reader that party politics as practiced by many of the Western democracies is quite similar. The "power elites" who reside at the top of the so-called greasy pole, holding positions as the head of ruling and contesting parties, are likely to demand the same sort of obedience to orders as any military officer. ..."
"... Rafe explained it this way ..."
"... Leaders of political parties can control their organizations in dictatorial fashion. They have power to reward or punish their party's cohorts in a fashion that can make or break careers. For instance, they control the dispersal of party funds from monies for elections right down to one's office budget; they determine whether a candidate will have to face a primary challenge; they make all committee assignments; they can promote and demote within the party ranks. ..."
"... As Rafe Mair observed, the possibilities for both reward and punishment are almost endless. In this way elected officials become bound to the diktats of their party's leaders. They cannot normally vote their conscience or reliably represent their constituency unless doing so coincides with the desires of their party's leadership. ..."
"... Foreign Policy Inc.: Privatizing America's National Interest ..."
"... America's Palestine: Popular and Official Perceptions from Balfour to Israeli Statehood ..."
"... This is an excellent summary of the basis in mentality of what is factually a 21st century version of a fascist regime. Even though two political parties and the shell forms of republican government may exist, the reality is that the parties are factions and the way things operate is via conformity and loyalty to an authoritarian power structure. ..."
Many working-class Americans voted for Donald Trump believing he would address their needs,
not those of rich Republicans. But all pols, it seems, end up conforming to their political
group's priorities, as Lawrence Davidson explains.
By Lawrence Davidson
In 1956, William H. Whyte published a book entitled The Organization Man about
America's societal changes in the post-World War II economy. Basing his findings on a large
number of interviews with CEOs of major American corporations, Whyte concluded that, within the
context of modern organizational structure, American "rugged individualism" had given way to a
"collectivist ethic." Economic success and individual recognition were now pursued within an
institutional structure – that is, by "serving the organization."
Whyte's book was widely read and praised, yet his thesis was not as novel as it seemed.
"Rugged individualism," to the extent that it existed, was (and is) the exception for human
behavior and not the rule. We have evolved to be group-oriented animals and not lone wolves.
This means that the vast majority of us (and certainly not just Americans) live our lives
according to established cultural conventions. These operate on many levels – not just
national patriotism or the customs of family life.
What Whyte ran across was the sub-culture of the workplace as followed by those who set
themselves upon a "career path" within a specific organization. The stereotypical examples are
those,
to quote Whyte , "who have left home spiritually as well as physically, to take the vows of
organization life. [They adopt an ethic that] rationalizes the organization's demand for fealty
and gives those who offer it wholeheartedly a sense of dedication."
Today, some private-sector organizations have moved away from the most extreme demands
of such conformity, but some other career lines have not, two examples being the military and
career party politics.
For insight in this we can turn to the sociologist C. Wright Mills , whose famous book
The Power
Elite was published the same year as Whyte's The Organization Man. Mills's
work narrows the world's ruling bureaucracies to government, military and top economic
corporations. T hose who make their careers within these entities, especially the military
and the government, are ideologically conditioned to identify their well-being with the
specific goals of their chosen organizations. That means they must bind themselves not only to
the goals, but also to the ethics of their workplace.
Those who balk are eventually punished and cast out of the organizations. Those who
guide these organizations, and essentially decide how rules and ethics will be interpreted and
applied, are Mills's "power elite."
How this works out in the military is pretty obvious. There is a long tradition of
dedication to duty. At the core of this dedication is a rigid following of orders given by
superiors. This tradition is upheld even if it is suspected that one's superior is
incompetent.
It may come as a surprise to the reader that party politics as practiced by many of the
Western democracies is quite similar. The "power elites" who reside at the top of the so-called
greasy pole, holding positions as the head of ruling and contesting parties, are likely to
demand the same sort of obedience to orders as any military officer.
The Organization Man or Woman in Politics
Running for and holding office in countries like the United States and Canada often requires
one to "take the vows of organization life." Does this support democracy or erode it? Here is
one prescient answer: the way we have structured our party politics has given us "an appalling
political system which is a step-by-step denial of democracy and a solid foundation for a
'soft' dictatorship."
One of the elegant rooms at President Trump's Mar-a-Lago club. (Photo from
maralagoclub.com)
Those are the words of the late Rafe Mair , a Canadian politician, broadcaster,
author and a good friend of this writer. Rafe spent years in Canadian politics, particularly in
his home province of British Columbia, and his experience led him to the conclusion expressed
above. How does this translate into practice?
Rafe
explained it this way : "In a parliamentary [or other form of representative]
democracy the voter transfers his rights to his member of parliament [congressperson, senator
or state legislator] to exercise on his behalf – the trouble is, by running for his
political party the [elected person, in turn, is led to] assign your [the voter's] rights to
the [party] leader for his exclusive use!"
There is no law that makes the elected official do this. However, the inducements to do so
are very powerful.
Leaders of political parties can control their organizations in dictatorial fashion.
They have power to reward or punish their party's cohorts in a fashion that can make or break
careers. For instance, they control the dispersal of party funds from monies for elections
right down to one's office budget; they determine whether a candidate will have to face a
primary challenge; they make all committee assignments; they can promote and demote within the
party ranks.
As Rafe Mair observed, the possibilities for both reward and punishment are almost
endless. In this way elected officials become bound to the diktats of their party's leaders.
They cannot normally vote their conscience or reliably represent their constituency unless
doing so coincides with the desires of their party's leadership.
I believe we are prisoners of a corrupted "democracy."
-- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- –
July 13, 2017
The Prisoners of "Democracy"
Screwing the masses was the forte of the political establishment. It did not really matter
which political party was in power, or what name it went under, they all had one ruling
instinct, tax, tax, and more taxes. These rapacious politicians had an endless appetite for
taxes, and also an appetite for giving themselves huge raises, pension plans, expenses, and
all kinds of entitlements. In fact one of them famously said, "He was entitled to his
entitlements." Public office was a path to more, and more largesse all paid for by the
compulsory taxes of the masses that were the prisoners of "democracy."
[more info on this at link below] http://graysinfo.blogspot.ca/2017/07/the-prisoners-of-democracy.html
Sam F , October 30, 2017 at 11:42 am
Yes, our ertswhile democracy has been completely corrupted. Thanks to Lawrence Davidson,
William Whyte, C. Wright Mills, and Rafe Mair for this consideration of the systemic
corruption of political parties. The diseases of conformity within party organizations are a
nearly inherent problem of democracy.
The improper influence which determines the policies conformed to by parties is the
central problem, and stems largely from influence of the economic Power Elite, directing the
policies to which the Organization Man must be obedient to be chosen. This distortion can be
eliminated by Amendments to the Constitution to restrict funding of mass media and elections
to limited individual contributions.
Our problem is that we cannot make such reforms because those tools of democracy are
already controlled by oligarchy, which never yields power but to superior force. Talk of
justice and peace is not in their language of might makes right, and has no effect
whatsoever. They yielded to the 1964 Civil Rights Act only because their fear of riots in the
streets led them to pretend that MLK et al had been persuasive.
The foreign wars may be stopped by the defeat, isolation, and embargo of the US by foreign
powers. But within the US, the full price of democracy must again be paid the People of the
US. The oligarchy must be defeated by superior force: only those who deny enforcement to
oligarchy and terrify the rich will bring them to yield any power. That is likely to await
more severe recessions and inequities caused by the selfish and irresponsible rich.
mike k , October 30, 2017 at 3:42 pm
You are exactly right Sam F. Unfortunately time is quickly running out for our corrupt
"civilization." The time to cultivate and practice wisdom has passed. The sad truth is that
our goose is cooked; there will be no cavalry showing up to save us. We are now "eating our
karma" and will reap our just deserts. Not because I or anyone say so, but because implacable
laws of nature will now play out. Dominant intellectual species occupy a precarious position
in planetary evolution, and we are on the verge of a great fall – and all the King's
horses and all the King's men will not be able to put our extincting species together again
..
Sam F , October 30, 2017 at 4:11 pm
Your reply touches a responsive chord, in that humanity seems to have made so little
permanent progress in its million years or so, mostly in its last few hundred years, an
insignificant fraction of planetary history. But the history and literature of temporary
progress lost is significant as the repository of ideas for future democracies, at those rare
moments when they are designed.
Our diseased society is but one tree in the forest of democracies. The US is or will be
like the apparently healthy tree that took down my power lines last night, a pretty red oak
with brilliant autumn leaves, but sideways now and blocking the road. But like the leaves on
that tree, we can see the problem and still hope to be as happy as this year's leaves on
healthier trees.
As in what I like to call the universal mind of humanity, individuals may have foresight
and thoughts beyond their apparent functions, which survive in that greater mind of their
thoughts recorded or just passed along, and in that way their learning is not in vain.
Drew Hunkins , October 30, 2017 at 10:34 am
Trump did nix out the TPP and did desire a rapprochement of sorts with Moscow. He also
regularly asserted that he wanted to re-build American manufacturing in the heartland and
wanted to rein in Washington's footprint across the globe. Of course Trump ultimately
capitulated to the militarist Russophobes. One can only put so much stock in campaign
pronouncements, but he did come off as less bellicose than Killary, that was clear to any
fair minded observer.
Trump's also been a nightmare as it comes to workers' rights in general, consumer and
environmental protections and fair taxation as it relates to regressive vs progressive rates.
He was also an Islamophobe when it comes to Iran and fell right in line with Adelson and the
other ZIonist psychopaths.
The most welcoming aspect of Trump was his desire to make peace with Russia, this has been
completely sabotaged by the deep state militarists. This is the reason the Corkers, Flakes
and much of the establishment mass media browbeat and attack him relentlessly. Most of them
ignore what he actually should be admonished for opting for nuclear brinkmanship instead.
exiled off mainstreet , October 30, 2017 at 11:25 am
This is the best description I have seen about Trump's role.
Bob Van Noy , October 30, 2017 at 10:37 am
Thank you CN and Lawrence Davidson for what I think is a accurate explanation of the
failure of our Democracy. I especially like the reference to C. Wright Mills who is a heroic
character for me. I think Mr. Mill's book on the Power Elite was prescient, as was his
thinking in general. He published a little known book "Listen, Yankee" (1960) that was very
insightful about the then current Cuban Revolution. It seems in retrospect that there was
plenty of warning at the time for America to wake up to the goals of Big Government and Big
Business but it was either successfully repressed or ignored by those who might have made a
difference, like Labor. At any rate, C. Wright Mills died too early, because he seemed
uniquely suited to make a difference. His writing remains current, I'll add a link.
I am a big CW Mills fan too. We have had many warnings – now we are going to
experience the fate of those who ignore wisdom.
tina , October 30, 2017 at 10:31 pm
Hey, college UWM 1984- 1987 Mass Comm, I did not graduate , but we studied Mills, Lewis
Mumford, and my favorite, Marshall McLuhan. Also, first time I was introduced to Todd Gitlin
and IF Stone. While I did not pursue a life in journalism, I so appreciate all those who did
the hard work. I still have all my college required reading books from these people, it is
like a set of encyclopedias, only better. And better than the internet. Keep up the work CN ,
I am not that talented, but what you do is important.
First, let me commend Lawrence Davidson for his selection of two of the most insightful
writers of the sixties to use as a springboard for his perceptive essay. A third(John Kenneth
Galbraith) would complete a trilogy of the brilliant academic social analysis of that time.
Galbraith's masterpiece(The Affluent Society) examined the influence of the heavy emphasis
corporate advertising had on American culture and concluded that the economic/social
structure was disproportionately skewed toward GDP(gross domestic product) at the expense of
educational investment. This was in direct contrast with the popular novels and essays of Ayn
Rand, the goddess of greed whose spurious philosophy had come to epitomize the mindset that
continues to plague the globe with the neoliberal ideals that have been reinvented under many
names over time; i.e. laissez faire, trickle down,the Laffer curve, free market economics and
monetarism.
Zachary Smith , October 30, 2017 at 12:17 pm
Usually such claims are themselves no more than campaign hot air. However, in their
ignorance, voters may well respond to such hot air, and the result can be a jump from the
proverbial frying pan into the fire. U.S. voters seem to have taken just such a leap when
they elected Donald Trump president.
Nowhere in this essay are either of the terms "Hillary" or "Clinton" mentioned. U.S.
voters had the choice of a known evil on the "D" side of the ballot, or another person well
understood to be a shallow, self-centered, rich *****. They were going to end up with an
unqualified person either way the voting went. Quite possibly the nod went to Trump because
1) his promises were surely more believable than those of Clinton and 2) Trump wasn't yet the
known destroyer of entire nations.
Describing the predicament of the voters as "ignorance" just isn't fair when looking at
the overall picture.
mike k , October 30, 2017 at 3:50 pm
Yes. Voters were put in a no win situation. That's why I did not participate in the "show"
election.
Realist , October 31, 2017 at 4:33 am
What were Obama's reasons for failing to take a stand, once elected, on all the promises
he made during his campaigns? He mostly gave away the store to the other side, and insulted
his supporters while doing so. Talk about progressives not getting a "win" even after
carrying the elections. Two terms earlier, the media called the contest one of two
"moderates" between Bush and Gore. If that was "moderation" practiced by Dubya, I need a new
dictionary. Most recent elections have been pointless, especially when the Supreme Court
doesn't allow a complete recount of the votes. In a field of 13(!) primary candidates last
year, the GOP could not provide one quality individual. The Dems cheated to make sure the
worst possible of theirs would get the nomination. I see nothing but mental and moral midgets
again on the horizon for 2020. I don't expect Trump to seek re-election. He will have had a
bellyful should he even survive.
I believe what has happened to all of us is: "The Imposition of a New World Order." This
plan has been helped by puppet politicians. Therefore the question must be asked: "Is There
An Open Conspiracy to Control the World'?
[More info on this at link below] http://graysinfo.blogspot.ca/2014/12/is-there-open-conspiracy-to-control.html
john wilson , October 30, 2017 at 1:00 pm
Stephen: why do you ask the question to which you already know the answer? Yes, we're all
screwed and have been for years. The bankers already control the world and the military make
sure its stays that way.
Very true john wilson. Questions beget answers and information.
cheers Stephen J.
mike k , October 30, 2017 at 3:52 pm
It's like the Purloined Letter by Poe – the truth of our enslavement is so obvious,
that only the deeply brainwashed can fail to see it.
Zachary Smith , October 30, 2017 at 12:48 pm
The parts of The Organization Man I found most interesting were the chapters about
"Testing The Organization Man". The companies were deliberately selecting for people
we currently label Corporate Psychopaths. Whyte suggested memorizing some "attitudes" before
taking one of the tests. Among them:
I loved my father and my mother, but my father a little bit more
I like things pretty much the way they are
I never worry much about anything
I don't care for books or music much
I love my wife and children
I don't let them get in the way of company work
You can substitute any number of things that you won't allow to get in the way of
company work .
Ecology. Laws. Regulations. Integrity. Religion.
"Screw planet Earth. Exxon comes first!" Or "screw Jesus and the horse he rode in on. We
need to cut taxes and balance the budget. People are poor because they're too lazy to get a
job."
mike k , October 30, 2017 at 3:53 pm
Good points. Brainwashing in action revealed.
john wilson , October 30, 2017 at 12:55 pm
Democracy is another word for consensual slavery. In a communist system or a dictatorship
etc you are told you are a slave because you have no voice or choice. In a democracy you do
have a choice and its between one salve master and another. If you vote Democrat you are just
as much a slave to the system as you are if you vote Republican. The possibility of a third
choice which might just free you from your chains, is a fantasy and only there as window
dressing to give democracy some credibility. The term for this dilemma is called being
TOTALLY SCREWED!!
mike k , October 30, 2017 at 3:55 pm
Amen John. You got it right brother.
exiled off mainstreet , October 31, 2017 at 11:01 am
This is an excellent summary of the basis in mentality of what is factually a 21st century
version of a fascist regime. Even though two political parties and the shell forms of
republican government may exist, the reality is that the parties are factions and the way
things operate is via conformity and loyalty to an authoritarian power structure.
"... The History of the Phillips Curve: Consensus and Bifurcation ..."
"... The Fed Has a Theory. Trouble is the Proof is Patchy ..."
"... Do Phillips Curves Conditionally Help to Forecast Inflation? ..."
"... Declining Labor and Capital Shaes ..."
"... I am constantly baffled by economists trying to explain very complex non-linear system with simple two variable models. I have been dealing with a couple of engineering problems today where the publication I am using has over 50 design charts just for gravity pipe flow. Each chart has about five variables accommodated while holding a number of others constant. ..."
"... So I think we see the Philips curve predictably happening in the short-term in fields like technology where there is big demand and not enough people. However, as a general rule across the economy, I simply don't see why the relationship between inflation and unemployment should be the same today as it was in 2007, 1997, 1987, or 1977. ..."
"... Economics is infected with too much ideology and not enough scientific method. That is more the definition of a religion than a science. ..."
"... If neoliberals were intellectually honest, they wouldn't call it supply side economics, they'd call it philo-capital economics ..."
"... 80's Poly-Sci defined, "neo-feudalism" (or, as "Shock Doctrine", privatization of all "resource" + government capacity, subject financial sector capture) ..."
"... As far as I can tell, the whole idea of NAIRU is strictly an artifact of economic modeling, not something that's actually ever been observed in the wild. And doesn't it seem odd that making sure we don't drop below NAIRU is something the Fed feels like it needs to intervene to ensure rather than letting the market sort it out. Even if NAIRU was a real thing, you would assume that low unemployment –> increased wages –> increased prices –> reduced consumption –> lay-offs and higher unemployment. Which is to say, if there were such a thing as a natural rate of unemployment, wouldn't markets naturally produce it, obviating any need for the Fed to, say, jack up interest rates to keep the economy from "heating up" (I guess because people have so much money burning holes in their pockets?). It almost like, when it suits the capitalists, they stop believing in this whole "invisible hand" thing .strange ..."
"... "Neoliberalism sees competition as the defining characteristic of human relations. It redefines citizens as consumers, whose democratic choices are best exercised by buying and selling, a process that rewards merit and punishes inefficiency. It maintains that "the market" delivers benefits that could never be achieved by planning. ..."
The Rise and Fall of
the Phillips Curve Posted on October 27, 2017 The
Phillips Curve says that there is an inverse relation between unemployment and inflation. Low
unemployment is correlated with a rise in inflation. It's an article of faith to economists of
all stripes. It's listed in the popular introductory economics textbook by N. Gregory Mankiw as
one of the Ten Things All Economists agree
on . It's especially loved by the Fed, which raises or lowers interest rates depending in
part on its predictions. Its critics point out that its predictions are poor.
In this post, I discuss the derivation of the Phillips Curve, its adaption by Samuleson and
Solow to manage the economy, its breakdown in the 1970s, exploitation by neoliberals of that
breakdown to replace Keynesian demand-based economics with monetarism and supply-side
economics, its rejuvenation, and the evidence that it doesn't make accurate predictions.
I conclude with some observations based on an important paper by Simcha Barkai that
challenges the core beliefs of neoliberalism. It suggests we can raise wages substantially
without causing inflation by lowering corporate profits.
History
This part is based on Sections I-III of Robert Gordon's article, The History of the
Phillips Curve: Consensus and Bifurcation , Economica (2011) 78, 10–50 (behind
paywall, but you can find it online at your local library). Gordon is an economics professor at
Northwestern and has worked on the Phillips Curve for decades.
William Phillips published a paper in 1958 showing a correlation between wage growth and
inflation in the UK between 1861 and 1913. He fitted a curve to the data, and then compared
that curve to UK data from two later periods. There was a remarkable similarity for most of the
two periods, with exceptions Phillips explains away. Here is the curve Phillips derived:
1. w t = -.90 + 9.64U -1.39
Gordon says that " the inflation rate would be expected to equal the growth rate of wages
minus the long-term growth rate of productivity." P. 12.
1a. p = w – k
Here p is inflation, w is wage growth, and k is productivity growth. Generally in these
equations, lower case letters are rates of change and upper case letters are levels. We can
substitute Equation 1a into Equation 1 to get the original Phillips Curve.
2. p = -.90 + 9.64U -1.39 – k.
Paul Samuelson and Robert Solow picked up on the Phillips paper with a paper of their own in
1960. Gordon says much of their paper is a discussion of pre-Phillips theory. They can't find
data on the US economy similar to that found by Phillips for the UK economy, so they work up
some of their own data and make some calculations showing a result similar to that of Phillips.
Whereas Phillips does not mention the possibility that the curve might shift, Samuelson and
Solow find such shifts and offer possible explanations, such as strong labor unions.
Here's a schematic drawing of the Phillips Curve from Wikipedia :
The standard curve might be the one on the left. It shows very high inflation at very low
unemployment, but falls quickly as unemployment rises. That suggested to Samuelson and Solow
that there is a trade-off if the economy is in specific parts of the Phillips Curve: by
allowing a slightly higher level of inflation, you could get a big drop in unemployment. The US
tried this idea in the 1960s. This policy was tied to Keynesianism, which was the predominate
theory in the Kennedy and Johnson era, and into the Nixon Presidency.
When OPEC massively increased the price of oil in the early 70s, inflation soared far past
the level suggested by the Phillips Curve. The neoliberals at the University of Chicago argued
that the failure of the Phillips Curve proved that Keynesian economics was worthless, and
pushed their solution: monetarism. They also had a formula to replace the Phillips Curve as a
predictor of inflation.
Their explanation for the failure of the trade-off was something like this. Suppose the
beginning rates of inflation and unemployment are at Point A on the above chart. The Fed lowers
interest rates resulting in a small increase of inflation, so that the economy moves to Point B
with lower unemployment. People believe that is unsustainable, and that the economy will revert
to the natural rate of unemployment, the vertical line. As a result, the Phillips Curve shifts
up and to the right over time, so that the economy moves to Point C, with the beginning
unemployment rate but higher inflation.
The neoliberals won. Keynesianism lost out and was replaced by monetarism. This was probably
not deserved, according to Gordon. He says that Samuelson and Solow were not talking about the
situation that came about in the 70s, but rather the situation in the early 1960s. He also
spends a good part of his paper showing that the formulas offered by Friedman and the
neoliberals for predicting inflation were a total failure both on factual and theoretical
grounds.
Gordon himself proposed a version of the Phillips Curve designed to deal with the problem of
supply and demand shocks like the Oil Shock:
3. p = Ep t + b(U t – U tN ) + z
t + e t
In Equation 3, the second U term is the natural rate of unemployment, z t
represents cost-push pressure, and e t is apparently a constant. The natural rate of
unemployment and the z term vary over time, and for some reason so does the e term. There is
nothing left of the wage term. The Phillips Curve is now free from the bonds of factual data
that gave Phillips his interesting result. It's a curve-fitting exercise, using economic
theories put together in a way that fits the data. It's a complicated formula in which every
term needs to be calculated from some other theory or data.
Gordon says that Equation 3 is the canonical version of the Phillips Curve. It is
incorporated in most econometric models, modified by some other variables and terms, including
levels of taxation, expectations of inflation, inflation inertia, which relates to price and
wage rigidity in the short run, and a host of other terms. But as we shall see, it doesn't work
as a predictor.
Criticism of the Phillips Curve
The Phillips Curve has been controversial for a long time, as Mankiw
admits in his introductory textbook. Ben Leubsdorf wrote a very readable criticism for the
Wall Street Journal on August 14, 2014, just before the Fed started raising interest rates. His
title is The Fed Has a Theory. Trouble is the Proof is Patchy (sadly behind a paywall;
it's available online at your local library).
Leubsdorf confirms that most economists believe that there is a short run trade-off between
inflation and unemployment and also agree that this trade-off doesn't hold in the long term,
meaning that we can't get permanently lower unemployment by accepting a bit more inflation. But
the problem is that there is also no apparent connection in the short run either. Here's a
chart originally in Leubsdorf's article and reprinted in a post discussing the article by
Jared Bernstein .
Source: Wall Street Journal
To read this chart, select an expansion period from the list on the upper right, find the
line that color, and locate the circle at one end of the line; that's the starting point. Then
follow the line to see how the relationship between unemployment (x-axis) and inflation
(y-axis) changes over time. As you can see there is no apparent connection in any except the
first expansion. The lack of connection to theory is especially obvious in the current
expansion.
The Leubsdorf article has several quotes from Very Serious People to the effect we think
there's a relationship and we're going to act like there is a relationship, and we can
fine-tune the economy with our gut instincts.
It doesn't look like the latest study will change minds either. That one comes from the
Philadelphia Fed in August 2017, Do Phillips Curves Conditionally Help to Forecast
Inflation? The conclusion is that the Phillips Curve does worse than something called a
univariate model which I won't discuss.
In this September 26
New York Times article there are more Very Serious People explaining they need to follow
their instincts about the economy in deciding on interest rates and they are sure inflation is
coming. Meanwhile, the economy continues to add jobs with no obvious increase in inflation as
shown by the blue line on the above chart. Inflation is
currently running at 1.3% .
Damage From the Phillips Curve
We have already seen that the first notable failure of the Phillips Curve was used to
undermine Keynesian economics in favor of monetarism. As a result, working people of all
classes were doubly harmed, first by the abandonment of the Fed of any significant role in
cutting unemployment, and second by the savage use of high rates to control inflation.
Here's a chart showing the labor share in gross national product on the left axis (blue
line) and the prime rate on the right axis (red line).
The grey bars are recessions. This chart shows that up to 2000 every time workers start to
get a bigger share of the GDP, the Fed raises interest rates. The Phillips Curve was the
justification for those rate hikes. There is some evidence wages are firming up today, and
maybe even rising a fraction faster than inflation. Following tradition but not evidence, the
Fed is raising rates. If that hurts workers, also in accordance with tradition, that's just too
bad.
Observations
Take another look at Equation 1a. If we set inflation at zero, Equation 1 says that wage
growth equals productivity growth. That's not true. Here's a chart from the Economic Policy Institute .
The wage line is for production and non-supervisory personnel, which the EPI says is about
80% of employed people. The average wage for all workers has grown somewhat faster, but is
still well under the rate of increase of productivity over the long term.
Money produced in the economy goes either to capital or labor. So, the excess gains from
productivity must be going to capital.
Actually, it seems strange to suggest that none of the gains from increased productivity go
to capital, as Equation 1a does. Consider a company like Google. It can buy a few more computer
blades and serve more customers with little or no increase in total wages. The gains from the
productivity of the new capital all go to the company. Or consider a company that outsources
its labor. Some of the gains might be used to cut prices, I suppose, but surely most of the
gain stays with the company.
The following chart shows the sudden growth in top wealth. It demonstrates that the growth
began at the same time as the productivity-wages gap began, more support for the idea that the
gains from productivity are going to capital.
Capital can take many forms. It could be plant and equipment, commercial or agricultural
land, personal residences, art, gold, and many other things believed to store value, whether or
not they are actually producing anything, or even whether they actually store value. We know
that top wealth is rising, the stock market is up, and the value of residential real property
in all major cities is rising. All these and more suggest that the total amount of capital is
increasing. All that increase is funded by the gains from productivity.
A recent paper by Simcha Barkai, Declining Labor and
Capital Shaes , provides a convincing explanation. The labor share is declining he
says. But so is what he calls the "capital share", a defined term, calculated by multiplying
the "required rate of return" by the capital stock deployed in the non-financial business
sector. Capital stock includes plant and equipment, land, and intangibles such as patents and
software, less depreciation. The required return on capital is approximately and sensibly
defined as the cost of obtaining capital in the financial markets. He shows that the cost of
capital has declined by 7% over the period of his study, 1984-2014. If the amount of capital
deployed had increased as might be expected with this large drop in cost, the capital share
might have remained the same. Instead, businesses did not deploy additional capital, and the
capital share declined by some 30% over the period. During that period the labor share declined
10% from a larger starting point.
The combined losses were more than made up by increases in the profits share. Profits add to
the value of the firm, and are distributed by the owners of firms as they see fit, which isn't
to lowly workers. This is from Barkai's paper:
Across specifications, the profit share (equal to the ratio of profits to gross value
added) has increased by more than 12 percentage points. To offer a sense of magnitude, the
value of this increase in profits amounts to over $1.1 trillion in 2014, or $14 thousand for
each of the approximately 81 million employees of the non-financial corporate sector. P.
3.
Barkai attributes this almost entirely to increased concentration of US industries, and most
of the paper is devoted to proof of that conclusion. He links that increase in concentration to
changes in anti-trust law and policy engineered by Robert Bork when he was at the University of
Chicago.
Conclusion
Following Barkai, we should rewrite Equation 1a like this:
1b. p = w + γ + c t – k
where γ is the rate of growth of the profits share, c t is the rate of
growth of the capital share, w is the rate of growth of wages, p is inflation, and k is
productivity. Substituting the original Phillips equation, Equation 1 into Equation 1b gives
us
4. p = -.90 + 9.64U -1.39 + γ + c t – k.
This equation calls attention to the role that profits play in the economy, something
economists generally generally ignore. When people do discuss profits, it's always in the
context of the importance of capital and the need to coddle it. That view lies at the heart of
neoliberalism, and at the heart of Fed policy. It is also at the heart of the Law and Economics
movement also spawned at the University of Chicago, a movement that has changed the legal
system to favor capital. If neoliberals were intellectually honest, they wouldn't call it
supply side economics, they'd call it philo-capital economics.
Equation 1 has been replaced by Equation 3 in the standard model of the Phillips Curve.
3. p = Ep t + b(U t – U tN ) + z
t + e t
Making this work with Barkai's analysis is harder. We get a clue from Gordon's explanation
of the z term: he call it cost push, meaning price shocks caused by labor unions and "bauxite
barons". This is where capital growth fits in. The ability to control markets gives firms the
ability to cause price shocks, as when pharmaceutical companies drive up the price of epi-pens
or other drugs, but also the ability to gradually increase prices above the rate of inflation.
Therefore, I'd rewrite Equation 3 this way:
5. 3. p = Ep t + b(U t – U tN ) + γ
+ c t + e t
Gordon doesn't explain the e term, so we'll just let that pick up anything that used to be
in the z term that is somehow missed by my addition. It would, for example, include demand-pull
inflation, which hasn't been a problem for some time.
In the current situation, with profits at very high levels, we can easily increase wages
without increasing inflation if the rich were willing to accept lower profits, subject to the
availability of sufficient resources to meet the new levels of demand substantially higher
wages might cause.
Barkai says just distributing the historically high profits to workers would give every
working person (other than those in the financial sector) a $14K raise. That dwarfs the
make-believe
$4K-9K per household the Republicans promise from their proposed tax cuts.
Unfortunately, the Phillips Curve isn't the only thing blocking action to help the average
citizen.
I am constantly baffled by economists trying to explain very complex non-linear system
with simple two variable models. I have been dealing with a couple of engineering problems
today where the publication I am using has over 50 design charts just for gravity pipe flow.
Each chart has about five variables accommodated while holding a number of others
constant.
So I believe the Philips curve is valid but it is in a different place in multi-variable
space each decade or so based on fundamental changes in the economy. Over the past thirty
years, I can think of four major changes off the top of my head that lead me to expect the
Philips curve to translate in multi-variable space:
1. Free trade agreements (NAFTA etc.)
2. Technology displacing workers
3. Baby boomer demographic moving from entering peak productivity to retirement age
4. Women and minorities are becoming more widespread throughout most or all jobs.
So workers to day are now competing more with Second and Third World workers while
technology is dramatically changing the workplace (e.g. secretarial positions dramatically
reduced), and inexperienced 25 year old white men, women, minorities are being hired to
replace experienced 60 year old white men. Why would we expect to have a nice linear
relationship between unemployment and wages across this period?
So I think we see the Philips curve predictably happening in the short-term in fields like
technology where there is big demand and not enough people. However, as a general rule across
the economy, I simply don't see why the relationship between inflation and unemployment
should be the same today as it was in 2007, 1997, 1987, or 1977.
Economics is infected with too much ideology and not enough scientific method. That is
more the definition of a religion than a science.
Good article. In my econ undergrad, I remember my intermediate macro professor pointing
out that reality didn't match the theoretical Philips curve very well and then we continued
assuming that it did, for the remainder of the course. {facepalm}
If neoliberals were intellectually honest, they wouldn't call it supply side economics,
they'd call it philo-capital economics
Might I suggest "capitalphilic economics"? Seems to roll off the tongue a little
better.
80's Poly-Sci defined, "neo-feudalism" (or, as "Shock Doctrine", privatization of all
"resource" + government capacity, subject financial sector capture)
Doncha just love how it's defined, in practice, as whatever the unemployment rate seems to
settle around. If I'm not mistaken, in the 70's NAIRU was considered to be 6 or 7 %. Then
unemployment fell and inflation didn't accelerate so they changed NAIRU to 5%.
What I want to know is if there has ever been a documented case where it can be shown that
low unemployment levels actually led to accelerating-inflation. The inflationary periods in
US history that I'm familiar with seem to have all been caused by supply shocks (i.e. oil
embargo) or financial shenanigans (the housing market of the early aughties). Ditto for other
countries, so far as I know.
As far as I can tell, the whole idea of NAIRU is strictly an artifact of economic
modeling, not something that's actually ever been observed in the wild. And doesn't it seem
odd that making sure we don't drop below NAIRU is something the Fed feels like it needs to
intervene to ensure rather than letting the market sort it out. Even if NAIRU was a real
thing, you would assume that low unemployment –> increased wages –>
increased prices –> reduced consumption –> lay-offs and higher
unemployment. Which is to say, if there were such a thing as a natural rate of unemployment,
wouldn't markets naturally produce it, obviating any need for the Fed to, say, jack up
interest rates to keep the economy from "heating up" (I guess because people have so much
money burning holes in their pockets?). It almost like, when it suits the capitalists, they
stop believing in this whole "invisible hand" thing .strange
If I remember right, Phillips published this paper because LSE was pushing him to publish
something so that they could justify awarding him professorship and tenure, and he could go
to tinkering with his MONIAC. I was told he just wanted to get something out, and this was
the first idea he had so he wrote it up, but wasn't really persuaded..
The damage to the real world the academia demands does..
"Real world" powers can riffle through the files of academia, hard and soft sciences or
the various humanities or whatever, even languages and linguistics, and, because "freedom,"
can always come up with something published that "proves" whatever line of BS the looters are
pushing at any given moment to increase their "take."
But then ever since humans discovered ratiocination, thus it has always been. SOMEone or
SOMEthing always has to be "the authority," or at least "authoritative "
This is one reason why America is being parasitized by finance -- - Math. That and the
math card in computers that allows the instantaneous creation of speculation and playing of
the numbers with hypothetical money that later translates into real productivity or more
likely misery.
The average American's eyes glaze over as soon as you put up a math formula. He of course,
will memorize all manner of arcane sports trivia and statistics, but when it comes time to
quantify his own economic doom, or to think about his or her own economic travails with
numbers and curves, it's mind shutdown time.
This is why we love Yves. She has allowed us to get an insight into, become informed and
learn about economics through high quality reporting. Thank you for this reminder of the
hocus pocus and the witch-doctory that is casting our spell into economic hell.
not just "math": Rand-Friedman-libertarian ideological definition:
"Neoliberalism sees competition as the defining characteristic of human relations. It
redefines citizens as consumers, whose democratic choices are best exercised by buying and
selling, a process that rewards merit and punishes inefficiency. It maintains that "the
market" delivers benefits that could never be achieved by planning.
Attempts to limit competition are treated as inimical to liberty. Tax and regulation
should be minimised, public services should be privatised. The organisation of labour and
collective bargaining by trade unions are portrayed as market distortions that impede the
formation of a natural hierarchy of winners and losers. Inequality is recast as virtuous: a
reward for utility and a generator of wealth, which trickles down to enrich everyone. Efforts
to create a more equal society are both counterproductive and morally corrosive. The market
ensures that everyone gets what they deserve.
We internalise and reproduce its creeds. The rich persuade themselves that they acquired
their wealth through merit, ignoring the advantages – such as education, inheritance
and class – that may have helped to secure it. The poor begin to blame themselves for
their failures, even when they can do little to change their circumstances.
Never mind structural unemployment: if you don't have a job it's because you are
unenterprising. Never mind the impossible costs of housing: if your credit card is maxed out,
you're feckless and improvident. Never mind that your children no longer have a school
playing field: if they get fat, it's your fault. In a world governed by competition, those
who fall behind become defined and self-defined as losers."
Your link dances around calling it out: neoliberalism is a rebranding of social
darwinism.
Not much "neo" about it. But for all the alleged "progress," it seems we're trapped in a
culture that really finds it hard to let go of the 19th Century. And mot just economically,
but socially as well.
"natural hierarchy of winners and losers " – does not exist. They rebranded to try
to get around all the artificial selection in the global economy.
In an early draft of this article, I had a reference to Econned, where Yves discusses the
use of the Gaussian Copula in the organization of RMBSs. So, yes, it's largely the math that
Samuelson and Solow and the people who came later loved.
You'll note that I only use very simple math, mostly because it's a nice shorthand, like
Equations 1a and 1b
vlade hit on a key point, IMO. I was an undergrad at prestigious Midwestern school during
the period where they split the Econ department in 2 -- a econometrics-esque degree from the
Math/Science school, vs. 'Economics' which they kept in the College of Arts and Letters.
They've been strangling the latter department since while ensuring steady flow of grants to
the math-based department, a la the Phillips story alluded to above.
Seconding diptherio – I remember the introductory statistics and econometric courses
I was required to take, where we'd routinely dissect econ reporting in the press based on
flawed mathematics or poor statistical methods, and yet carry as though these were meaningful
and useful figures (e.g. unemployment, inflation).
So what to do -- do you try to change the way economics is practiced? Or do you try to
take away the influence that neoliberalism and/or industrial capitalism have on the education
fields? And how exactly do you do that (reform education) given how instrumental it is for
neoliberalism to continue.
I see an analogy here, maybe I am wrong. Picture bull-fighting, an appropriate concept,I
think. I see neoliberalism as the Matador, education as the cape, and the public as the bull.
So the questions above might be rephrased as from the bull's perspective, do you chase the
cape or gore the matador?
The stakes are high for the matador -- although as a spectator that fact is hidden in
plain sight.
Thanks for this very readable and important post. Demystify the Phillips Curve and other
economic "truths" being used against Main Street is significant.
" This equation calls attention to the role that profits play in the economy, something
economists generally generally ignore. When people do discuss profits, it's always in the
context of the importance of capital and the need to coddle it. That view lies at the heart
of neoliberalism, and at the heart of Fed policy."
When you think about it, the PC supports the argument of how Supply & Demand explains
pretty much everything about economics. It you need to explain economics in a nutshell to a
working guy who thinks nothing is really all that complicated (were it not for intellectuals
over-thinking things), it fills the bill rather nicely. A matter of rhetorical Supply &
Demand, come to think of it.
For most people, being confronted with "scientific evidence" is enough to lay to rest any
and all doubt about the claims being made in a proposition. Scientific evidence hardens
claims into hard facts, and does so quickly. What better way to make something appear
scientific than to riddle its academic literature with curves and formulas, and give it its
own pride of place at the nobles side by side with real sciences. That real sciences have
laws that are universally applicable or can at least be reconciled across levels of reality
with the consistency you'd expect of something labelled a science (e.g. how quantum
electrodynamics reconciles classical electrodynamics at the atomic and subatomic levels)
seems to be a minor inconvenience to those with vested interests in having economics accepted
by the public as a hard science (precisely, I say again, because presenting "scientific
evidence" with formulas and curves disarms most people, among them the political ruling
class, of their critical thinking faculties). Add living in an age of credentialism to the
mix and the general ineptitude of our ruling politicians and one can see how economists can
wreak so much havoc with their ex-cathedra pronouncements on what makes the economy work
The material about Simcha Barkai's paper is the most interesting part of this to me. That
paper strikes a serious blow at the heart of neoliberal antitrust law, but it also explains
the wage-productivity gap and shows the way to social changes that would benefit most of
us.
The Philips Curve exemplifies the dysfunction created by separating
mathematical/quantitative descriptions of an economy from that same lived economy and its
history. The PC was originally developed on British data covering a period roughly from ten
years after the Crystal Palace Exhibition of 1851 to WWI, and then extended to WWII. Over the
same period, literature met Oliver Twist and Alice and her rabbit hole, was jostled by Hardy
and Lawrence, and jolted by Joyce, Woolf and Eliot, not least because a woman writer demanded
a room of her own. The changes in social, economic and political life were comparable.
The British statistics cover a period when power shifted as dramatically as literature. A
suffrage limited to propertied men became universal. The agency, the organization,
persistence and determination necessary to create that change was considerable. So, too, a
landowning aristocracy, once at the apex of all social, political, legal and economic life,
saw its monopoly shrink, or rather found itself joined by large business owners, financiers,
traders and press lords, and for a time, trades union leaders.
Parliament expressed that power shift, for example, by ending tariffs protecting domestic
grain production, substituting, instead, subsidies for imported food stuffs, in order more
cheaply to keep workers fed and at their machines. (A hard-fought concession to a new,
competing power block of manufacturers, their financiers and traders,) A major constitutional
crisis in 1910-11 presaged adoption of Bismarckian welfare programs, which America did not
see until FDR and LBJ. These were a modest but viciously fought concession in order to avoid
the kind of extra-constitutional change experienced by Russia a few years later.
Workers over this period witnessed the final stage of enclosures (privatizing of common
lands), the end of cottage industries, and the rise, dominance and decline of heavy industry.
The Crystal Palace's startling iron pillars and acres of glass yielded to curtain walls and
structural steel. Technology, as today, raced headlong. Stage coaches gave way to steam
railroads; the telegraph to the telephone and wireless; lances, swords and muzzle loaders to
dreadnoughts, flying machines, automatic weapons and poison gas – all with vastly
different supply chains, need for capital and levels of employment.
The empire added half of Africa, notably South Africa and its ores, diamonds and gold, and
de facto control of Egypt and its canal at Suez. De jure imperial relations existed with
India and the "white commonwealth" countries of Canada, Australia, New Zealand and South
Africa (post-Boer War). De facto imperial relations existed with much of Latin America, the
Caribbean and East Asia. The pound was a global currency and the Royal Navy was admonished to
"rule the waves", an aspiration that has since given way to following and buying from the
stars and stripes. The ebb and flow of imperial power affected raw material prices coming in
and export prices going out.
By what logic would the statistics of economic relations, of changing notions of
acceptable levels of employment and inflation (capital's nemesis), not be affected by
dramatic changes in social, political and economic conditions? Demonstrating sufficient
continuity to establish a "law" for those relations for a single country, let alone one valid
across time and national boundaries, would seem to be a sisyphean task.
There's a persuasive interpretation of Phillips' original work and application to US data
by John Hussman, which argues :
1) Phillips' original paper is right but most of the work since is garbage which missed
the point.
2) Phillips' correct result is a relationship between unemployment and real wage growth
("wage inflation"), not consumer prices.
3) Most modern interpretations have either incompetently lost the point about real wages,
or deliberately obfuscated. (Modern econ exists to serve capital more than labor, so this is
not surprising.)
"When labor is scarce (low unemployment), the price of labor
tends to rise relative to the price of other things (thus we observe real wage inflation ).
In contrast, when labor is plentiful (high unemployment), the price of labor tends to
stagnate relative to the price of other things (real wages stagnate)."
Whether real wage inflation translates into consumer price inflation depends on the supply
and demand of consumer goods, repayment of debts, workers' need to save for retirements
etc.
I believe real wage growth, at the expense of corporate profits, is exactly what has been
missing from the health of the economy for the past 20-40 years.
I also suspect the true reason why central banks fear low unemployment is because those
increases in workers' wages will come at the expense of corporate profitability. (Especially
in an economy with high corporate profit levels and inadequate price competition.)
I also suspect most modern recessions have not been caused by the low unemployment, but
rather by the credit tightening applied to prevent low unemployment – to prevent
workers from enjoying higher wages at the owners' expense.
"... Again Mike Whitney does not get it. Though in the first part of the article I thought he would. He was almost getting there. The objective was to push new administration into the corner from which it could not improve relations with Russia as Trump indicated that he wanted to during the campaign. Convincing Americans in Russia's influence or Russia collusion with Trump was only a tool that would create pressure on Trump that together with the fear of paralysis of his administration and impeachment would push Trump into the corner from which the only thing he could do was to worsen relations with Russia. What American people believe or not is really secondary. With firing of Gen. Flynn Trump acted exactly as they wanted him to act. This was the beginning of downward slope. ..."
"... The only part that is absurd is that Russia posed a bona fide threat to the US. I'm fine with the idea that he ruined Brennen's plans in Syria. But thats just ego we shouldn't have been there anyway. ..."
"... I am reading Howard Zinn, A Peoples History of the USA, 1492 to the Present. A sad story, how the USA always was a police state, where the two percent rich manipulated the 98% poor, to stay rich. When there were insurrections federal troops restored order. Also FDR put down strikes with troops. ..."
"... America wants to see Jewish oligarchs and their pet 'reformers' e.g. Garry Kasparov in charge of Russia. In the middle east they want endless war until all threats to Israel have been removed. ..."
"... "Brennan had a strong motive to strike back at Moscow. He had "a dog in the fight", and his dog lost. And since he couldn't win on the battlefield, his only choice was to launch an asymmetrical attack via the media. Isn't this where the Russia hacking idea originated?" -- Whitney ..."
"... "The absence of evidence suggests that Russia hacking narrative is a sloppy and unprofessional disinformation campaign that was hastily slapped together by over confident Intelligence officials who believed that saturating the public airwaves with one absurd story after another would achieve the desired result " ..."
Sadly, Brennan's propaganda coup only works on what the Bell Curve crowd up there would call
the dumbest and most technologically helpless 1.2σ. Here is how people with half a
brain interpret the latest CIA whoppers.
Again Mike Whitney does not get it. Though in the first part of the article I thought he
would. He was almost getting there. The objective was to push new administration into the
corner from which it could not improve relations with Russia as Trump indicated that he wanted
to during the campaign. Convincing Americans in Russia's influence or Russia collusion with
Trump was only a tool that would create pressure on Trump that together with the fear of
paralysis of his administration and impeachment would push Trump into the corner from which
the only thing he could do was to worsen relations with Russia. What American people believe
or not is really secondary. With firing of Gen. Flynn Trump acted exactly as they wanted him
to act. This was the beginning of downward slope.
Anyway, the mission was accomplished and the relations with Russia are worse now than
during Obama administration. Trump can concentrate on Iran in which he will be supported by
all sides and factions including the media. Even Larry David will approve not only the
zionist harpies like Pam Geller, Rita Katz and Ilana Mercer.
The only part that is absurd is that Russia posed a bona fide threat to the US. I'm fine
with the idea that he ruined Brennen's plans in Syria. But thats just ego we shouldn't have
been there anyway.
No one really cares about Ukraine. And the European/Russian trade zone? No one cares. The
Eurozone has its hands full with Greece and the rest of the old EU. I have a feeling they
have already gone way too far and are more likely to shrink than expand in any meaningful
way
The one thing I am not positive about. If the elite really believe that Russia is a
threat, then Americans have done psych ops on themselves.
The US was only interested in Ukraine because it was there. Next in line on a map. The
rather shocking disinterest in investing money -- on both sides -- is inexplicable if it was
really important. Most of it would be a waste -- but still. The US stupidly spent $5 billion
on something -- getting duped by politicians and got theoretical regime change, but it was
hell to pry even $1 billion for real economic aid.
" ..factions within the state whose interests do not coincide with those of the American
people."
All the more powerfully put because of its recognisably comical. understatement.
Thank you Mr Whitney. Brilliant article that would be all over the mainstream media were
the US MSM an instrument of American rather than globalist interests.
I am reading Howard Zinn, A Peoples History of the USA, 1492 to the Present.
A sad story, how the USA always was a police state, where the two percent rich manipulated
the 98% poor, to stay rich.
When there were insurrections federal troops restored order.
Also FDR put down strikes with troops.
Yes. To have the best chance to change minds, though, the article should be edited one
more time.
Errors like "Capital Hill," using "have" instead of "has" with "none" ("So far, none of
the four investigations on Capital Hill have produced "), and even a missing word
("perception [of] Russia") are needless distractions that enable those who want to avoid or
prevent others from thinking critically. People tend to overlook these things when they're
sympathetic, and to seize upon them when they're not.
You should be aware that Zinn's book is not, IMO, an honest attempt at writing history. It
is conscious propaganda intended to make Americans believe exactly what you are taking from
it.
I distrust economic explanations because there are usually stronger forces in play, forces we
are skittish about mentioning. America's interest, driven by AIPAC and the neocon policy
brains trust, is less in the world than in the middle east and eastern Europe, two areas
where Jews and nationalists have long engaged in bloody conflict. The interest in North Korea
is that it could sell weapons to Iran.
Writing in 1920 Belloc speaks of the Jewish hatred for
Russia. You could add the Jewish hatred for Ukraine, Poland, Lithuania, and other eastern
countries where Jews and Christians have historically had an unpleasant relationship. Jews
want to see a politically correct united Europe where nationalism and religion will be
extinguished by laws against hate speech and cultural re-education. They much preferred the
Slavic nations under Communism. They bent over backwards to make excuses for Stalin and his
successors.
America wants to see Jewish oligarchs and their pet 'reformers' e.g. Garry
Kasparov in charge of Russia. In the middle east they want endless war until all threats to
Israel have been removed. While there are multiple factors at work, e.g. Hillary's wanting an
excuse for losing, the effort of Jews to master their traditional Christian and Muslim
enemies is probably the most powerful and simultaneously the one we can't discuss openly -- a
perilous state of affairs.
"Brennan had a strong motive to strike back at Moscow. He had "a dog in the fight", and
his dog lost. And since he couldn't win on the battlefield, his only choice was to launch
an asymmetrical attack via the media. Isn't this where the Russia hacking idea originated?"
-- Whitney
The pity of it is that many Americans now find Putin more credible than any American
president! In such a mishmash, Whitney has cut through the identity politics and the
personality cults to get almost to the root -- where it started in 2013 -- the real issue
that no government wants citizens to recognize or understand, the issue of WMDs -- in this
case, chemical warfare . Here's the story, told from the official USA side , complete
with anti-Russian headline that hardly represents the story itself:
Forget about official USA bias in this account by The Century Foundation, the history is
accurate enough that we easily see that there is no consensus on any of it. For one brief
moment – long enough that some horrible WMDs were destroyed – Russia and USA
seemed to act sensibly together and then back to the never-ending fight. It reminds of a
Tom-and-Jerry cartoon, where the action suddenly freezes due to some distraction, and then
the cat and the mouse resume where they left off.
What is the best that we can hope for? That somehow we can untangle the Gordian knot of
she-said-he-said -- about supposed Russian hacking in election 2016 (?) -- before one Last
Superpower or another resorts to the sword of nuclear Armageddon?
How about this as our goal -- maybe, just maybe, we can somehow return to pre-9-11 levels
of cooperation between USA and Russia.
Without having to relive 9-11 either metaphorically or virtually?
"The absence of evidence suggests that Russia hacking narrative is a sloppy and
unprofessional disinformation campaign that was hastily slapped together by over confident
Intelligence officials who believed that saturating the public airwaves with one absurd story
after another would achieve the desired result "
But it DID achieve the desired result! Trump folded under the pressure, and went full out
neoliberal. Starting with his missile attack on Syria, he is now OK with spending trillions
fighting pointless endless foreign wars on the other side of the world.
I think maybe half the US population does believe the Russian hacking thing, but that's
not really the issue. I think that the pre-Syrian attack media blitz was more a statement of
brute power to Trump: WE are in charge here, and WE can take you down and impeach you, and
facts don't matter!
Sometimes propaganda is about persuading people. And sometimes, I think, it is about
intimidating them.
Whitney is another author who declares the "Russians did it" narrative a psyop. He then
devotes entire columns to the psyop, "naww Russia didn't do it".
There could be plenty to write about – recent laws that do undercut liberty, but no,
the Washington Post needs fake opposition to its fake news so you have guys like Whitney in
the less-mainstream fake news media.
So Brennan wanted revenge? Well that's simple enough to understand, without being too
stupid. But Whitney's whopper of a lie is what you're supposed to unquestionably believe. The
US has "rival political parties". Did you miss it?
The US is doing nothing more than acting as the British Empire 2.0.
WASP culture was born of a Judaizing heresy: Anglo-Saxon Puritanism. That meant that the
WASP Elites of every are pro-Jewish, especially in order to wage war, physical and/or
cultural, against the vast majority of white Christians they rule.
By the early 19th century, The Brit Empire's Elites also had a strong, and growing, dose
of pro-Arabic/pro-Islamic philoSemitism. Most of that group became ardently pro-Sunni, and
most of the pro-Sunni ones eventually coalescing around promotion of the House of Saud, which
means being pro-Wahhabi and permanently desirous of killing or enslaving virtually all Shiite
Mohammedans.
So, by the time of Victoria's high reign, the Brit WASP Elites were a strange brew of
hardcoree pro-Jewish and hardcore pro-Arabic/islamic. The US foreign policy of today is an
attempt to put those two together and force it on everyone and make it work.
The Brit secret service, in effect, created and trained not merely the CIA but also the
Mossad and Saudi Arabia's General Intelligence Presidency. All four are defined by endless
lies, endless acts of utterly amoral savagery. All 4 are at least as bad as the KGB ever was,
and that means as bad as Hell itself.
Fair enough. I didn't know that about the foreword. If accurate, that's a reasonable
approach for a book.
Here's the problem.
Back when O. Cromwell was the dictator of England, he retained an artist to paint him. The
custom of the time was for artists to "clean up" their subjects, in a primitive form of
photoshopping.
OC being a religious fanatic, he informed the artist he wished to be portrayed as God had
made him, "warts and all." (Ollie had a bunch of unattractive facial warts.) Or the artist
wouldn't be paid.
Traditional triumphalist American narrative history, as taught in schools up through the
60s or so, portrayed America as "wart-free." Since then, with Zinn's book playing a major
role, it has increasingly been portrayed as "warts-only," which is of course at least equally
flawed. I would say more so.
All I am asking is that American (and other) history be written "warts and all." The
triumphalist version is true, largely, and so is the Zinn version. Gone With the Wind
and Roots both portray certain aspects of the pre-war south fairly accurately..
America has been, and is, both evil and good. As is/was true of every human institution
and government in history. Personally, I believe America, net/net, has been one of the
greatest forces for human good ever. But nobody will realize that if only the negative side
of American history is taught.
"There must be something really dirty in Russigate that hasn't yet come out to generate
this level of panic."
You continue to claim what you cannot prove.
But then you are a Jews First Zionist.
Russia-Gate Jumps the Shark
Russia-gate has jumped the shark with laughable new claims about a tiny number of
"Russia-linked" social media ads, but the US mainstream media is determined to keep a
straight face
Most of that group became ardently pro-Sunni, and most of the pro-Sunni ones eventually
coalescing around promotion of the House of Saud, which means being pro-Wahhabi and
permanently desirous of killing or enslaving virtually all Shiite Mohammedans.
Thanks for the laugh. During the 19th century, the Sauds were toothless, dirt-poor hicks
from the deep desert of zero importance on the world stage.
The Brits were not Saudi proponents, in fact promoting the Husseins of Hejaz, the guys
Lawrence of Arabia worked with. The Husseins, the Sharifs of Mecca and rulers of Hejaz, were
the hereditary enemies of the Sauds of Nejd.
After WWI, the Brits installed Husseins as rulers of both Transjordan and Iraq, which with
the Hejaz meant the Sauds were pretty much surrounded. The Sauds conquered the Hejaz in 1924,
despite lukewarm British support for the Hejaz.
Nobody in the world cared much about the Saudis one way or another until massive oil
fields were discovered, by Americans not Brits, starting in 1938. There was no reason they
should. Prior to that Saudi prominence in world affairs was about equal to that of Chad
today, and for much the same reason. Chad (and Saudi Arabia) had nothing anybody else
wanted.
'Putin stopped talking about the "Lisbon to Vladivostok" free trade area long ago" --
Michael Kenney
Putin was simply trying to sell Russia's application for EU membership with the
catch-phrase "Lisbon to Vladivostok". He continued that until the issue was triply mooted (1)
by implosion of EU growth and boosterism, (2) by NATO's aggressive stance, in effect taken by
NATO in Ukraine events and in the Baltics, and, (3) Russia's alliance with China.
It is surely still true that Russians think of themselves, categorically, as Europeans.
OTOH, we can easily imagine that Russians in Vladivostok look at things differently than do
Russians in St. Petersburg. Then again, Vladivostok only goes back about a century and a
half.
Anyway, the mission was accomplished and the relations with Russia are worse now than
during Obama administration.
I generally agree with your comment, but that part strikes me as a bit of an exaggeration.
While relations with Russia certainly haven't improved, how have they really worsened? The
second round of sanctions that Trump reluctantly approved have yet to be implemented by
Europe, which was the goal. And apart from that, what of substance has changed?
It's not surprising that 57 percent of the American people believe in Russian meddling.
Didn't two-thirds of the same crowd believe that Saddam was behind 9/11, too? The American
public is being brainwashed 24 hours a day all year long.
The CIA is the world largest criminal and terrorist organization. With Brennan the worst
has come to the worst. The whole Russian meddling affair was initiated by the Obama/Clinton
gang in cooperation with 95 percent of the media. Nothing will come out of it.
This disinformation campaign might be the prelude to an upcoming war.
Right now, the US is run by jerks and idiots. Watch the video.
Only dumb people does not know that TRUMP IS NETANYAHU'S PUPPET.
The fifth column zionist jews are running the albino stooge and foreign policy in the
Middle East to expand Israel's interest against American interest that is TREASON. One of
these FIFTH COLUMNISTS is Jared Kushner. He should be arrested.
[The key figures who had primary influence on both Trump's and Bush's Iran policies held
views close to those of Israel's right-wing Likud Party. The main conduit for the Likudist
line in the Trump White House is Jared Kushner, the president's son-in-law, primary foreign
policy advisor, and longtime friend and supporter of Netanyahu. Kushner's parents are also
long-time supporters of Israeli settlements on the occupied West Bank.
Another figure to whom the Trump White House has turned is John Bolton, undersecretary of
state and a key policymaker on Iran in the Bush administration. Although Bolton was not
appointed Trump's secretary of state, as he'd hoped, he suddenly reemerged as a player on
Iran policy thanks to his relationship with Kushner. Politico reports that Bolton met with
Kushner a few days before the final policy statement was released and urged a complete
withdrawal from the deal in favor of his own plan for containing Iran.
Bolton spoke with Trump by phone on Thursday about the paragraph in the deal that vowed it
would be "terminated" if there was any renegotiation, according toPolitico. He was calling
Trump from Las Vegas, where he'd been meeting with casino magnate Sheldon Adelson, the third
major figure behind Trump's shift towards Israeli issues. Adelson is a Likud supporter who
has long been a close friend of Netanyahu's and has used his Israeli tabloid newspaper Israel
Hayomto support Netanyahu's campaigns. He was Trump's main campaign contributor in 2016,
donating $100 million. Adelson's real interest has been in supporting Israel's interests in
Washington -- especially with regard to Iran.]
Putin's dream of Greater Europe is the death knell for the unipolar world order. It
means the economic center of the world will shift to Central Asia where abundant resources
and cheap labor of the east will be linked to the technological advances and the Capital
the of the west eliminating the need to trade in dollars or recycle profits into US
debt. The US economy will slip into irreversible decline, and the global hegemon will
steadily lose its grip on power. That's why it is imperative for the US prevail in
Ukraine– a critical land bridge connecting the two continents– and to topple
Assad in Syria in order to control vital resources and pipeline corridors. Washington
must be in a position where it can continue to force its trading partners to denominate
their resources in dollars and recycle the proceeds into US Treasuries if it is to maintain
its global primacy. The main problem is that Russia is blocking Uncle Sam's path to
success which is roiling the political establishment in Washington.
American dominance is very much tied to the dollar's role as the world's reserve currency,
and the rest of the world no longer want to fund this bankrupt, warlike state –
particularly the Chinese.
First, it confirms that the US did not want to see the jihadist extremists
defeated by Russia. These mainly-Sunni militias served as Washington's proxy-army
conducting an ambitious regime change operation which coincided with US strategic
ambitions.
The CIA run US/Israeli/ISIS alliance.
Second, Zakharova confirms that the western media is not an independent news
gathering organization, but a propaganda organ for the foreign policy establishment who
dictates what they can and can't say.
They are given the political line and they broadcast it.
The loosening of rules governing the dissemination of domestic propaganda coupled with
the extraordinary advances in surveillance technology, create the perfect conditions for
the full implementation of an American police state. But what is more concerning, is
that the primary levers of state power are no longer controlled by elected officials but by
factions within the state whose interests do not coincide with those of the American
people. That can only lead to trouble.
At some point Americans are going to get a "War on Domestic Terror" cheered along by the
media. More or less the arrest and incarceration of any opposition following the Soviet
Bolshevik model.
On the plus side, everyone now knows that the Anglo-US media from the NY Times to the
Economist, from WaPo to the Gruniard, and from the BBC to CNN, the CBC and Weinstein's
Hollywood are a worthless bunch of depraved lying bastards.
Such a truthful portrait of reality ! The ruling elite is indeed massively corrupt,
compromised, and controlled by dark forces. And the police state is already here. For most
people, so far, in the form of massive collection of personal data and increasing number of
mandatory regulations. But just one or two big false-flags away from progressing into
something much worse.
The thing is, no matter how thick the mental cages are, and how carefully they are
maintained by the daily massive injections of "certified" truth (via MSM), along with
neutralizing or compromising of "troublemakers", the presence of multiple alternative sources
in the age of Internet makes people to slip out of these cages one by one, and as the last
events show – with acceleration.
It means that there's a fast approaching tipping point after which it'd be impossible for
those in power both to keep a nice "civilized" face and to control the "cage-free"
population. So, no matter how the next war will be called, it will be the war against the
free Internet and free people. That's probably why N. Korean leader has no fear to start
one.
American dominance is very much tied to the dollar's role as the world's reserve
currency, and the rest of the world no longer want to fund this bankrupt, warlike state
– particularly the Chinese.
indeed, there are many Americans like myself that pray the world will find a way to end
the Federal Reserve Note as the world's reserve currency.
As long as this state of affairs persists, the Fiend will reign supreme.
At some point Americans are going to get a "War on Domestic Terror" cheered along by the
media. More or less the arrest and incarceration of any opposition following the Soviet
Bolshevik model.
under Hillary I would say that would have been a dead certainty
Under Trump, I'm not so sure..
as long as the American people are armed to the teeth, (and we are ; ), then I feel
reasonably assured that a full-scale, gulag type of Soviet system is far off, false flag or
no false flag, (so long as we have our guns)
The objective was to push new administration into the corner from which it could not
improve relations with Russia as Trump indicated that he wanted to during the campaign.
Good point. That was probably one of the objectives (and from the point of view of the
deep-state, perhaps the most important objective) of the "Russia hacked our democracy"
narrative, in addition to the general deligitimization of the Trump administration.
And, keep in mind, Washington's Sunni proxies were not a division of the Pentagon; they
were entirely a CIA confection: CIA recruited, CIA-armed, CIA-funded and
CIA-trained.
Clearly the CIA was making war on Syria. Is secret coercive covert action against sovereign
nations Ok? Is it legal?
When was the CIA designated a war making entity – what part of the constitution OK's
that? Isn't the congress obliged by constitutional law to declare war? (These are NOT six
month actions – they go on and on.)
Are committees of six congressman and six senators, who meet in secret, just avoiding the
grave constitutional questions of war? We the People cannot even interrogate these
politicians. (These politicians make big money in the secrecy swamp when they leave
office.)
Syria is only one of many nations that the CIA is attacking – how many countries are
we attacking with drones? Where is congress?
Spying is one thing – covert action is another – covert is wrong – it
goes against world order. Every year after 9/11 they say things are worse – give them
more money more power and they will make things safe. That is BS!
9/11 has opened the flood gates to the US government attacking at will, the various
peoples of this Earth. That is NOT our prerogative.
We are being exceptionally arrogant.
Close the CIA – give the spying to the 16 other agencies.
"... The elite schools, and I have taught as a visiting professor at a few of them, such as Princeton and Columbia, replicate the structure and goals of corporations. If you want to even get through a doctoral committee, much less a tenure committee, you must play it really, really safe. You must not challenge the corporate-friendly stance that permeates the institution and is imposed through corporate donations and the dictates of wealthy alumni. Half of the members of most of these trustee boards should be in prison! ..."
"... Speculation in the 17th century in Britain was a crime. Speculators were hanged. And today they run the economy and the country. They have used the capturing of wealth to destroy the intellectual, cultural and artistic life in the country and snuff out our democracy. There is a word for these people: traitors. ..."
...The elite schools,
and I have taught as a visiting professor at a few of them, such as Princeton and Columbia, replicate
the structure and goals of corporations. If you want to even get through a doctoral committee, much
less a tenure committee, you must play it really, really safe. You must not challenge the corporate-friendly
stance that permeates the institution and is imposed through corporate donations and the dictates
of wealthy alumni. Half of the members of most of these trustee boards should be in prison!
Speculation in the 17th century in Britain was a crime. Speculators were hanged. And today they
run the economy and the country. They have used the capturing of wealth to destroy the intellectual,
cultural and artistic life in the country and snuff out our democracy. There is a word for these
people: traitors.
The paper is two years old. Looks how his prediction fared. Stagnation is still with us
althouth low oil prices lifted all the boats. But this period is coming to the end.
Notable quotes:
"... The financial crisis that erupted in 2008 challenged the foundations of orthodox economic theory and policy. At its outset, orthodox economists were stunned into silence as evidenced by their inability to answer the Queen of England's simple question (November 5th, 2008) to the faculty of the London School of Economics as to why no one foresaw the crisis. ..."
"... Six years later, orthodoxy has fought back and largely succeeded in blocking change of thought and policy. The result has been economic stagnation ..."
"... Perspective # 3 is the progressive position which is rooted in Keynesian economics and can be labeled the "destruction of shared prosperity hypothesis" ..."
"... It is identified with the New Deal wing of the Democratic Party and the labor movement, but it has no standing within major economics departments owing to their suppression of alternatives to economic orthodoxy. ..."
"... However, financial excess is just an element of the crisis and the full explanation is far deeper than just financial market regulatory failure According to the Keynesian destruction of shared prosperity hypothesis, the deep cause is generalized economic policy failure rooted in the flawed neoliberal economic paradigm that was adopted in the late 1970s and early 1980s. ..."
"... globalization reconfigured global production by transferring manufacturing from the U.S. and Europe to emerging market economies. This new global division of labor was then supported by having U.S. consumers serve as the global economy's buyer of first and last resort, which explains the U.S. trade deficit and the global imbalances problem. ..."
"... This new global division of labor inevitably created large trade deficits that also contributed to weakening the aggregate demand (AD)generation process by causing a hemorrhage of spending on imports (Palley, 2015) ..."
"... Finance does this through three channels. First, financial markets have captured control of corporations via enforcement of the shareholder value maximization paradigm of corporate governance. Consequently, corporations now serve financial market interests along with the interests of top management. Second, financial markets in combination with corporations lobby politically for the neoliberal policy mix. ..."
"... Third, financial innovation has facilitated and promoted financial market control of corporations via hostile take-overs, leveraged buyouts and reverse capital distributions. Financial innovation has therefore been key for enforcing Wall Street's construction of the shareholder value maximization paradigm. ..."
"... The second vital role of finance is the support of AD. The neoliberal model gradually undermined the income and demand generation process, creating a growing structural demand gap. The role of finance was to fill that gap. Thus, within the U.S., deregulation, financial innovation, speculation, and mortgage lending fraud enabled finance to fill the demand gap by lending to consumers and by spurring asset price inflation ..."
"... this AD generation role of finance was an unintended consequence and not part of a grand plan. Neoliberal economists and policymakers did not realize they were creating a demand gap, but their laissez-faire economic ideology triggered financial market developments that coincidentally filled the demand gap. ..."
"... the financial process they unleashed was inevitably unstable and was always destined to hit the wall. There are limits to borrowing and limits to asset price inflation and all Ponzi schemes eventually fall apart. ..."
"... the long duration of financial excess made the collapse far deeper when it eventually happened. It has also made escaping the after-effects of the financial crisis far more difficult as the economy is now burdened by debts and destroyed credit worthiness. That has deepened the proclivity to economic stagnation. ..."
"... The neoliberal labor market flexibility agenda explicitly attacks unions and works to shift income to wealthier households. ..."
"... That model inevitably produces stagnation because it produces a structural demand shortage via (i) its impact on income distribution, and (ii) via its design of globalization which generates massive trade deficits, wage competition and off-shoring of jobs and investment. In terms of the three-way contest between the government failure hypothesis, the market failure hypothesis and the destruction of shared prosperity hypothesis, the economic policy debate during the Great Recession was cast as exclusively between government failure and market failure. ..."
"... This attitude to fiscal policy reflects the dominance within the Democratic Party of "Rubinomics", the Wall Street view associated with former Treasury Secretary Robert Rubin, that government spending and budget deficits raise real interest rates and thereby lower growth. According to that view, the US needs long-term fiscal austerity to offset Social Security and Medicare Side-by-side with the attempt to reflate the economy, the Obama administration also pushed for major overhaul and tightening of financial sector regulation via the Dodd- Frank Act (2010). ..."
"... The Obama administration's softcore neoliberalism would have likely generated stagnation by itself, but the prospect has been further strengthened by Republicans. ..."
"... The Obama administration was to provide fiscal stimulus to jump start the economy; the Fed would use QE to blow air back into the asset price bubble; the Dodd-Frank Act (2010) would stabilize financial markets; and globalization would be deepened by further NAFTA-styled international agreements. This is a near-identical model to that which failed so disastrously. Consequently, stagnation is the logical prognosis. ..."
"... Consequently, the economy is destined to repeat the patterns of the 1990s and 2000s. However, the US economy has also experienced almost twenty more years of neoliberalism which has left its economic body in worse health than the 1990s. That means the likelihood of delivering another bubble-based boom is low and stagnation tendencies will likely reassert themselves after a shorter and weaker period of expansion ..."
This paper examines the major competing interpretations of the economic crisis in the US and
explains the rebound of neoliberal orthodoxy. It shows how US policymakers acted to stabilize
and save the economy, but failed to change the underlying neoliberal economic policy model.
That failure explains the emergence of stagnation, which is likely to endure
Current economic
conditions in the US smack of the mid-1990s. The 1990s expansion proved unsustainable and so
will the current modest expansion. However, this time it is unlikely to be followed by
financial crisis because of the balance sheet cleaning that took place during the last
crisis
Revised 1: This paper has been prepared for inclusion in Gallas, Herr, Hoffer and Scherrer
(eds.), Combatting Inequality: The Global North and South , Rouledge, forthcoming in
2015.
The crisis and the resilience of neoliberal economic orthodoxy
The financial crisis that erupted in 2008 challenged the foundations of orthodox economic
theory and policy. At its outset, orthodox economists were stunned into silence as evidenced by
their inability to answer the Queen of England's simple question (November 5th, 2008) to the
faculty of the London School of Economics as to why no one foresaw the crisis.
Six years later,
orthodoxy has fought back and largely succeeded in blocking change of thought and policy. The
result has been economic stagnation
This paper examines the major competing interpretations of
the economic crisis in the US and explains the rebound of neoliberal orthodoxy. It shows how US
policymakers acted to stabilize and save the economy, but failed to change the underlying
neoliberal economic policy model.
That failure explains the emergence of stagnation in the US
economy and stagnation is likely to endure.
Current economic conditions in the US smack of the
mid-1990s. The 1990s expansion proved unsustainable and so will the current modest expansion.
However, this time it is unlikely to be followed by financial crisis because of the balance
sheet cleaning that took place during the last crisis.
Competing explanations of the
crisis
The Great Recession, which began in December 2007 and includes the financial crisis of 2008,
is the deepest economic downturn in the US since the World War II. The depth of the downturn is
captured in Table 1 which shows the decline in GDP and the peak unemployment rate. The
recession has the longest duration and the decline in GDP is the largest. The peak unemployment
rate was slightly below the peak rate of the recession of 1981-82. However, this ignores the
fact that the labor force participation rate fell in the Great Recession (i.e. people left the
labor force and were not counted as unemployed) whereas it increased in the recession of
1981-82 (i.e. people entered the labor force and were counted as unemployed).
Table 1. Alternative measures of the depth of US recessions.
... ... ...
Table 2 provides data on the percent change in private sector employment from business cycle
peak to trough. The 7.6 percent loss of private sector jobs in the Great Recession dwarfs other
recessions, providing another measure of its depth and confirming it extreme nature. 2 Over the
course of the 1981-82 labor force participation rose from 63.8 percent to 64.2 percent, thereby
likely increasing the unemployment rate. In contrast, over the course of the Great Recession
the labor force participation rate fell from 66.0 percent to 65.7 percent, thereby likely
decreasing the unemployment. The decrease in the labor force participation rate was even
sharper for prime age (25 – 54 years old) workers, indicating that the decrease in the
overall participation rate was not due to demographic factors such as an aging population.
Instead, it was due to lack of job opportunities, which supports the claim that labor force
exit lowered the unemployment rate. Table 2. U.S. private employment cycles, peak to trough.
Source: Bureau of labor statistics and author's calculations.
... ... ...
Broadly speaking there exist three competing perspectives on the crisis (Palley, 2012).
Perspective # 1 is the hardcore neoliberal position which can be labeled the
"government failure hypothesis" . In the U.S. it is identified with the Republican
Party and with the economics departments of Stanford University, the University of Chicago,
and the University of Minnesota.
The hardcore neoliberal government failure argument is that
the crisis is rooted in the U.S. housing bubble and its bust. The claim is that the bubble
was due to excessively prolonged loose monetary policy and politically motivated government
intervention in the housing market aimed at increasing ownership. With regard to monetary
policy, the Federal Reserve pushed interest rates too low for too long following the
recession of 2001.
With regard to the housing market, government intervention via the
Community Reinvestment Act and Fannie Mae and Freddie Mac, drove up house prices and
encouraged homeownership beyond peoples' means.
Perspective # 2 is the softcore neoliberal position, which can be labeled the "market
failure hypothesis" . It is identified with the Obama administration, the Walls Street
and Silicon Valley wing of the Democratic Party, and economics departments such as those at
MIT, Yale and Princeton. In Europe it is identified with "Third Way" politics.
The softcore
neoliberal market failure argument is that the crisis is due to inadequate financial sector
regulation. First, regulators allowed excessive risk-taking by banks. Second, regulators
allowed perverse incentive pay structures within banks that encouraged management to engage
in "loan pushing" rather than "sound lending." Third, regulators pushed both deregulation and
self-regulation too far. Together, these failures contributed to financial misallocation,
including misallocation of foreign saving provided through the trade deficit, that led to
financial crisis. The crisis in turn deepened an ordinary recession, transforming it into the
Great Recession which could have become the second Great Depression absent the extraordinary
policy interventions of 2008-09
Perspective # 3 is the progressive position which is rooted in Keynesian economics and
can be labeled the "destruction of shared prosperity hypothesis".
It is identified
with the New Deal wing of the Democratic Party and the labor movement, but it has no
standing within major economics departments owing to their suppression of alternatives to
economic orthodoxy. The Keynesian "destruction of shared prosperity" argument is that
the crisis is rooted in the neoliberal economic paradigm that has guided economic policy for
the past thirty years. An important feature of the argument is that, though the U.S. is the
epicenter of the crisis, all countries are implicated as they all participated in the
adoption of a systemically flawed policy paradigm. That paradigm infected finance via
inadequate regulation, enabling financial excess that led to the financial crisis of 2008.
However, financial excess is just an element of the crisis and the full explanation is far
deeper than just financial market regulatory failure According to the Keynesian destruction
of shared prosperity hypothesis, the deep cause is generalized economic policy failure rooted
in the flawed neoliberal economic paradigm that was adopted in the late 1970s and early
1980s.
For the period 1945 - 1975 the U.S. economy was characterized by a "virtuous circle"
Keynesian growth model built on full employment and wage growth tied to productivity growth.
This model is illustrated in Figure 1 and its logic was as follows. Productivity growth drove
wage growth, which in turn fuelled demand growth and created full employment. That provided an
incentive for investment, which drove further productivity growth and supported higher wages.
This model held in the U.S. and, subject to local modifications, it also held throughout the
global economy - in Western Europe, Canada, Japan, Mexico, Brazil and Argentina.
Figure 1. The 1945 – 75 virtuous circle Keynesian growth model. Wage growth Demand
growth Full employment Productivity growth Investment
After 1980 the virtuous circle Keynesian
growth model was replaced by a neoliberal growth model. The reasons for the change are a
complex mix of economic, political and sociological reasons that are beyond the scope of the
current paper. The key changes wrought by the new model were:
Abandonment of the commitment
to full employment and the adoption of commitment to very low inflation;
Severing of the
link between wages and productivity growth.
Together, these changes created a new economic
dynamic. Before 1980, wages were the engine of U.S. demand growth. After 1980, debt and asset
price inflation became the engine The new economic model was rooted in neoliberal economic
thought. Its principal effects were to weaken the position of workers; strengthen the position
of corporations; and unleash financial markets to serve the interests of financial and business
elites.
As illustrated in figure 2, the new model can be described as a neoliberal policy box
that fences workers in and pressures them from all sides. On the left hand side, the corporate
model of globalization put workers in international competition via global production networks
that are supported by free trade agreements and capital mobility.
On the right hand side, the
"small" government agenda attacked the legitimacy of government and pushed persistently for
deregulation regardless of dangers. From below, the labor market flexibility agenda attacked
unions and labor market supports such as the minimum wage, unemployment benefits, employment
protections, and employee rights. From above, policymakers abandoned the commitment of full
employment, a development that was reflected in the rise of inflation targeting and the move
toward independent central banks influenced by financial interests.
Figure 2. The neoliberal
policy box. Globalization WORKERS Abandonment of full employment Small Government Labor Market
Flexibility
Corporate globalization is an especially key feature. Not only did it exert
downward inward pressures on economies via import competition and the threat of job
off-shoring, it also provided the architecture binding economies together. Thus, globalization
reconfigured global production by transferring manufacturing from the U.S. and Europe to
emerging market economies. This new global division of labor was then supported by having U.S.
consumers serve as the global economy's buyer of first and last resort, which explains the U.S.
trade deficit and the global imbalances problem.
This new global division of labor inevitably
created large trade deficits that also contributed to weakening the aggregate demand
(AD)generation process by causing a hemorrhage of spending on imports (Palley, 2015)
An
important feature of the Keynesian hypothesis is that the neoliberal policy box was implemented
on a global basis, in both the North and the South. As in the U.S., there was also a structural
break in policy regime in both Europe and Latin America. In Latin America , the International
Monetary Fund and World Bank played an important role as they used the economic distress
created by the 1980s debt crisis to push neoliberal policy
They did so by making financial
assistance conditional on adopting such policies. This global diffusion multiplied the impact
of the turn to neoliberal economic policy and it explains why the Washington Consensus enforced
by the International Monetary Fund and World Bank has been so significant. It also explains why
stagnation has taken on a global dimension.
III The role of finance in the neoliberal
model
Owing to the extraordinarily deep and damaging nature of the financial crisis of 2008,
financial market excess has been a dominant focus of explanations of the Great Recession.
Within the neoliberal government failure hypothesis the excess is attributed to ill-advised
government intervention and Federal Reserve interest rate policy. Within the neoliberal market
failure hypothesis it is attributed to ill-advised deregulation and failure to modernize
regulation.
According to the Keynesian destruction of shared prosperity hypothesis neither of
those interpretations grasps the true significance of finance. The government failure
hypothesis is empirically unsupportable (Palley, 2012a, chapter 6), while the market failure
hypothesis has some truth but also misses the true role of finance That role is illustrated in
Figure 3 which shows that finance performed two roles in the neoliberal model. The first was to
structurally support the neoliberal policy box. The second was to support the AD generation
process. These dual roles are central to the process of increasing financial domination of the
economy which has been termed financialization (Epstein, 2004, p.3; Krippner, 2004, 2005;
Palley, 2013). Figure 3. The role of finance in the neoliberal model. The role of finance:
"financialization" Supporting the neoliberal policy box Aggregate demand generation Corporate
behavior Economic policy Financial innovation The policy box shown in Figure 2 has four sides.
A true box has six sides and a four sided structure would be prone to structural weakness.
Metaphorically speaking, one role of finance is to provide support on two sides of the
neoliberal policy box, as illustrated in Figure 4.
Finance does this through three channels.
First, financial markets have captured control of corporations via enforcement of the
shareholder value maximization paradigm of corporate governance. Consequently, corporations now
serve financial market interests along with the interests of top management. Second, financial
markets in combination with corporations lobby politically for the neoliberal policy mix.
The
combination of changed corporate behavior and economic policy produces an economic matrix that
puts wages under continuous pressure and raises income inequality.
Third, financial innovation
has facilitated and promoted financial market control of corporations via hostile take-overs,
leveraged buyouts and reverse capital distributions. Financial innovation has therefore been
key for enforcing Wall Street's construction of the shareholder value maximization paradigm.
Figure 4. Lifting the lid on the neoliberal policy box. The neoliberal box Corporations
Financial markets
The second vital role of finance is the support of AD. The neoliberal model
gradually undermined the income and demand generation process, creating a growing structural
demand gap. The role of finance was to fill that gap. Thus, within the U.S., deregulation,
financial innovation, speculation, and mortgage lending fraud enabled finance to fill the
demand gap by lending to consumers and by spurring asset price inflation
Financialization
assisted with this process by changing credit market practices and introducing new credit
instruments that made credit more easily and widely available to corporations and households.
U.S. consumers in turn filled the global demand gap, along with help from U.S. and European
corporations who were shifting manufacturing facilities and investment to the emerging market
economies.
Three things should be emphasized.
First, this AD generation role of finance was an
unintended consequence and not part of a grand plan. Neoliberal economists and policymakers did
not realize they were creating a demand gap, but their laissez-faire economic ideology
triggered financial market developments that coincidentally filled the demand gap.
Second, the
financial process they unleashed was inevitably unstable and was always destined to hit the
wall. There are limits to borrowing and limits to asset price inflation and all Ponzi schemes
eventually fall apart. The problem is it is impossible to predict when they will fail. All that
can be known with confidence is that it will eventually fail.
Third, the process went on far
longer than anyone expected, which explains why critics of neoliberalism sounded like Cassandras (Palley, 1998, Chapter 12). However,
the long duration of financial excess made the
collapse far deeper when it eventually happened. It has also made escaping the after-effects of
the financial crisis far more difficult as the economy is now burdened by debts and destroyed
credit worthiness. That has deepened the proclivity to economic stagnation.
IV
Evidence
Evidence regarding the economic effects of the neoliberal model is plentiful and clear
Figure 5 shows productivity and average hourly compensation of non-supervisory workers (that is
non-managerial employees who are about 80 percent of the workforce). The link with productivity
growth was severed almost 40 years ago and hourly compensation has been essentially stagnant
since then.
Figure 5.
... ... ...
Table
3 shows data on the distribution of income growth by business cycle expansion across the
wealthiest top 10 percent and bottom 90 percent of households. Over the past sixty years there
has been a persistent decline in the share of income gains going to the bottom 90 percent of
households ranked by wealth. However, in the period 1948 – 1979 the decline was gradual.
After 1980 there is a massive structural break and the share of income gains going to the
bottom 90 percent collapses. Before 1980, on average the bottom 90 percent received 66 percent
of business cycle expansion income gains. After 1980, on average they receive just 8 percent.
Table 3. Distribution of income growth by business cycle expansion across the wealthiest top 10
percent and bottom 90 percent of households. Source: Tcherneva (2014), published in The New
York Times , September 26, 2014. '49- '53 '54- '57 '59- '60 '61- '69 '70- '73 '75- '79
'82- '90 '91- '00 '01- '07 '09- '12 Average Pre-1908 Average Post-1980 Top 10% 20% 28 32 33
43 45 80 73 98 116 34% 92% Bottom 90% 80% 72 68 67 57 55 20 27 2 -16 66% 8%
Figure 6
shows the share of total pre-tax income of the top one percent of households ranked by wealth.
From the mid-1930s, with the implementation of the New Deal social contract, that share fell
from a high of 23.94 percent in 1928 to a low of 8.95 percent in 1978. Thereafter it has
steadily risen, reaching 23.5 percent in 2007 which marked the beginning of the Great
Recession. It then fell during the Great Recession owing to a recession-induced fall in
profits, but has since recovered most of that decline as income distribution has worsened again
during the economic recovery. In effect, during the neoliberal era the US economy has retraced
its steps, reversing the improvements achieved by the New Deal and post-World War II
prosperity, so that the top one percent's share of pre-tax income has returned to pre-Great
Depression levels.
Figure 6. US pre-tax income share of top 1 percent. Source:
http://inequality.org/income-inequality/. Original source: Thomas Piketty and Emanuel Saez
(2003), updated at http://emlab.edu/users/saez.
As argued in Palley (2012a, p. 150-151) there
is close relationship between union membership density (i.e. percent of employed workers that
are unionized) and income distribution. This is clearly shown in Figure 7 which shows union
density and the share of pre-tax income going to the top ten percent of wealthiest households.
The neoliberal labor market flexibility agenda explicitly attacks unions and works to shift
income to wealthier households.
Share of income going to the top 10 percent 2013: 47.0% Union
membership density 11.2% 0% 10% 20% 30% 40% 50% 60% 1917 1923 1929 1935 1941 1947 1953 1959
1965 1971 1977 1983 1989 1995 2001 2007 2013 Source: Data on union density follows the
composite series found in Historical Statistics of the United States; updated to 2013 from
unionstats.com. Income inequality (share of income to top 10%) from Piketty and Saez,
"Income
Inequality in the United States, 1913-1998, Quarterly Journal of Economics , 118(1),
2003, 1-39. Updated Figure 7. Union membership and the share of income going to the top ten
percent of wealthiest households, 1917 – 2013. Source: Mishel, Gould and Bivens (2015).
Table 4 provides data on the evolution of the U.S. goods and services trade balance as a share
of GDP by business cycle peak. Comparison across peaks controls for the effect of the business
cycle. The data show through to the late 1970s U.S. trade was roughly in balance, but after
1980 it swung to massive deficit and the deficits increased each business cycle. These deficits
were the inevitable product of the neoliberal model of globalization (Palley, 2015) and they
undermined the AD generation process in accordance with the Keynesian hypothesis.
Table 4. The
U.S. goods & services trade deficit/surplus by business cycle peaks, 1960 – 2007.
Sources: Economic Report of the President, 2009 and author's calculations. Business cycle
peak year Trade balance ($ millions) GDP ($ billions) Trade balance/ GDP (%) 1960 3,508
526.4 0.7 1969 91 984.6 0.0 1973 1,900 1,382.7 0.1 1980 -25,500 2,789.5
-0.9 1981 -28,023 3,128.4 -0.9 1990 -111,037 5,803.1 -1.9 2001 -429,519
10,128.0 -4.2 2007 -819,373 13,807.5 -5.9
Finally, Figure 8 shows total domestic debt
relative to GDP and growth. This Figure is highly supportive of the Keynesian interpretation of
the role of finance. During the neoliberal era real GDP growth has actually slowed but debt
growth has exploded. The reason is the neoliberal model did nothing to increase growth, but it
needed faster debt growth to fill the demand gap created by the model's worsening of income
distribution and creation of large trade deficits. Debt growth supported debt-financed consumer
spending and it supported asset price inflation that enabled borrowing which filled the demand
gap caused by the neoliberal model. Figure 8. Total domestic debt and growth (1952-2007).
Source: Grantham, 2010.
V The debate about the causes of the crisis: why it matters
The importance of the debate about the causes of the crisis is that each perspective
recommends its own different policy response. For hardcore neoliberal government failure
proponents the recommended policy response is to double-down on the policies described by the
neoliberal policy box and further deregulate markets; to deepen central bank independence and
the commitment to low inflation via strict rules based monetary policy; and to further shrink
government and impose fiscal austerity to deal with increased government debt produced by the
crisis For softcore neoliberal market failure proponents the recommended policy response is to
tighten financial regulation but continue with all other aspects of the existing neoliberal
policy paradigm. That means continued support for corporate globalization, socalled labor
market flexibility, low inflation targeting, and fiscal austerity in the long term.
Additionally, there is need for temporary large-scale fiscal and monetary stimulus to combat
the deep recession caused by the financial crisis.
However, once the economy has recovered,
policy should continue with the neoliberal model For proponents of the destruction of shared
prosperity hypothesis the policy response is fundamentally different. The fundamental need is
to overthrow the neoliberal paradigm and replace it with a "structural Keynesian" paradigm.
That involves repacking the policy box as illustrated in Figure 9.
The critical step is to take
workers out of the box and put corporations and financial markets in so that they are made to
serve a broader public interest. The key elements are to replace corporate globalization with
managed globalization that blocks race to the bottom trade dynamics and stabilizes global
financial markets; restore a commitment to full employment; replace the neoliberal
anti-government agenda with a social democratic government agenda; and replace the neoliberal
labor market flexibility with a solidarity based labor market agenda.
The goals are restoration
of full employment and restoration of a solid link between wage and productivity growth.
Figure
9. The structural Keynesian box Corporations & Managed Financial Markets Globalization Full
Employment Social Democratic Government Solidarity Labor Markets
Lastly, since the neoliberal
model was adopted as part of a new global economic order, there is also need to recalibrate the
global economy. This is where the issue of "global rebalancing" enters and emerging market
economies need to shift away from export-led growth strategies to domestic demand-led
strategies. That poses huge challenges for many emerging market economies because they have
configured their growth strategies around export-led growth whereby they sell to U.S.
consumers.
VI From crisis to stagnation: the failure to change
Massive policy interventions, unequalled in the post-war era, stopped the Great Recession
from spiraling into a second Great Depression. The domestic economic interventions included the
2008 Troubled Asset Relief Program (TARP) that bailed out the financial sector via government
purchases of assets and equity from financial institutions; the 2009 American Recovery and
Reinvestment Act (ARRA) that provided approximately $800 billion of fiscal stimulus, consisting
of approximately $550 billion of government spending and $250 billion of tax cuts; the Federal
Reserve lowering its interest target to near-zero (0 - 0.25 percent); and the Federal Reserve
engaging in quantitative easing (QE) transactions that involve it purchasing government and
private sector securities. At the international level, in 2008 the Federal Reserve established
a temporary $620 billion foreign exchange (FX) swap facility with foreign central banks.
That
facility provided the global economy with dollar balances, thereby preventing a dollar
liquidity shortage from triggering a wave of global default on short-term dollar loans that the
financial system was unwilling to roll-over because of panic.3
Additionally, there was
unprecedented globally coordinated fiscal stimulus arranged via the G-20 mechanism. 3
The FX
swaps with foreign central banks have been criticized as being a bail-out for foreign
economies. In fact, they saved the US financial system which would have been pulled down by
financial collapse outside
Despite their scale, these interventions did not stop the recession
from being the deepest since 1945, and nor did they stop the onset of stagnation. Table 5 shows
how GDP growth has failed to recover since the end of the Great Recession, averaging just 2.1
percent for the five year period from 2010 – 2014. Furthermore, that period includes the
rebound year of 2010 when the economy rebounded from its massive slump owing to the
extraordinary fiscal and monetary stimulus measures that were put in place
Table 5. U.S. GDP
growth. Source: Statistical Annex of the European Union, Autumn 2014 and author's calculations.
The growth rate for 2014 is that estimated in October 2014.
Table 6 shows employment creation in the five years after the end of recessions, which provides
another window on stagnation. The job creation numbers show that the neoliberal model was
already slowing in the 1990s with the first episode of "jobless the US.
Many foreign banks
operating in the US had acquired US assets financed with short-term dollar borrowings. When the
US money market froze in 2008 they could not roll-over these loans in accordance with normal
practice. That threatened massive default by these banks within the US financial system, which
would have pulled down the entire global financial system.
The Federal Reserve could not lend
directly to these foreign banks and their governing central banks lacked adequate dollar
liquidity to fill the financing gap. The solution was to lend dollars to foreign central banks,
which then made dollar loans to foreign banks in need of dollar roll-over short-term financing.
recovery".
It actually ground to stagnation in the 2001 – 2007 period, but this was
masked by the house price bubble and the false prosperity it created. Stagnation has persisted
after the Great Recession, but the economic distress caused by the recession has finally
triggered awareness of stagnation among elites economists. In a sense, the Great Recession
called out the obvious, just as did the little boy in the Hans Anderson story about the
emperor's new suit
Table 6. U.S. private sector employment creation in the five year period
after the end of recessions for six business cycles with extended expansions. Source: Bureau of
labor statistics and author's calculations. * = January 1980 the beginning of the next
recession Recession end date Employment at recession end date (millions) Employment five years
later (millions) Percent growth in employment Feb 1961 45.0 52.2 16.0% Mar 1975 61.9 74.6*
20.5% Nov 1982 72.8 86.1 18.3% March 1991 90.1 99.5 10.4% Nov 2001 109.8 115.0 4.7% June 2009
108.4 117.1 8.0% The persistence of stagnation after the Great Recession raises the question
"why"? The answer is policy has done nothing to change the structure of the underlying
neoliberal economic model.
That model inevitably produces stagnation because it produces a
structural demand shortage via (i) its impact on income distribution, and (ii) via its design
of globalization which generates massive trade deficits, wage competition and off-shoring of
jobs and investment. In terms of the three-way contest between the government failure
hypothesis, the market failure hypothesis and the destruction of shared prosperity hypothesis,
the economic policy debate during the Great Recession was cast as exclusively between
government failure and market failure.
With the Democrats controlling the Congress and
Presidency after the 2008 election, the market failure hypothesis won out and has framed policy
since then. According to the hypothesis, the financial crisis caused an exceptionally deep
recession that required exceptionally large monetary and fiscal stimulus to counter it and
restore normalcy. Additionally, the market failure hypothesis recommends restoring and
renovating financial regulation, but other than that the neoliberal paradigm is appropriate and
should be deepened In accordance with this thinking, the in-coming Obama administration
affirmed existing efforts to save the system and prevent a downward spiral by supporting the
Bush administration's TARP, the Federal Reserve's first round of QE (November/December 2008)
that provided market liquidity, and the Federal Reserve's FX swap agreement with foreign
central banks
Thereafter, the Obama administration worked to reflate the economy via passage of
the ARRA (2009) which provided significant fiscal stimulus. With the failure to deliver a
V-shaped recovery, candidate Obama became even more vocal about fiscal stimulus However,
reflecting its softcore neoliberal inclinations, the Obama administration then became much less
so when it took office. Thus, the winners of the internal debate about fiscal policy in the
first days of the Obama administration were those wanting more modest fiscal stimulus.4
Furthermore, its analytical frame was one of temporary stimulus with the 4 Since 2009 there has
been some evolution of policy positions characterized by a shift to stronger support for fiscal
stimulus. This has been especially marked in Larry Summers, who was the Obama administration's
goal of long-term fiscal consolidation, which is softcore neoliberal speak for fiscal austerity
Seen in the above light, after the passage of ARRA (2009), the fiscal policy divide between the
Obama administration and hardcore neoliberal Republicans was about the speed and conditions
under which fiscal austerity should be restored.
This attitude to fiscal policy reflects the
dominance within the Democratic Party of "Rubinomics", the Wall Street view associated with
former Treasury Secretary Robert Rubin, that government spending and budget deficits raise real
interest rates and thereby lower growth. According to that view, the US needs long-term fiscal
austerity to offset Social Security and Medicare Side-by-side with the attempt to reflate the
economy, the Obama administration also pushed for major overhaul and tightening of financial
sector regulation via the Dodd- Frank Act (2010).
That accorded with the market failure
hypothesis's claim about the economic crisis and Great Recession being caused by financial
excess permitted by the combination of excessive deregulation, lax regulation and failure to
modernize regulation Finally, and again in accordance with the logic of the market failure
hypothesis, the Obama administration has pushed ahead with doubling-down and further
entrenching the neoliberal policy box. This is most visible in its approach to globalization.
In 2010, free trade agreements modelled after NAFTA were signed with South Korea, Colombia and
Panama. The Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment
Partnership (TTIP), two mega-agreements negotiated in secrecy and apparently bearing chief
economic adviser when it took office. This shift has become a way of rewriting history by
erasing the memory of initial positions. That is also true of the IMF which in 2010-2011 was a
robust supporter of fiscal consolidation in Europe. similar hallmarks to prior trade
agreements, are also being pushed by the Obama administration
The Obama administration's softcore neoliberalism would have likely generated stagnation by itself, but the prospect has
been further strengthened by Republicans.
Thus, in accordance with their point of view,
Republicans have persistently pushed the government failure hypothesis by directing the policy
conversation to excessive regulation and easy monetary policy as the causes of the crisis.
Consequently, they have consistently opposed strengthened financial regulation and demands for
fiscal stimulus.
At the same time, they have joined with softcore neoliberal Democrats
regarding doubling-down on neoliberal box policies, particularly as regards trade and
globalization Paradoxically, the failure to change the overall economic model becomes most
visible by analyzing the policies of the Federal Reserve, which have changed the most
dramatically via the introduction of QE. The initial round of QE (QE1) was followed by QE2 in
November 2010 and QE3 in September 2012, with the Fed shifting from providing short-term
emergency liquidity to buying private sector financial assets.
The goal was to bid up prices of
longer term bonds and other securities, thereby lowering interest rates on longer-term
financing and encouraging investors to buy equities and other riskier financial assets. The
Fed's reasoning was lower long-term rates would stimulate the economy, and higher financial
asset prices would trigger a positive wealth effect on consumption spending. This makes clear
the architecture of policy.
The Obama administration was to provide fiscal stimulus to jump
start the economy; the Fed would use QE to blow air back into the asset price bubble; the
Dodd-Frank Act (2010) would stabilize financial markets; and globalization would be deepened by
further NAFTA-styled international agreements. This is a near-identical model to that which
failed so disastrously. Consequently, stagnation is the logical prognosis.
VII
Déjà vu all over again: back to the 1990s but with a weaker economy
The exclusion of the destruction of shared prosperity hypothesis, combined with the joint
triumph of the market failure and government failure hypotheses, means the underlying economic
model that produced the Great Recession remains essentially unchanged. That failure to change
explains stagnation. It also explains why current conditions smack of "déjà vu
all over again" with the US economy in 2014-15 appearing to have returned to conditions
reminiscent of the mid-1990s.
Just as the 1990s failed to deliver durable prosperity, so too
current optimistic conditions will prove unsustainable absent deeper change The
déjà vu similarities are evident
in the large US trade deficit that has started
to again deteriorate rapidly;
a return of the over-valued dollar problem that promises to
further increase the trade deficit and divert jobs and investment away from the US economy;
a
return to reliance on asset price inflation and house price increases to grow consumer demand
and construction;
a return of declining budget deficits owing to continued policy disposition
toward fiscal austerity; a return of the contradiction that has the Federal Reserve tighten
monetary policy when economic strength triggers rising prices and wages that bump against the
ceiling of the Fed's self-imposed 2 percent inflation target; and renewal of the push for
neoliberal trade agreements
All of these features mean both policy context and policy design
look a lot like the mid-1990s. The Obama administration saved the system but did not change it
Consequently, the economy is destined to repeat the patterns of the 1990s and 2000s. However,
the US economy has also experienced almost twenty more years of neoliberalism which has left
its economic body in worse health than the 1990s. That means the likelihood of delivering
another bubble-based boom is low and stagnation tendencies will likely reassert themselves
after a shorter and weaker period of expansion
This structurally weakened state of the US
economy is evident in the further worsening of income inequality that has occurred during the
Great Recession and subsequent slow recovery.
... ... ...
Thomas I. Palley, Senior Economic Policy Advisor, AFL-CIO Washington, D.C. [email protected]
Chris Hedges published this book eight years ago and the things he predicted have sadly been
realized
Notable quotes:
"... his screed is a liberating tonic against the crazy-making double-speak and the lies Americans are sold by our country's elite in order to distract us from the true threat and nature of the Corporate State, from the cult of celebrity, to how our nation's Universities have been hijacked to serve the interests, not of the public, but of our corporate overlords. It explains the self-same conditions in all aspects of our society and culture that we now must face, the ever-shrinking flame of enlightenment being exchanged for the illusory shadows on a cave wall. ..."
"... He fearlessly and incisively calls us out on the obvious farce our democracy has become, how we got here, and highlights the rapidly closing window in which we have to do something to correct it. It is a revelation, and yet he merely states the obvious. The empire has no clothes. ..."
"... One of the most powerful aspects of this book was in regard to how our Universities are run these days. I may be in the minority, but I experienced a life-changing disillusionment when I gained entrance to a prestigious "elite" University. Instead of drawing the best and the brightest, or being a place where scholarship was valued, where students were taught critical thinking skills, the University I attended was nothing more than an expensive diploma mill for the children of the wealthy. In the eyes of the University, students were not minds to be empowered and developed, but walking dollar signs. ..."
"... Instead of critical thinking, students were taught to OBEY, not to question authority, and then handed a piece of paper admitting them to the ruling class that is destroying America without a moral compass. Selfishness, deceit, disregard for the common good, and a win-at-all-costs attitude were rewarded. Empathy, curiosity, dissent, and an honest, intellectually rigorous evaluation of ourselves and our world were punished. Obviously I am not the only one to whom this was cause to fear for the future of our country. ..."
Hedges cogently and systematically dismantles the most pernicious cultural delusions of
our era and lays bare the pitiful truths that they attempt to mask. This book is a
deprogramming manual that trims away the folly and noise from our troubled society so that
the reader can focus on the most pressing matters of our time.
Despite the dark reality Hedges excavates, his screed is a liberating tonic against
the crazy-making double-speak and the lies Americans are sold by our country's elite in order
to distract us from the true threat and nature of the Corporate State, from the cult of
celebrity, to how our nation's Universities have been hijacked to serve the interests, not of
the public, but of our corporate overlords. It explains the self-same conditions in all
aspects of our society and culture that we now must face, the ever-shrinking flame of
enlightenment being exchanged for the illusory shadows on a cave wall.
As a twenty-something caught in the death-throes of American Empire and culture, I have
struggled to anticipate where our country and our world are heading, why, and what sort of
life I can expect to build for myself. Hedges presents the reader with the depressing, yet
undeniable truth of the forces that have coalesced to shape the world in which we now find
ourselves. The light he casts is searing and relentless. He fearlessly and incisively
calls us out on the obvious farce our democracy has become, how we got here, and highlights
the rapidly closing window in which we have to do something to correct it. It is a
revelation, and yet he merely states the obvious. The empire has no clothes.
One of the most powerful aspects of this book was in regard to how our Universities
are run these days. I may be in the minority, but I experienced a life-changing
disillusionment when I gained entrance to a prestigious "elite" University. Instead of
drawing the best and the brightest, or being a place where scholarship was valued, where
students were taught critical thinking skills, the University I attended was nothing more
than an expensive diploma mill for the children of the wealthy. In the eyes of the
University, students were not minds to be empowered and developed, but walking dollar
signs.
Instead of critical thinking, students were taught to OBEY, not to question authority,
and then handed a piece of paper admitting them to the ruling class that is destroying
America without a moral compass. Selfishness, deceit, disregard for the common good, and a
win-at-all-costs attitude were rewarded. Empathy, curiosity, dissent, and an honest,
intellectually rigorous evaluation of ourselves and our world were punished. Obviously I am
not the only one to whom this was cause to fear for the future of our country.
Five stars is not enough. Ever since I began reading Empire of Illusion, I have insisted
friends and family pick up a copy, too. Everyone in America should read this incredibly
important book.
Among interesting ideas that Mirkowski presented in this lecture are "privatization of science" -- when well paid
intellectual prostitutes produce the reuslt which are expected by their handlers. the other is his thought
on the difference between neoclassical economics and neoliberalism. Neoliberalism believes in state
intervention and this intervention should take the form of enforcing market on all spheres of human
society.
Another interesting idea that neoliberalism in many cases doe not need the success of its ideas.
The failure can also be exploited for enforcing "more market" on the society.
In other words market fundamentalism has all features of civil religion and like in Middle Ages
it is enforced from above. heretics are not burned at the stake but simply ostracized.
Notable quotes:
"... how it is that science came to be subordinate to economics and the very future of nature to be contingent upon the market. ..."
"... As a leading exponent of the Institutional school, he has published formal treatments of financial markets that update Minsky's 'financial instability hypothesis' for the world of computerised derivative trading. ..."
Life and Debt: Living through the Financialisation of the Biosphere
How can it be that the climate crisis, the biodiversity crisis and the deepest financial crisis
since 1930s have done so little to undermine the supremacy of orthodox economics?
The lecture will preview material from Mirowski's new book: Never Lt a Serious Crisis Go to Waste:
How Neoliberalism Survived the Financial Meltdown (Verso, 2013).
In this lecture, Professor Mirowski responds to the question of how it is that science came
to be subordinate to economics and the very future of nature to be contingent upon the market.
Charting the contradictions of the contemporary political landscape, he notes that science denialism,
markets for pollution permits and proposals for geo-engineering can all be understood as political
strategies designed to neutralize the impact of environmentalism, as they all originated in the network
of corporate-sponsored think-tanks that have made neoliberal accounts of society, politics and the
economy so prevalent that even the most profound crises are unable to shake their grip on the political
imagination.
For those of us who are still paying attention, the task of constructing an alternative politics
of science and markets is a vital one.
Philip Mirowski is Carl E. Koch Professor at the University of Notre Dame, Indiana. His most famous
book, More Heat Than Light: Economics as Social Physics (1989) established his reputation as a formidable
critic of the scientific status of neoclassical economics. His Machine Dreams: Economics becomes
a Cyborg Science (2002) presents a history of the Cold War consolidation of American economic orthodoxy
in the same intellectual milieu that produced systems theory, the digital computer, the atomic bomb,
the strategy of Mutually Assured Destruction, and the 'think tank'. The Road from Mont Pelerin: the
Making of the Neoliberal Thought Collective (with Dieter Plewhe, 2009), drawn from the archives of
the Mont Pelerin Society and the Chicago School, presents a scholarly history of neoliberalism: the
political movement initiated by Friedrich Hayek and Milton Friedman in the 1940s, which has since
become the world's dominant philosophy of government.
As a leading exponent of the Institutional school, he has published formal treatments of financial
markets that update Minsky's 'financial instability hypothesis' for the world of computerised derivative
trading.
This lecture is presented by the UTS Cosmopolitan Civil Societies Research Centre and the Australian
Working Group on Financialisation at the University of Sydney.
The idea the a scientist can be a gangster was probably first presented by
Sir Arthur Conan Doyle
in his famous Sherlock Holmes
detective stories. Neoliberalism just made this a reality. Mass production of "scientific gangsters"
is an immanent feature of neoliberalism.
Notable quotes:
"... By Lynn Parramore, Senior Research Analyst at the Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website ..."
"... The Idea That Businesses Exist Solely to Enrich Shareholders Is Harmful Nonsense ..."
"... Neil Fligstein wrote a good book awhile back called The Transformation of Corporate Control that shows how most large manufacturing companies were initially run by engineers, then sales people, then finance people (as corporations came to be seen as bundles of assets as opposed to businesses). I think this transformation paralleled the rise of neoclassical economics. So, not so much "chicken-and-egg" as "class war." In Germany, at least until recently, I believe CEO's of manufacturing firms were still disproportionately engineers. ..."
"... a group of hedge fund activists can suck the value that you've created right out, driving your company down and making you worse off and the company financially fragile ..."
"... That means transforming business education, including the replacement of agency theory with innovation theory ..."
"... since gigantism is the norm, rather than family run farms in a mostly agrarian economy such failures are catastrophic. The linkage between these elephants tends to create systemic risk. Previously, failure was small and isolated. ..."
"... Welcome to our wonderful new world of infinite mutual vulnerability! Risk On! Nuclear weapons, Equifax, Googleamazon, NSApanopticon, FIRE, hacking, crapification The Soviet Union vanished as an entity, many starved, but the mopes there at least still knew how to raise up edible crops and live on "less" and maybe do better collective response to that sharp peak on the entropy curve. Wonder how things might play out exceptionally, here in the Empire? ..."
"... It should be noted that Michael Jensen of HBS, one of the originators of the `maximize shareholder value' of corporate governance, is on some short lists for this year's not-exactly-the-Nobel Prize in Economics. ..."
The Idea That Businesses Exist Solely to Enrich Shareholders Is Harmful Nonsense
In a new
INET paper
featured in the Financial Times , economist William Lazonick lays out a theory about how corporations
can work for everyone – not just a few executives and Wall Streeters. He challenges a set of controversial
ideas that became gospel in business schools and the mainstream media starting in the 1980s. He
sat down with INET's Lynn Parramore to discuss.
Lynn Parramore: Since the 1980s, business schools have touted "agency theory," a controversial
set of ideas meant to explain how corporations best operate. Proponents say that you run a business
with the goal of channeling money to shareholders instead of, say, creating great products or making
any efforts at socially responsible actions such as taking account of climate change. Many now take
this view as gospel, even though no less a business titan than Jack Welch, former CEO of GE, called
the notion that a company should be run to maximize shareholder value "the dumbest idea in the world."
Why did Welch say that?
William Lazonick: Welch made that statement in a 2009
interview
, just ahead of the
news that GE had lost its S&P Triple-A rating in the midst of the financial crisis. He explained
that, "shareholder value is a result, not a strategy" and that a company's "main constituencies are
your employees, your customers and your products." During his tenure as GE CEO from 1981 to 2001,
Welch had an obsession with increasing the company's stock price and hitting quarterly earnings-per-share
targets, but he also understood that revenues come when your company generates innovative products.
He knew that the employees' skills and efforts enable the company to develop those products and sell
them.
If a publicly-listed corporation succeeds in creating innovative goods or services, then shareholders
stand to gain from dividend payments if they hold shares or if they sell at a higher price. But where
does the company's value actually come from? It comes from employees who use their collective and
cumulative learning to satisfy customers with great products. It follows that these employees are
the ones who should be rewarded when the business is a success. We've become blinded to this simple,
obvious logic.
LP: What have these academic theorists missed about how companies really operate and perform?
How have their views impacted our economy and society?
WL: As I show in my new INET paper " Innovative Enterprise Solves the Agency Problem ," agency
theorists don't have a theory of innovative enterprise. That's strange, since they are talking about
how companies succeed.
They believe that to be efficient, business corporations should be run to "maximize shareholder
value." But as I have argued in
another recent INET paper , public shareholders at a company like GE are not investors
in the company's productive capabilities.
LP: Wait, as a stockholder I'm not an investor in the company's capabilities?
WL: When you buy shares of a stock, you are not creating value for the company -- you're just
a saver who buys shares outstanding on the stock market for the sake of a yield on your
financial portfolio. Public shareholders are value extractors , not value creators.
By touting public shareholders as a corporation's value creators, agency theorists lay the groundwork
for some very harmful activities. They legitimize "hedge fund activists," for example. These are
aggressive corporate predators who buy shares of a company on the stock market and then use the power
bestowed upon them by the ill-conceived U.S. proxy voting system, endorsed by the Securities and
Exchange Commission (SEC), to demand that the corporation inflate profits by cutting costs. That
often means mass layoffs and depressed incomes for anybody who remains. In an industry like
pharmaceuticals , the activists also press for extortionate product price increases. The higher
profits tend to boost stock prices for the activists and other shareholders if they sell their shares
on the market.
LP: So the hedge fund activists are extracting value from a corporation instead of creating it,
and yet they are the ones who get enriched.
WL: Right. Agency theory aids and abets this value extraction by advocating, in the name of "maximizing
shareholder value," massive distributions to shareholders in the form of dividends for holding shares
as well as stock buybacks that you hear about, which give manipulative boosts to stock prices. Activists
get rich when they sell the shares. The people who created the value -- the employees -- often get
poorer.
###p"downsize-and-distribute" -- something that corporations have been doing since the 1980s,
which has
resulted in extreme concentration of income among the richest households and the erosion of middle-class
employment opportunities.
LP: You've called stock buybacks -- what happens when a company buys back its own shares from
the marketplace, often to manipulate the stock price upwards -- the "legalized looting of the U.S.
business corporation." What's the problem with this practice?
WL: If you buy shares in Apple, for example, you can get a dividend for holding shares and, possibly,
a capital gain when you sell the shares. Since 2012, when Apple made its first dividend payment since
1996, the company has shelled out $57.4 billion as dividends, equivalent to over 22 percent of net
income. That's fine. But the company has also spent $157.9 billion on stock buybacks, equal to 62
percent of net income.
Yet the only time in its history that Apple ever raised funds on the public stock market was in
1980, when it
collected $97 million in its initial public offering. How can a corporation return capital to
parties that never supplied it with capital? It's a very misleading concept.
The vast majority of people who hold Apple's publicly-listed shares have simply bought outstanding
shares on the stock market. They have contributed nothing to Apple's value-creating capabilities.
That includes veteran corporate raider Carl Icahn, who raked in
$2 billion by holding $3.6 billion in Apple shares for about 32 months, while using his influence
to encourage Apple to do $80.3 billion in buybacks in 2014-2015, the largest repurchases ever. Over
this period, Apple, the most cash-rich company in history, increased its debt by $47.6 billion to
do buybacks so that it would not have to repatriate its offshore profits, sheltered from U.S. corporate
taxes.
There are many ways in which the company could have returned its profits to employees and taxpayers
-- the real value creators -- that are consistent with an innovative business model. Instead,
in doing massive buybacks, Apple's board (which includes former Vice President Al Gore) has endorsed
legalized looting. The SEC bears a lot of blame. It's supposed to protect investors and make sure
financial markets are free of manipulation. But back in 1982, the SEC bought into agency theory under
Reagan and came up with a rule that gives corporate executives a "safe harbor" against charges of
stock-price manipulation when they do billions of dollars of buybacks for the sole purpose of manipulating
their company's stock price.
LP: But don't shareholders deserve some of the profits as part owners of the corporation?
WL: Let's say you buy stock in General Motors. You are just buying a share that is outstanding
on the market. You are contributing nothing to the company. And you will only buy the shares because
the stock market is highly liquid, enabling you to easily sell some or all of the shares at any moment
that you so choose.
In contrast, people who work for General Motors supply skill and effort to generate the company's
innovative products. They are making productive contributions with expectations that, if
the innovative strategy is successful, they will share in the gains -- a bigger paycheck, employment
security, a promotion. In providing their labor services, these employees are the real value creators
whose economic futures are at risk.
LP: This is really different from what a lot of us have been taught to believe. An employee gets
a paycheck for showing up at work -- there's your reward. When we take a job, we probably don't expect
management to see us as risk-takers entitled to share in the profits unless we're pretty high up.
WL: If you work for a company, even if its innovative strategy is a big success, you run a big
risk because under the current regime of "maximizing shareholder value" a group of hedge fund activists
can suck the value that you've created right out, driving your company down and making you worse
off and the company financially fragile. And they are not the only predators you have to deal with.
Incentivized with huge amounts of stock-based pay, senior corporate executives will, and often do,
extract value from the company
for their own personal gain -- at your expense. As Professor Jang-Sup Shin and I argue in a forthcoming
book, senior executives often become value-extracting insiders. And they open the corporate coffers
to hedge fund activists, the value-extracting outsiders. Large institutional investors can use their
proxy votes to support corporate raids, acting as value-extracting enablers.
You put in your ideas, knowledge, time, and effort to make the company a huge success, and still
you may get laid off or find your paycheck shrinking. The losers are not only the mass of corporate
employees -- if you're a taxpayer, your money provides the business corporation with physical infrastructure,
like roads and bridges, and human knowledge, like scientific discoveries, that it needs to innovate
and profit. Senior corporate executives are constantly complaining that they need lower corporate
taxes in order to compete, when what they
really want is more cash to distribute to shareholders and boost stock prices. In that system,
they win but
the rest of us lose .
LP: Some academics say that hedge fund activism is great because it makes a company run better
and produce higher profits. Others say, "No, Wall Streeters shouldn't have more say than executives
who know better how to run the company." You say that both of these camps have got it wrong. How
so?
WL: A company has to be run by executive insiders, and in order to produce innovation these executives
have got to do three things:
First you need a resource-allocation strategy that, in the face of uncertainty, seeks to generate
high-quality, low-cost products. Second, you need to implement that strategy through training, retaining,
motivating, and rewarding employees, upon whom the development and utilization of the organization's
productive capabilities depend. Third, you have to mobilize and leverage the company's cash flow
to support the innovative strategy. But under the sway of the "maximizing shareholder value" idea,
many senior corporate executives have been unwilling, and often unable, to perform these value-creating
functions. Agency theorists have got it so backwards that they actually celebrate the virtues of
"
the value extracting CEO ." How strange is that?
Massive stock buybacks is where the incentives of corporate executives who extract value align
with the interests of hedge fund activists who also want to suck value from a corporation. When they
promote this kind of alliance, agency theorists have in effect served as academic agents of activist
aggression. Lacking a theory of the value-creating firm, or what I call a "theory of innovative enterprise,"
agency theorists cannot imagine what an executive who creates value actually does. They don't see
that it's crucial to align executives' interests with the value-creating investment requirements
of the organizations over which they exercise strategic control. This intellectual deficit is not
unique to agency theorists; it is inherent in their training in
neoclassical economics .
LP: So if shareholders and executives are too often just looting companies to enrich themselves
– "value extraction," as you put it – and not caring about long-term success, who is in a better
position to decide how to run them, where to allocate resources and so on?
WL: We need to redesign corporate-governance institutions to promote the interests of American
households as workers and taxpayers. Because of technological, market, or competitive uncertainties,
workers take the risk that the application of their skills and the expenditure of their efforts will
be in vain. In financing investments in infrastructure and knowledge, taxpayers make productive capabilities
available to business enterprises, but with no guaranteed return on those investments.
These stakeholders need to have representation on corporate boards of directors. Predators, including
self-serving corporate executives and greed-driven shareholder activists, should certainly not have
representation on corporate boards.
LP: Sounds like we've lost sight of what a business needs to do to be successful in the long run,
and it's costing everybody except a handful of senior executives, hedge fund managers, and Wall Street
bankers. How would your "innovation theory" help companies run better and make for a healthier economy
and society?
WL: Major corporations are key to the operation and performance of the economy. So we need a revolution
in corporate governance to get us back on track to stable and equitable economic growth. Besides
changing board representation, I would change the incentives for top executives so that they are
rewarded for allocating corporate resources to value creation. Senior executives should gain along
with the rest of the organization when the corporation is successful in generating competitive products
while sharing the gains with workers and taxpayers.
Innovation theory calls for changing the mindsets and skill sets of senior executives. That means
transforming business education, including the replacement of agency theory with innovation theory.
That also means changing the career paths through which corporate personnel can rise to positions
of strategic control, so that leaders who create value get rewarded and those who extract it are
disfavored. At the institutional level, it would be great to see the SEC, as the regulator of financial
markets, take a giant step in supporting value creation by banning stock buybacks whose purpose it
is to manipulate stock prices.
To get from here to there, we have to replace nonsense with common sense in our understanding
of how business enterprises operate and perform.
Owners come first!
That was the slogan of our former board chair. He didn't disclose to the employees that his compensation
was influenced mightily by how big the net income was. He did tell the employees that they were
well down the hierarchy, after Owners (capital O) and then vendors and then customers. His former
employees deserted in droves.
I'd say that maximizing long-term shareholder value is a great idea the problem is, as is so
often the case these days, short-term thinking.
Driving away a company's best employees makes that quarter's numbers look better, but destroys
long-term value. Same thing for so many other short-term, "I'll be gone, you'll be gone" strategies.
One step to fixing things – change the definition of long-term capital gains from the current
1 year to, say, 5 years. This "one simple trick" would fix everything from the carried interest
loophole to the abuses inherent in the current Wall Street gambling mentality.
We can talk about what is best in theory, but reality is just that, shareholders come first.
They control the board and the CEO and the CEO institutes the will of the shareholders down
into the business entities, determining the level of reinvestment in the business units and the
level of employee compensation. That will continue to be the case until the company goes bankrupt
at which point shareholders are entitled to nothing.
I agree with others that Jack Welch is saying what he is saying after the fact. Way too easy
to do.
>Welch had an obsession with increasing the company's stock price and hitting quarterly
earnings-per-share targets, but he also understood
Yeah so he talks a good game but when he had the reins – one of the most powerful men in the
world meekly (ok, that's a hilarious adjective when applied to Jack Welsh) followed the herd.
Or more accurately, found out where the herd was heading and got out in front of it. The true
sign of modern "leadership".
Or more accurately, found out where the herd was heading and got out in front of it.
The true sign of modern "leadership".
Reminds me of something i have read, supposedly a quite from some politician or other, going
to the tune of "i need to find out where the mob is going, so i can lead them there".
Welch's primary business strategy at GE was to exit every product market in which GE's market
share was not in the top two in the industry (selling them off or closing them down) and reallocate
resources to industries where GE was market dominant, often buying up the competition rather than
truly investing in innovation. A truly awful human being.
As I personally have always believed, Employees have more invested in their employers than
shareholders. Shareholders can sell quickly and have no loyalty. Employees do not enjoy such a
liquid "jobs market."
There also seems to be a turning point in companies, where they change the perception of the
customers form a group to be treasured, to a group who are to b exploited – change the relationship
so the customers become "marks."
I also believe there should be an almost automatic "break -up" provision for companies who
reach a certain market share.
Finally there should be one definition of income, and it should include Wages, Dividends, and
Capital Gains.
there should be an almost automatic "break -up" provision for companies who reach a certain
market share.
Yes, anti-trust enforcement would be nice. Hypothetical President Sanders might actually do
that. Real and hypothetical Presidents Bush, Obama, Romney, B. Clinton, H. Clinton, and Trump
have other priorities.
Sen Bernie Sanders sees right through the neoclassical fetters, blinders, and bullshit. He
recognizes how intellectually and economically stagnant and dangerous it is. He has the most powerful
conceptual, articulate grasp of economics that I've seen the past 40 years. He also, IIRC, had
MMTer Stephanie Kelton as an advisor, and had her advise the Senate Finance Committee. Also notable:
Sen Elizabeth Warren.
The other political operators that you mention are still in thrall to neoclassical assumptions.
They mistake 'takers' for 'makers' and are economically bamboozled. And it has worked out well
for all of them, on a personal basis, so it is not surprising that they don't see the problems.
Anyone actually trying to build an innovative business, OTOH, has to see through the bamboozlement
or else you're out of business pronto.
The class of humans that by inclination and opportunity become C-Suite and VC looters and "owners:"
did they precede the imprimatur of "economists" with their notions of price, value, and crossing
of curves, or did the "economists" do a Martin Luther, nail up a bunch of theses, and preach fire
and brimstone to turn the greedheads loose?
And was/is any other outcome for the species and the planet even possible?
Neil Fligstein wrote a good book awhile back called The Transformation of Corporate Control
that shows how most large manufacturing companies were initially run by engineers, then sales
people, then finance people (as corporations came to be seen as bundles of assets as opposed to
businesses). I think this transformation paralleled the rise of neoclassical economics. So, not
so much "chicken-and-egg" as "class war." In Germany, at least until recently, I believe CEO's
of manufacturing firms were still disproportionately engineers.
"most large manufacturing companies were initially run by engineers, then sales people,
then finance people"
The Lincoln Electric Company, which became famous for its "Incentive Management" program of
compensating employees, was a client of mine. Over three decades I saw it progress through precisely
those stages, and gradually lose every characteristic that had made the company unique.
This post was a genuine pleasure to read. Especially:
If you work for a company, even if its innovative strategy is a big success, you run a big
risk because under the current regime of "maximizing shareholder value" a group of hedge
fund activists can suck the value that you've created right out, driving your company down
and making you worse off and the company financially fragile .
And we've had a government by and for hedge fund managers for about the same amount of time
that we've had economic woes. One problem is that hedge funders like Romney, who actually don't
think about consumer product development, actually don't have to test and deploy products, bring
their bean-counter assumptions to business and make a hash of things. I mention Romney specifically,
because he presents himself to the world as a paragon of economic wisdom.
Romney has a prestigious business school background. Which makes me want to highlight this:
Innovation theory calls for changing the mindsets and skill sets of senior executives.
That means transforming business education, including the replacement of agency theory
with innovation theory .
Just a thought: "innovation theory," like MMT, is maybe just a tool set? "Innovation" includes
"autonomous combat devices," and CRSP-R, and nuclear weapons, and the F-35, and fracking, and
derivatives, and plastics, and charter schools, stuff and ideas that for some of us constitute
"value" are corporations as the category has grown to be, any more likely to "innovate" in the
areas of social improvements and possibilities, or stewardship of the planet, or close down the
toll stations and all the other rent collection scams and extortions they have "innovated" to
date? Or release their chokehold on "policy?"
Says the proponent: "Major corporations are key to the operation and performance of the economy.
So we need a revolution in corporate governance to get us back on track to stable and equitable
economic growth. Besides changing board representation, I would change the incentives for top
executives so they are rewarded for allocating corporate resources to value creation. Senior executives
should gain along with the rest of the organization when the corporation is successful in generating
competitive products while sharing the gains with workers and taxpayers." There seems to be so
much wrong and just more Biz-babble about this, one hardly knows where to start unpacking.
"Major corporations are key?" Really? Monsanto? GM? Bechtel? The Big Banks? And "back on track":
When has the political economy, writ small or large, ever been "on track to stability and equitable
growth," said "growth' itself seemingly one of the pathologies that's killing us? And who's going
to write the entries for the corporate senior executives' dance cards that will measure their
"success," in those feel-good categories?
But it's a good conversation piece, and maybe an opening into Something Better, however us
inherently mostly self-interested, self-pleasing omnivorous predators might define "better "
Badly run companies, naturally extinguish themselves. Unfortunately they take down their customers,
owners, vendors and employees in the process. But the government can step in and either save a
company that otherwise would die, or act as a crony corruption partner on behalf of a well connected
company. Same as it always was.
But since gigantism is the norm, rather than family run farms in a mostly agrarian economy
such failures are catastrophic. The linkage between these elephants tends to create systemic risk.
Previously, failure was small and isolated.
Welcome to our wonderful new world of infinite mutual vulnerability! Risk On! Nuclear weapons,
Equifax, Googleamazon, NSApanopticon, FIRE, hacking, crapification The Soviet Union vanished as
an entity, many starved, but the mopes there at least still knew how to raise up edible crops
and live on "less" and maybe do better collective response to that sharp peak on the entropy curve.
Wonder how things might play out exceptionally, here in the Empire?
It should be noted that Michael Jensen of HBS, one of the originators of the `maximize
shareholder value' of corporate governance, is
on some short lists
for this year's not-exactly-the-Nobel Prize in Economics.
"... Mirowski identifies three basic aspects of neoliberalism that the Left has failed to understand: the movement's intellectual history, the way it has transformed everyday life, and what constitutes opposition to it. Until we come to terms with them, Mirowski suggests, right-wing movements such as the Tea Party (a prominent player in the book) will continue to reign triumphant. ..."
"... Joining a long line of thinkers, most famously Karl Polanyi, Mirowski insists that a key error of the Left has been its failure to see that markets are always embedded in other social institutions. Neoliberals, by contrast, grasp this point with both hands -- and therefore seek to reshape all of the institutions of society, including and especially the state, to promote markets. Neoliberal ascendancy has meant not the retreat of the state so much as its remaking. ..."
"... he also recognizes that the neoliberals themselves have been canny about keeping the real nature of their project hidden through a variety of means. Neoliberal institutions tend to have what he calls a "Russian doll" structure, with the most central ones well hidden from public eyes. Mirowski coins an ironic expression, "the Neoliberal Thought Collective," for the innermost entities that formulate the movement's doctrine. The venerable Mont Pelerin Society is an NTC institution. Its ideas are frequently disseminated through venues which, formally at least, are unconnected to the center, such as academic economics departments. Thus, neoclassical economists spread the gospel of the free market while the grand project of remaking the state falls to others. ..."
"... At the same time as neoliberal commonsense trickles down from above, Mirowski argues that it also wells up from below, reinforced by our daily patterns of life. Social networking sites like Facebook encourage people to view themselves as perpetual cultural entrepreneurs, striving to offer a newer and better version of themselves to the world. Sites like LinkedIn prod their users to present themselves as a fungible basket of skills, adjustable to the needs of any employer, without any essential characteristics beyond a requisite subservience. Classical liberalism always assumes the coherent individual self as its basic unit. Neoliberalism, by contrast, sees people as little more than variable bundles of human capital, with no permanent interests or even attributes that cannot be remade through the market. For Mirowski, the proliferation of these forms of everyday neoliberalism constitute a "major reason the neoliberals have emerged from the crisis triumphant." ..."
"... Finally, Mirowski argues that the Left has too often been sucked in by neoliberalism's loyal opposition. Figures like Joseph Stiglitz or Paul Krugman, while critical of austerity and supportive of the welfare state, accept the fundamental neoclassical economic precepts at the heart of neoliberal policy. Mirowski argues that we must ditch this tradition in its entirety. Even attempts to render its assumptions more realistic -- as in the case of behavioral economics, for example, which takes account of the ways real people diverge from the hyperrationality of homo economicus -- provide little succor for those seeking to overturn the neoliberals. ..."
"... Mirowski's insistence on the centrality of the state to the neoliberal project helps correct the unfortunate tendency of many leftists over the past decade to assent to neoliberal nostrums about the obsolescence of the state. Indeed, Mirowski goes further than many other critics who have challenged the supposed retreat of the state under neoliberalism. ..."
"... Loïc Wacquant, for instance, has described the "centaur state" of neoliberalism, in which a humanist liberalism reigns for the upper classes, while the lower classes face the punitive state apparatus in all its bestiality. ..."
"... Mirowski shows us that the world of the rich under neoliberalism in no way corresponds to the laissez-faire of classical liberalism. The state does not so much leave the rich alone as actively work to reshape the world in their interests, helping to create markets for the derivatives and securities that made (and then destroyed) so many of the fortunes of the recent past. The neoliberal state is an eminently interventionist one, and those mistaking it for the austere nightwatchman of libertarian utopianism have little hope of combating it. ..."
"... Mirowski's concern to disabuse his readers of the notion that the wing of neoliberal doctrine disseminated by neoclassical economists could ever be reformed produces some of the best sections of the book. His portrait of an economics profession in haggard disarray in the aftermath of the crisis is both comic and tragic, as the amusement value of the buffoonery on display diminishes quickly when one realizes the prestige still accorded to these figures. Reading his comprehensive examination of the discipline's response to the crisis, one is reminded of Freud's famous broken kettle. The professional economists' account of their role in the crisis went something like (a) there was no bubble and (b) bubbles are impossible to predict but (c) we knew it was a bubble all along. ..."
"... Though Krugman and Stiglitz have attacked concepts like the efficient markets hypothesis (which holds that prices in a competitive financial market reflect all relevant economic information), Mirowski argues that their attempt to do so while retaining the basic theoretical architecture of neoclassicism has rendered them doubly ineffective. ..."
"... First, their adoption of the battery of assumptions that accompany most neoclassical theorizing -- about representative agents, treating information like any other commodity, and so on -- make it nearly impossible to conclusively rebut arguments like the efficient markets hypothesis. ..."
To understand how a body of thought became an era of capitalism requires more than intellectual
history.
"What is going to come after neoliberalism?" It was the question on many radicals' lips, present
writer included, after the financial crisis hit in 2008. Though few were so sanguine about our prospects
as to repeat the suicidal optimism of previous radical movements ("After Hitler, Our Turn!"), the
feeling of the day was that the era of unfettered marketization was coming to a close. A new period
of what was loosely referred to as Keynesianism would be the inevitable result of a crisis caused
by markets run amok.
Five years later, little has changed. What comes after neoliberalism? More neoliberalism, apparently.
The prospects for a revived Left capable of confronting it appear grim.
Enter Philip Mirowski's Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived
the Financial Meltdown . Mirowski maintains that the true nature of neoliberalism has gone
unrecognized by its would-be critics, allowing the doctrine to flourish even in conditions, such
as a massive financial crisis, that would seem to be inimical to its survival. Leftists keep busy
tilting at the windmill of deregulation as the giants of neoliberalism go on pillaging unmolested.
Mirowski identifies three basic aspects of neoliberalism that the Left has failed to understand:
the movement's intellectual history, the way it has transformed everyday life, and what constitutes
opposition to it. Until we come to terms with them, Mirowski suggests, right-wing movements such
as the Tea Party (a prominent player in the book) will continue to reign triumphant.
The book begins with the war of ideas -- a conflict in which, Mirowski argues, the Left has been
far too generous in taking neoliberals at their word, or at least their best-publicized word. We
have, in effect, been suckered by kindly old Milton Friedman telling us how much better off we'd
all be if the government simply left us "free to choose." But neoliberals have at times been forthright
about their appreciation for the uses of state power. Markets, after all, do not simply create themselves.
Joining a long line of thinkers, most famously Karl Polanyi, Mirowski insists that a key error
of the Left has been its failure to see that markets are always embedded in other social institutions.
Neoliberals, by contrast, grasp this point with both hands -- and therefore seek to reshape all of
the institutions of society, including and especially the state, to promote markets. Neoliberal ascendancy
has meant not the retreat of the state so much as its remaking.
If Mirowski is often acidic about the Left's failure to understand this point, he also recognizes
that the neoliberals themselves have been canny about keeping the real nature of their project hidden
through a variety of means. Neoliberal institutions tend to have what he calls a "Russian doll" structure,
with the most central ones well hidden from public eyes. Mirowski coins an ironic expression, "the
Neoliberal Thought Collective," for the innermost entities that formulate the movement's doctrine.
The venerable Mont Pelerin Society is an NTC institution. Its ideas are frequently disseminated through
venues which, formally at least, are unconnected to the center, such as academic economics departments.
Thus, neoclassical economists spread the gospel of the free market while the grand project of remaking
the state falls to others.
At the same time as neoliberal commonsense trickles down from above, Mirowski argues that
it also wells up from below, reinforced by our daily patterns of life. Social networking sites like
Facebook encourage people to view themselves as perpetual cultural entrepreneurs, striving to offer
a newer and better version of themselves to the world. Sites like LinkedIn prod their users to present
themselves as a fungible basket of skills, adjustable to the needs of any employer, without any essential
characteristics beyond a requisite subservience. Classical liberalism always assumes the coherent
individual self as its basic unit. Neoliberalism, by contrast, sees people as little more than variable
bundles of human capital, with no permanent interests or even attributes that cannot be remade through
the market. For Mirowski, the proliferation of these forms of everyday neoliberalism constitute a
"major reason the neoliberals have emerged from the crisis triumphant."
Finally, Mirowski argues that the Left has too often been sucked in by neoliberalism's loyal
opposition. Figures like Joseph Stiglitz or Paul Krugman, while critical of austerity and supportive
of the welfare state, accept the fundamental neoclassical economic precepts at the heart of neoliberal
policy. Mirowski argues that we must ditch this tradition in its entirety. Even attempts to render
its assumptions more realistic -- as in the case of behavioral economics, for example, which takes
account of the ways real people diverge from the hyperrationality of homo economicus -- provide
little succor for those seeking to overturn the neoliberals.
For Mirowski, these three failures of the Left go a long way toward explaining how neoliberals
have largely escaped blame for a crisis they created. The Left persistently goes after phantoms like
deregulation or smaller government, which neoliberals easily parry by pointing out that the regulatory
apparatus has never been bigger. At the same time, we ignore the deep roots of neoliberal ideology
in everyday life, deceiving ourselves as to the scale of the task in front of us.
Whatever criticisms of Mirowski's analysis are in order, much of it is compelling, particularly
in regard to the intellectual history of the NTC. Mirowski's insistence on the centrality of
the state to the neoliberal project helps correct the unfortunate tendency of many leftists over
the past decade to assent to neoliberal nostrums about the obsolescence of the state. Indeed, Mirowski
goes further than many other critics who have challenged the supposed retreat of the state under
neoliberalism.
Loïc Wacquant, for instance, has described the "centaur state" of neoliberalism, in which
a humanist liberalism reigns for the upper classes, while the lower classes face the punitive state
apparatus in all its bestiality. But Mirowski shows us that the world of the rich under
neoliberalism in no way corresponds to the laissez-faire of classical liberalism. The state does
not so much leave the rich alone as actively work to reshape the world in their interests, helping
to create markets for the derivatives and securities that made (and then destroyed) so many of the
fortunes of the recent past. The neoliberal state is an eminently interventionist one, and those
mistaking it for the austere nightwatchman of libertarian utopianism have little hope of combating
it.
It's here that we begin to see the strategic genius of neoliberal infrastructure, with its teams
of college economics professors teaching the wondrous efficacy of supply and demand on the one hand,
and the think tanks and policy shops engaged in the relentless pursuit of state power on the other.
The Left too often sees inconsistency where in fact there is a division of labor.
Mirowski's concern to disabuse his readers of the notion that the wing of neoliberal doctrine
disseminated by neoclassical economists could ever be reformed produces some of the best sections
of the book. His portrait of an economics profession in haggard disarray in the aftermath of the
crisis is both comic and tragic, as the amusement value of the buffoonery on display diminishes quickly
when one realizes the prestige still accorded to these figures. Reading his comprehensive examination
of the discipline's response to the crisis, one is reminded of Freud's famous broken kettle. The
professional economists' account of their role in the crisis went something like (a) there was no
bubble and (b) bubbles are impossible to predict but (c) we knew it was a bubble all along.
Incoherence notwithstanding, however, little in the discipline has changed in the wake of the
crisis. Mirowski thinks that this is at least in part a result of the impotence of the loyal opposition
-- those economists such as Joseph Stiglitz or Paul Krugman who attempt to oppose the more viciously
neoliberal articulations of economic theory from within the camp of neoclassical economics. Though
Krugman and Stiglitz have attacked concepts like the efficient markets hypothesis (which holds that
prices in a competitive financial market reflect all relevant economic information), Mirowski argues
that their attempt to do so while retaining the basic theoretical architecture of neoclassicism has
rendered them doubly ineffective.
First, their adoption of the battery of assumptions that accompany most neoclassical theorizing
-- about representative agents, treating information like any other commodity, and so on -- make
it nearly impossible to conclusively rebut arguments like the efficient markets hypothesis.
Instead, they end up tinkering with it, introducing a nuance here or a qualification there. This
tinkering causes their arguments to be more or less ignored in neoclassical pedagogy, as economists
more favorably inclined toward hard neoliberal arguments can easily ignore such revisions and hold
that the basic thrust of the theory is still correct. Stiglitz's and Krugman's arguments, while receiving
circulation through the popular press, utterly fail to transform the discipline.
Mirowski also heaps scorn on the suggestion, sometimes made in leftist circles, that the problem
at the heart of neoclassical economics is its assumption of a hyperrational homo economicus
, relentlessly comparing equilibrium states and maximizing utility. Though such a revision may
be appealing to a certain radical romanticism, Mirowski shows that a good deal of work going on under
the label of behavioral economics has performed just this revision, and has come up with results
that don't differ substantively from those of the mainstream. The main problem with neoclassicism
isn't its theory of the human agent but rather its the theory of the market -- which is precisely
what behavioral economics isn't interested in contesting.
In all, Mirowski's indictment of the state of economic theory and its imbrication with the neoliberal
project is devastating. Unfortunately, he proves much less successful in explaining why
things have turned out as they have. The book ascribes tremendous power to the Neoliberal Thought
Collective, which somehow manages to do everything from controlling the economics profession to reshaping
the state to forging a new sense of the human self. The reader is left wondering how the NTC came
to acquire such power. This leads to the book's central flaw: a lack of any theory of the structure
of modern capitalism. Indeed, the NTC seems to operate in something of a vacuum, without ever confronting
other institutions or groups, such as the state or popular movements, with interests and agendas
of their own.
To be fair, Mirowski does offer an explanation for the failure of popular movements to challenge
neoliberalism, largely through his account of "everyday" neoliberalism. At its strongest, the book
identifies important strategic failures, such as Occupy's embrace of "a mimicry of media technologies
as opposed to concerted political mobilization." However, Mirowski extends the argument well beyond
a specific failure of the Occupy movement to propose a general thesis that developments like Facebook
and reality TV have transmitted neoliberal ideology to people who have never read Friedman and Hayek.
In claiming that this embodied or embedded ideology plays an important role in the failure of the
Left, he places far more explanatory weight on the concept of everyday neoliberalism than it is capable
of bearing.
At the simplest level, it's just not clear that everyday neoliberalism constitutes the kind of
block to political action that Mirowski thinks it does. No doubt, many people reading this article
right now simultaneously have another browser tab open to monster.com or LinkedIn, where they are
striving to present themselves as a fungible basket of skills to any employer that will have them.
In this economy, everyone has to hustle, and that means using all available means. That many of these
same readers have probably also done things like organize against foreclosures should give pause
to any blurring of the distinction between using various media technologies and embracing the ideology
Mirowski sees embodied in them.
Indeed, the ubiquity of participation in such technologies by people who support, oppose, or are
apathetic about neoliberalism points to a larger phenomenon on which Mirowski is silent: the labor
market. Put bluntly, it is difficult to imagine anyone engaging in the painfully strained self-advertisement
facilitated by LinkedIn in a labor market with, say, 2-percent unemployment. In such a market, in
which employers were competing for comparatively scarce workers, there would be very little need
for those workers to go through the self-abasing ritual of converting themselves into fungible baskets
of skills. In our current situation, by contrast, where secure and remunerative employment is comparatively
scarce, it is no surprise that people turn to whatever technologies are available to attempt to sell
themselves. As Joan Robinson put it, the only thing worse than being exploited by capitalism is not
being exploited by it.
In evaluating the role of everyday neoliberalism, it is also helpful to move, for the moment,
beyond the perspective of the United States, where the NTC has clearly had great success, and adopt
that of countries where resistance is significantly more developed, such as Venezuela or South Africa.
Especially in the former, popular movements have been notably successful in combating neoliberal
efforts to take over the state and reshape the economy, and have instead pushed the country in the
opposite direction. Is it really plausible that a main reason for this difference is that everyday
neoliberalism is more intense in the United States? I doubt it. For one thing, the strength of Venezuela's
radical movements, in comparison with the US, clearly antedates the developments (social media,
Here Comes Honey Boo Boo , and so on) that Mirowski discusses.
Moreover, it is just as plausible that the entrepreneurial culture he describes is even more extensive
in the slums of the global South, where neoliberal devastation has forced many poor households to
rely on at least one family member engaging in semi-legal arbitrage in goods salvaged from garbage
or made at home. Surely such activities provide a firmer foundation for commercial subjectivity than
having a 401(k). That resistance has grown in such circumstances suggests that looking to malignant
subjectivities to explain popular passivity is an analytic dead-end.
If everyday neoliberalism doesn't explain the comparative weakness of the US left, what does?
This is, of course, the key question, and I can do no more than gesture at an answer here. But I
would suggest that the specific histories of the institutions of the American left, from the Communist
Party to Students for a Democratic Society to labor unions, and the histories of the situations they
confronted, provide us with a more solid foundation for understanding our current weakness than the
hegemony of neoliberal culture does. Moreover, with a theory of capitalism that emphasizes the way
the structure of the system makes it both necessary and very difficult for most people to organize
to advance their interests, it becomes very easy to explain the persistence of a low level of popular
mobilization against neoliberalism in the context of a weakened left.
If Mirowski's account doesn't give us a good basis for explaining why popular resistance has been
so lacking in the US, it nonetheless suggests why he is so concerned with explaining the supposed
dominance of neoliberal ideology among the general population. From the beginning, he raises the
specter of right-wing resurgence, whether in the form of Scott Walker surviving the recall campaign
in Wisconsin, the Tea Party mania of 2010, or the success of right-wing parties in Europe. However,
much of this seems overstated, especially from a contemporary perspective. The Tea Party has, for
all intents and purposes, disappeared from the front lines of American politics, and the Republican
Party, while capable of enacting all kinds of sadistic policies on the state level, has remained
in a state of disarray on the national level since the 2006 congressional elections.
More fundamentally, the argument that the voting public embraces neoliberalism doesn't square
well with recent research by political scientists like Larry Bartels and Martin Gilens emphasizing
the profound disconnect between the policy preferences of the poor and what transpires in Washington.
What appears to be happening is less the general populace's incorporation into neoliberalism than
their exclusion from any institutions that would allow them to change it. Importantly, this alternative
explanation does not rely on the Left conceit that rebellion lurks perpetually just below the placid
social surface, ready to explode into radical insurgency at any moment. It simply contends that the
political passivity of neoliberalism's victims reflects a real diminution of their political options.
Mirowski's failure to address these larger institutional and structural dynamics vitiates much
of the explanatory power of his book. On a purely descriptive level, the sections on the intellectual
history of neoliberalism and the non-crisis of neoclassical economics illuminate many of the hidden
corners of neoliberal ideology. However, if Mirowski is right to suggest that we need to understand
neoliberalism better to be successful in fighting it -- and he surely is -- then much more is needed
to explain neoliberal success and Left failure.
To understand how a body of thought became an era of capitalism requires more than intellectual
history. It demands an account of how capitalism actually works in the period in question, and how
the ideas of a small group of intellectuals came to be the policy preferences of the rich. Mirowski
has given us an excellent foundation for understanding the doctrine, but it will remain for others
to explain its actual development.
"... Claim 1 is a restatement of the marginal productivity theory which is at the heart of neoclassical economics. In a general equilibrium model of a perfectly competitive economy with full employment, it can be deduced as a theorem. With constant returns to scale, ..."
"... The two propositions seem at odds. If people earn their marginal productivity (by #1), there should not be the externalities (in #2). The presence of the externalities suggests that incomes are not set according to marginal contributions to the economy. In turn, that calls into question the general equilibrium model. ..."
"... If, I repeat, If capital is invested, it is much more likely to be in automation. Which maintains or increases productivity while lowering labor costs. Demand is the only thing that can increase employment. But, that employment could be anywhere in the world. ..."
"... Alongside these two points I would add the (in econ-blogospheric terms, Sumnerian) point that Central Banks switched from targeting unemployment to targeting inflation; the result has been much longer periods of unemployment and underemployment, (arguably) artificially depressing wages, especially at the low end. (Hence wage stagnation). ..."
Restating the case against trickle down (updated in response to comments)
by John Quiggin on September 2, 2017 I've just given a
couple of talks focusing on inequality, one for the Global Change Institute at UQ, following a
presentation by Wayne Swan and the second at a conference organized by the TJ Ryan
Foundation (including great talks by Peter Saunders, Sally McManus, and others), where I
was responding to a paper by Jim Stanford from the Centre for Future Work. Because I was
speaking second in both cases, I didn't prepare a paper or slides, but tailored my talk to
complement the one before. That can be a high risk strategy, but in this case, I think it
worked very well.
It led me to a new, and I hope improved, statement of the case against 'trickle down'
theory. As always, the most important part of a refutation is a clear statement of the theory
you propose to refute, so that it can be shown where it falls down. After the talks I wrote
this up, and it's over the fold. Comments and constructive criticism much appreciated.
The case against trickle down, restated
The trickle down theory relies on the following claims*
In the absence of taxes and other government interventions, high market incomes reflect,
and elicit, high productivity, investment and effort.
More effort from highly productive workers and investors increases the productivity of
workers in general.
The trickle down argument then starts with the claim that reducing tax on high income
earners will lead them to work harder and invest more. Since they are (by claim 1) the most
productive members of the community, their efforts will (by claim 2) make everyone else more
productive, and will benefit consumers. So, reducing taxes on high income groups will make
everyone better off.
Claim 1 is a restatement of the marginal productivity theory which is at the heart of
neoclassical economics. In a general equilibrium model of a perfectly competitive economy with
full employment, it can be deduced as a theorem. With constant returns to scale,
Claim 2 is generally assumed to be true, although it's not usually spelt out. It is true
either if there are external economies of scale such as information externalities (the most
productive provide a model for others to copy) or complementarity in production (working with
highly productive colleagues and managers makes people in general more productive). With
economies of scale, Claim 1 needs to be interpreted carefully, The implication is not that
everyone receives a payment equal to their marginal product, but that market incomes are
(roughly) proportional to average and marginal productivity.
If Claim 2 doesn't hold then all the benefits of increased effort from highly productive
workers and investors is captured by the workers and investors themselves. This means that the
there is no 'trickle down' except through the tax system. The policy implication is that tax
rates for high income earners should be set at or near the top of the 'Laffer curve' where
revenue is maximized,
estimated by Piketty, Saez and Stantcheva at around 80 per cent.
The neoclassical model that gives rise to Claim 1 has never been a fully accurate
representation of the economy. But it is even less accurate now than in the past. The crucial
recent developments, likely to continue in the absence of radical policy change, are:
(i) wage stagnation, with the result that the link between productivity and incomes has been
broken for workers as a group
(ii) the increasing proportion of profits derived from monopoly power and financial sector
speculation
(iii) the rise of the information economy. Information is a public good, so imposing explicit
prices on information or bundling it with undesired advertising reduces its social value
(iv) the likely emergence of a patrimonial society in which high incomes are derived from
inherited wealth
These developments mean that cuts in the top rate of income tax will primarily reward
ownership of capital, unproductive activity, or luck in choosing ones parents, rather than
increasing productivity. They also undermine the second proposition underlying trickle down
theory. The pursuit of monopoly profits ('rent-seeking' in the jargon of free-market economics)
reduces rather than increases the productivity of the economy as a whole.
That's the theory. The empirical evidence, which was in dispute for a long time, is now
clear-cut, at least for the United States. Decades of pro-rich policies have, unsurprisingly,
made the rich much richer. Contrary to the predictions trickle down theory, the result has been
to reduce, rather than increase, the productivity and dynamism of the economy. The combination
of slower growth and increased inequality implies, as a matter of arithmetic, that the majority
of the population must be worse off.
*There are some other versions of trickle down that can be dismissed more easily. Most
notably, there's the idea that the spending of the rich will create employment. That's true,
but more employment would be generated if income were redistributed to the poor, who save less
of their income and consume more.
Claim 1 is a restatement of the marginal productivity theory which is at the heart of
neoclassical economics. In a general equilibrium model of a perfectly competitive economy
with full employment, it can be deduced as a theorem.
Honestly, this makes 'neoclassical economics' sound suspiciously like yet another perpetual
motion scheme.
We can also cite the exponential growth of share buybacks to boost stock prices and thus
enrich CEOs + corporate officials with stock options. This now seems to be the main corporate
use for profits, as opposed to investment. This trend would seem to short-circuit the whole
argument in claim 1, since if businesses use profits to buy back shares instead of investing
to increase productivity, claim 1 is entirely moot.
See "Profits Without Prosperity" by William Lazonick, Harvard Business Review, 2014.
"2. More effort from highly productive workers and investors increases the productivity of
workers in general."
What, people claim this? With a straight face? I work in a factory. I'd say the opposite is
true, the harder I work, the more everyone else slacks off!
Tinkle down theory: We must coddle the rich, because if we don't, then they will have a sad
and won't work hard. But the poor? Anything they get makes them work less hard.
But maybe: Tax the rich harder and they work harder, because they still want more, more,
more. And the poor? Anything they get empowers them, and further motivates them to escape
poverty.
Ian Maitland 09.02.17 at 2:48 am
"The empirical evidence [against trickle down theory], which was in dispute for a long time,
is now clear-cut, at least for the United States."
I wonder if the clause tacked on to that sentence -- "at least for the United States" --
isn't a dead giveway?
What about the rest of the world? True, globalization enriched corporations and created
Third World billionaires, but the most striking development of the two or three decades up to
2007 was the transformation of the situation and prospects of the world's poor. 2015
economics Nobelist Angus Deaton has said: "Life is better now than at almost any time in
history. More people are richer and fewer people live in dire poverty. Lives are longer and
parents no longer routinely watch a quarter of their children die."
Between 1970 and 2006,
the percentage of the world population in poverty has fallen by 80 percent from 27% to 5%.
The corresponding total number of poor has fallen from 403 million in 1970 to 152 million in
2006. At the same time, various measures of global inequality have declined substantially and
measures of global welfare increased by somewhere between 128% and 145% (Pinkovskiy.&
Sala-i-Martin 2009; see also Kinley, 2009: 14-15).
It is amazing how we take for granted what in retrospect will be seen as a golden age. How
quickly we have forgotten how, before globalization, much of the Third World had been written
off by experts. In the 1960s and 1970s, for example, Peter Singer placed Bangladesh in the
"hopeless" category. "We have no obligation to assist countries whose government make our aid
ineffective," Singer wrote. Paul Ehrlich wrote in The Population Bomb that, "India couldn't
possibly feed two hundred million more people by 1980." He endorsed a system of "triage" that
would end food aid to "hopeless" countries such as India and Egypt. (India has gone from
being an economic basket case to a bread basket). Garrett Hardin used the lifeboat earth
metaphor to argue against helping the world's poorest. That help would lead to unsustainable
population growth that would capsize the lifeboat, so they had to be thrown overboard.
Globalization was mostly about the lifting of barriers to trade and investment and
liberalizing domestic economies. The era has been called "the age of Milton Friedman" by
Andrei Shleifer (2009) because it marked a stride toward a global free market. The miracle of
globalization was, accidentally or on purpose, the result of the unleashing of market forces.
Instead of planners, foreign aid, high tariffs and import substitution, it was greater market
openness that drove this transformation.
I don't know if this qualifies as "trickle down," but I think we should all give thanks
for what has been accomplished. Sadly, the Great Recession and the populist revolt have put
the brakes on the process.
@6 I've responded to this point before, as follows:
In the wake of the GFC, some advocates of economic liberalism have sought to shift the
ground of debate, arguing that, whatever the impact of financial globalisation on developed
countries, it has been hugely beneficial for India and China which, between them, account for
a third of the world's population.
There are all sorts of problems with this argument.
The relatively disappointing economic performance of China and India in the postwar decades
certainly provides strong grounds for criticising the economic policies of Mao Zedong and
Nehru. But even in the days when some observers saw these policies as providing an
appropriate development path for the countries that adopted them, no one seriously proposed
their adoption by developed countries. And as more attention has been focused on the
irrational aspects of these policies (such as the Great Leap Forward, in which people were
made to melt down their cooking pots to provide scrap for backyard smelters, which presumably
produced new cooking pots, or the dozens of licenses required to undertake the simplest
economic activity in India) it has become easier to understand why their removal or
relaxation
At the same time, neither of these rapidly-growing economies come anywhere near meeting the
standard description of a free-market economy. China still has a huge state-owned enterprise
sector, a tightly restricted financial system and a closely managed exchange rate. India
began its growth spurt before the main period of market liberalisation and also retains a
large state sector. In both countries, as earlier in Japan and South-East Asia, the state has
played a major role in promoting particular directions of development.
In summary, while the development success stories of China and India, and, before them of
Japan and the East Asian tigers, may have some useful lessons for countries struggling to
escape the poverty trap, they can tell us nothing about the relative merits of economic
liberalism and social democracy.
I am not an economist (is IANAE a thing?), but it always seemed to me that the two main
problems with trickle-down are the second to last paragraph – empirical disproof
– and the idea that, say, lowering taxes from 35% to 25% is some kind of huge incentive
that will make people who are affected by that change work harder. I do not find it a priori
plausible that somebody would ever say:
"Hey, if I work harder to earn another $10,000 I will only actually get to take $6,500
home. If that is the case, then I will not work harder and rather lose out on the $6,500,
even if I could really do with another $6,500. So there. But if you lower the tax rate so
that I get to keep $7,500, now we are talking! Those 10% are so much more relevant than the
other 65%." (Add zeroes at the end of those numbers as required.)
This is just not a reasoning that will ever make sense or occur to anybody in real life,
i.e. outside of a libertarian think tank, unless we are indeed talking a tax rate of 95%.
I do not find it a priori plausible that somebody would ever say:
"Hey, if I work harder to earn another $10,000 I will only actually get to take $6,500
home. If that is the case, then I will not work harder and rather lose out on the $6,500,
even if I could really do with another $6,500. So there. But if you lower the tax rate so
that I get to keep $7,500, now we are talking! Those 10% are so much more relevant than the
other 65%."
for what it's worth, I have thought things at least very similar to that several times,
and even acted on them, when, for example, I was already teaching several classes, and I was
asked if I'd like to teach one more. At that point, teaching one more would start to have
significant impact on my quality of life and ability to do writing. I'd be unhappy. But, I
could use the extra money. But each dollar cut off made a bit difference, considering that it
would actually be a pretty significant impact on my happiness at that point to teach another
class. Even if I could use the money, it had to be a fair amount of money before I'd take the
class on. Now, I don't mean to draw any sort of general conclusion from this, or to suggest
that it's a problem with the post, or to suggest that my situation suggests anything
important about tax policy or whatnot. But, that things like this happens seems pretty clear
to me, because they have happened to me.
Bill 09.02.17 at 9:47 am (
The two propositions seem at odds. If people earn their marginal productivity (by #1), there
should not be the externalities (in #2). The presence of the externalities suggests that
incomes are not set according to marginal contributions to the economy. In turn, that calls
into question the general equilibrium model.
"So, reducing taxes on high income groups will make everyone better off."
Even if 1 and 2 hold that "better off" conclusion still does not follow. Or at minimum
"better off" must be defined and qualified. How well off social animals like us are arguably
depend on both absolute and relative factors. Even if 1 and 2 raise the economic floor for
literally everyone they may also increase economic inequality, which can cause health
worsening (spirit level type argument) and worse equality of opportunity for the children of
those not earning most. Seeing one's child strive but not succeed because of a system of
economic inequality is arguably a "being worse off" factor.
"Trickle down" never works if you don't have Rich dudes who don't trickle down enough.
But it kind of works if you have a German Mittelstands-dude who has such a high social
conscious with an empathetic responsibility for his workers and his community that he pays
his workers excellent – insists on NOT firing -(or outsourcing) them and is in
economical crisis even willing to sacrifice his own well being for the well being of his
community and workers.
And this simple Kindergarten-wisdom (philosophy?) just doesn't apply (anymore?) in THE
homeland – even supposedly – and to a certain extend applied when a dude called
Ford made sure that his workers could afford the cars they build.
"Trickle down" never works if you don't have Rich dudes who don't trickle down enough.
It's better than that: even if trickle-down actually works the way it's supposed to the
way it's supposed to work it'll make problems of equality worse, not better,
long-term. See, you're giving the money to people with the expectation that they will use it to make
"profitable investments". But a profitable investment -- definitionally -- returns more money
to its maker than they spend: the result of "trickle down" is profitable investments made by
the currently-rich that make them even richer .
"Claim 2 is generally assumed to be true, although it's not usually spelt out. It is true
either if there are information externalities (the most productive provide a model for others
to copy) or complementarily in production (working with highly productive colleagues and
managers makes people in general more productive).
If Claim 2 doesn't hold then all the benefits of increased effort from highly productive
workers and investors is captured by the workers and investors themselves. This means that
the there is no 'trickle down' except through the tax system. The policy implication is that
tax rates for high income earners should be set at or near the top of the 'Laffer curve'
where revenue is maximized, estimated by Piketty, Saez and Stantcheva at around 80 per
cent."
Well, no, not really. Imagine, just imagine for a moment, that the harder work and greater
investment in pursuit of those higher incomes leads to something like that new leukemia drug
just approved. $500k a treatment today, that being cheaper than the other treatment, bone
marrow transplant. And in 10 or so years time the patent expires and it drops in price again.
No, this is not an argument that drug patents are super, rather, do we think that people are
incentivised to create new things by the prospects of gaining gazillions?
Are those 600 Americans likely to get this treatment each year made richer by its
existence?
We're made richer by being able to consume the greater production of those more highly
motivated high productivity people, aren't we?
As to the 80% peak, that suffers from the same problem that the very similar Diamond and
Saez one does. It assumes that we've already closed off all avenues of avoidance (D&S
using "allowances" to mean this). A residence based tax system, rather than a passport one,
is just such an allowance. For you can avoid by leaving the country and we've even got a name
for when this happened, the brain drain.
Further, the Staggers gets the NI situation wrong. D&S, certainly, talk about "taxes
on income", not "income taxes". They specifically include employer paid taxes on employment
income. Meaning adding employers' NI for the UK, not just the residual 2% employees'. At
which point, with allowances like residence based, D&S give us something like 54% as the
Peak. Or, given NI, somewhere around where we are with income tax alone right now, 45% or
so.
IANAE, and no longer reading as much economics as I used to, and this may belong to JQ's last
paragraph about trivial trickle-down theories, but I was inspired to visit the Marx-Kalecki
three-sector model. (Investment goods, wage goods, luxury goods/capitalist consumption.)
Which as usual, approaches the problem from the production side. "Trickle-down" in this case
depends on how capitalist spend their increased income, whether on investment or luxury
goods.
John Bellamy
Foster Monthly Review, 2013. One point here is to refute the "profit-squeeze" theory,
which still endures in some Marxian economics. This may be a "what next after refuting
trickle-down."
Only for those interested, I am not capable or enthused to defend the whole thing.
"For Kalecki, the power of labor to increase money wages!although present to a minor
extent in the normal business upswing!was not a significant economic threat to capital even
at full employment due primarily to the pricing power of firms. Hence, if the system
neglected consistently to promote full-employment through the stimulation of government
spending this was not to be attributed to economic reasons per se, but rather to the
political threat that permanent full employment would represent to the capitalist class."
I buy this completely, and the "pricing power of firms" is the main reason I oppose any
UBI job guarantee/ELR is much better. But state infrastructure is best. The taxes on capital
and capitalists must go to government spending ( socialized worker consumption ) and
investment (workers capital?) or it is counterproductive.
1) The Meidner Plan is back in the news, see Jacobin.
2) Increased taxes on capitalists for redistribution will upset capitalists. You want to
drive almost every economist nuts, start talking about state control of pricing . That
can done indirectly in ways like gov't housing or Medicare-for-all. The problems with
redistribution without socialized pricing are evident in the PPACA.
I may misunderstand, but the way you describe it it seems as if the concern to become
overworked would have been the main factor. I must say that if the question is whether we
want to lower top tax rates by 10% so that more people work themselves to death and get a
heart attack in their 40s I'd say thanks but no thanks.
Maybe even phrasing it as "working harder", as I did in my first comment, is the wrong way
of looking at trickle-down economics; the main argument seems to be that an investor or
company owner would rather let their money sit around useless and earn a mere 1% in interest
than invest in some 'job creating' activity that earns a return of 20% if they only get to
keep 13%. Phrased like that I think it would be hard to argue that any even half-rational
investor would ever reject the 13% ROI.
The problem might be that there just is no additional, unused opportunity for productive
activity that earns a return of 20% on investment if the masses have seen stagnant wages for
the last few decades. How would they afford to buy the new product that the investment would
be in, except in the sense of a zero sum game where another investment elsewhere becomes less
attractive to make up the difference? So if the investor's tax rate is lowered their choices
are still money sitting around uselessly or inflating a bubble.
steven t johnson 09.02.17 at 1:38 pm
A man digging a ditch with a shovel is working much harder than the dude with a backhoe. It
is not clear the guy working harder gets paid more. It's not clear the guy on the backhoe is
getting more than minimum wage. The amount of profit expected from the ditch seems to me to
depend on a lot more than how hard or productive either worker is. And the last I looked,
economics doesn't have an agreed upon theory on the dynamics of the general rate of profit.
All that stuff about marginal revenue productivity etc. seems to me to be unlikely to be
much more than ideology.
Last one, because I would like this to be clearer. I am inverting is a little bit from
"decreased taxes with increase growth" to "will increased taxes inhibit growth" using a
3-department model because:
Krugzilla: "much corporate taxation probably doesn't fall on returns to physical capital,
but rather on monopoly rents."
So question for Quiggin, leaving aside finance and rents
Are increased taxes on physical/fixed capital a good thing, growth and welfare
enhancing?
Are increased taxes on corporate returns, profits, good?
Should we end all depreciation allowances?
De we want to tax productive investment?
It is about the framing. Too often this is argued as about capitalist income and
capitalist consumption, as in Obama taxing private jets.
@13
"See, you're giving the money to people with the expectation that they will use it to make
"profitable investments".
Or to spend it for a really great watch? – as I happen to know -(and love) these
great Swiss Watchmakers who love to have the dough of Rich US-dudes redistributed towards
some real cool Craftsmen. -(wherever they are) – as I'm right now spending some time
with some really cool US carpenter -(in Iceland) – who loves it too – when he
get's flown to Iceland to do some "real cool" work here too.
And isn't that really "fascinating" that so many "Rich Dudes" -(of all nations) seem to
have this "thing" about (only) making "profitable investments" in order to return more money
to themselves – than they spend – in order to make them even richer BUT when it
comes to pay for a "Craftsman" who manufactures a nice well done cabinet -(or a well working
golden watch) a "Real Rich Dude" is even willing to throw in a first class airline ticket to
Geneve?
Bill @10 This is a good point. I think (1) needs to be modified to say that incomes are
proportional to marginal product. Then point (2) requires generalized external economies of
scale, which is the central idea in endogenous growth theory. I'll work on this.
Tim @14 The example you give is precisely covered by point 2.
Trickle-down is popular because many people are happy to tug their forelock if they can look
down on somebody else. This is more an American disease than a European one.
Phrased like that I think it would be hard to argue that any even half-rational investor
would ever reject the 13% ROI.
You think other people are like you. Other people think other other people are like them.
What this says about advocates of trickle-down economics is left as an exercise.
There is a problem which is referred to in New Zealand as the three B's. Once people own a
boat, a BMW, and a bach (holiday home), there's a tendancy to work less hard, maybe even
retire early and sit around doing nothing. Margaret Thatcher herself harshly criticised the
British equivalent of this. I share your skepticism that tax rates will help with this, but
it is a problem.
– or let's blame it all on the "fashionable American-Anglo culture of "Disruption"?
While in sane and reasonable economical environments the words "trickle down" just don't
exist BUT a culture of "Cooperation and Compromises or how do the Germans call it
"Mitbestimmung" – and there is no need for "trickle down" in Mitbestimmung as everybody
agrees that everybody should get her or his faire share of the "winnings".
"Capitalist income when directed by policy into productive actually job-creating
investment is of general benefit and should be taxed at a lower marginal rate."
is the big trickle-down, the primal, universal trickle-down that enables all the
others.
Not capitalist income vs labour income, not capital income share vs labour share, the
problem is capital vs labour, " good to increase capital cause jobs " is an assumption
so basic I don't even know how to quantify its adversary or opposition. Raw Number of
workers? Capital's opposition is made invisible by mainstream economics. And looking at
capitalist income or capitalist share of income or marginal productivity etc I think are
means to ensure that capital quantity keeps increasing ("cause we can tax the profits or
outflow") and capitalist political power (cause we don't want to lose the factory or sports
stadium cause jobs) keeps increasing.
No, Marx didn't go here, but then Marx believed that increasing capital quantity would
inevitably lead to proletarian revolution. We no longer have that excuse.
Tax not consumption, tax not income, tax capital directly so that we have less of it. The
govt can use the income to create socialized investment and production.
"In the absence of taxes and other government interventions,"
This is always the weasel out. There are always at least some taxes and government
interventions on which to blame the failure of markets to work their magic.
bob mcmanus 09.03.17 at 12:25 pm (
Last one again. I may not respond if anyone bothers, because this is at least orthogonal to
the OP.
How to tax capital? Simple, an example. Declare face value of equities at closing bell on
April 15 and tax it. 50%, 10%, 0.1%. Forget realized capital gains or transaction taxes, tax
face values. Yes indeed I understand what will happen to face values the day before and the
day after. I want to drive NASDAQ to zero, how about Krugman? Why not? (Also bonds and bank
assets, of course)
Yes, I know we do tax property at a local level and I spent some time looking for the tax
incidence between business wealth and housing values but I suspect it varies wildly along
with a maze of capital-protecting laws. I did notice that non- profits are taxed
differently if at all, in other words, still looking at property under the lens of income. So
the Clinton Foundation provides Chelsea economic security and political power in
perpetuity.
Capital is a power relation that shows up in de-facto segregated communities and unequal
education spending and outcomes and I would possibly tax houses as I would equities.
And of course all this can be incremental and marginal, we don't need to go fullbore
expropriation from the start.
But private property is a socialized power relation, and we want to discourage private
investment as much as possible. Otherwise, its still a trickle down economy.
I think it's important to take issue with comment 6, by Ian Maitland, which is a collection
of despicable lies. I know it makes no difference to Ian Maitland, who is a lying shill, but
it is important for people reading.
First Maitland says (contradictorily) that the proportion of the world population in
poverty has fallen to 5%, and that only 152 million people live in poverty. This is untrue.
The World Bank
estimates that 10.7% of the world's population, or about 790 million people, live in
poverty, and that the majority of poverty reduction has only occurred due to China and India
(i.e. no change in Africa). Maitland is using dubious numbers from a single shonky 2009
analysis published in that dumpster for shit papers, the NBER.
Second, Peter Singer never wrote the phrase Maitland accuses him of, with respect to the
Bangladesh famine. Singer's paper on the famine
can be found here and is a discussion of the urgent need to increase aid to "East
Bengal", as well as whether people in developed countries are justified in impoverishing
themselves in support of starving people in East Bengal (he concludes that they should not
impoverish themselves so much that their utility is lower than that of the Bangladeshis they
want to help). He discusses and dismisses the idea that people in rich countries should not
give aid to East Bengal because the real cause of its famine is population control, and aid
without population control won't work: He recommends aid now, and then further aid for
population control. He says people should be "working full time" to push both issues with
their government, and sneers at the UK government for valuing concorde more than starving
Bangladeshis.
The nearest quote to that which Maitland attributes to Singer comes from a later book,
Practical Ethics , and is part of a discussion about whether rich people should give
money to aid poor countries, and how to judge the best way to do this. Practical
Ethics was written in 1979, about the time that now-independent Bangladesh was becoming
a success story in health, population control and nutrition despite being much poorer than
India. In the sentence before the sentence closest to that which Maitland cites, Singer
states that we have an obligation to assist poor countries, but not to waste our money on
ways that don't help. This sentence has nothing to do with Bangladesh, and nothing to do with
abandoning poor countries to starve – in fact it concerns the best way to do precisely
the opposite.
In short, what Maitland wrote here is entirely false, deliberately misleading, and
malicious. I know most people on here are aware that Maitland is a lying liar, but just in
case anyone is new here and thinks that the failure to challenge his lies is a sign that
they're accepted by others as fact, here is the rebuttal: everything at comment 6 is a
vicious lie, and people like Maitland should be deeply ashamed of themselves for the
deliberate and mendacious lies they tell.
Layman 09.03.17 at 12:50 pm (
Garett Wilson: "There is a problem which is referred to in New Zealand as the three B's. Once
people own a boat, a BMW, and a bach (holiday home), there's a tendancy to work less hard,
maybe even retire early and sit around doing nothing. Margaret Thatcher herself harshly
criticised the British equivalent of this. I share your skepticism that tax rates will help
with this, but it is a problem."
Why is this a problem? Sure, it's an affront to Puritanism, but besides that?
= = = Once people own a boat, a BMW, and a bach (holiday home), there's a tendancy to
work less hard, maybe even retire early and sit around doing nothing. [ ] I share your
skepticism that tax rates will help with this, but it is a problem. = = =
Why? Why is it a problem, that is?
I realize that many global cultures based on English, Scots, and closely-related Northern
European cultures have adopted the neo-Puritan attitude that mankind deserves to be punished
and that 60-100 hours/week of grinding labor from age 16 to 80 is a necessary part of that
punishment. I'm less sure why the rest of us should accept that, particularly given the trend
toward automation of production of the necessities of life.
The devil is, as always, in the details. These arguments always ignore the inconvenient facts
of tax brackets (you mean the 90% tax rate for high earners doesn't apply to the first dollar
earned?) or deductions/exemptions. My rule of thumb is that top earners pay an effective tax
rate of around a third of the actual rate. George Romney was assessed a 70-90% rate in the
60s and paid something in the 30s: his son Willard would have been assessed a 39.6% rate and
paid something in the teens, probably not too far off what most of the CT commentariat pay.
Economics is theoretical politics just as politics is applied economics: it all made more
sense when it was called "political economy." Then you knew that economists were trying to
write policy and that politicians were trying to hide their schemes behind some academic fig
leaf.
And +1 to the "tinkle-down" variant I'll be sure to use that.
"Tim @14 The example you give is precisely covered by point 2."
Umm, how? If there's a consumer surplus then the workers and inventors and capitalists etc
simply aren't gaining all of he value. I don't we generally think that there is usually a
consumer surplus?
A rich guy on holiday at the beach notices a local fisherman sitting on the beach strumming a
guitar and sipping a beer at 1400 hours.
He inquires as to why he is not still at work.
Local; "I've caught enough fish for today!"
Rich Guy; "But if you work harder and longer, 6 or 7 days a week, 12 hours a day, you will be
able to buy another fishing boat, employ more fisherman, buy 2 more boats, then 4 boats."
Local:" What for?"
Rich Guy: " So you can retire and sit on the beach strumming your guitar and drinking beer!"
. . . the marginal productivity theory . . . is at the heart of neoclassical economics. In
a general equilibrium model of a perfectly competitive economy with full employment, it can
be deduced as a theorem. . . . The neoclassical model . . . has never been a fully accurate
representation of the economy.
Way to go out on a limb with classic understatement. Never a " fully accurate
representation"!
It seems to me we are back in Lesson 1 / Lesson 2 economics, wondering whether Lesson 2 is
going to be an explanation of how Lesson 1 is wrong and wrong in every conceivable respect
and implication, . . . or an explanation of how Lesson 1 is right, but not quite
right.
In some respects, you seem to want to turn the claims for trickle-down economics
topsy-turvy and show how pretty much the opposite of what the advocates of trickle-down
predicted and recommended has turned out to be true and ought to be recommended.
But, in other respects, you seem to want to defend neoclassical economics, as a merely
imperfect representation, which has, perhaps become less accurate as the further development
of the economic system has unfolded.
The rhetorical turn, "it is even less accurate now than in the past" leads to a narrative
in which epiphenomena are transformed into their own causal forces, perhaps to avoid the
contradiction in your analysis. Wage stagnation is an outcome that disproves the neoclassical
economics that recommended the policies that created wage stagnation, but some instinct holds
you back from saying that, so now wage stagnation is itself a reason to believe that
neoclassical economics is "less accurate" a representation. Did wage stagnation cause itself?
Did the recommendations or expectations of orthodox neoclassical economics have anything to
do with it?
I guess we do not need to answer and we should not wonder if the recommendations
themselves were innocent misunderstandings of the economy or a fraudulent apology for policy
that in fact targeted the consequent upward redistribution of income and wealth.
Is neoclassical economics simply a rhetoric engine for generating these frauds or did
neoclassical economists know what the powers-that-be were doing as well as how to sell what
the powers-that-be were doing? It is a classic conundrum in economics. The doctrines of
economics provide the styling for the outward apology and (importantly false) rationale (see
the discussion of the allegedly Machiavellian roles of James M Buchanan and Milton Friedman
in the other thread) for policy, but also the operating manual for policy. Somewhere, someone
has to have some idea of what they are doing, in pulling the levers and operating the
machinery of the economic system. Even granted that there might be important limits -- the
serious people have been known to run the economy off the edge of a cliff. It is just hard to
know even then -- when we are enveloped in a crisis of crisis capitalism -- if the
powers-that-be are doing it by mistake (1930) or on purpose (2008).
I cannot tell from the OP whether you think economic theory and the intuitions it
cultivates, for better and worse, should matter or not. Is neoclassical economics wrong? Or
misused?
I sort of question whether it's even worth engaging with trickle-down at this level, as
opposed to just saying "Well, it doesn't work." Are there still serious ecenomists who are
saying it does?
JQ@7
The dramatic increase in income and reduction in poverty in the Third World go far beyond
China and India. China is the most extreme, but it's pretty much everywhere, except
Africa.
Alex SL@8
People are always tempted to respond to economists' assertions by saying,"Well, *I*
wouldn't do that!" Unfortunately, introspection generally doesn't work, because the
assertions usually are not about what a typical person would do, but about what people on the
margin would do, i.e., people who are close to indifferent beween doing it and not doing
it.
steven t johnson@18
Two things you can be sure of (both in line with neoclassical theory): 1) The guy
operating the backhoe will be making more than the guy wielding the shovel 2) The guy
operating the backhoe will be making (a lot) more than the minimum wage.
1) The guy operating the backhoe will be making more than the guy wielding the shovel 2) The
guy operating the backhoe will be making (a lot) more than the minimum wage.
At the level of: a lot of guys wielding shovels will move less dirt than a lot of guys
driving back-hoes, and so be less productive and have less to share, this is true.
At the level of the work-crew digging ditches it's not. Three guys dig a ditch – one
marks the line, one drives the back-hoe, one shovels the odd bits that the back-hoe can't do.
Every so often they change places, because they all know all the jobs, and shovelling is hard
work. Or old Joe drives the back-how while young Dave does the shovel, because that's fairer
given Joe's got a bad back. Joe gets paid a bit more because he's senior. And Ramjit gets
paid most because he's in charge and is responsible for seeing that the ditch goes where it's
supposed to.
You can't devolve cooperative production down to individual productivity.
"The dramatic increase in income and reduction in poverty in the Third World go far beyond
China and India."
No one talks much about South Korea, but a generation ago they were very poor. Now they
are as rich as Japan, with income distribution like the Scandinavians. Of course this all
happened with a great deal of heavy handed government intervention, to the disapproval of
free market fundamentalists in the West, but it was still capitalism.
Gareth Wilson
Well, hypothetically he could be; but then again, hypothetically he could be hard at work
grinding the faces of the poor, and it's a good thing, and not a problem, that he isn't. What
he is actually doing is indulging himself with leisure, which at least contributes to his own
standard of living. If everybody works less, everybody has more leisure, which is a
contribution to everybody's standard of living.
"If Claim 2 doesn't hold then all the benefits of increased effort from highly productive
workers and investors is captured by the workers and investors themselves. "
This statement does not seem accurate.
My restatement would be:
If Claim 2 doesn't hold then all the benefits of increased effort from highly productive
workers and investors is captured by the workers, investors and their customers.
Encouraging a popular actor to take on another role, replacing someone less skilled, will
not in and of itself increase anyone's productivity. It will however benefit those that
consume the actors output.
Equally encouraging a highly paid person working to abandon their secure position and take
the risk of starting a firm or joining a risky start-up, may in the short run only benefit
those that consume the new product.
If, I repeat, If capital is invested, it is much more likely to be in automation. Which
maintains or increases productivity while lowering labor costs.
Demand is the only thing that can increase employment. But, that employment could be anywhere
in the world.
The old myth that acquisitiveness always and everywhere falls into the neat little channels
that happen to make it socially productive rather than the opposite.
Howard Frant @ 69 (re: backhoe)
Peter T @ 40 (re: workcrew)
Yes to both of you.
Like Howard, I do not see what is gained here by linking the intuitions of "trickle-down"
to marginal product theory of allocative efficiency. I have even used the "big shovel" theory
myself to explain the concept of marginal product and its application to wages.
But, marginal product theory is an analysis arrested at a very early stage, with no
uncertainty or strategic behavior, let alone such pre-requisites of practical production
organization as science, engineering, energy and management -- all of them touched on in Peter
T's sketch.
It seems particularly remarkable that JQ makes no mention of what I would take to be the
biggest betrayal of "trickle-down": that lowering the marginal rates of income tax on
super-high wage earners "incentivizes" (horrible word used here ironically) CEOs to direct
the affairs of large enterprises in ways that transfer income upward, including but not
limited to, control frauds.
If the economic system is organized primarily in hierarchical organization, then allowing
those in charge to do well by predation and looting is probably a formula for increasing
inequality. A wild and crazy idea I know, but there it is.
BW @47 "It seems particularly remarkable that JQ makes no mention of what I would take to be
the biggest betrayal of "trickle-down": that lowering the marginal rates of income tax on
super-high wage earners "incentivizes" (horrible word used here ironically) CEOs to direct
the affairs of large enterprises in ways that transfer income upward, including but not
limited to, control frauds. "
That was the central point of the post (incentives reward unproductive rent-seeking), so
either I've been very unclear or BW is reading uncharitably/with poor comprehension. If
anyone is still reading the thread, could they help me work out which it is.
That was the central point of the post (incentives reward unproductive rent-seeking), so
either I've been very unclear or BW is reading uncharitably/with poor comprehension. If
anyone is still reading the thread, could they help me work out which it is.
'I/you/they could have written that more clearly' is like a fortune-teller's cold reading,
the kind of thing that is always or nearly always true, but in this case it seems to me you
were clear enough (and as a cold reading obviously it applies to bruce wilder as much as it
does to you; and to me as well, of course). It seems as if there was some reason (although I
can't think of one) that it was important to bruce wilder to signal disagreement with you
instead of, as could so easily have been done, signalling agreement, making the same point
not as a correction of an omission on your part but as an amplification: 'One particularly
important/striking example of what you're discussing is the behaviour of CEOs of large
corporations transferring income upwards including, but not limited to, control frauds' (or
something like that).
"The smaller reminders can be just as telling. One former Apple contractor recalled
spending months testing a new version of Apple's operating system. To celebrate the release,
the Apple employees they'd worked closely with on the project were invited to a splashy party
in San Francisco, while the contractors had beers among themselves in a neighborhood
pub."
A large part of the Stormfront and Breitbart funding comes from Silicon Valley.
To tell the truth, I am not that interested in Tim Cook. I am not even interested in the
Apple janitors.
I am interested in those employees that benefit from ultimate rent-seeking company Apple
who went to the San Francisco party, and support either the libertarian right or the
neoliberal center (and probably TPP). Whatever economic theory we come up with has to reach
those folk and not threaten their livelihoods or it is politically as useless as
Georgism.
Has anyone done a critique of trickle-down from the perspective of supply chain optimization?
I'm a bit rusty on it, but a lot of the work that's been done on creating incentives for
supply chain partners shows why just giving people money in the hopes that they spend it
never pays back as well as just keeping the money (they reoptimize at a level that involves
them just pocketing a higher percentage of the money than they otherwise would have), and
that effective incentives demand the desired behavior before they pay out.
@nastywoman -- I just had to inform you that Ford DID NOT make sure his workers could
afford to buy the product they made. That was one of the most successful public relations
frauds ever propagated. What Ford did was to announce a "plan." Like Trump he was a little
short on the details. There were strings on the proposal. If the worker was thought to not
bathe often enough, he didn't get the $5. If a worker's hair was considered too long, he did
not get the $5. If the spies from the Service Department decided his lawn needed mowing, he
didn't get the $5. If his neighbors said he didn't go to church on Sunday, he didn't get the
$5. If the worker's English was thought to be deficient, he didn't get the $5. There were
many, many more strings. Ford, in fact, paid his workers rather poorly, and his Service
Department was very skilled at "talking with" anyone who was dissatisfied. Henry Ford (Old
Henry) was a nasty, priggish, anti-Semitic, racist [bannable], and the world is a better
place with him dead.
That was the central point of the post (incentives reward unproductive rent-seeking)
Presumably that is here:
These developments [presumably points (i) to (iv) listed just above] mean that cuts in
the top rate of income tax will primarily reward ownership of capital, unproductive activity,
or luck in choosing ones parents, rather than increasing productivity. They also undermine
the second proposition underlying trickle down theory. The pursuit of monopoly profits
('rent-seeking' in the jargon of free-market economics) reduces rather than increases the
productivity of the economy as a whole.
If I was trying to convince someone of the desirability of higher marginal tax rates on
high earners, I would certainly bring up some version of JQ's point (ii):
(ii) the increasing proportion of profits derived from monopoly power and financial
sector speculation
But, even though in most ways I couldn't be farther from Bruce Wilder in terms of
appreciation for the insights of neoclassical economic theory, alongside point (ii) I would
have made a point that is more like what I think BW is suggesting: the remuneration of
high(er) earners (seemingly increasingly, but perhaps this is really an old story) seems to
be far more subject to manipulation and less the result of pure market forces than the
remuneration of low(er) earners.
(Maybe BW would actually say that no one's remuneration has anything to do with any sort
of market, but that the remuneration of higher earners especially has nothing
to do with any sort of market).
(Also maybe this point is being made explicitly in the OP, and I just can't see it –
as JQ didn't include an explicit version of this point alongside points (i) to (iv), it makes
me wonder if he doesn't think there's been a significant change in this tendency).
Alongside these two points I would add the (in econ-blogospheric terms, Sumnerian) point
that Central Banks switched from targeting unemployment to targeting inflation; the result
has been much longer periods of unemployment and underemployment, (arguably) artificially
depressing wages, especially at the low end. (Hence wage stagnation).
As an addendum to my previous comment, is it obvious that lower marginal tax rates actually
encourages unproductive rent-seeking among corporate executives? At first glance I would
think it would just alter the form; labor income vs. stock options vs. perks and so on. At
second glance I wonder if it couldn't go the other way, maybe the income effect would
out-weigh the substitution effect. (I might not be thinking very clearly about this).
Anyway, after reading the following, I have never underestimated the intensity (insanity?)
of people, no matter how well off they are, about maintaining their income at what they feel
is the "necessary" level:
"... For the architect of the euro, taking macroeconomics away from elected politicians and forcing
deregulation were part of the plan ..."
"... The idea that the euro has "failed" is dangerously naive. The euro is doing exactly what its
progenitor – and the wealthy 1%-ers who adopted it – predicted and planned for it to do. ..."
Thanks to New Deal democrat, who made me curious about yesterday's "comment section in re Summers'
piece." Then thanks to Ron Waller for his comment which closed with: (Good read: "Robert Mundell,
evil genius of the euro".)
For the architect of the euro, taking macroeconomics away from elected politicians and forcing
deregulation were part of the plan
The idea that the euro has "failed" is dangerously naive. The euro is doing exactly what its
progenitor – and the wealthy 1%-ers who adopted it – predicted and planned for it to do.
That progenitor is former University of Chicago economist Robert Mundell. The architect of "supply-side
economics" is now a professor at Columbia University, but I knew him through his connection to my
Chicago professor, Milton Friedman, back before Mundell's research on currencies and exchange rates
had produced the blueprint for European monetary union and a common European currency.
Mundell, then, was more concerned with his bathroom arrangements. Professor Mundell, who has both
a Nobel Prize and an ancient villa in Tuscany, told me, incensed:
"They won't even let me have a toilet. They've got rules that tell me I can't have a toilet in
this room! Can you imagine?"
As it happens, I can't. But I don't have an Italian villa, so I can't imagine the frustrations
of bylaws governing commode placement.
But Mundell, a can-do Canadian-American, intended to do something about it: come up with a
weapon that would blow away government rules and labor regulations. (He really hated the union plumbers
who charged a bundle to move his throne.)
"It's very hard to fire workers in Europe," he complained. His answer: the euro.
The euro would really do its work when crises hit, Mundell explained. Removing a government's
control over currency would prevent nasty little elected officials from using Keynesian monetary
and fiscal juice to pull a nation out of recession.
"It puts monetary policy out of the reach of politicians," he said. "[And] without fiscal
policy, the only way nations can keep jobs is by the competitive reduction of rules on business."
He cited labor laws, environmental regulations and, of course, taxes. All would be flushed away
by the euro. Democracy would not be allowed to interfere with the marketplace – or the plumbing.
As another Nobelist, Paul Krugman, notes, the creation of the eurozone violated the basic economic
rule known as "optimum currency area". This was a rule devised by Bob Mundell.
That doesn't bother Mundell. For him, the euro wasn't about turning Europe into a powerful, unified
economic unit. It was about Reagan and Thatcher.
"Ronald Reagan would not have been elected president without Mundell's influence," once wrote
Jude Wanniski in the Wall Street Journal. The supply-side economics pioneered by Mundell became the
theoretical template for Reaganomics – or as George Bush the Elder called it, "voodoo economics":
the magical belief in free-market nostrums that also inspired the policies of Mrs Thatcher.
Mundell explained to me that, in fact, the euro is of a piece with Reaganomics:
"Monetary discipline forces fiscal discipline on the politicians as well."
And when crises arise, economically disarmed nations have little to do but wipe away government
regulations wholesale, privatize state industries en masse, slash taxes and send the European welfare
state down the drain.
Thus, we see that (unelected) Prime Minister Mario Monti is demanding labor law "reform" in Italy
to make it easier for employers like Mundell to fire those Tuscan plumbers. Mario Draghi, the (unelected)
head of the European Central Bank, is calling for "structural reforms" – a euphemism for worker-crushing
schemes. They cite the nebulous theory that this "internal devaluation" of each nation will make
them all more competitive.
Monti and Draghi cannot credibly explain how, if every country in the Continent cheapens its workforce,
any can gain a competitive advantage.
But they don't have to explain their policies; they just have to let the markets go to work on each
nation's bonds. Hence, currency union is class war by other means.
The crisis in Europe and the flames of Greece have produced the warming glow of what the supply-siders'
philosopher-king Joseph Schumpeter called "creative destruction". Schumpeter acolyte and free-market
apologist Thomas Friedman flew to Athens to visit the "impromptu shrine" of the burnt-out bank where
three people died after it was fire-bombed by anarchist protesters, and used the occasion to deliver
a homily on globalization and Greek "irresponsibility".
The flames, the mass unemployment, the fire-sale of national assets, would bring about what Friedman
called a "regeneration" of Greece and, ultimately, the entire eurozone. So that Mundell and those
others with villas can put their toilets wherever they damn well want to.
Far from failing, the euro, which was Mundell's baby, has succeeded probably beyond its progenitor's
wildest dreams.
[Needless to say, I am not a fan of Robert Mundell's.]
"It puts monetary policy out of the reach of politicians," he said. "[And] without fiscal policy,
the only way nations can keep jobs is by the competitive reduction of rules on business."
"..It's quite reasonable to suppose that, thanks to dependence on imported inputs and/or demand
for imported consumption goods, output can't rise without higher imports. And a country may well
run out of foreign exchange before it runs out of domestic savings, finance or productive capacity.
This is the idea behind multiple gap models in development economics, or balance of payments constrained
growth. It also seems like the direction orthodoxy is heading in the eurozone, where competitiveness
is bidding to replace inflation as the overriding concern of macro policy."
"I wonder how this fits with the national savings rate discussion of Miles Kimball and Brad Setser."
[Don't know and it sounds like way too much work for me to try to figure out. Savings rate
is not a problem for us and it is difficult to see how Greece could realistically increase theirs
sufficient to change anything without some other intervention being made first to decrease unemployment
and increase output.]
"... Two of my criticisms about Krugman/Friedman, etc is that is 'free markets' are supposed to substitute for policy in the government sphere. Except very telling except when we're talking about funding the security state. ..."
"... The other is that the real power of markets is that in a real free market (not a Potemkin one) decisions are made often at the point where needs, information, incentives, and economic power come together. But where the large scale decisions the governments have to make, markets fail. Policy though doesn't. But Neoliberals hate policy. ..."
"... Well, duh. "Policy" and "Capitalism" don't go together and never have. When you enact policy, you destroy the ability to make profit and you get the 1970's. ..."
"... Free market is a neoliberal myth, the cornerstone of neoliberalism as a secular religion. Somewhat similar to "Immaculate Conception" in Catholicism. ..."
"... In reality market almost by definition is controlled by government, who enforces the rules and punish for the transgressions. ..."
"... Also note interesting Orwellian "corruption of the language" trick neoliberals use: neoliberals talk about "free market, not "fair market". ..."
"... After 2008 few are buying this fairy tale about how markets can operate and can solve society problems independently of political power, and state's instruments of violence (the police and the military). This myths is essentially dead. ..."
"... Friedmanism is this sense a flavor of economic Lysenkoism. Note that Lysenko like Friedman was not a complete charlatan. Some of his ideas were pretty sound and withstood the test of time. But that does not make his less evil. ..."
Krugman's refusal to endorse fiscal stimulus unless the economy is at zero lower bound. That is
not only anti-Keynesian, it plays directly into the hands of the debt fear mongers. (Krugman is
also worried about the debt.)
[ Only correct to a degree, economic weakness is recognized. ]
Two of my criticisms about Krugman/Friedman, etc is that is 'free markets' are supposed to substitute
for policy in the government sphere. Except very telling except when we're talking about funding
the security state.
The other is that the real power of markets is that in a real free market (not a Potemkin one)
decisions are made often at the point where needs, information, incentives, and economic power
come together. But where the large scale decisions the governments have to make, markets fail. Policy
though doesn't. But Neoliberals hate policy.
Well, duh. "Policy" and "Capitalism" don't go together and never have. When you enact policy,
you destroy the ability to make profit and you get the 1970's.
likbez -> Gibbon1... , -1
Free market is a neoliberal myth, the cornerstone of neoliberalism as a secular religion.
Somewhat similar to "Immaculate Conception" in Catholicism.
In reality market almost by definition is controlled by government, who enforces the rules
and punish for the transgressions.
Also note interesting Orwellian "corruption of the language" trick neoliberals use: neoliberals
talk about "free market, not "fair market".
After 2008 few are buying this fairy tale about how markets can operate and can solve society
problems independently of political power, and state's instruments of violence (the police and
the military). This myths is essentially dead.
But like Adventists did not disappear when the Second Coming of Christ did not occurred in
predicted timeframe, neoliberals did not did not disappeared after 2008 either. And neither did
neoliberalism, it just entered into zombie, more bloodthirsty stage.
The fact that even the term
"neoliberalism" is prohibited in the US MSM also helped. It is king of stealth ideology, unlike
say, Marxists, neoliberals do not like to identify themselves as such. The behave more like members
of some secret society, free market masons.
Friedmanism is this sense a flavor of economic Lysenkoism. Note that Lysenko like Friedman
was not a complete charlatan. Some of his ideas were pretty sound and withstood the test of time.
But that does not make his less evil.
And for those who try to embellish this person, I would remind his role in 1973 Chilean coup
d'état ( https://en.wikipedia.org/wiki/1973_Chilean_coup_d%27%C3%A9tat
) and bringing Pinochet to power. His "Chicago boys" played a vital role in the events. This
man did has blood on his hands.
Of course, bringing a reign of terror to Chile was not why the CIA had sponsored him. The reason
he was there was to reverse the gains of the Allende social democracy and return control of the
country's economic and political assets to the oligarchy. Pinochet was convinced, through supporters
among the academics in the elite Chilean universities, to try a new series of economic policies,
called "neoliberal" by their founders, the economists of the University of Chicago, led by an
economist by the name of Milton Friedman, who three years later would go on to win a Nobel Prize
in Economics for what he was about to unleash upon Chile.
Friedman and his colleagues were referred to by the Chileans as "the Chicago Boys." The term
originally meant the economists from the University of Chicago, but as time went on, as their
policies began to disliquidate the middle class and poor, it took on a perjorative meaning. That
was because as the reforms were implemented, and began to take hold, the results were not what
Friedman and company had been predicting. But what were the reforms?
The reforms were what has come to be called "neoliberalism." To understand what "neoliberal"
economics is, one must first understand what "liberal" economics are, and so we'll digress briefly
from our look at Chile for a quick
he western financial crisis of 2007-8 was the worst since 1931, yet its immediate
repercussions were surprisingly modest. The crisis challenged the foundation stones of the
long-dominant neoliberal ideology but it seemed to emerge largely unscathed. The banks were
bailed out; hardly any bankers on either side of the Atlantic were prosecuted for their crimes;
and the price of their behaviour was duly paid by the taxpayer. Subsequent economic policy,
especially in the Anglo-Saxon world, has relied overwhelmingly on monetary policy, especially
quantitative easing. It has failed. The western economy has stagnated and is now approaching
its lost decade, with no end in sight.
After almost nine years, we are finally beginning to reap the political whirlwind of the
financial crisis. But how did neoliberalism manage to survive virtually unscathed for so long?
Although it failed the test of the real world, bequeathing the worst economic disaster for
seven decades, politically and intellectually it remained the only show in town. Parties of the
right, centre and left had all bought into its philosophy, New Labour a classic in point. They knew no other
way of thinking or doing: it had become the common sense. It was, as Antonio Gramsci put it,
hegemonic. But that hegemony cannot and will not survive the test of the real world.
The first inkling of the wider political consequences was evident in the turn in public
opinion against the banks, bankers and business leaders. For decades, they could do no wrong:
they were feted as the role models of our age, the default troubleshooters of choice in
education, health and seemingly everything else. Now, though, their star was in steep descent,
along with that of the political class. The effect of the financial crisis was to undermine
faith and trust in the competence of the governing elites. It marked the beginnings of a wider
political crisis.
But the causes of this political crisis, glaringly evident on both sides of the Atlantic,
are much deeper than simply the financial crisis and the virtually stillborn recovery of the
last decade. They go to the heart of the neoliberal project that dates from the late 70s and
the political rise of Reagan and Thatcher, and embraced at its core the idea of a global free
market in goods, services and capital. The depression-era system of bank regulation was
dismantled, in the US in the 1990s and in Britain in 1986, thereby creating the conditions for
the 2008 crisis. Equality was scorned, the idea of trickle-down economics lauded, government
condemned as a fetter on the market and duly downsized, immigration encouraged, regulation cut
to a minimum, taxes reduced and a blind eye turned to corporate evasion.
It should be noted that, by historical standards, the neoliberal era has not had a
particularly good track record. The most dynamic period of postwar western growth was that
between the end of the war and the early 70s, the era of welfare capitalism and Keynesianism,
when the growth rate was double that of the neoliberal period from 1980 to the
present.
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Pinterest Ronald Reagan and Margaret Thatcher, pictured in 1984, ushered in the era of
neoliberalism. Photograph: Bettmann Archive
But by far the most disastrous feature of the neoliberal period has been the huge growth in
inequality. Until very recently, this had been virtually ignored. With extraordinary speed,
however, it has emerged as one of, if not the most important political issue on both sides of
the Atlantic, most dramatically in the US. It is, bar none, the issue that is driving the
political discontent that is now engulfing the west. Given the statistical evidence, it is
puzzling, shocking even, that it has been disregarded for so long; the explanation can only lie
in the sheer extent of the hegemony of neoliberalism and its values.
But now reality has upset the doctrinal apple cart. In the period 1948-1972, every section
of the American population experienced very similar and sizable increases in their standard of
living; between 1972-2013, the bottom 10% experienced falling real income while the top 10% did
far better than everyone else. In the US, the median real income for full-time male workers is
now lower than it was four decades ago: the income of the bottom 90% of the population has
stagnated for over 30 years .
A not so dissimilar picture is true of the UK. And the problem has grown more serious since
the financial crisis. On average, between 65-70% of households
in 25 high-income economies experienced stagnant or falling real incomes between 2005 and
2014.
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Large sections of the population in both the US and the UK are now in revolt against their
lot
The reasons are not difficult to explain. The hyper-globalisation era has been
systematically stacked in favour of capital against labour: international trading agreements,
drawn up in great secrecy, with business on the inside and the unions and citizens excluded,
the Trans-Pacific
Partnership (TPP) and the
Transatlantic Trade and Investment Partnership (TTIP) being but the latest examples; the
politico-legal attack on the unions; the encouragement of
large-scale immigration in both the US and Europe that helped to undermine the bargaining
power of the domestic workforce; and the failure to retrain displaced workers in any meaningful
way.
As Thomas
Piketty has shown, in the absence of countervailing pressures, capitalism naturally
gravitates towards increasing inequality. In the period between 1945 and the late 70s, Cold War
competition was arguably the biggest such constraint. Since the collapse of the Soviet Union,
there have been none. As the popular backlash grows increasingly irresistible, however, such a
winner-takes-all regime becomes politically unsustainable.
Large sections of the population in both the US and the UK are now in revolt against their
lot, as graphically illustrated by the support for Trump and Sanders in the US and the Brexit
vote in the UK. This popular revolt is often described, in a somewhat denigratory and
dismissive fashion, as populism. Or, as Francis Fukuyama writes in a recent excellent
essay in Foreign Affairs : "'Populism' is the label that political elites attach
to policies supported by ordinary citizens that they don't like." Populism is a movement
against the status quo. It represents the beginnings of something new, though it is generally
much clearer about what it is against than what it is for. It can be progressive or
reactionary, but more usually both.
Brexit is a classic example of such populism. It has overturned a fundamental cornerstone of
UK policy since the early 1970s. Though ostensibly about Europe, it was in fact about much
more: a cri de coeur from those who feel they have lost out and been left behind, whose living
standards have stagnated or worse since the 1980s, who feel dislocated by large-scale
immigration over which they have no control and who face an increasingly insecure and
casualised labour market. Their revolt has paralysed the governing elite, already claimed one
prime minister, and left the latest one fumbling around in the dark looking for divine
inspiration.
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Pinterest Brexit was the marker of a working-class revolt. Photograph: Mark Thomas/Alamy
The wave of populism marks the return of class as a central agency in politics, both in the
UK and the US. This is particularly remarkable in the US. For many decades, the idea of the
"working class" was marginal to American political discourse. Most Americans described
themselves as middle class, a reflection of the aspirational pulse at the heart of American
society. According to a Gallup poll, in 2000 only 33% of Americans called themselves working
class; by 2015 the figure was 48%, almost half the population.
Brexit, too, was primarily a working-class revolt. Hitherto, on both sides of the Atlantic,
the agency of class has been in retreat in the face of the emergence of a new range of
identities and issues from gender and race to sexual orientation and the environment. The
return of class, because of its sheer reach, has the potential, like no other issue, to
redefine the political landscape.
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The working class belongs to no one: its orientation, far from predetermined, is a
function of politics
The re-emergence of class should not be confused with the labour movement. They are not
synonymous: this is obvious in the US and increasingly the case in the UK. Indeed, over the
last half-century, there has been a growing separation between the two in Britain. The
re-emergence of the working class as a political voice in Britain, most notably in the Brexit
vote, can best be described as an inchoate expression of resentment and protest, with only a
very weak sense of belonging to the labour movement.
Indeed, Ukip has been as important – in the form of immigration and Europe – in
shaping its current attitudes as the Labour party. In the United States, both Trump and Sanders
have given expression to the working-class revolt, the latter almost as much as the former. The
working class belongs to no one: its orientation, far from predetermined, as the left liked to
think, is a function of politics.
The neoliberal era is being undermined from two directions. First, if its record of economic
growth has never been particularly strong, it is now dismal. Europe is barely larger than it
was on the eve of the financial crisis in 2007; the United States has done better but even its
growth has been anaemic. Economists such as Larry Summers believe that the prospect for the
future is most likely one of secular stagnation .
Worse, because the recovery has been so weak and fragile, there is a widespread belief that
another financial crisis may well beckon. In other words, the neoliberal era has delivered the
west back into the kind of crisis-ridden world that we last experienced in the 1930s. With this
background, it is hardly surprising that a majority in the west now believe their children will
be worse off than they were. Second, those who have lost out in the neoliberal era are no
longer prepared to acquiesce in their fate – they are increasingly in open revolt. We are
witnessing the end of the neoliberal era. It is not dead, but it is in its early death throes,
just as the social-democratic era was during the 1970s.
A sure sign of the declining influence of neoliberalism is the rising chorus of intellectual
voices raised against it. From the mid-70s through the 80s, the economic debate was
increasingly dominated by monetarists and free marketeers. But since the western financial
crisis, the centre of gravity of the intellectual debate has shifted profoundly. This is most
obvious in the United States, with economists such as Joseph Stiglitz, Paul Krugman, Dani
Rodrik and Jeffrey Sachs becoming increasingly influential. Thomas Piketty's Capital in the
Twenty-First Century has been a massive seller. His work and that of Tony
Atkinson and Angus Deaton have pushed the question of the inequality to the top of the
political agenda. In the UK, Ha-Joon Chang , for long isolated within
the economics profession, has gained a following far greater than those who think economics is
a branch of mathematics.
;'Virtually no one foresaw the triumph of Jeremy Corbyn', pictured
at rally in north London last week. Photograph: Daniel Leal-Olivas/AFP/Getty Images
Meanwhile, some of those who were previously strong advocates of a neoliberal approach, such
as Larry Summers and the Financial Times 's Martin Wolf, have become extremely
critical. The wind is in the sails of the critics of neoliberalism; the neoliberals and
monetarists are in retreat. In the UK, the media and political worlds are well behind the
curve. Few recognise that we are at the end of an era. Old attitudes and assumptions still
predominate, whether on the BBC's Today programme, in the rightwing press or the
parliamentary Labour party.
Following Ed Miliband's resignation as Labour leader, virtually no one foresaw the triumph
of Jeremy
Corbyn in the subsequent leadership election. The assumption had been more of the same, a
Blairite or a halfway house like Miliband, certainly not anyone like Corbyn. But the zeitgeist
had changed. The membership, especially the young who had joined the party on an unprecedented
scale, wanted a complete break with New Labour. One of the reasons why the left has failed to
emerge as the leader of the new mood of working-class disillusionment is that most social
democratic parties became, in varying degrees, disciples of neoliberalism and
uber-globalisation. The most extreme forms of this phenomenon were New Labour and the
Democrats, who in the late 90s and 00s became its advance guard, personified by Tony Blair and
Bill Clinton, triangulation and the third way.
But as David Marquand observed in a review for the New Statesman , what is the
point of a social democratic party if it doesn't represent the less fortunate, the
underprivileged and the losers? New Labour deserted those who needed them, who historically
they were supposed to represent. Is it surprising that large sections have now deserted the
party who deserted them? Blair, in his reincarnation as a money-obsessed consultant to a shady
bunch of presidents and dictators, is a fitting testament to the demise of New Labour.
The rival contenders – Burnham, Cooper and Kendall – represented continuity.
They were swept away by Corbyn, who won nearly 60% of the votes. New Labour was over, as dead
as Monty Python's parrot. Few grasped the meaning of what had happened. A Guardian
leader welcomed the surge in membership and then, lo and behold, urged support for Yvette
Cooper, the very antithesis of the reason for the enthusiasm. The PLP refused to accept the
result and ever since has tried with might and main to remove Corbyn.
Just as the Labour party took far too long to come to terms with the rise of Thatcherism and
the birth of a new era at the end of the 70s, now it could not grasp that the Thatcherite
paradigm, which they eventually came to embrace in the form of New Labour, had finally run its
course. Labour, like everyone else, is obliged to think anew. The membership in their antipathy
to New Labour turned to someone who had never accepted the latter, who was the polar opposite
in almost every respect of Blair, and embodying an authenticity and decency which Blair
patently did not.
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Labour may be in intensive care, but the condition of the Conservatives is not a great
deal better
Corbyn is not a product of the new times, he is a throwback to the late 70s and early 80s.
That is both his strength and also his weakness. He is uncontaminated by the New Labour legacy
because he has never accepted it. But nor, it would seem, does he understand the nature of the
new era. The danger is that he is possessed of feet of clay in what is a highly fluid and
unpredictable political environment, devoid of any certainties of almost any kind, in which
Labour finds itself dangerously divided and weakened.
Labour may be in intensive care, but the condition of the Conservatives is not a great deal
better. David Cameron was guilty of a huge and irresponsible miscalculation over Brexit. He was
forced to resign in the most ignominious of circumstances. The party is hopelessly divided. It
has no idea in which direction to move after Brexit. The Brexiters painted an optimistic
picture of turning away from the declining European market and embracing the expanding markets
of the world, albeit barely mentioning by name which countries it had in mind. It looks as if
the new prime minister may have an anachronistic hostility towards China and a willingness to
undo the good work of George Osborne. If the government turns its back on China, by far the
fastest growing market in the world, where are they going to turn?
Brexit has left the country fragmented and deeply divided, with the very real prospect that
Scotland might choose independence. Meanwhile, the Conservatives seem to have little
understanding that the neoliberal era is in its death throes.
'Put America first': Donald
Trump in Cleveland last month. Photograph: Joe Raedle/Getty Images
Dramatic as events have been in the UK, they cannot compare with those in the United States.
Almost from nowhere, Donald Trump rose to capture the
Republican nomination and confound virtually all the pundits and not least his own party. His
message was straightforwardly anti-globalisation. He believes that the interests of the working
class have been sacrificed in favour of the big corporations that have been encouraged to
invest around the world and thereby deprive American workers of their jobs. Further, he argues
that large-scale immigration has weakened the bargaining power of American workers and served
to lower their wages.
He proposes that US corporations should be required to invest their cash reserves in the US.
He believes that the North American Free Trade Agreement (Nafta) has had the effect of
exporting American jobs to Mexico. On similar grounds, he is opposed to the TPP and the TTIP.
And he also accuses China of stealing American jobs, threatening to impose a 45% tariff on
Chinese imports.
To globalisation Trump counterposes economic nationalism: "Put America first". His appeal,
above all, is to the white working class who, until Trump's (and Bernie Sander's) arrival on
the political scene, had been ignored and largely unrepresented since the 1980s. Given that
their wages have been falling for most of the last 40 years, it is extraordinary how their
interests have been neglected by the political class. Increasingly, they have voted Republican,
but the Republicans have long been captured by the super-rich and Wall Street, whose interests,
as hyper-globalisers, have run directly counter to those of the white working class. With the
arrival of Trump they finally found a representative: they won Trump the Republican
nomination.
The economic nationalist argument has also been vigorously pursued by Bernie Sanders , who ran Hillary
Clinton extremely close for the Democratic nomination and would probably have won but for more
than 700 so-called super-delegates, who were effectively chosen by the Democratic machine and
overwhelmingly supported Clinton. As in the case of the Republicans, the Democrats have long
supported a neoliberal, pro-globalisation strategy, notwithstanding the concerns of its trade
union base. Both the Republicans and the Democrats now find themselves deeply polarised between
the pro- and anti-globalisers, an entirely new development not witnessed since the shift
towards neoliberalism under Reagan almost 40 years ago.
Another plank of Trump's nationalist appeal – "Make America great again" – is
his position on foreign policy. He believes that America's pursuit of great power status has
squandered the nation's resources. He argues that the country's alliance system is unfair, with
America bearing most of the cost and its allies contributing far too little. He points to Japan
and South Korea, and Nato's European members as prime examples.He seeks to rebalance these
relationships and, failing that, to exit from them.
As a country in decline, he argues that America can no longer afford to carry this kind of
financial burden. Rather than putting the world to rights, he believes the money should be
invested at home, pointing to the dilapidated state of America's infrastructure. Trump's
position represents a major critique of America as the world's hegemon. His arguments mark
a radical break with the neoliberal, hyper-globalisation ideology that has reigned since the
early 1980s and with the foreign policy orthodoxy of most of the postwar period. These
arguments must be taken seriously. They should not be lightly dismissed just because of their
authorship. But Trump is no man of the left. He is a populist of the right. He has launched a
racist and xenophobic attack on Muslims and on Mexicans. Trump's appeal is to a white working
class that feels it has been cheated by the big corporations, undermined by Hispanic
immigration, and often resentful towards African-Americans who for long too many have viewed as
their inferior.
A Trump America would mark a descent into authoritarianism characterised by abuse,
scapegoating, discrimination, racism, arbitrariness and violence; America would become a deeply
polarised and divided society. His threat to impose
45% tariffs on China , if implemented, would certainly provoke retaliation by the Chinese
and herald the beginnings of a new era of protectionism.
Trump may well lose the presidential election just as Sanders failed in his bid for the
Democrat nomination. But this does not mean that the forces opposed to hyper-globalisation
– unrestricted immigration, TPP and TTIP, the free movement of capital and much else
– will have lost the argument and are set to decline. In little more than 12 months,
Trump and Sanders have transformed the nature and terms of the argument. Far from being on the
wane, the arguments of the critics of hyper-globalisation are steadily gaining ground. Roughly
two-thirds of Americans agree that "we should not think so much in international terms but
concentrate more on our own national problems". And, above all else, what will continue to
drive opposition to the hyper-globalisers is inequality.
"... The book was The Constitution of Liberty by Frederick Hayek . Its publication, in 1960, marked the transition from an honest, if extreme, philosophy to an outright racket. The philosophy was called neoliberalism . It saw competition as the defining characteristic of human relations. The market would discover a natural hierarchy of winners and losers, creating a more efficient system than could ever be devised through planning or by design. Anything that impeded this process, such as significant tax, regulation, trade union activity or state provision, was counter-productive. Unrestricted entrepreneurs would create the wealth that would trickle down to everyone. ..."
"... But by the time Hayek came to write The Constitution of Liberty, the network of lobbyists and thinkers he had founded was being lavishly funded by multimillionaires who saw the doctrine as a means of defending themselves against democracy. Not every aspect of the neoliberal programme advanced their interests. Hayek, it seems, set out to close the gap. ..."
"... He begins the book by advancing the narrowest possible conception of liberty: an absence of coercion. He rejects such notions as political freedom, universal rights, human equality and the distribution of wealth, all of which, by restricting the behaviour of the wealthy and powerful, intrude on the absolute freedom from coercion he demands. ..."
"... The general thrust is about the gradual hollowing out of the middle class (or more affluent working class, depending on the analytical terms being used), about insecurity, stress, casualisation, rising wage inequality. ..."
"... So Hayek, I feel, is like many theoreticians, in that he seems to want a pure world that will function according to a simple and universal law. The world never was, and never will be that simple, and current economics simply continues to have a blindspot for externalities that overwhelm the logic of an unfettered so-called free market. ..."
"... J.K. Galbraith viewed the rightwing mind as predominantly concerned with figuring out a way to justify the shift of wealth from the immense majority to an elite at the top. I for one regret acutely that he did not (as far as I know) write a volume on his belief in progressive taxation. ..."
"... The system that Clinton developed was an inheritance from George H.W. Bush, Reagan (to a large degree), Carter, with another large assist from Nixon and the Powell Memo. ..."
"... What's changed is the distribution of the gains in GDP growth -- that is in no small part a direct consequence of changes in policy since the 1970s. It isn't some "market place magic". We have made major changes to tax laws since that time. We have weakened collective bargaining, which obviously has a negative impact on wages. We have shifted the economy towards financial services, which has the tendency of increasing inequality. ..."
"... Wages aren't stagnating because people are working less. Wages have stagnated because of dumb policy choices that have tended to incentives looting by those at the top of the income distribution from workers in the lower parts of the economy. ..."
"... "Neoliberalism" is entirely compatible with "growth of the state". Reagan greatly enlarged the state. He privatized several functions and it actually had the effect of increasing spending. ..."
"... When it comes to social safety net programs, e.g. in health care and education -- those programs almost always tend to be more expensive and more complicated when privatized. If the goal was to actually save taxpayer money, in the U.S. at least, it would have made a lot more sense to have a universal Medicare system, rather than a massive patch-work like the ACA and our hybrid market. ..."
"... As for the rest, it's the usual practice of gathering every positive metric available and somehow attributing it to neoliberalism, no matter how tenuous the threads, and as always with zero rigour. Supposedly capitalism alone doubled life expectancy, supports billions of extra lives, invented the railways, and provides the drugs and equipment that keep us alive. As though public education, vaccines, antibiotics, and massive availability of energy has nothing to do with those things. ..."
"... I think the damage was done when the liberal left co-opted neo-liberalism. What happened under Bill Clinton was the development of crony capitalism where for example the US banks were told to lower their credit standards to lend to people who couldn't really afford to service the loans. ..."
The events that led to Donald Trump's election started in England in 1975. At a meeting a few months after Margaret Thatcher became
leader of the Conservative party, one of her colleagues, or so the story goes, was explaining what he saw as the core beliefs of
conservatism. She snapped open her handbag, pulled out a dog-eared book, and
slammed it on the table . "This is what we believe," she said. A political revolution that would sweep the world had begun.
The book was The Constitution
of Liberty by Frederick Hayek . Its publication, in 1960, marked the transition from an honest, if extreme, philosophy to an
outright racket.
The philosophy
was called neoliberalism . It saw competition as the defining characteristic of human relations. The market would discover a
natural hierarchy of winners and losers, creating a more efficient system than could ever be devised through planning or by design.
Anything that impeded this process, such as significant tax, regulation, trade union activity or state provision, was counter-productive.
Unrestricted entrepreneurs would create the wealth that would trickle down to everyone.
This, at any rate, is how it was originally conceived. But by the time Hayek came to write The Constitution of Liberty, the
network of lobbyists and thinkers he had founded was being lavishly funded by multimillionaires who saw the doctrine as a means of
defending themselves against democracy. Not every aspect of the neoliberal programme advanced their interests. Hayek, it seems, set
out to close the gap.
He begins the book by advancing the narrowest possible conception of liberty: an absence of coercion. He rejects such notions
as political freedom, universal rights, human equality and the distribution of wealth, all of which, by restricting the behaviour
of the wealthy and powerful, intrude on the absolute freedom from coercion he demands.
Democracy, by contrast, "is not an ultimate or absolute value". In fact, liberty depends on preventing the majority from exercising
choice over the direction that politics and society might take.
He justifies this position by creating a heroic narrative of extreme wealth. He conflates the economic elite, spending their money
in new ways, with philosophical and scientific pioneers. Just as the political philosopher should be free to think the unthinkable,
so the very rich should be free to do the undoable, without constraint by public interest or public opinion.
The ultra rich are "scouts", "experimenting with new styles of living", who blaze the trails that the rest of society will follow.
The progress of society depends on the liberty of these "independents" to gain as much money as they want and spend it how they wish.
All that is good and useful, therefore, arises from inequality. There should be no connection between merit and reward, no distinction
made between earned and unearned income, and no limit to the rents they can charge.
Inherited wealth is more socially useful than earned wealth: "the idle rich", who don't have to work for their money, can devote
themselves to influencing "fields of thought and opinion, of tastes and beliefs". Even when they seem to be spending money on nothing
but "aimless display", they are in fact acting as society's vanguard.
Hayek softened his opposition to monopolies and hardened his opposition to trade unions. He lambasted progressive taxation and
attempts by the state to raise the general welfare of citizens. He insisted that there is "an overwhelming case against a free health
service for all" and dismissed the conservation of natural resources. It should come as no surprise to those who follow such matters
that he was awarded
the Nobel prize for economics .
By the time Thatcher slammed his book on the table, a lively network of thinktanks, lobbyists and academics promoting Hayek's
doctrines had been established on both sides of the Atlantic,
abundantly financed by some of the world's richest people and
businesses , including DuPont, General Electric, the Coors brewing company, Charles Koch, Richard Mellon Scaife, Lawrence Fertig,
the William Volker Fund and the Earhart Foundation. Using psychology and linguistics to brilliant effect, the thinkers these people
sponsored found the words and arguments required to turn Hayek's anthem to the elite into a plausible political programme.
Thatcherism and Reaganism were not ideologies in their own right: they were just two faces of neoliberalism. Their massive tax
cuts for the rich, crushing of trade unions, reduction in public housing, deregulation, privatisation, outsourcing and competition
in public services were all proposed by Hayek and his disciples. But the real triumph of this network was not its capture of the
right, but its colonisation of parties that once stood for everything Hayek detested.
Bill Clinton and Tony Blair did not possess a narrative of their own. Rather than develop a new political story, they thought
it was sufficient to
triangulate
. In other words, they extracted a few elements of what their parties had once believed, mixed them with elements of what their
opponents believed, and developed from this unlikely combination a "third way".
It was inevitable that the blazing, insurrectionary confidence of neoliberalism would exert a stronger gravitational pull than
the dying star of social democracy. Hayek's triumph could be witnessed everywhere from Blair's expansion of the private finance initiative
to Clinton's
repeal of the Glass-Steagal Act , which had regulated the financial sector. For all his grace and touch, Barack Obama, who didn't
possess a narrative either (except "hope"), was slowly reeled in by those who owned the means of persuasion.
As I warned
in April, the result is first disempowerment then disenfranchisement. If the dominant ideology stops governments from changing
social outcomes, they can no longer respond to the needs of the electorate. Politics becomes irrelevant to people's lives; debate
is reduced to the jabber of a remote elite. The disenfranchised turn instead to a virulent anti-politics in which facts and arguments
are replaced by slogans, symbols and sensation. The man who sank Hillary Clinton's bid for the presidency was not Donald Trump. It
was her husband.
The paradoxical result is that the backlash against neoliberalism's crushing of political choice has elevated just the kind of
man that Hayek worshipped. Trump, who has no coherent politics, is not a classic neoliberal. But he is the perfect representation
of Hayek's "independent"; the beneficiary of inherited wealth, unconstrained by common morality, whose gross predilections strike
a new path that others may follow. The neoliberal thinktankers are now swarming round this hollow man, this empty vessel waiting
to be filled by those who know what they want. The likely result is the demolition of our remaining decencies,
beginning with the agreement to limit global warming .
Those who tell the stories run the world. Politics has failed through a lack of competing narratives. The key task now is to tell
a new story of what it is to be a human in the 21st century. It must be as appealing to some who have voted for Trump and Ukip as
it is to the supporters of Clinton, Bernie Sanders or Jeremy Corbyn.
A few of us have been working on this, and can discern what may be the beginning of a story. It's too early to say much yet, but
at its core is the recognition that – as modern psychology and neuroscience make abundantly clear – human beings, by comparison with
any other animals, are both
remarkably social and
remarkably
unselfish . The atomisation and self-interested behaviour neoliberalism promotes run counter to much of what comprises human
nature.
Hayek told us who we are, and he was wrong. Our first step is to reclaim our humanity.
justamug -> Skytree 16 Nov 2016 18:17
Thanks for the chuckle. On a more serious note - defining neoliberalism is not that easy since it is not a laid out philosophy
like liberalism, or socialism, or communism or facism. Since 2008 the use of the word neoliberalism has increased in frequency
and has come to mean different things to different people.
A common theme appears to be the negative effects of the market on the human condition.
Having read David Harvey's book, and Phillip Mirowski's book (both had a go at defining neoliberalism and tracing its history)
it is clear that neoliberalism is not really coherent set of ideas.
ianfraser3 16 Nov 2016 17:54
EF Schumacher quoted "seek first the kingdom of God" in his epilogue of "Small Is Beautiful: a study of economics as if people
mattered". This was written in the early 1970s before the neoliberal project bit in the USA and the UK. The book is laced with
warnings about the effects of the imposition of neoliberalism on society, people and the planet. The predictions have largely
come true. New politics and economics needed, by leaders who place at the heart of their approach the premise, and fact, that
humans are "by comparison with any other animals, are both remarkably social and remarkably unselfish". It is about reclaiming
our humanity from a project that treats people as just another commodity.
Filipio -> YouDidntBuildThat 16 Nov 2016 17:42
Whoa there, slow down.
Your last post was questioning the reality of neoliberalism as a general policy direction that had become hegemonic across
many governments (and most in the west) over recent decades. Now you seem to be agreeing that the notion does have salience, but
that neoliberalism delivered positive rather than negative consequences.
Well, its an ill wind that blows nobody any good, huh?
Doubtless there were some positive outcomes for particular groups. But recall that the context for this thread is not whether,
on balance, more people benefited from neoliberal policies than were harmed -- an argument that would be most powerful only in
very utilitarian style frameworks of thought (most good for the many, or most harm for only the few). The thread is about the
significance of the impacts of neoliberalism in the rise of Trump. And in specific relation to privatisation (just one dimension
of neoliberalism) one key impact was downsizing (or 'rightsizing'; restructuring). There is a plethora of material, including
sociological and psychological, on the harm caused by shrinking and restructured work-forces as a consequence of privatisation.
Books have been written, even in the business management sector, about how poorly such 'change' was handled and the multiple deleterious
outcomes experienced by employees.
And we're still only talking about one dimension of neoliberalism! Havn't even touched on deregulation yet (notably, labour
market and financial sector).
The general thrust is about the gradual hollowing out of the middle class (or more affluent working class, depending on
the analytical terms being used), about insecurity, stress, casualisation, rising wage inequality.
You want evidence? I'm not doing your research for you. The internet can be a great resource, or merely an echo chamber. The
problem with so many of the alt-right (and this applies on the extreme left as well) is that they only look to confirm their views,
not read widely. Open your eyes, and use your search engine of choice. There is plenty out there. Be open to having your preconceptions
challenged.
RichardErskine -> LECKJ3000 16 Nov 2016 15:38
LECKJ3000 - I am not an economist, but surely the theoretical idealised mechanisms of the market are never realised in practice.
US subsidizing their farmers, in EU too, etc. And for problems that are not only externalities but transnational ones, the idea
that some Hayek mechanism will protect thr ozone layer or limit carbon emissions, without some regulation or tax.
Lord Stern called global warming the greatest market failure in history, but no market, however sophisticated, can deal with
it without some price put on the effluent of product (the excessive CO2 we put into the atmosphere).
As with Montreal and subsequent agreements, there is a way to maintain a level playing field; to promote different substances
for use as refrigerants; and to address the hole in ozone layer; without abandoning the market altogether. Simple is good, because
it avoids over-engineering the interventions (and the unintended consequences you mention).
The same could/ should be true of global warming, but we have left it so late we cannot wait for the (inevitable) fall of fossil
fuels and supremacy of renewables. We need a price on carbon, which is a graduated and fast rising tax essentially on its production
and/or consumption, which has already started to happen ( http://www.worldbank.org/content/dam/Worldbank/document/SDN/background-note_carbon-tax.pdf
), albeit not deep / fast / extensive enough, or international in character, but that will come, if not before the impacts really
bite then soon after.
So Hayek, I feel, is like many theoreticians, in that he seems to want a pure world that will function according to a simple
and universal law. The world never was, and never will be that simple, and current economics simply continues to have a blindspot
for externalities that overwhelm the logic of an unfettered so-called free market.
LionelKent -> greven 16 Nov 2016 14:59
And persistent. J.K. Galbraith viewed the rightwing mind as predominantly concerned with figuring out a way to justify the
shift of wealth from the immense majority to an elite at the top. I for one regret acutely that he did not (as far as I know)
write a volume on his belief in progressive taxation.
RandomLibertarian -> JVRTRL 16 Nov 2016 09:19
Not bad points.
When it comes to social safety net programs, e.g. in health care and education -- those programs almost always tend to be more
expensive and more complicated when privatized. If the goal was to actually save taxpayer money, in the U.S. at least, it would
have made a lot more sense to have a universal Medicare system, rather than a massive patch-work like the ACA and our hybrid market.
Do not forget that the USG, in WW2, took the deliberate step of allowing employers to provide health insurance as a tax-free
benefit - which it still is, being free even from SS and Medicare taxes. In the post-war boom years this resulted in the development
of a system with private rooms, almost on-demand access to specialists, and competitive pay for all involved (while the NHS, by
contrast, increasingly drew on immigrant populations for nurses and below). Next, the large sums of money in the system and a
generous court system empowered a vast malpractice industry. So to call our system in any way a consequence of a free market is
a misnomer.
Entirely state controlled health care systems tend to be even more cost-effective.
Read Megan McArdle's work in this area. The US has had similar cost growth since the 1970s to the rest of the world. The problem
was that it started from a higher base.
Part of the issue is that privatization tends to create feedback mechanism that increase the size of spending in programs.
Even Eisenhower's noted "military industrial complex" is an illustration of what happens when privatization really takes hold.
When government becomes involved in business, business gets involved in government!
Todd Smekens 16 Nov 2016 08:40
Albert Einstein said, "capitalism is evil" in his famous dictum called, "Why Socialism" in 1949. He also called communism,
"evil", so don't jump to conclusions, comrades. ;)
His reasoning was it distorts a human beings longing for the social aspect. I believe George references this in his statement
about people being "unselfish". This is noted by both science and philosophy.
Einstein noted that historically, the conqueror would establish the new order, and since 1949, Western Imperialism has continued
on with the predatory phase of acquiring and implementing democracy/capitalism. This needs to end. As we've learned rapidly, capitalism
isn't sustainable. We are literally overheating the earth which sustains us. Very unwise.
Einstein wrote, "Man is, at one and the same time, a solitary being and a social being. As a solitary being, he attempts to
protect his own existence and that of those who are closest to him, to satisfy his personal desires, and to develop his innate
abilities. As a social being, he seeks to gain the recognition and affection of his fellow human beings, to share in their pleasures,
to comfort them in their sorrows, and to improve their conditions of life. Only the existence of these varied, frequently conflicting,
strivings accounts for the special character of a man, and their specific combination determines the extent to which an individual
can achieve an inner equilibrium and can contribute to the well-being of society."
Personally, I'm glad George and others are working on a new economic and social construct for us "human beings". It's time
we leave the predatory phase of "us versus them", and construct a new society which works for the good of our now, global society.
zavaell -> LECKJ3000 16 Nov 2016 06:28
The problem is that both you and Monbiot fail to mention that your "the spontaneous order of the market" does not recognize
externalities and climate change is outside Hayek's thinking - he never wrote about sustainability or the limits on resources,
let alone the consequences of burning fossil fuels. There is no beauty in what he wrote - it was a cold, mechanical model that
assumed certain human behaviour but not others. Look at today's money-makers - they are nearly all climate change deniers and
we have to have government to reign them in.
aLERNO 16 Nov 2016 04:52
Good, short and concise article. But the FIRST NEOLIBERAL MILESTONE WAS THE 1973 COUP D'ETAT IN CHILE, which not surprisingly
also deposed the first democratically-elected socialist government.
accipiter15 16 Nov 2016 02:34
A great article and explanation of the influence of Hayek on Thatcher. Unfortunately this country is still suffering the consequences
of her tenure and Osborne was also a proponent of her policies and look where we are as a consequence. The referendum gave the
people the opportunity to vent their anger and if we had PR I suspect we would have a greater turn-out and nearly always have
some sort of coalition where nothing gets done that is too hurtful to the population. As for Trump, again his election is an expression
of anger and desperation. However, the American voting system is as unfair as our own - again this has probably been the cause
of the low turn-out. Why should people vote when they do not get fair representation - it is a waste of time and not democratic.
I doubt that Trump is Keynsian I suspect he doesn't have an economic theory at all. I just hope that the current economic thinking
prevailing currently in this country, which is still overshadowed by Thatcher and the free market, with no controls over the city
casino soon collapses and we can start from a fairer and more inclusive base!
JVRTRL -> Keypointist 16 Nov 2016 02:15
The system that Clinton developed was an inheritance from George H.W. Bush, Reagan (to a large degree), Carter, with another
large assist from Nixon and the Powell Memo.
Bill Clinton didn't do it by himself. The GOP did it with him hand-in-hand, with the only resistance coming from a minority
within the Democratic party.
Trump's victory was due to many factors. A large part of it was Hillary Clinton's campaign and the candidate. Part of it was
the effectiveness of the GOP massive resistance strategy during the Obama years, wherein they pursued a course of obstruction
in an effort to slow the rate of the economic recovery (e.g. as evidence of the bad faith, they are resurrecting a $1 trillion
infrastructure bill that Obama originally proposed in 2012, and now that they have full control, all the talk about "deficits"
goes out the window).
Obama and the Democratic party also bear responsibility for not recognizing the full scope of the financial collapse in 2008-2009,
passing a stimulus package that was about $1 trillion short of spending needed to accelerate the recovery by the 2010 mid-terms,
combined with a weak financial regulation law (which the GOP is going to destroy), an overly complicated health care law -- classic
technocratic, neoliberal incremental policy -- and the failure of the Obama administration to hold Wall Street accountable for
criminal misconduct relating to the financial crisis. Obama's decision to push unpopular trade agreements didn't help either.
As part of the post-mortem, the decision to continuing pushing the TPP may have cost Clinton in the rust belt states that went
for Trump. The agreement was unpopular, and her shift on the policy didn't come across as credible. People noticed as well that
Obama was trying to pass the measure through the lame-duck session of Congress post-election. With Trump's election, the TPP is
done too.
JVRTRL daltonknox67 16 Nov 2016 02:00
There is no iron law that says a country has to run large trade deficits. The existence of large trade deficits is usually
a result of policy choices.
Growth also hasn't gone into the tank. What's changed is the distribution of the gains in GDP growth -- that is in no small
part a direct consequence of changes in policy since the 1970s. It isn't some "market place magic". We have made major changes
to tax laws since that time. We have weakened collective bargaining, which obviously has a negative impact on wages. We have shifted
the economy towards financial services, which has the tendency of increasing inequality.
The idea too that people will be "poorer" than in the 1920s and 1930s is just plain ignorant. It has no basis in any of the
data. Wages in the bottom quartile have actually decreased slightly since the 1970s in real terms, but those wages in the 1970s
were still exponentially higher than wages in the 1920s in real terms.
Wages aren't stagnating because people are working less. Wages have stagnated because of dumb policy choices that have tended
to incentives looting by those at the top of the income distribution from workers in the lower parts of the economy. The 2008
bailouts were a clear illustration of this reality. People in industries rigged rules to benefit themselves. They misallocated
resources. Then they went to representatives and taxpayers and asked for a large no-strings attached handout that was effectively
worth trillions of dollars (e.g. hundreds of billions through TARP, trillions more through other programs). As these players become
wealthier, they have an easier time buying politicians to rig rules further to their advantage.
JVRTRL -> RandomLibertarian 16 Nov 2016 01:44
"The tyranny of the 51 per cent is the oldest and most solid argument against a pure democracy."
"Tyranny of the majority" is always a little bizarre, given that the dynamics of majority rule are unlike the governmental
structures of an actual tyranny. Even in the context of the U.S. we had minority rule due to voting restrictions for well over
a century that was effectively a tyranny for anyone who was denied the ability to participation in the elections process. Pure
majorities can go out of control, especially in a country with massive wealth disparities and with weak civic institutions.
On the other hand, this is part of the reason to construct a system of checks and balances. It's also part of the argument
for representative democracy.
"Neoliberalism" is entirely compatible with "growth of the state". Reagan greatly enlarged the state. He privatized several
functions and it actually had the effect of increasing spending.
When it comes to social safety net programs, e.g. in health care and education -- those programs almost always tend to be more
expensive and more complicated when privatized. If the goal was to actually save taxpayer money, in the U.S. at least, it would
have made a lot more sense to have a universal Medicare system, rather than a massive patch-work like the ACA and our hybrid market.
Entirely state controlled health care systems tend to be even more cost-effective. Part of the issue is that privatization
tends to create feedback mechanism that increase the size of spending in programs. Even Eisenhower's noted "military industrial
complex" is an illustration of what happens when privatization really takes hold.
daltonknox67 15 Nov 2016 21:46
After WWII most of the industrialised world had been bombed or fought over with destruction of infrastructure and manufacturing.
The US alone was undamaged. It enjoyed a manufacturing boom that lasted until the 70's when competition from Germany and Japan,
and later Taiwan, Korea and China finally brought it to an end.
As a result Americans born after 1950 will be poorer than the generation born in the 20's and 30's.
This is not a conspiracy or government malfunction. It is a quirk of history. Get over it and try working.
Arma Geddon 15 Nov 2016 21:11
Another nasty neoliberal policy of Reagan and Thatcher, was to close all the mental hospitals, and to sweeten the pill to sell
to the voters, they called it Care in the Community, except by the time those hospitals closed and the people who had to relay
on those institutions, they found out and are still finding out that there is very little care in the community left any more,
thanks to Thatcher's disintegration of the ethos community spirit.
In their neoliberal mantra of thinking, you are on your own now, tough, move on, because you are hopeless and non productive,
hence you are a burden to taxpayers.
Its been that way of thinking for over thirty years, and now the latest group targeted, are the sick and disabled, victims
of the neoliberal made banking crash and its neoliberal inspired austerity, imposed of those least able to fight back or defend
themselves i.e. vulnerable people again!
AlfredHerring GimmeHendrix 15 Nov 2016 20:23
It was in reference to Maggie slapping a copy of Hayek's Constitution of Liberty on the table and saying this is what we believe.
As soon as you introduce the concept of belief you're talking about religion hence completeness while Hayek was writing about
economics which demands consistency. i.e. St. Maggie was just as bad as any Stalinist: economics and religion must be kept separate
or you get a bunch of dead peasants for no reason other than your own vanity.
Ok, religion based on a sky god who made us all is problematic but at least there's always the possibility of supplication
and miracles. Base a religion on economic theory and you're just making sausage of your neighbors kids.
TanTan -> crystaltips2 15 Nov 2016 20:10
If you claim that the only benefit of private enterprise is its taxability, as you did, then why not cut out the middle man
and argue for full state-directed capitalism?
Because it is plainly obvious that private enterprise is not directed toward the public good (and by definition). As we have
both agreed, it needs to have the right regulations and framework to give it some direction in that regard. What "the radical
left" are pointing out is that the idea of private enterprise is now completely out of control, to the point where voters are
disenfranchised because private enterprise has more say over what the government does than the people. Which is clearly a problem.
As for the rest, it's the usual practice of gathering every positive metric available and somehow attributing it to neoliberalism,
no matter how tenuous the threads, and as always with zero rigour. Supposedly capitalism alone doubled life expectancy, supports
billions of extra lives, invented the railways, and provides the drugs and equipment that keep us alive. As though public education,
vaccines, antibiotics, and massive availability of energy has nothing to do with those things.
As for this computer being the invention of capitalism, who knows, but I suppose if one were to believe that everything was
invented and created by capitalism and monetary motives then one might believe that. Energy allotments referred to the limit of
our usage of readily available fossil fuels which you remain blissfully unaware of.
Children have already been educated to agree with you, in no small part due to a fear of the communist regimes at the time,
but at the expense of critical thinking. Questioning the system even when it has plainly been undermined to its core is quickly
labelled "radical" regardless of the normalcy of the query. I don't know what you could possibly think left-wing motives could
be, but your own motives are plain to see when you immediately lump people who care about the planet in with communist idealogues.
If rampant capitalism was going to solve our problems I'm all for it, but it will take a miracle to reverse the damage it has
already done, and only a fool would trust it any further.
YouDidntBuildThat -> Filipio 15 Nov 2016 20:06
Filipo
You argue that a great many government functions have been privatized. I agree. Yet strangely you present zero evidence of
any downsides of that happening. Most of the academic research shows a net benefit, not just on budgets but on employee and customer
satisfaction. See for example.
And despite these privitazation cost savings and alleged neoliberal "austerity" government keeps taking a larger share of our
money, like a malignant cancer. No worries....We're from the government, and we're here to help.
Keypointist 15 Nov 2016 20:04
I think the damage was done when the liberal left co-opted neo-liberalism. What happened under Bill Clinton was the development
of crony capitalism where for example the US banks were told to lower their credit standards to lend to people who couldn't really
afford to service the loans.
It was this that created too big to fail and the financial crisis of 2008. Conservative neo-liberals believe passionately in
competition and hate monopolies. The liberal left removed was was productive about neo-liberalism and replaced it with a kind
of soft state capitalism where big business was protected by the state and the tax payer was called on to bail out these businesses.
THIS more than anything else led to Trump's victory.
"... The word ["neoliberalism"] has become a rhetorical weapon, but it properly names the reigning ideology of our era – one that venerates the logic of the market and strips away the things that make us human. ..."
"... Last summer, researchers at the International Monetary Fund settled a long and bitter debate over "neoliberalism": they admitted it exists. Three senior economists at the IMF, an organisation not known for its incaution, published a paper questioning the benefits of neoliberalism ..."
"... The paper gently called out a "neoliberal agenda" for pushing deregulation on economies around the world, for forcing open national markets to trade and capital, and for demanding that governments shrink themselves via austerity or privatisation. The authors cited statistical evidence for the spread of neoliberal policies since 1980, and their correlation with anaemic growth, boom-and-bust cycles and inequality. ..."
"... In the aftermath of the 2008 financial crisis, it was a way of assigning responsibility for the debacle, not to a political party per se, but to an establishment that had conceded its authority to the market. For the Democrats in the US and Labour in the UK, this concession was depicted as a grotesque betrayal of principle. Bill Clinton and Tony Blair, it was said, had abandoned the left's traditional commitments, especially to workers, in favour of a global financial elite and the self-serving policies that enriched them; and in doing so, had enabled a sickening rise in inequality. ..."
"... Peer through the lens of neoliberalism and you see more clearly how the political thinkers most admired by Thatcher and Reagan helped shape the ideal of society as a kind of universal market ..."
"... Of course the goal was to weaken the welfare state and any commitment to full employment, and – always – to cut taxes and deregulate. But "neoliberalism" indicates something more than a standard rightwing wish list. It was a way of reordering social reality, and of rethinking our status as individuals. ..."
"... In short, "neoliberalism" is not simply a name for pro-market policies, or for the compromises with finance capitalism made by failing social democratic parties. It is a name for a premise that, quietly, has come to regulate all we practise and believe: that competition is the only legitimate organising principle for human activity. ..."
"... No sooner had neoliberalism been certified as real, and no sooner had it made clear the universal hypocrisy of the market, than the populists and authoritarians came to power ..."
"... Against the forces of global integration, national identity is being reasserted, and in the crudest possible terms. What could the militant parochialism of Brexit Britain and Trumpist America have to do with neoliberal rationality? ..."
"... It isn't only that the free market produces a tiny cadre of winners and an enormous army of losers – and the losers, looking for revenge, have turned to Brexit and Trump. There was, from the beginning, an inevitable relationship between the utopian ideal of the free market and the dystopian present in which we find ourselves; ..."
"... That Hayek is considered the grandfather of neoliberalism – a style of thought that reduces everything to economics – is a little ironic given that he was such a mediocre economist. ..."
"... This last is what makes neoliberalism "neo". It is a crucial modification of the older belief in a free market and a minimal state, known as "classical liberalism". In classical liberalism, merchants simply asked the state to "leave us alone" – to laissez-nous faire. Neoliberalism recognised that the state must be active in the organisation of a market economy. The conditions allowing for a free market must be won politically, and the state must be re-engineered to support the free market on an ongoing basis. ..."
"... Hayek had only his idea to console him; an idea so grand it would one day dissolve the ground beneath the feet of Keynes and every other intellectual. Left to its own devices, the price system functions as a kind of mind. And not just any mind, but an omniscient one: the market computes what individuals cannot grasp. Reaching out to him as an intellectual comrade-in-arms, the American journalist Walter Lippmann wrote to Hayek, saying: "No human mind has ever understood the whole scheme of a society At best a mind can understand its own version of the scheme, something much thinner, which bears to reality some such relation as a silhouette to a man." ..."
"... The only social end is the maintenance of the market itself. In its omniscience, the market constitutes the only legitimate form of knowledge, next to which all other modes of reflection are partial, in both senses of the word: they comprehend only a fragment of a whole and they plead on behalf of a special interest. Individually, our values are personal ones, or mere opinions; collectively, the market converts them into prices, or objective facts. ..."
"... According to the logic of Hayek's Big Idea, these expressions of human subjectivity are meaningless without ratification by the market ..."
"... ociety reconceived as a giant market leads to a public life lost to bickering over mere opinions; until the public turns, finally, in frustration to a strongman as a last resort for solving its otherwise intractable problems. ..."
"... What began as a new form of intellectual authority, rooted in a devoutly apolitical worldview, nudged easily into an ultra-reactionary politics ..."
The word ["neoliberalism"] has become a rhetorical weapon, but it properly names the reigning ideology of
our era – one that venerates the logic of the market and strips away the things that make us human.
Last summer, researchers at the International Monetary Fund settled a long and bitter debate over
"neoliberalism": they admitted it exists. Three senior economists at the IMF, an organisation not
known for its incaution, published
a paper questioning
the benefits of neoliberalism. In so doing, they helped put to rest the idea that the word is
nothing more than a political slur, or a term without any analytic power. The paper gently called
out a "neoliberal agenda" for pushing deregulation on economies around the world, for forcing open
national markets to trade and capital, and for demanding that governments shrink themselves via austerity
or privatisation. The authors cited statistical evidence for the spread of neoliberal policies since
1980, and their correlation with anaemic growth, boom-and-bust cycles and inequality.
Neoliberalism is an old term, dating back to the 1930s, but it has been revived as a way of describing
our current politics – or more precisely,
the range of thought allowed by our politics . In the aftermath of the 2008 financial crisis,
it was a way of assigning responsibility for the debacle, not to a political party per se, but to
an establishment that had conceded its authority to the market. For the Democrats in the US and Labour
in the UK, this concession was depicted as a grotesque betrayal of principle. Bill Clinton and Tony
Blair, it was said, had abandoned the left's traditional commitments, especially to workers, in favour
of a global financial elite and the self-serving policies that enriched them; and in doing so, had
enabled a sickening rise in inequality.
Neoliberalism: the idea that swallowed the world – podcast
Over the past few years, as debates have turned uglier, the word has become a rhetorical weapon,
a way for anyone left of centre to incriminate those even an inch to their right. (No wonder centrists
say it's a meaningless insult: they're the ones most meaningfully insulted by it.) But "neoliberalism"
is more than a gratifyingly righteous jibe. It is also, in its way, a pair of eyeglasses.
Peer through the lens of neoliberalism and you see more clearly how the political thinkers most
admired by Thatcher and Reagan helped shape the ideal of society as a kind of universal market
(and
not, for example, a polis, a civil sphere or a kind of family) and of human beings as profit-and-loss
calculators (and not bearers of grace, or of inalienable rights and duties). Of course the goal
was to weaken the welfare state and any commitment to full employment, and – always – to cut taxes
and deregulate. But "neoliberalism" indicates something more than a standard rightwing wish list.
It was a way of reordering social reality, and of rethinking our status as individuals.
Still peering through the lens, you see how, no less than the welfare state, the free market
is a human invention. You see how pervasively we are now urged to think of ourselves as proprietors
of our own talents and initiative, how glibly we are told to compete and adapt. You see the extent
to which a language formerly confined to chalkboard simplifications describing commodity markets
(competition, perfect information, rational behaviour) has been applied to all of society, until
it has invaded the grit of our personal lives, and how the attitude of the salesman has become enmeshed
in all modes of self-expression.
In short, "neoliberalism" is not simply a name for pro-market policies, or for the compromises
with finance capitalism made by failing social democratic parties. It is a name for a premise that,
quietly, has come to regulate all we practise and believe: that competition is the only legitimate
organising principle for human activity.
No sooner had neoliberalism been certified as real, and no sooner had it made clear the universal
hypocrisy of the market, than the populists and authoritarians came to power. In the US, Hillary
Clinton, the neoliberal arch-villain, lost – and to a man who knew just enough
to pretend he hated free trade . So are the eyeglasses now useless? Can they do anything to help
us understand what is broken about British and American politics? Against the forces of global
integration, national identity is being reasserted, and in the crudest possible terms. What could
the militant parochialism of Brexit Britain and Trumpist America have to do with neoliberal rationality?
What possible connection is there between the president – a freewheeling boob – and the bloodless
paragon of efficiency known as the free market?
It isn't only that the free market produces a tiny cadre of winners and an enormous army of
losers – and the losers, looking for revenge, have turned to Brexit and Trump. There was, from the
beginning, an inevitable relationship between the utopian ideal of the free market and the dystopian
present in which we find ourselves; between the market as unique discloser of value and guardian
of liberty, and our current descent into post-truth and illiberalism.
Moving the stale debate about neoliberalism forward begins, I think, with taking seriously the
measure of its cumulative effect on all of us, regardless of affiliation. And this requires returning
to its origins, which have nothing to do with Bill or Hillary Clinton. There once was a group of
people who did call themselves neoliberals, and did so proudly, and their ambition was a total revolution
in thought. The most prominent among them, Friedrich Hayek, did not think he was staking out a position
on the political spectrum, or making excuses for the fatuous rich, or tinkering along the edges of
microeconomics.
He thought he was solving the problem of modernity: the problem of objective knowledge. For Hayek,
the market didn't just facilitate trade in goods and services; it revealed truth. How did his ambition
collapse into its opposite – the mind-bending possibility that, thanks to our thoughtless veneration
of the free market, truth might be driven from public life altogether?
When the idea occurred to Friedrich Hayek in 1936, he knew, with the conviction of a "sudden illumination",
that he had struck upon something new. "How can the combination of fragments of knowledge existing
in different minds," he wrote, "bring about results which, if they were to be brought about deliberately,
would require a knowledge on the part of the directing mind which no single person can possess?"
This was not a technical point about interest rates or deflationary slumps. This was not a reactionary
polemic against collectivism or the welfare state. This was a way of birthing a new world. To his
mounting excitement, Hayek understood that the market could be thought of as a kind of mind.
Adam Smith's "invisible hand" had already given us the modern conception of the market: as an
autonomous sphere of human activity and therefore, potentially, a valid object of scientific knowledge.
But Smith was, until the end of his life, an 18th-century moralist. He thought the market could be
justified only in light of individual virtue, and he was anxious that a society governed by nothing
but transactional self-interest was no society at all. Neoliberalism is Adam Smith without the anxiety.
That Hayek is considered the grandfather of neoliberalism – a style of thought that reduces
everything to economics – is a little ironic given that he was such a mediocre economist. He
was just a young, obscure Viennese technocrat when he was recruited to the London School of
Economics to compete
with, or possibly even dim, the rising star of John Maynard Keynes at Cambridge.
The plan backfired, and Hayek lost out to Keynes in a rout. Keynes's General Theory of Employment,
Interest and Money, published in 1936, was greeted as a masterpiece. It dominated the public discussion,
especially among young English economists in training, for whom the brilliant, dashing, socially
connected Keynes was a beau idéal . By the end of the second world war, many prominent free-marketers
had come around to Keynes's way of thinking, conceding that government might play a role in managing
a modern economy. The initial excitement over Hayek had dissipated. His peculiar notion that doing
nothing could cure an economic depression had been discredited in theory and practice. He later admitted
that he wished his work criticising Keynes would simply be forgotten.
... Hayek built into neoliberalism the assumption that the market provides all necessary protection
against the one real political danger: totalitarianism. To prevent this, the state need only keep
the market free.
This last is what makes neoliberalism "neo". It is a crucial modification of the older belief
in a free market and a minimal state, known as "classical liberalism". In classical liberalism, merchants
simply asked the state to "leave us alone" – to laissez-nous faire. Neoliberalism recognised that
the state must be active in the organisation of a market economy. The conditions allowing for a free
market must be won politically, and the state must be re-engineered to support the free market on
an ongoing basis.
That isn't all: every aspect of democratic politics, from the choices of voters to the decisions
of politicians, must be submitted to a purely economic analysis. The lawmaker is obliged to leave
well enough alone – to not distort the natural actions of the marketplace – and so, ideally, the
state provides a fixed, neutral, universal legal framework within which market forces operate spontaneously.
The conscious direction of government is never preferable to the "automatic mechanism of adjustment"
– ie the price system, which is not only efficient but maximises liberty, or the opportunity for
men and women to make free choices about their own lives.
As Keynes jetted between London and Washington, creating the postwar order, Hayek sat pouting
in Cambridge. He had been sent there during the wartime evacuations; and he complained that he was
surrounded by "foreigners" and "no lack of orientals of all kinds" and "Europeans of practically
all nationalities, but very few of real intelligence".
Stuck in England, without influence or respect, Hayek had only his idea to console him; an
idea so grand it would one day dissolve the ground beneath the feet of Keynes and every other intellectual.
Left to its own devices, the price system functions as a kind of mind. And not just any mind, but
an omniscient one: the market computes what individuals cannot grasp. Reaching out to him as an intellectual
comrade-in-arms, the American journalist Walter Lippmann wrote to Hayek, saying: "No human mind has
ever understood the whole scheme of a society At best a mind can understand its own version of
the scheme, something much thinner, which bears to reality some such relation as a silhouette to
a man."
It is a grand epistemological claim – that the market is a way of knowing, one that radically
exceeds the capacity of any individual mind. Such a market is less a human contrivance, to be manipulated
like any other, than a force to be studied and placated. Economics ceases to be a technique – as
Keynes believed it to be – for achieving desirable social ends, such as growth or stable money.
The only social end is the maintenance of the market itself. In its omniscience, the market constitutes
the only legitimate form of knowledge, next to which all other modes of reflection are partial, in
both senses of the word: they comprehend only a fragment of a whole and they plead on behalf of a
special interest. Individually, our values are personal ones, or mere opinions; collectively, the
market converts them into prices, or objective facts.
... ... ...
The more Hayek's idea expands, the more reactionary it gets, the more it hides behind its pretence
of scientific neutrality – and the more it allows economics to link up with the major intellectual
trend of the west since the 17th century. The rise of modern science generated a problem: if the
world is universally obedient to natural laws, what does it mean to be human? Is a human being simply
an object in the world, like any other? There appears to be no way to assimilate the subjective,
interior human experience into nature as science conceives it – as something objective whose rules
we discover by observation.
... ... ...
More than anyone, even Hayek himself, it was the great postwar Chicago economist Milton Friedman
who helped convert governments and politicians to the power of Hayek's Big Idea. But first he broke
with two centuries of precedent and declared that economics is "in principle independent of any particular
ethical position or normative judgments" and is "an 'objective' science, in precisely the same sense
as any of the physical sciences". Values of the old, mental, normative kind were defective, they
were "differences about which men can ultimately only fight". There is the market, in other words,
and there is relativism.
Markets may be human facsimiles of natural systems, and like the universe itself, they may be
authorless and valueless. But the application of Hayek's Big Idea to every aspect of our lives negates
what is most distinctive about us. That is, it assigns what is most human about human beings – our
minds and our volition – to algorithms and markets, leaving us to mimic, zombie-like, the shrunken
idealisations of economic models. Supersizing Hayek's idea and radically upgrading the price system
into a kind of social omniscience means radically downgrading the importance of our individual capacity
to reason – our ability to provide and evaluate justifications for our actions and beliefs.
As a result, the public sphere – the space where we offer up reasons, and contest the reasons
of others – ceases to be a space for deliberation, and becomes a market in clicks, likes and retweets.
The internet is personal preference magnified by algorithm; a pseudo-public space that echoes the
voice already inside our head. Rather than a space of debate in which we make our way, as a society,
toward consensus, now there is a mutual-affirmation apparatus banally referred to as a "marketplace
of ideas". What looks like something public and lucid is only an extension of our own pre-existing
opinions, prejudices and beliefs, while the authority of institutions and experts has been displaced
by the aggregative logic of big data. When we access the world through a search engine, its results
are ranked, as the founder of Google puts it, "recursively" – by an infinity of individual users
functioning as a market, continuously and in real time.
... ... ...
According to the logic of Hayek's Big Idea, these expressions of human subjectivity are meaningless
without ratification by the market – as Friedman said, they are nothing but relativism, each
as good as any other. When the only objective truth is determined by the market, all other values
have the status of mere opinions; everything else is relativist hot air. But Friedman's "relativism"
is a charge that can be thrown at any claim based on human reason. It is a nonsense insult, as all
humanistic pursuits are "relative" in a way the sciences are not. They are relative to the (private)
condition of having a mind, and the (public) need to reason and understand even when we can't expect
scientific proof. When our debates are no longer resolved by deliberation over reasons, then the
whimsies of power will determine the outcome.
This is where the triumph of neoliberalism meets the political nightmare we are living through
now. "You had one job," the old joke goes, and Hayek's grand project, as originally conceived in
30s and 40s, was explicitly designed to prevent a backslide into political chaos and fascism. But
the Big Idea was always this abomination waiting to happen. It was, from the beginning, pregnant
with the thing it was said to protect against. Society reconceived as a giant market leads to
a public life lost to bickering over mere opinions; until the public turns, finally, in frustration
to a strongman as a last resort for solving its otherwise intractable problems.
... ... ...
What began as a new form of intellectual authority, rooted in a devoutly apolitical worldview,
nudged easily into an ultra-reactionary politics. What can't be quantified must not be real,
says the economist, and how do you measure the benefits of the core faiths of the enlightenment –
namely, critical reasoning, personal autonomy and democratic self-government? When we abandoned,
for its embarrassing residue of subjectivity, reason as a form of truth, and made science the sole
arbiter of both the real and the true, we created a void that pseudo-science was happy to fill.
"... I argue here that it's the abuse of mathematics by Neoclassical economists -- who practice what I have dubbed "Mythematics" rather than Mathematics--and that some phenomena are uncovered by mathematical logic that can't be discovered by verbal logic alone. ..."
"... A lady in the audience named Barb Jacobson suggested that using the name Neo-Classical gives it a certain degree of cache and wants you guys to start calling it for what it is: "Scorched Earth Economics." What a great name to use and doesn't it ring true? ..."
This is the brief talk I gave at a conference celebrating 25 years of the
Critical Realist seminar series at Cambridge University. Critical realists argue against the
use of mathematics in economics; I argue here that it's the abuse of mathematics by Neoclassical
economists -- who practice what I have dubbed "Mythematics" rather than Mathematics--and that some
phenomena are uncovered by mathematical logic that can't be discovered by verbal logic alone.
I give the example of my own model of Minsky's Financial Instability Hypothesis, which revealed
the possibility of a "Great Moderation" preceding a "Great Recession" before either event had happened.
David Milburn, September 12, 2015 at 9:38 am
Steve,
Last week Prof Bill Mitchell was in London where he gave a talk on re-framing the language
used in the media that carried on the myth of the mainstream groupthink. A lady in the audience
named Barb Jacobson suggested that using the name Neo-Classical gives it a certain degree of
cache and wants you guys to start calling it for what it is: "Scorched Earth Economics." What
a great name to use and doesn't it ring true? Barb Jacobson is spot on!
Sue Madden, September 13, 2015 at 8:28 am
Hi Steve,
I was really amused to see an interview a while back in the New Scientist, with the "research
chief" (!!) at the B of E. If you haven't seen it, you really must:
Opinion Interview with Andy Haldane: "Sackcloth and Ashes on Thread needle Street" New Scientist
25 March 2015
Corbyn was elected leader!!!! Now the sparks will fly. At least a public debate worthy of
the name might at last be heard in our sad country.
Thanks for your work in trying to enlighten us!!
Sue.
"... Repeat mechanically your assumptions and suggestions, diminish the opportunity for communicating dissent and opposition. This is the formula for political conditioning of the masses. ..."
"... I-dont-care reaction ..."
"... Confusing a targeted audience is one of the necessary ingredients for effective mind control." ..."
"... Ennui of the bureaucrat, entropy of an inability to change, and the credibility trap of failed ideologies in a failing empire. ..."
"... Not so for the financiers and their minions. They will not be quiet, alas. The more badly they behave, the louder they seem to become. ..."
"... Although a child is limited by lack of faculty and experience, the speculator is hampered by vanity, a self-imposed lack of human development, and an almost obsessive preoccupation with drinking, favorite objects, and teats. ..."
"He who dictates and formulates the words and phrases we use, he who is master of the press and radio, is master of the
mind. Repeat mechanically your assumptions and suggestions, diminish the opportunity for communicating dissent and
opposition. This is the formula for political conditioning of the masses.
The big lie and monotonously repeated
nonsense have more emotional appeal in a cold war than logic and reason.
The continual intrusion into our minds of the hammering noises of arguments and propaganda can lead to two kinds of
reactions. It may lead to apathy and indifference, the I-dont-care reaction, or to a more intensified
desire to study and to understand. Unfortunately, the first reaction is the more popular one. Confusing a targeted
audience is one of the necessary ingredients for effective mind control."
Joost Meerloo, The Rape of the Mind
There is going to be another financial crisis within the next two years, and it will be global, and it may be much more
consequential than the other two or three we have seen since the Fed embarked on this course of its long and checkered
career.
It is also avoidable, and in their quiet, private moments the really good economists can see it coming. Why don't they
say anything? Ennui of the bureaucrat, entropy of an inability to change, and the credibility trap of failed ideologies
in a failing empire.
They did not get to where they are by 'rocking the boat.' And so they will be quiet, unless they see some advantage
in it for them, most ordinarily in a pay for say.
Not so for the financiers and their minions. They will not be quiet, alas. The more badly they behave, the louder
they seem to become.
They are short term, and almost infantile in the self-centered reasoning. Although a child is limited by lack of
faculty and experience, the speculator is hampered by vanity, a self-imposed lack of human development, and an almost obsessive
preoccupation with drinking, favorite objects, and teats.
They see something and they want it, they know only what they can feel in the desire of the moment, morally they are
undeveloped, and when they make a mess they cry loudly, until an adult comes to clean it up for them. But unlike a child
they have no gratitude, no sense of their own dependency, or natural affection for others.
"... Comparative advantage is an absurdity. Protectionism is the only way to wealth, yet economists brainwashed generations of 17 and 18 year olds to believe that up was down and free trade would help the US. ..."
"... This is a new "flat earth" cult. And pretty well paid one: academic economists recently became something like lackeys of financial oligarchy and get some crump from the financial oligarchy table in return to promoting neo-classical economics, as a valuable for neoliberals pseudo-science. ..."
"... People who "do not fit" are filtered at early stages, much like in political parties. Nepotism is another factor. Having relatives in high positions (like is the case with Summers), being member of the dominant ethnic clan, or being a friend of an influential economist (like academic Mafiosi Andrei Shleifer) greatly helps... ..."
"... The most interesting part about this pseudoscience is how well it fits together (reminding me Marxism, to which it was a reaction). ..."
Will the American Economic Association ever apologize to the American people
for helping to destroy the country with their absurd, simple-minded free
trade preaching?
Comparative advantage is an absurdity. Protectionism is the only
way to wealth, yet economists brainwashed generations of 17 and 18 year
olds to believe that up was down and free trade would help the US.
AEA should toast itself in the ruins of Ohio, North Carolina or Iowa
- pick any one of the thousands of ruined cities to gloat over.
libezkova -> Will US Economists apologize for destroying the US? Free trade
ruined America,
April 11, 2017 at 04:48 PM
You are simply naïve.
This is a new "flat earth" cult. And pretty well paid one: academic
economists recently became something like lackeys of financial oligarchy
and get some crump from the financial oligarchy table in return to promoting
neo-classical economics, as a valuable for neoliberals pseudo-science.
Tremendous value of neoclassical economics for neoliberals is that they
can use mathiness (trying to imitate physics) to obscure the promotions
of neoliberal thinking. In fact, neoclassical economics is the major tool
of indoctrination into "free market" nonsense of university students.
People who "do not fit" are filtered at early stages, much like in
political parties. Nepotism is another factor. Having relatives in high
positions (like is the case with Summers), being member of the dominant
ethnic clan, or being a friend of an influential economist (like academic
Mafiosi Andrei Shleifer) greatly helps...
People who do not fit but have tremendous talent are often suppressed.
Like was the case with Hyman Minsky (and he was lucky that his career was
at late stages during the full triumph of neoliberalism -- he managed to
get a tenured professor position in 1965 when he was 46)
The most interesting part about this pseudoscience is how well it
fits together (reminding me Marxism, to which it was a reaction).
Set of neoclassical myths such as "efficient market hypothesis", "rational
expectations", "generalized stochastic equilibrium", "invisible hand", comprise
a pretty coherent "secular religion". It may even have some minor value
as a mathematical theory of some fictitious economic space (almost like
in a computer game like Civilization) that never existed and will never
exist.
But it is sold differently and tends to produce predictions and prescriptions
(highly politicized in their nature) in line with neoliberal thinking. That's
why it is maintained and promoted.
So expecting them to apologize is nonsense.
You can benefit from re-reading recent discussion of Karl Polanyi famous
book "The Great Transformation" in this blog
Another interesting question is how neoliberalism and neo-classical economics
survived the financial meltdown. Here Professor Phillip Mirowski has some
interesting insights:
"... Reminds me of the 60's and the SDS and their ilk. A large part of the under 30 crowd idolized Mao's Little Red Book and convinced themselves the "revolution" was imminent. So many times I heard the phrase "Up Against the Wall, MFs." Stupid fools. Back then people found each other by "teach-ins" and the so called "underground press." In those days it took a larger fraction to be able to blow in each other's ear and convince themselves they were the future "vanguard." ..."
-"Trump isnt our last chance. Its your last chance."
Reminds me of the 60's and the SDS and their ilk. A large part of the under 30 crowd
idolized Mao's Little Red Book and convinced themselves the "revolution" was imminent. So
many times I heard the phrase "Up Against the Wall, MFs." Stupid fools. Back then people
found each other by "teach-ins" and the so called "underground press." In those days it took
a larger fraction to be able to blow in each other's ear and convince themselves they were
the future "vanguard."
These days, with the internet, it is far easier for a smaller fraction to gravitate to an
echo chamber, reinforce group think, and believe their numbers are much larger than what, in
reality, exists. This happens across the board. It's a rabbit hole Tyler. Don't go down
it.
For the scientific method can teach us nothing else beyond how facts are related to, and
conditioned by, each other. The aspiration toward such objective knowledge belongs to the
highest of which man is capable, and you will certainly not suspect me of wishing to belittle
the achievements and the heroic efforts of man in this sphere. Yet is equally clear that
knowledge of what is does not open the door directly to what should be. One can have the
clearest and most complete knowledge of what is , and yet not be able to deduct from that
what should be the goal of our human aspirations.
Objective knowledge provides us with powerful instruments for the achievements of certain
ends, but the ultimate goal itself and the longing to reach it must come from another source.
And it is hardly necessary to argue for the view that our existence and our activity acquire
meaning only by the setting up of such a goal and of corresponding values. (Albert Einstein,
1939)
I thought it dealt with thinking in general, just swell. ;-)
"... This piece sounds like the survival of the fittest in vogue during GE's CEO Jack Welch days. I always add something to the nietzschean sentence. What does not kill you will make you stronger or will physically and mentally disable you for life. What is the what? The what can be the being pushed to play the most distasteful and absurd capitalist games. A hierarchical screwing! ..."
"... We rely on groups to support each other, because individually it is very hard to survive through chaos. That's the reason we are herd or pack animals, and our associations are know as society. ..."
"... When Maggott Thatcher stated 'there is no such thing as society." she was denying our basic survival mechanism to promote her own narrow, neoliberal, selfish ends. ..."
"... The Master and His Emissary ..."
"... The Minimalist Program ..."
"... brain functions across time and under myriad circumstances to generate behaviors ..."
"... i was disappointed to find he simply dove deeper into the proposition that our behavior is determined by our genes. Homo sapiens's prime adaptation is culture, which allows learned behaviors in individuals to be tranformed into adaptations. Our genes do not determine our behavior. We do. And we determine the behavior of the next generation by our choices of what cultural norms to propagate. ..."
"... As Bill Black has pointed out numerous times, the people who brought on the financial collapse were acting completely rationally. They crashed their own corporations not out of irrationality. They did it because they were trying to make themselves rich, and they didn't give a damn about the corporations they were looting in the process. ..."
"... The writer himself should have spent more time focusing on that great white shark because he's failed to notice he's given renewed life to social darwinism. These "highly evolved" institutions he talks about – like banks and hedge funds – are, in fact, keenly honed predators. Which is odd. An advanced social species like ours isn't supposed to prey on other members. His competition model involves people essentially eating other people. He's failed to note any distinction between inter-species and intra-species competition. ..."
diptherio, that was my thought also as I read more and more rapidly
down the article. Fraud seems to have disappeared from financial
discussions altogether.
Convenient is putting it mildly. About 2/3 of the way through I was
waiting for a reference to Keynes, or Minsky, or Marx or -- and this is
from my reading of Geoffrey Ingham's "The Nature of Money" -- Weber but
instead found him coasting into some general behavioral precepts before
landing without reference to anyone. It's like we're witnessing Spinoza
concoct a system, rather than an economist talk about the importance of
dropping models that have been under attack, and via arguments that are
much more specific, for decades.
I think this model handles fraud a lot better than the EMT does. If
you accept that individuals make decisions based on a collection of
subjective heuristics unique to that individual (which may not bear more
than an indirect relationship to rationality) then you need to consider
the possibility that those heuristics might be manipulated by an outside
party for the purpose of separating said individual from their cash.
Which would cover a wide range of behaviours, from fraud to lesser
examples like marketing (which is also not modeled by the EMT).
On a first impression it seems to be at least approximately consistent
with reality and how people behave, which puts it ahead of EMT and most
modern economic theory right off the bat, but it looks like more work is
needed to get it to a point where it becomes a developed model capable of
making falsifiable predictions.
I also take exception to the definition of 'rationality' as the
solution to an optimization problem based on a universal utility function
in which everything can be measured by a single number and is directly
comparable to everything else. To the extent this article uses the term,
it seems to be adopting the standard utility maximization definition,
which means it's more of a minor heresy than a completely new theory.
So adaptive markets are pretty much the same as rational ones, just
taking a slightly more roundabout route to those optimal outcomes?
Never been taken with the invocation of evolution outside biology. A lot
of bacteria get killed before they find a way round a decent antibiotic.
Evolution at the speed of thought
has me quite baffled.
This piece sounds like the survival of the fittest in vogue during
GE's CEO Jack Welch days. I always add something to the nietzschean
sentence. What does not kill you will make you stronger or will
physically and mentally disable you for life. What is the what? The what
can be the being pushed to play the most distasteful and absurd
capitalist games. A hierarchical screwing!
OK I lay my cards on the table as someone who came from economics and
ended up following the psychologists but this sounds like a belated attempt
to reconcile a bunch of findings from experimental economics that were long
known in psychology And which lay out an unduly long list of assumptions in
an attempt to keep some links with economics when the psychologists
recognised back in 1960 that just two assumptions were needed – giving the
flexibility required to explain all sorts of heuristics.
We've seen how biofeedback measurements can be used to study
behavior, We know that human behavior, both the rational and the seemingly
irrational ,
Nonlinear Feedback generates Chaos .
As a result of this feedback As long as those challenges remain
stable over time, their heuristics will eventually adapt to yield
approximately optimal solutions to those challenges.
Nonlinear feedback – Chaos
Assumption = As long as these challenges remain stable .
Chaos removes any possibility of stability.
Good article, but the conclusion is hopeless, because the author is
seeking some assurance of stability where there is none.
Now to the social part of the thought experiment:
We rely on groups to support each other, because individually it is very
hard to survive through chaos. That's the reason we are herd or pack
animals, and our associations are know as society.
When Maggott Thatcher stated 'there is no such thing as society." she was
denying our basic survival mechanism to promote her own narrow, neoliberal,
selfish ends.
I agree with your comment Synoia but I do have a small quibble with
where you say Chaos removes any possibility of stability. Chaos in
markets can lead to financial ruin, which is a form of stability. Think
bank runs. Sudden, unpredictable changes in the market could cause
investors to get cold feet and pull out there money en masse. Once my
bank runs out of money I can predict with reasonable certainty that if I
didn't get my money out in time, I ain't getting it back (well ok, maybe
if I was too big to fail things would be different ). Regardless, you are
right, the author isn't doing his theory any justice in assuming
"challenges remain stable over time".
Financial markets are a product of human evolution, and follow
biological laws instead. The same basic principles of mutation,
competition, and natural selection that determine the life history of a
herd of antelope also apply to the banking industry, albeit with somewhat
different population dynamics.
It's time Lefties admit that the conservatives are right about one thing:
there is such a thing as "human nature." Traditional humanism with its roots
in religion prefers to see us as moral beings who must choose between good
and evil using our "free will." But it's possible that what is really
happening is that our sometimes overpowering instincts are warring with our
reason. Where the conservatives get it wrong is by putting all the emphasis
on the former–the latter not so much.
I have a friend who dislikes dogs and complains about people
anthropomorphizing their pets. My reply is that what motivates animal lovers
is not so much that they are like us but that we are like them. This
recognition–that we are a part of nature–may be a way out of the planet's
looming disaster. Good to see economists taking up a theory that admits
reality.
As a psychologist, when I look at economics (which is often), I see a few
dangerous linear assumptions elaborated in complex calculus trying to apply
LISREL or some other tool to make sense of past economic behavior which is
then projected forward just in time to be proven incorrect – much of the
time.
A theory is no use if it cannot be shown to predict better than what we
have already. We have theories in behavioral science like chaos and
complexity which seem to capture irrationality to some extent. We also have
analytic strategies that do not depend on linear equations – dynamical
models. Such dynamic models have been shown to predict all sorts of
behaviors in the animal world, and work by folks like Josh Epstein has shown
it works for people too.
Maybe thinking more dynamically is key to better understanding – like why
Bitcoins are worth anything more than a bag of Legos – at least Legos are
tangible.
Homo sapiens isn't Homo economicus. Humans have a full set of values,
some of which conflict with straight up monetary gains.
There is some level of honest behavior that is most profitable to a
society. Brazil and the U.S. have had similar level of land and natural
resources but very different outcomes. Corruption is the indicator that
determines which society did better.
Your statement: "Homo sapiens isn't Homo economicus" is the crux of
the issue. This is why so much of modern economic theory is bunk. The
main hypothesis is incorrect. My training is in physics so what we used
to say to denigrate a theory that was based on bad assumptions was
"assume a spherical cow". The economics profession has been harming the
common people with their "spherical cows" for decades but it's all good
because the people Carlin called the real owners have done nicely. At
least until now. I think I'm beginning to here the distant sound of
tumbrils rolling toward the homes of the real owners.
Isn't "Assume a can-opener" or something like that the punch line
for the joke about some guys starving on a desert island when a can of
stew washes up on the beach.
Found it!:
[https://en.wikipedia.org/wiki/Assume_a_can_opener]
"There is a story that has been going around about a physicist, a
chemist, and an economist who were stranded on a desert island with no
implements and a can of food. The physicist and the chemist each
devised an ingenious mechanism for getting the can open; the economist
merely said, "Assume we have a can opener"
yeah I always loved that joke. It ties in with the comments
above made by Tomonthebeach and edr. The psychological stuff I deal
with is careful to stay within the confines of the problem we are
trying to solve, rather than assume some global utility function
underpinned by homo economicus (and which therefore borders on
religion).
Synoia also made a great comment regarding dynamics . if I'd
stayed in academia the next project I'd have been trying to address
was using choice model parameters as "starting values" to implement
agent based models alas that's something I never got to
investigate and that I hope others will.
Reminds me of another joke -- mechanical engineering has made
great progress elaborating the mathematics for a chair with zero
legs and for chairs with one and two legs. There is a lot of
excitement in recent developments in the study of chairs with
three legs but deep mysteries remain in efforts to understand
the mathematics of chairs with more than three legs.
Ayn Rand's Objectivism was just a mating strategy in that it provided
justification for her to poach husbands from heiresses and slap the buns on
dreamboat Alan Greenspan. [Have you read my book? Let's erect that
skyscraper.–Ayn] The economy is just a vehicle for the human genomes of
economists to replicate.
Survival to what? For the most part to a second nature world which is a
cultural construction.
Adaptation to environment, as if the latter had been thrown to us by the
gods of nature or, to give you a more scientific tang, it had been formed by
natural evolutionary forces. Undoubtedly, the most powerful agents through
the institutions they shape and control have a lot to do on how thick is the
air we breath and how heavy is the weight of the world we carry on our
backs. This is not to say that they are not to some degree obliged to their
inheritance and creations or that others can not have any saying, influence
or acquiescence to them.
Adaptations to changes, as if the changes were the inevitable product of
autopiloted supra-objective structures for agents without agents and such
changes-now indeed- brought about the corollary of adaptation.
I still prefer Iain McGilchrist's
The Master and His Emissary
,
for its neurological detail. It covers the same scope as this post, yet also
says some things.
Noam Chomsky was careful to label his latest linguistic approach
The
Minimalist
Program
, because it is not testable by
hypotheses. It is a shame that this point of rigor was lost on his MIT
colleges at the Sloan School.
Whatever. Adaptive Market? Fine. Never admit to the command economy.
Thank you for the reference to Chomsky's recent books on linguistics.
But a quibble -- did Chomsky label his linguistic approach as a 'Program'
because it doesn't generate testable hypotheses? I haven't read "The
Minimalist Program" yet but would think he used the label 'Program' to
indicate he was proposing a broad framework for new research in
linguistics and its implications for human cognition. I believe Chomsky
is presenting the case for his life's work and proposing paths for its
continuation.
The MP is an approach to the subject of linguistics and language.
While it encapsulates theoretical elements, an approach isn't
provable. Linguistics is goofy because it is within the intersection
of mathematics and biology, fields which expose themselves to
different levels of rigor.
The sloppy five key principles of the singular Adaptive Market
Hypothesis are teasing my
brain functions across time and under
myriad circumstances to generate behaviors
other than to retch.
They read like a sell sheet.
Thank you very much! it's too late at night to follow Chomsky's
video but I put it on my list for tomorrow afternoon. I was
surprised by how the price for Chomsky's book "The Minimalist
Program" cost. The video will help me decide whether to spring for
the book now or watch for a used copy..
As for the post -- I am not sure why we were presented with it.
It seems like some warmed over rancid tripe.
Did you mean to reference
https://www.youtube.com/watch?v=Oq5lMTKJiqE
This is titled "The minimalist program and language acqusition". I
have a copy of "What kind of Creatures are We?" and I've watched
several of his videos derivative from his Dewey Lectures.
5. Survival is the ultimate force driving competition, innovation, and
adaptation.
Nope.
This is an old view of evolution. Evolution has evolved more than that.
Survival is just one of the forces. I would argue that randomness is a very
powerful force.
This seems a transparent effort by (some) economists to substitute one
ridiculous paradigm with another. I guess the title says it all.
This was the most hilarious part:
On one side of the divide were the free market economists, who believe
that we are all economically rational adults, governed by the law of
supply and demand. On the other side were the behavioral economists, who
believe that we are all irrational animals, driven by fear and greed like
so many other species of mammals.
So not only is the neoclassical paradigm NOT driven by greed but
apparently it (rational maximization) is the exact opposite! Who knew?
yeah it's why people like me are regarded as traitors . if you
disagree with both sides you simply double your enemies (there is a Terry
Pratchett point in there) ..
it's simply a case of horses for courses in certain circumstances yes
a traditional individual maximisation function works in others the
maximand is some societal one. You can use the same simple psychological
theory of prediction but you have to recognise what the intrinsic
"underlying scale of value" is. The psychologists have known since 1927
that choices can be "irrational" according to neoclassical economics. By
understanding how people make errors they have been streets ahead (e.g.
proving something in 1960 that an economist published in 1974 and got a
"nobel" prize for)
Is this post representative of the deep thought available from the Sloan
School? Drag in some evolution and discussions of our origins as troglodytes -- make a quick review of behavioral theories of the market -- throw in some
Darwin and voilà -- "adaptive markets". If I give up on trying to derive a
theory for how the market operates from a theory for how the individuals in
that market operate why do I care about the rational economic man or the
adaptive man evolving in the jungles of the market. Perhaps I might question
some of the other assumptions used to construct my model of the market and
look more closely at some of the fraud and some of the smarmy trading
practices[as many other commenters noted].
Does the new book by the author of this post explain how to develop the
heuristics which will eventually adapt to yield approximately optimal
solutions -- so some quants can program my adaptive trader computer program?
[Footnote: "adaptive" is cool also for sounding like "adaptive systems" a
systems approach for solving problems like noise cancellation.]
If it takes a theory to beat a theory, this author needs to look under
more rocks. This theory isn't new. Its former iteration was faith healing
(to pray harder). The Adaptive Markets Hypothesis iteration is to flail and
suffocate on the beach longer. I'll give it points though for cleverly
tucking old articles of faith into a pocket protector.
Nice when you don't even have to revise the textbooks to accommodate the
new paradigm. I can already hear the calls for deregulation so that markets
can better adapt.
About a third through I thought I knew where he was going: economic
behavior is predicated on cultural norms, it appears to give rise to laws
where those norms are stable across time, but recent rapid shifts in norms
have created behaviors which are not anticipated by the laws, exposing the
fallacy of calling them laws. Example: short term profit seeking to the
exclusion of all else was not culturally allowed before, but now it is. This
leads to different market behavior. Prior observers were not wrong about the
laws they pronounced. The laws simply relied on moral restraints that were
as ubiquitous, and thus as hidden, as water is to a fish.
Instead, i was disappointed to find he simply dove deeper into the
proposition that our behavior is determined by our genes. Homo sapiens's
prime adaptation is culture, which allows learned behaviors in individuals
to be tranformed into adaptations. Our genes do not determine our behavior.
We do. And we determine the behavior of the next generation by our choices
of what cultural norms to propagate.
Yeah, if he had specified culture to be what most would call
sub-cultures, like the 1%, the professional class, the blue-collar group,
etc., then he would have a broad based, but consistent actions, division
of an economy. But that idea is high heresy; there is not a 'society',
there is only lone individuals acting alone. Quite the crock of BS.
PS. in the interest of 'efficiency' (instead of creating a second
posting, I'll piggyback here), let me say these replys are one reason why
I support this site: After reading the first 3 paragraphs and skimming
his section headers, I recognized the storyline. So I dived into the
replies and learned what was worth learning. Thanks guys, you saved my
blood pressure.
This post could be a Thomas Friedman writing contest winner!
"We've travelled millions of years into our past, looked deep inside the
human brain, and explored the cutting edge of current scientific theories. ,
, , We're neither entirely rational nor entirely irrational, hence neither
the rationalists nor the behavioralists are completely convincing. We need a
new narrative for how markets work, and now have enough pieces of the puzzle
to start putting it all together."
That's not quite at Mr. Friedman's level of mixed metaphorical mayhem . .
. But it's close!
It makes me think of FANTASTIC VOYAGE with Racquel Welch and Donald
Pleasance, when scientists were shrunk to microscopic size and then rode
around inside a human body's ciruclatory system in incredibly small
submarine that lookd like a space ship. Then there was trouble and Donald
Pleasance was sucked up head first into the white blood cell. I'm not making
this up! You can Youtube it and see.
It may be that there's white blood cell like things we don't have the
scientific equipment to see that actually cause booms and busts, but if we
could see them through things like telescopes or time machine space ships
like the Post sort of says, then you could see how they suck people up into
them. This really is cutting edge financial science.
Also, if somebody has never been an animal, then how do they know animals
are driven by fear and greed, That made me stop and think, just at the end
of the first paragraph! That seems like an extraordinary claim to make.
Maybe somebody can be injected with Zebra genes and let loose in Tanzania in
some national park for a few weeks until the genes wash out of their system.
Then they can report back. But until that time, it's only speculation.
As Bill Black has pointed out numerous times, the people who brought on
the financial collapse were acting completely rationally. They crashed their
own corporations not out of irrationality. They did it because they were
trying to make themselves rich, and they didn't give a damn about the
corporations they were looting in the process.
As others have noted, the absence of fraud in this model is telling.
The writer himself should have spent more time focusing on that great
white shark because he's failed to notice he's given renewed life to social
darwinism. These "highly evolved" institutions he talks about – like banks
and hedge funds – are, in fact, keenly honed predators. Which is odd. An
advanced social species like ours isn't supposed to prey on other members.
His competition model involves people essentially eating other people. He's
failed to note any distinction between inter-species and intra-species
competition.
The gene selection he invokes is far more complicated. We live in
societies whose rules determines winners and losers. What, in essense, is
this competition best optimizing? Does "survival" in this system mean
optimizing each individual's potential? What is it we want "economic
survival" to mean? He talks about environmental adaptation but leaves out
the fact we define our own environment. There's no way to efface politics.
"... Main image: Maxian/Getty/iStockphoto/Guardian Design ..."
"... This is an edited extract from Twilight of the Money Gods: Economics as a Religion and How it all Went Wrong by John Rapley, published by Simon & Schuster on 13 July at £20. To order a copy for £17, go to ..."
"... bookshop.theguardian.com ..."
"... or call 0330 333 6846. Free UK p&p over £10, online orders only. Phone orders min p&p of £1.99. ..."
Tuesday 11 July 2017
01.00 EDT
Last modified on Tuesday 11 July 2017
11.20 EDT
A
lthough
Britain has an established church, few of us today pay it much mind. We follow an
even more powerful religion, around which we have oriented our lives: economics.
Think about it.
Economics
offers a comprehensive doctrine with a moral code promising
adherents salvation in this world; an ideology so compelling that the faithful
remake whole societies to conform to its demands. It has its gnostics, mystics and
magicians who conjure money out of thin air, using spells such as "derivative" or
"structured investment vehicle". And, like the old religions it has displaced, it
has its prophets, reformists, moralists and above all, its high priests who uphold
orthodoxy in the face of heresy.
Over time, successive economists slid into the
role we had removed from the churchmen: giving us guidance on how to reach a
promised land of material abundance and endless contentment. For a long time, they
seemed to deliver on that promise, succeeding in a way few other religions had
ever done, our incomes rising thousands of times over and delivering a cornucopia
bursting with new inventions, cures and delights.
This was our heaven, and richly did we reward the economic priesthood, with
status, wealth and power to shape our societies according to their vision. At the
end of the 20th century, amid an economic boom that saw the western economies
become richer than humanity had ever known, economics seemed to have conquered the
globe. With nearly every country on the planet adhering to the same free-market
playbook, and with university students flocking to do degrees in the subject,
economics seemed to be attaining the goal that had eluded every other religious
doctrine in history: converting the entire planet to its creed.
Yet if history teaches anything, it's that whenever economists feel certain
that they have found the holy grail of endless peace and prosperity,
the end of the present regime is nigh.
On the eve of
the 1929 Wall Street crash
, the American economist Irving Fisher advised
people to go out and buy shares; in the 1960s, Keynesian economists said there
would never be another recession because they had perfected the tools of demand
management.
The 2008 crash was no different. Five years earlier, on 4 January 2003, the
Nobel laureate Robert Lucas had delivered a triumphal presidential address to the
American Economics Association. Reminding his colleagues that macroeconomics had
been born in the depression precisely to try to prevent another such disaster ever
recurring, he declared that he and his colleagues had reached their own end of
history: "Macroeconomics in this original sense has succeeded," he instructed the
conclave. "Its central problem of depression prevention has been solved."
No sooner do we persuade ourselves that the economic priesthood has finally
broken the old curse than it comes back to haunt us all: pride always goes before
a fall. Since the crash of 2008, most of us have watched our living standards
decline. Meanwhile, the priesthood seemed to withdraw to the cloisters, bickering
over who got it wrong. Not surprisingly, our faith in the "experts" has
dissipated.
Hubris, never a particularly good thing, can be especially dangerous in
economics, because its scholars don't just observe the laws of nature; they help
make them. If the government, guided by its priesthood, changes the
incentive-structure of society to align with the assumption that people behave
selfishly, for instance, then lo and behold, people will start to do just that.
They are rewarded for doing so and penalised for doing otherwise. If you are
educated to believe greed is good, then you will be more likely to live
accordingly.
The hubris in economics came not from a moral failing among economists, but
from a false conviction: the belief that theirs was a science. It neither is nor
can be one, and has always operated more like a church. You just have to look at
its history to realise that.
T
he American
Economic Association,
to which Robert
Lucas gave his address, was created in 1885, just when economics was starting to
define itself as a distinct discipline. At its first meeting, the association's
founders proposed a platform that declared: "The conflict of labour and capital
has brought to the front a vast number of social problems whose solution is
impossible without the united efforts of church, state and science." It would be a
long path from that beginning to the market evangelism of recent decades.
Yet even at that time, such social activism provoked controversy. One of the
AEA's founders, Henry Carter Adams, subsequently delivered an address at Cornell
University in which he defended free speech for radicals and accused
industrialists of stoking xenophobia to distract workers from their mistreatment.
Unknown to him, the New York lumber king and Cornell benefactor Henry Sage was in
the audience. As soon as the lecture was done, Sage stormed into the university
president's office and insisted: "This man must go; he is sapping the foundations
of our society." When Adams's tenure was subsequently blocked, he agreed to
moderate his views. Accordingly, the final draft of the AEA platform expunged the
reference to laissez-faire economics as being "unsafe in politics and unsound in
morals".
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'Economics has always operated more like a church' Trinity Church seen
from Wall Street. Photograph: Alamy Stock Photo
So was set a pattern that has persisted to this day. Powerful political
interests – which historically have included not only rich industrialists, but
electorates as well – helped to shape the canon of economics, which was then
enforced by its scholarly community.
Once a principle is established as orthodox, its observance is enforced in much
the same way that a religious doctrine maintains its integrity: by repressing or
simply eschewing heresies. In Purity and Danger,
the anthropologist Mary Douglas
observed the way taboos functioned to help
humans impose order on a seemingly disordered, chaotic world. The premises of
conventional economics haven't functioned all that differently. Robert Lucas once
noted approvingly that by the late 20th century, economics had so effectively
purged itself of Keynesianism that "the audience start(ed) to whisper and giggle
to one another" when anyone expressed a Keynesian idea at a seminar. Such
responses served to remind practitioners of the taboos of economics: a gentle
nudge to a young academic that such shibboleths might not sound so good before a
tenure committee. This preoccupation with order and coherence may be less a
function of the method than of its practitioners. Studies of personality traits
common to various disciplines have discovered that economics, like engineering,
tends to attract people with an unusually strong preference for order, and a
distaste for ambiguity.
The irony is that, in its determination to make itself a science that can reach
hard and fast conclusions, economics has had to dispense with scientific method at
times. For starters, it rests on a set of premises about the world not as it is,
but as economists would like it to be. Just as any religious service includes a
profession of faith, membership in the priesthood of economics entails certain
core convictions about human nature. Among other things, most economists believe
that we humans are self-interested, rational, essentially individualistic, and
prefer more money to less. These articles of faith are taken as self-evident. Back
in the 1930s, the great economist Lionel Robbins described his profession in a way
that has stood ever since as a cardinal rule for millions of economists. The
field's basic premises came from "deduction from simple assumptions reflecting
very elementary facts of general experience" and as such were "as universal as the
laws of mathematics or mechanics, and as little capable of 'suspension'".
Deducing laws from premises deemed eternal and beyond question is a
time-honoured method. For thousands of years, monks in medieval monasteries built
a vast corpus of scholarship doing just that, using a method perfected by Thomas
Aquinas known as scholasticism. However, this is not the method used by
scientists, who tend to require assumptions to be tested empirically before a
theory can be built out of them.
But, economists will maintain, this is precisely what they themselves do – what
sets them apart from the monks is that they must still test their hypotheses
against the evidence. Well, yes, but this statement is actually more problematic
than many mainstream economists may realise. Physicists resolve their debates by
looking at the data, upon which they by and large agree. The data used by
economists, however, is much more disputed. When, for example, Robert Lucas
insisted that Eugene Fama's efficient-markets hypothesis – which maintains that
since a free market collates all available information to traders, the prices it
yields can never be wrong – held true despite "a flood of criticism", he did so
with as much conviction and supporting evidence as his fellow economist Robert
Shiller had mustered in rejecting the hypothesis. When the Swedish central bank
had to decide who would win the 2013 Nobel prize in economics, it was torn between
Shiller's claim that markets frequently got the price wrong and Fama's insistence
that markets always got the price right. Thus it opted to split the difference and
gave both men the medal
– a bit of Solomonic wisdom that would have elicited
howls of laughter had it been a science prize. In economic theory, very often, you
believe what you want to believe – and as with any act of faith, your choice of
heads or tails will as likely reflect sentimental predisposition as scientific
assessment.
It's no mystery why the data used by economists and other social scientists so
rarely throws up incontestable answers: it is
human
data. Unlike people,
subatomic particles don't lie on opinion surveys or change their minds about
things. Mindful of that difference, at his own presidential address to the
American Economic Association nearly a half-century ago, another Nobel laureate,
Wassily Leontief, struck a modest tone. He reminded his audience that the data
used by economists differed greatly from that used by physicists or biologists.
For the latter, he cautioned, "the magnitude of most parameters is practically
constant", whereas the observations in economics were constantly changing. Data
sets had to be regularly updated to remain useful. Some data was just simply bad.
Collecting and analysing the data requires civil servants with a high degree of
skill and a good deal of time, which less economically developed countries may not
have in abundance. So, for example, in 2010 alone, Ghana's government – which
probably has one of the better data-gathering capacities in Africa –
recalculated its economic output by 60%
. Testing your hypothesis before and
after that kind of revision would lead to entirely different results.
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'The data used by economists rarely throws up incontestable answers'
traders at the New York Stock Exchange in October 2008. Photograph: Spencer
Platt/Getty Images
Leontief wanted economists to spend more time getting to know their data, and
less time in mathematical modelling. However, as he ruefully admitted, the trend
was already going in the opposite direction. Today, the economist who wanders into
a village to get a deeper sense of what the data reveals is a rare creature. Once
an economic model is ready to be tested, number-crunching ends up being done
largely at computers plugged into large databases. It's not a method that fully
satisfies a sceptic. For, just as you can find a quotation in the Bible that will
justify almost any behaviour, you can find human data to support almost any
statement you want to make about the way the world works.
That's why ideas in economics can go in and out of fashion. The progress of
science is generally linear. As new research confirms or replaces existing
theories, one generation builds upon the next. Economics, however, moves in
cycles. A given doctrine can rise, fall and then later rise again. That's because
economists don't confirm their theories in quite the same way physicists do, by
just looking at the evidence. Instead, much as happens with preachers who gather a
congregation, a school rises by building a following – among both politicians and
the wider public.
For example, Milton Friedman was one of the most influential economists of the
late 20th century. But he had been around for decades before he got much of a
hearing. He might well have remained a marginal figure had it not been that
politicians such as Margaret Thatcher and Ronald Reagan were sold on his belief in
the virtue of a free market. They sold that idea to the public, got elected, then
remade society according to those designs. An economist who gets a following gets
a pulpit. Although scientists, in contrast, might appeal to public opinion to
boost their careers or attract research funds, outside of pseudo-sciences, they
don't win support for their theories in this way.
However, if you think describing economics as a religion debunks it, you're
wrong. We need economics. It can be – it has been – a force for tremendous good.
But only if we keep its purpose in mind, and always remember what it can and can't
do.
T
he Irish
have been known to describe
their
notionally Catholic land as one where a thin Christian veneer was painted over an
ancient paganism. The same might be said of our own adherence to today's
neoliberal orthodoxy, which stresses individual liberty, limited government and
the free market. Despite outward observance of a well-entrenched doctrine, we
haven't fully transformed into the economic animals we are meant to be. Like the
Christian who attends church but doesn't always keep the commandments, we behave
as economic theory predicts only when it suits us. Contrary to the tenets of
orthodox economists, contemporary research suggests that, rather than seeking
always to maximise our personal gain, humans still remain reasonably altruistic
and selfless. Nor is it clear that the endless accumulation of wealth always makes
us happier. And when we do make decisions, especially those to do with matters of
principle, we seem not to engage in the sort of rational "utility-maximizing"
calculus that orthodox economic models take as a given. The truth is, in much of
our daily life
we don't fit the model
all that well.
For decades, neoliberal evangelists replied to such objections by saying it was
incumbent on us all to adapt to the model, which was held to be immutable – one
recalls Bill Clinton's depiction of neoliberal globalisation, for instance, as
a "force of nature"
. And yet, in the wake of the 2008 financial crisis and the
consequent recession, there has been a turn against globalisation across much of
the west. More broadly, there has been
a wide repudiation of the "experts"
, most notably in the 2016 US election and
Brexit referendum.
It would be tempting for anyone who belongs to the "expert" class, and to the
priesthood of economics, to dismiss such behaviour as a clash between faith and
facts, in which the facts are bound to win in the end. In truth, the clash was
between two rival faiths – in effect, two distinct moral tales. So enamoured had
the so-called experts become with their scientific authority that they blinded
themselves to the fact that their own narrative of scientific progress was
embedded in a moral tale. It happened to be a narrative that had a happy ending
for those who told it, for it perpetuated the story of their own relatively
comfortable position as the reward of life in
a meritocratic society
that blessed people for their skills and flexibility.
That narrative made no room for the losers of this order, whose resentments were
derided as being a reflection of their boorish and retrograde character – which is
to say, their fundamental vice. The best this moral tale could offer everyone else
was incremental adaptation to an order whose caste system had become calcified.
For an audience yearning for a happy ending, this was bound to be a tale of woe.
The failure of this grand narrative is not, however, a reason for students of
economics to dispense with narratives altogether. Narratives will remain an
inescapable part of the human sciences for the simple reason that they are
inescapable for humans. It's funny that so few economists get this, because
businesses do. As the Nobel laureates George Akerlof and Robert Shiller write in
their recent book,
Phishing for Phools
, marketers use them all the time, weaving stories in the
hopes that we will place ourselves in them and be persuaded to buy what they are
selling. Akerlof and Shiller contend that the idea that free markets work
perfectly, and the idea that big government is the cause of so many of our
problems, are part of a story that is actually misleading people into adjusting
their behaviour in order to fit the plot. They thus believe storytelling is a "new
variable" for economics, since "the mental frames that underlie people's
decisions" are shaped by the stories they tell themselves.
Economists arguably do their best work when they take the stories we have given
them, and advise us on how we can help them to come true. Such agnosticism demands
a humility that was lacking in economic orthodoxy in recent years. Nevertheless,
economists don't have to abandon their traditions if they are to overcome the
failings of a narrative that has been rejected. Rather they can look within their
own history to find a method that avoids the evangelical certainty of orthodoxy.
In his 1971 presidential address to the American Economic Association, Wassily
Leontief counselled against the dangers of self-satisfaction. He noted that
although economics was starting to ride "the crest of intellectual respectability
an uneasy feeling about the present state of our discipline has been growing in
some of us who have watched its unprecedented development over the last three
decades".
Noting that pure theory was making economics more remote from day-to-day
reality, he said the problem lay in "the palpable inadequacy of the scientific
means" of using mathematical approaches to address mundane concerns. So much time
went into model-construction that the assumptions on which the models were based
became an afterthought. "But," he warned – a warning that the sub-prime boom's
fascination with mathematical models, and the bust's subsequent revelation of
their flaws, now reveals to have been prophetic – "it is precisely the empirical
validity of these assumptions on which the usefulness of the entire exercise
depends."
Leontief thought that economics departments were increasingly hiring and
promoting young economists who wanted to build pure models with little empirical
relevance. Even when they did empirical analysis, Leontief said economists seldom
took any interest in the meaning or value of their data. He thus called for
economists to explore their assumptions and data by conducting social, demographic
and anthropological work, and said economics needed to work more closely with
other disciplines.
Leontief's call for humility some 40 years ago stands as a reminder that the
same religions that can speak up for human freedom and dignity when in opposition,
can become obsessed with their rightness and the need to purge others of their
wickedness once they attain power. When the church retains its distance from
power, and a modest expectation about what it can achieve, it can stir our minds
to envision new possibilities and even new worlds. Once economists apply this kind
of sceptical scientific method to a human realm in which ultimate reality may
never be fully discernible, they will probably find themselves retreating from
dogmatism in their claims.
Paradoxically, therefore, as economics becomes more truly scientific, it will
become less of a science. Acknowledging these limitations will free it to serve us
once more.
Main image: Maxian/Getty/iStockphoto/Guardian Design
This is an edited extract from Twilight of the Money Gods: Economics as a
Religion and How it all Went Wrong by John Rapley, published by Simon & Schuster
on 13 July at £20. To order a copy for £17, go to
bookshop.theguardian.com
or call 0330 333 6846. Free UK p&p over
£10, online orders only. Phone orders min p&p of £1.99.
I agree that the replication crisis is more than just a normal scientific self-correction. For
one thing, it is about widespread methods problems, rather than refining or replacing a particular
theory. But I don't agree that "they should have known" based on statistics education. First,
I came away from three semesters of statistics with a vague impression that multiple comparisons
correction and conditional stopping were "picky" theoretical considerations. There was just no
discussion of how wrong you can be if you break "the rules".
The more subtle and fascinating part of the replication crisis is how fields evolved standards
of practice that seem "designed" to satisfy the institutional incentives for maximum publishable
results per unit effort. This is evolution in action.
Some people like Meehl in psychology noticed the problem decades ago, but everyone was too
busy writing papers to pay attention to these party poopers.
More broadly, it isn't obvious what the right level of rigor and the strictness standards for
evidence should be. The skeptical position is always strong. Formal statistical procedures for
confident knowledge are only about 100 years old. Somehow we got along before then, and succeeded
in socially constructing functional systems. Social psychology is an example of just such a functional
system; it just wasn't optimizing what we thought it was.
To put it another way, the current replication crisis narrative is level 5, comparing systems.
To say it is just about bad methods is level 4. The level 5 understanding is that the system structure
and incentives must change.
Citing when you can't remember the author or title is bad method. Yes? If you're saying that
its a fact you ought to be able to back it up. I'm not familiar with the claim you make, though
it is not central to my own work, so I might have missed it. Still...
Getting things completely wrong used to be a lot more common than it is today. Which
is a testament to progress.
I agree that the problem goes deeper. But my story about what has gone wrong is different -
I've tried to make this comment stand-alone, but it may rely on terminology I've been developing
this year on my blog. It's hard to get across my point without the jargon.
The field of psychology tried to move from non-science to science by ostensibly adopting scientific
methods. The trouble is that at this level of the science stack, the methods of reductive materialism
are very difficult to apply or simply don't apply. That difficulty was never really acknowledged
or accounted for. Methods for studying systems, or even the acknowledgement that human beings
are social animals, seemed to get lost in the rush to find results that would make the physicists
pay attention.
This is really a failure of metaphysical reductionism, because it did not allow those working
at the upper levels of the stack the proper freedom to chose methods appropriate to their level.
Reductionists who dominate science only recognise the lowest levels as real, thus psychology had
try too hard to make their results fit that skewed paradigm. Psychology was never going to be
very amenable to analysis because systems dominate at that level of the stack. The havoc already
wrecked by the Romantics following Freud meant that psychology had been so decontextualised from
its social milieu that once reductionists got involved it was always going to be a disaster.
Many biologists are antireductive in outlook, because once you take your organism apart it
ceases do anything interesting. Even so the gold standard for knowledge and method is reductionism,
even when it is entirely inappropriate to the scale and level.
Since you are right about hindsight here is some foresight:
Biology is currently dominated by Neoliberal political ideology and Utilitarian philosophy
that is going to have to change at some point. Compare Richard Dawkins to the late Lynn Margulis
or Frans de Waal and you realise that Dawkins perpetuates some completely ludicrous myths about
people and evolution.
The role of symbiosis, hybridisation, cooperation, communities, and other systemic features
of living systems are almost completely written out of history. Witness the extent of hybridisation
amongst human species that makes a mockery of the "tree" metaphor for evolution. Similarly our
nature as social animals, which requires that we operate on the basis of in-group empathy and
reciprocity as all social animals do, is still being nudged out of the mainstream by the (literally)
insane assumptions of Nash and game theory.
A time will come when we have a paradigm shift in biology that will expose wrong-headed methods
that obscured knowledge and obstructed progress after the discovery of DNA. This will be on the
same scale as the psychology debacle, but it might not get the same level of press as psych because
people respect biology and psych has always been suspect.
The unfolding debacle in psychology is nothing compared to the fantasy island that is economics.
In economics many of the major tenets still taught up to graduate level have already been
disproved , but that has not changed anything. For example in the 1970s (!) Sonnenschein,
Mantel, and Debreu proved that a demand curve need not be a simple curve with a downward slope
- in practice a demand curve can be any polynomial, i.e. any wavy line (Steve Keen Debunking
Economics ).
The equivalent is teaching the planetary model of an atom to PhD level. And then noting that
an atom is nothing like a solar system, but continuing to model it as a solar system because anything
else is too hard! The failure of the vast majority of professional economists to predict either
the Great Crash of 1929 and the subsequent Depression or the Great Recession of 2008
and the subsequent stagnation is an indictment that goes far deeper than what is happening in
psychology. Neoclassical Economics is no better than a hoax. No amount of failure to replicate
seems to have any effect on the economics hegemony.
Finally, here's a weird thing about the replication crisis in psychology. The very same bloggers
and tweeters who promote the "replication crisis" narrative, still routinely blog and tweet about
one-off, non-replicated studies recently published in psych journals as if there is no crisis
.
This helped clarify some thoughts I've
had floating around in my mind for a while, thanks.
Around 2012, in the context of algorithmic trading, I tasked myself (with the help of a team)
with finding a way to predict price movements of a certain set of securities at a certain frequency
(or lower). The details of the problem aren't that important but one critical side effect was
a limited data set.
Methodological issues
I myself had no more than undergrad statistics knowledge although some members of the team
had grad-level training and experience working on applied problems (most relevant being in physics).
Nevertheless, we fell into the trap of bad statistics -- fooling ourselves to make methodological
exceptions due to small expected effect sizes (sounds like psych, eh?), data snooping, etc
For one thing, it is about widespread methods problems, rather than refining or replacing
a particular theory. But I don't agree that "they should have known" based on statistics education.
First, I came away from three semesters of statistics with a vague impression that multiple
comparisons correction and conditional stopping were "picky" theoretical considerations. There
was just no discussion of how wrong you can be if you break "the rules".
My guess is more time spent learning to not break the rules would have not helped...
Epistemic virtue issues
If we fooled ourselves into seeing something that wasn't there, we would waste money doing
further research on it, and then directly lose money by trying to make real-world, real money
predictions with it. This wasn't enough! In this case, I think it was the mindset that
failing to find something wasn't an option because of the plan I had created (for various
reasons) to find a way along this path.
Skin in the game isn't sufficient if you are hamstrung to play the game anyway. You need a
way to surrender a path and look for alternatives
In economics many of the major tenets still taught up to graduate level have already been
disproved, but that has not changed anything. For example in the 1970s (!) Sonnenschein, Mantel,
and Debreu proved that a demand curve need not be a simple curve with a downward slope - in
practice a demand curve can be any polynomial, i.e. any wavy line (Steve Keen Debunking Economics).
They are forced to play the game -- the path cannot be abandoned until an alternative exists.
But it will be tough to find until the path is abandoned...
Mentorship/community issues
I think this could have saved my endeavor. Unfortunately I was in a position where there was
no one around me to learn how to do the science in this particular domain , and there
was team-wide skepticism of how much knowledge on how to do the science was transferable cross-domain
. In hindsight, the answer is much more than we thought .
This is both discouraging and encouraging for the future of social sciences. The discouraging
aspect is there may be very few, or no one, left in them that is capable of doing the science
properly. From whom will they be mentored and how will the community guide itself, then? On top
of this, you have the problem of cultural momentum. The encouraging aspect is the surprising amount
of transferability of science-skill between fields. Maybe some physicists will be able to move
into psych and revitalize it? This leaves out the issues of applying reductive positivism to "higher
domain" fields raised by Jayarava, however.
This is really a failure of metaphysical reductionism, because it did not allow those working
at the upper levels of the stack the proper freedom to chose methods appropriate to their level.
Reductionists who dominate science only recognise the lowest levels as real, thus psychology
had try too hard to make their results fit that skewed paradigm. Psychology was never going
to be very amenable to analysis because systems dominate at that level of the stack.
Do you have a sense of what these more appropriate methods are? More exploratory science being
labeled as such?
You've added much analysis & detail, but this strangely reminds of something I was taught as
a child: If you lose your keys, you won't find them by staying under the street lamp. You have
to go back out there in the dark, where it's cold and scary.
(The person who taught me this was a Sunday school teacher. I've noticed that mentioning anything
to do with Christianity gets up the backs of most scientists, but as was so rightly pointed out,
there is cargo-cult science just as there is cargo-cult religion, but there are still a few people
in both fields who are trying to get it right. )
Both Kevin Kelly, and you, make the key point that productive scenes need boundaries. My
thesis will be that in the "atomized era," the internet and other forces have made boundary-maintenance
much more difficult-so scenes are less prevalent, to the culture's detriment.
My (Millenial) friend and (Millenial) I were speculating about this just the other day -- specifically
how much more exclusive and comfy online communities used to feel. Funny that the growth of the
Internet has caused this boundary-removing effect even on itself. Looking forward to this thesis!
The situated learning stuff is fascinating. Are you familiar with Ericsson's work on expertise?
I wonder what the hybrid theory between situated learning and deliberate practice is. Are there
contradictions?
I have some questions pertaining to your recent Imperfect Buddha podcast. Sorry if this is
the wrong place.
You sounded nonchalant when saying that you don't know how to account for people's frequent
comments that they only developed some of the aspects (cognitive, ethical, social, etc) of a particular
stage, or even developed stages out of order. Why so nonchalant? Why not more suspicion for Kegan's
experimental methodology?
I have a specific (apparent) contradiction in mind about Stage 4. You've written that STEM
people are more likely to develop Stage 4 cognitive skills. But also there's a (reasonable) stereotype
of STEM people being disdainful for (what appear to them as) arbitrary rules/systems/bureaucracy/etc.
How do you square this?
@Duckland "Ugh, this is so byzantine, why can't this bureaucracy act logically and efficiently?
All we have is a slow and illegible mess of incentives with no rhyme or reason to it. They really
need to optimize this. If only they had the right system."
how much more exclusive and comfy online communities used to feel.
Yes... partly (many have observed) this is due to the rise of centralized social networks.
There used to be zillions of little communities here and there; now a handful of platforms dominate,
and commercial reasons dictate discouraging boundaries around subcultures.
Are you familiar with Ericsson's work on expertise?
From secondary sources only. I know the gist; haven't read him.
I wonder what the hybrid theory between situated learning and deliberate practice is. Are
there contradictions?
Hmm, interesting questions. Offhand: the situated learning people are anthropologists, and
their prototype cases come from traditional, non-systematic communities. (Mayan midwives are their
favorite.) So Lave & Wenger have an arguably-stage-5 theory of a stage 3 phenomenon. All lower-stage
phenomena persist when you transition into later stages, so we do all learn in part through participation
in a community of practice; but in modern societies, we also learn through stage 4 explicit systems
of instruction and practice. Those coexist and interact in complicated ways. Offhand, I don't
recall research on the details of those interactions, but I'd bet people have done substantial
work on that.
even developed stages out of order
Have people said that? I don't recall it. Some geeky people feel they skipped stage 3, but
I think they're probably wrong. They just aren't particularly good at emotions and relationships.
But this would be hard to test.
Unless you have a very large dataset, or do very careful longitudinal studies, all you can
say empirically is that "statistically, most people develop through the stages in order and roughly
in sync." I'm pretty sure that's true. There may be exceptions, or not.
I think the uses I am putting the framework to don't depend on whether or not there are rare
exceptions.
Now it could also be that the whole story is completely bogus. A lot of psychological work
has recently disintegrated in the face of more rigorous experimental replication. (Kegan's framework,
and especially Kohlberg's work, have been replicated many times by independent researchers;
but they might all be making the same mistakes.) This stuff might also fail a more rigorous test.
My guess is not; but unless/until the test is done, one can't know. In academia, this research
area seems to have gone out of fashion, so I would guess we're not going to see a strong test
anytime soon.
Croulebarbe 's answer to your last questions seems right. That is: "right system vs
wrong system" is stage 4.
Also, although a bureaucratic system is justified on a stage 4 basis, sloppy ones operate largely
on a stage 3 basis: the rules are interpreted relationally/communally rather than logically. I
suspect that's what STEM people particularly loathe.
When I enrolled the PhD programme It was clear to me that it's high time someone should be
able to predict or at least understand which are the key success factors for LGBT healthy relationships
in adult life.
While reading your essay I could but think of all my fears as a young and inexperienced researcher.
It hurt when reading "the guy who figured out the problem was ignored and never cited" and I figured
sincerely one of my deepest stupid motivations for doing this research – Ego satisfaction?
Do I really care about the phenomena I am supposed to study? What is the link than with my
engagement, with the time and effort I dedicate to it?
I believe I do have a lust for understanding, I do hope to figure out what is actually going
on. But that seems nothing compared to what I should know. The how. The methodology, the ability
to study what's relevant, to extract from literature the important issues and to be able to create
a research from a methodological point of view that is helpful and that will eventually pinpoint
my questions.
Thank you for stating I could be wrong and that's ok, it gives some sort of empowerment to
a young researcher like me. I will reflect more on what you call methods of technical rationality,
especially publishing negative results and abandoning the famously flawed p<0.05 significance
that used to scare the curiosity in me.
And yes, the mythical "scientific method"! I thought I was here to predict and measure. And
that there are clear ways for me to be able to control and predict my thesis.
So what I'm taking with me from your essay is firstly becoming a cargo cultist and go towards
a meta-systematic approach while looking to master at least some of the methods.
Tackling "cargo cult" phenomenon is something I began to ask myself since I started to teach.
How can I help the students create something original? How long is it acceptable to imitate
and after what stage are they expected to produce something original? What context could benefit
them? This are legitimate questions in any field. I see the phenomenon of imitation as an early
stage of learning process or skill acquisition. I enjoyed reading your article, first because
it validated some of my intuitions :) and secondly because it underlined the prerequisite for
overcoming the imitation phase - to overpass the form without substance phase.
One of them was curiosity. You've identified curiosity as a source of honesty: "Honesty comes
out of curiosity, mostly, I think. If you really do want to know, there's much less motivation
to promote a wrong answer-arrived at either through deliberate fraud or sloppy, inadequately-controlled
experimentation."
As an European working in the Middle East as an aid worker I had many friends (nationals)
who were looking for ways to immigrate to Europe, Australia or north America for a better life.
I was wondering why aren't they interested to improve things in their own country?
What could
change their minds? Reflecting more upon these issues, I understood that among different options
to understand the phenomenon, going back to school is the best step towards finding some good
leads. I ended up looking at the entire phenomenon of migration. Curiosity was the nudge that
led me towards pursuing a phd in the field of migration.
Your analysis about legitimate peripheral participation helped me better understand why some
people thrive and some are failing. I also had in mind something related to imprinting. Who are
the ones that have a major impact on you in an early stage as a junior researcher? How much is
the context influencing one's pursue of innovation and how much are other factors influencing its
success?
This guy is funny (and actually rather clueless, Summers is much better
) defender of "Flat Earth" theory:
== quote ==
A related criticism of macroeconomics is that it ignores financial factors.
Macroeconomists supposedly failed to anticipate the crisis because they
were enamored by models where financial markets and institutions were absent,
as all financing was assumed to be efficient (De Grawe, 2009, Skidelsky,
2009). The field would be in denial if it continued to ignore these macro-financial
links.
One area where macroeconomists have perhaps more of an influence is in
monetary policy. Central banks hire more PhD economists than any other policy
institution, and in the United States, the current and past chair of the
Federal Reserve are distinguished academic macroeconomists, as have been
several members of the FOMC over the years. In any given week, there are
at least one conference and dozens of seminars hosted at central banks all
over the world where the latest academic research is discussed. The speeches
of central bank governors refer to academic papers in macroeconomics more
than those by any other policymaker.
... ... ...
A separate criticism of macroeconomic policy advice accuses it of being
politically biased. Since the early days of the field, with Keynes and the
Great Depression, macroeconomics was associated with aggressive and controversial
policies and with researchers that wore other hats as public intellectuals.
Even more recently, during the rational expectations microfoundations revolution
of the 1970s, early papers had radical policy recommendations, like the
result that all systematic aggregate-demand policy is ineffective, and some
leading researchers had strong political views. Romer (2016) criticizes
modern macroeconomics for raising questions about what should be obvious
truths, like the effect of monetary policy on output. He lays blame on the
influence that Edward Prescott, Robert Lucas and Thomas Sargent had on field.
Krugman (2009) in turn, claims the problem of macroeconomics is ideology,
and in particular points to the fierce battles between different types of
macroeconomists in the 1970s and 1980s, described by Hall (1976) in terms
of saltwater versus freshwater camps.
...Macroeconomists, instead, are asked to routinely produce forecasts
to guide fiscal and monetary policy, and are perhaps too eager to comply.
"Is something really wrong with macroeconomics? - Ricardo Reis"
I appreciate that the author thinks the solution is to have young people
look at economics with fresh eyes to bring up new approaches this is a quote
when describing how they pick fresh young economists to go on a tour and
present their findings:
"the choices are arguably not biased in the direction of a particular
field, although they are most likely all in the mainstream tradition"
unfortunately the mainstream tradition is full of biase and restrictions
about what is allow to be considered and what is not so if all you allow
are people who are expanding on the "mainstream tradition" I think you are
severely restricting yourself further a lot of good ideas from the past
have been discarded, not allowed, ridiculed, not really analyzed or expanded
upon.... presented or taught or represented by people who have never studied
the ideas directly got them third hand or 5th hand , from people who misrepresent
the ideas in the first place
want fresh new ideas? go back to the beginning of economics, understand
over and over what the founds say , go read Adam Smith directly, read the
generally theory by Keynes directly don't just assume the verion samuelson
gave us of Keynes represents what he actually said, or Hansen or hicks,
or what ever nonsense they are passing along today as "what Keynes said"
reevaluation the who field over and over
And yea, study over and over the current teachings so you really understand
it intuitively don't allow magical thinking to let you "pretend" you got
it don't accept that its impossible to really understand it and "that's
just what the equations show" understand the limitations, figure out when
our fearless leaders and "great minds" and elder statesman of economics
are "overplaying their hand" and concluding more than they can this is hard
work and it takes dedication and don't assume that econometrics is the only
real economics and that theory is "unprovable" or "always subjective" because
without theory there is no econometrics, there is just a bunch of meaningless
numbers
so yea we can use fresh young minds taking a new look at things but we
will nowhere if all we allow is that "they are most likely all in the mainstream
tradition"
I'm not a professional economist, but almost every time I see a "Phillips Curve", I'm
reminded how badly understood it is and how poorly economics performs as a scientific
discipline. This area needs a complete rethink. This article above is not that rethink,
though I great appreciated the discussion about the perilous state of workers' rights prior
to the 20th century.
There is a Phillips Curve but it's probably not what you think. For the U.S. at least,
there's empirical evidence that the true relationship is between unemployment and subsequent
REAL wage inflation (not nominal). Even here one must be careful, for the link is not that
strong. And real wage growth could also be productivity-related… but productivity
growth itself might also be a function of labor scarcity. When a population desires to get
more work done with fewer hands, innovation favors productivity.
For some charts showing various examples of valid and invalid "Phillips Curves", including
a persuasive graph of the unemployment/real wage inflation curve, see these links:
"... I argue here that it's the abuse of mathematics by Neoclassical economists -- who practice what I have dubbed "Mythematics" rather than Mathematics--and that some phenomena are uncovered by mathematical logic that can't be discovered by verbal logic alone. ..."
"... A lady in the audience named Barb Jacobson suggested that using the name Neo-Classical gives it a certain degree of cache and wants you guys to start calling it for what it is: "Scorched Earth Economics." What a great name to use and doesn't it ring true? ..."
This is the brief talk I gave at a conference celebrating 25 years of the
Critical Realist seminar series at Cambridge University. Critical realists argue against the
use of mathematics in economics; I argue here that it's the abuse of mathematics by Neoclassical
economists -- who practice what I have dubbed "Mythematics" rather than Mathematics--and that some
phenomena are uncovered by mathematical logic that can't be discovered by verbal logic alone.
I give the example of my own model of Minsky's Financial Instability Hypothesis, which revealed
the possibility of a "Great Moderation" preceding a "Great Recession" before either event had happened.
David Milburn, September 12, 2015 at 9:38 am
Steve,
Last week Prof Bill Mitchell was in London where he gave a talk on re-framing the language
used in the media that carried on the myth of the mainstream groupthink. A lady in the audience
named Barb Jacobson suggested that using the name Neo-Classical gives it a certain degree of
cache and wants you guys to start calling it for what it is: "Scorched Earth Economics." What
a great name to use and doesn't it ring true? Barb Jacobson is spot on!
Sue Madden, September 13, 2015 at 8:28 am
Hi Steve,
I was really amused to see an interview a while back in the New Scientist, with the "research
chief" (!!) at the B of E. If you haven't seen it, you really must:
Opinion Interview with Andy Haldane: "Sackcloth and Ashes on Thread needle Street" New Scientist
25 March 2015
Corbyn was elected leader!!!! Now the sparks will fly. At least a public debate worthy of
the name might at last be heard in our sad country.
Thanks for your work in trying to enlighten us!!
Sue.
"... That is exactly what makes macro a pseudoscience (as Cassidy called it "Utopian economics".) You can't talk about economics ignoring existence of finance, because finance is an elephant in the room. A church of efficient stochastic equilibrium and an invisible hand that drives economics to it (the hand of God) is junk science, and always was. ..."
"macro rightly got a lot of stick by largely ignoring the role of finance,"
That is exactly what makes macro a pseudoscience (as Cassidy called it "Utopian economics".)
You can't talk about economics ignoring existence of finance, because finance is an elephant in
the room. A church of efficient stochastic equilibrium and an invisible hand that drives economics
to it (the hand of God) is junk science, and always was.
As much as I admire the mathematics, its use in macro is perverted and unscientific because
it relies on unrealistic assumptions. Its all pure mathiness.
Most of terminology that neoclassical economy introduced smells "fraud" or at least is detached
from reality. "Output gap" and related notion "potential output" can serve as an example. Look
at WWII production. For example, even potential output of a single plant (let's say three shift
work and full utilization of equipment) is pretty convoluted notion as there is a high level of
dependence on suppliers and somewhere typically "bottleneck" exists that prevent the factory achieving
this input. Still Hjalmar Schacht achieved wonders during WWII by just ordering German factories
to continue producing without waiting for orders to come.
== quote ==
Moreover, Keynes [1936, p. 177, 179] had denounced Walras's approach as wrong when he wrote
"Now the analysis of the previous chapters [of The General Theory] made it plain that this
account [in Walras] of the matter must be erroneous .this [Walrasian system] is a nonsense
theory".
== end of quote ==
And even worse, like most neoliberal economists, he tends to ignore Hyman Minsky important
contribution to understanding of source of instability in capitalist economics.
That fact alone IMHO makes his lectures junk science.
I remember that during 2008 events somebody called Bernanke not a specialist on Great Depression,
but a charlatan, who tried to explain Great Depression using neoclassic economics.
"I acknowledge that macro rightly got a lot of stick by largely ignoring the role of finance,
but I also point out that the poor recovery has involved a vindication of the core macro model:
austerity is a bad idea at the ZLB, QE was not inflationary and interest rates on government
debt did not rise but fell."
No shit Dick Tracy. Look at the devastation of the US of O (The United States of Oligarchy).
Let's join the Military in defending the shipping lanes, 3 hots and a cot.
I'm glad the core macro-model has been vindicated.
Is it my imagination or are the crazies around here getting crazier, and becoming increasingly
unable to even begin talking about macro in a serious way.
I mean, I don't mind a bit of vituperation or even limited amounts of incoherence and insanity,
if it is accompanied by at least earnest attempts to have substantive discussions. But it just
feels like the essential substance has become increasingly rare.
libezkova -> Sanjait... , -1
"Is it my imagination or are the crazies around here getting crazier, and becoming increasingly
unable to even begin talking about macro in a serious way."
If you think that neoliberal economists and their low-level supporters like some members of
this blog are crazy you are wrong. They are corrupt the same way as Mafia members are corrupt.
That's why they are unable to discuss economics in a serious way. Only "religious dogma" based
way is permitted.
Neoliberal Jesuits will defend their "flat earth" theory and ostracize heretics as long as
financial oligarchy is in power, because their well being is dependent on it, and they are paid
by financial oligarchy to do the job.
When neoliberalism was hatched it deliberately emulated methods of influence used by Communists
(and Austrians were intimately aware of them, because the country experienced communist revolution,
which failed) in trying to expand their influence at university departments and by creating think
tanks. Those subversive methods proved way too successful and they are now really entrenched:
neoclassic economic thinking permeates the society to the same or higher degree as Marx political
economy in the USSR.
See LSE discussion "Masters of the Universe: Hayek, Friedman, and the Birth of Neoliberal Politics
"
I think that that one of the few better and more productive pathway of discussing economic events
is the one that stems from Hyman Minsky work with its idea of positive feedback loops in economics
with one from financial system that periodically destabilizes the capitalist economy and create
a financial crisis.
The neoclassical concept of equilibrium is way too primitive and attempts to build economics
as branch of physics. It should be discarded for good, as the way it is used now is close to pure
charlatanism.
We also have an uncertainty principle here as even the suggestion of the intervention can change
the dynamics of the system (look at "Fed talk" )
The role of the state now is so huge that any talk about the economy achieving equilibrium
by itself is fraud outside few special cases. And actually the introduction of neoliberalism was
the "revolution from above" -- a coup d'état, if you wish.
== quote ==
In microeconomic theory, cost-minimization by consumers and by firms implies the existence
of supply and demand correspondences for which market clearing equilibrium prices exist, if
there are large numbers of consumers and producers. Under convexity assumptions or under some
marginal-cost pricing rules, each equilibrium will be Pareto efficient: In large economies,
non-convexity also leads to quasi-equilibria that are nearly efficient.
However, the concept of market equilibrium has been criticized by Austrians, post-Keynesians
and others, who object to applications of microeconomic theory to real-world markets, when
such markets are not usefully approximated by microeconomic models. Heterodox economists assert
that micro-economic models rarely capture reality.
== end of quote ==
Steve Keen in one who uses and try to develop further Minsky concepts and he was one of the
few who predicted the financial crash on 2008. IMHO he should get more respect and coverage at
the expense of neoliberal stooges like Krugman.
Ha-Joon Chang, Philip Mirowski, Joseph Stiglitz, Richard Koo, Yanis Varoufakis, Noam Chomsky
all have interesting and IMHO more realistic ideas about how the modern economy really function
and what can be more appropriate ways to model it.
We should reject masked by mathiness typical neoclassical junk that is mainstream now.
"... Most of the debt before the crisis was taken on by the 45+. They are 10 years older now and not about to re-leverage themselves. The growth will have to come from the younger group but they are full of student and car debt. Will they be able to buy houses for which prices have returned to pre-crisis levels? ..."
"... This leverage game depends on housing but it looks like we will be forced into a change of paradigm. ..."
"... Very well put. The ' leverage game ' comprises the whole neo-liberal paradigm which as you say depends on housing . ..."
"... Here in the UK until the last fifteen years or so, apart from a small number of very top end residential properties there was a ' property ladder ' we used to say . The meaning was that you could start at the bottom and if you chose to, could move up, and even though property prices moved up your wages were likely to increase, but your debt was being eroded bit by bit by inflation which kept the whole thing in sync. ..."
"... In a recession, a debt-burdened corporate sector behaves much as households do, cutting back particularly on capital investment. Government goes the opposite way, hiking debt during a recession to fund automatic stabilizers. But heavy gov't debt, like household debt, is a drag on consumption after a lag of several years. ..."
"... Focusing on household debt alone is of questionable value, when much broader debt aggregates are available. What's clear from the chart comparing household debt in six countries is that Canada and Australia are up to their necks in debt, largely owing to mortgage debt supported by their housing bubbles. ..."
"... When these housing bubbles burst - as bubbles invariably do - these two resource-oriented economies are going to be sucking wind. Unfortunately, in 2014 USgov started applying US income taxation to Canadians who stay 182 days a year or more in the US. Refugees from the Great White North who flee south will face a whole new level of pain when the US IRS works them over with a rubber hose. ..."
For some reason, many economists still don't see it!
Now the general meme is that after 10 years, balance sheets have slowly been repaired as if
these household would be about to remake the same debt mistakes.
Most of the debt before the crisis was taken on by the 45+. They are 10 years older now
and not about to re-leverage themselves. The growth will have to come from the younger group
but they are full of student and car debt. Will they be able to buy houses for which prices have
returned to pre-crisis levels?
This leverage game depends on housing but it looks like we will be forced into a change
of paradigm.
Very well put. The ' leverage game ' comprises the whole neo-liberal paradigm which as
you say depends on housing .
Here in the UK until the last fifteen years or so, apart from a small number of very top
end residential properties there was a ' property ladder ' we used to say . The meaning was that
you could start at the bottom and if you chose to, could move up, and even though property prices
moved up your wages were likely to increase, but your debt was being eroded bit by bit by inflation
which kept the whole thing in sync.
Those days are long gone and I think it is dawning on a lot of us that the game is finally
up for this paradigm and there is no going back. Hence the certain air of melancholy which pervades
the atmosphere.
I went to a little drinks party on Saturday evening and it was interesting how the room of
twenty or so people divided between those stuck in the status quo and those beginning to perceive
of a future beyond the status quo .
Globally, household debt is the smallest of the four commonly used categories of Household,
Corporate [non-financial], Government, and Financial. Chart:
In a recession, a debt-burdened corporate sector behaves much as households do, cutting
back particularly on capital investment. Government goes the opposite way, hiking debt during
a recession to fund automatic stabilizers. But heavy gov't debt, like household debt, is a drag
on consumption after a lag of several years.
Focusing on household debt alone is of questionable value, when much broader debt aggregates
are available. What's clear from the chart comparing household debt in six countries is that Canada
and Australia are up to their necks in debt, largely owing to mortgage debt supported by their
housing bubbles.
When these housing bubbles burst - as bubbles invariably do - these two resource-oriented
economies are going to be sucking wind. Unfortunately, in 2014 USgov started applying US income
taxation to Canadians who stay 182 days a year or more in the US. Refugees from the Great White
North who flee south will face a whole new level of pain when the US IRS works them over with
a rubber hose.
"... Ann Pettifor has become so disgusted with all of this "gee, we didn't know" and other incompetencies
that she has written a piece demanding that the government take a hard look at the economics profession
in a first step to making it responsive and responsible to the people. This is the UK, and we should
definitely do it here, US, too. ..."
Ann Pettifor has become so disgusted with all of this "gee, we didn't know" and other incompetencies
that she has written a piece demanding that the government take a hard look at the economics profession
in a first step to making it responsive and responsible to the people. This is the UK, and we
should definitely do it here, US, too.
From a class conflict perspective, the economics field is responsive to its constituency: the
1%. As Marx and others have pointed out, the ideological necessity of making what is unjust appear
as "There Is No Alternative" is the unstated core mandate of the economists. Therefore, despite
the ludicrousness of this analysis, I find it another chink in the armor of the dominant ideology
that the obvious is now being so gingerly discussed by mainstream economists, the chief ideological
propagandists of the 1%.
When households take on long-term debt, they increase current spending power but commit
to a pre-specified path of future debt service (interest payments and amortisations).
How much are these people paid to come up with these thrilling and original conclusions?
"... The argument for a higher inflation target is NOT straightforward, once you understand two
things. First interest theory is axiomatically false.#1 Because of this monetary policy never had sound
scientific foundations. Second the same holds for fiscal policy.#2 ..."
"... The argument AGAINST higher inflation is that it REDUCES employment. Given the overall situation,
the ONLY sensible policy is to increase the average wage rate, such that the rate of change of the wage
rate is greater than the rate of change of productivity, because this increases employment. This is
a SYSTEMIC necessity and has NOTHING to do with social policy. Employment is co-determined by the relationship
between average wage rate, price and productivity. This relationship should automatically produce full
employment but does not. ..."
Economic bungee jumping without cord: Comment on Simon Wren-Lewis on 'Raising the inflation target'
You say: "The argument for a higher inflation target is straightforward, once you understand
two things. First the most effective and reliable monetary policy instrument is to influence the
real interest rate in the economy, which is the nominal interest rate less expected inflation.
Second nominal short term interest rates have a floor near zero (the Zero Lower Bound, or ZLB)."
The argument for a higher inflation target is NOT straightforward, once you understand
two things. First interest theory is axiomatically false.#1 Because of this monetary policy never
had sound scientific foundations. Second the same holds for fiscal policy.#2
Let us assume for a moment that, for whatever reasons, neither monetary nor fiscal policy is
applicable. So, given investment expenditures of the business sector and the expenditure ratio
of the household sector, the only alternative left is to directly influence the macroeconomic
price mechanism.#3
The argument AGAINST higher inflation is that it REDUCES employment. Given the overall
situation, the ONLY sensible policy is to increase the average wage rate, such that the rate of
change of the wage rate is greater than the rate of change of productivity, because this increases
employment. This is a SYSTEMIC necessity and has NOTHING to do with social policy. Employment
is co-determined by the relationship between average wage rate, price and productivity. This relationship
should automatically produce full employment but does not.
Standard employment theory is false.#4 The proposal to get the economy going by increasing
price inflation is the direct result of the complete lack of understanding how the market economy
works.
The most tantalizing predictions of cyberpunk never came true. There are no gangs of cyborgs ruling
shantytowns in New York City and there are no corporations larger than the federal government. But
the sci-fi subgenre envisions such dystopias being underpinned by something subtler: the state of
man's soul when there are no longer limits.
The 1980s provided fertile ground for the piercing new vision of science fiction pioneered by
William Gibson and his contemporaries. The global capitalism of Reagan and Thatcher ceded agency
from nation-states to nation-agnostic corporations. Less obvious but just as important was the fact
that the space race was over and Star Trek 's naivety was laid bare. Computers, not spaceships,
would become the measure of progression towards the future. The sleek, utopian vision of the mid-century
futurism was further discredited by soaring crime in urban centers.
Modernity that was once expected to bring matching space unitards instead brought radical self-expression.
The overabundance of choice, these authors suggested, leads to decadence, decay and a society where
people can't see clearly without losing their humanity.
And so the heroes of cyberpunk are outsiders -- the punks to which the genre owes half its name.
In cyberpunk, there are no more grand narratives about progress and triumph. Humans have nowhere
to go and decay is globalized; this is sci-fi without the comforting thought of alien life. Readers
experience an Earth where the concept of "place" has passed its expiration date. Protagonists, like
the megacorporations they tangle with, exist across borders, anywhere being as familiar or foreign
as anywhere else. Neon Japanese syllabary studs skyscrapers that loom over the crowded downtowns
of American cities. Virtual reality is at once a catalyst and a coping mechanism for social breakdown.
What is an individual to do in the face of such brutal atomization? Why, he takes individualism
to its perverse conclusions, William Gibson's
Neuromancer
suggests. Take the following passage:
His face was a simple graft grown on collagen and shark-cartilage polysaccharides, smooth and
hideous.
The novel implies that the character might appear a little later with a completely different face.
Self was another uncertainty that had been sloughed off by ceaseless momentum. Even the author's
jargon serves to impart a feeling of unfamiliarity.
We're starting to live in a time when such terrible and wondrous things are not only technically
possible but socially acceptable. Headlines were made last month over a fetal
lamb being grown in an artificial uterus. The creature, invaded with tubes, suckles and kicks
inside its bulging, rippling enclosure. The juxtaposition of twitching organism and sterile, utilitarian
plastic is simply cyberpunk. Gender is going the way of that thug's cartilage-grown face. Male and
female is looking more like Coke and Pepsi, with some opting to make their own artisanal cola blends.
As rootlessness moves from exception to rule, obligations to others begin to look like hindrances.
It isn't difficult to see how three-parent babies in polycarbonate wombs fit into all of this.
Change is fast these days. We can feel acceleration that was once only perceptible between generations.
At the same time, the past is more crystallized than it's ever been before. Today's everyman, immersed
in a data-sphere orders of magnitude more efficient than any library, can see more clearly than ever
that things were different in an ever-familiar past. A world with meaning resolves ever sharper as
we speed away from it.
But the left-liberal ethic that was once a vantage point from which the genre's founders saw so
far is now fogging their sight, restricting them to toiling within the status quo. Cyberpunk has
come true in ways that makes progressives uncomfortable if they are unpacked. The genre's founders
married a criticism of corporations to the dreary aesthetic of rootlessness, but progressivism only
offers a critique of the former on its own merits. Take away the violence and grit and you get
Brave New World , a world that the gender ideologue can't levy an argument against. Consumerization
of the body, reproduction and social relations lost their conspicuous ugliness when they were rebranded
as "liberation." (Outside of sci-fi, the
only major literary figure
who tackles these issues , Michel Houellebecq,
is painted as a reactionary.)
Gibson's upcoming book,
Agency , has a plot one would expect from a lesser author: the future is awful because
Trump was elected president. This might seem like a perplexing lack of creativity, but consider the
intervening third of a century. Gibson was in the business of scrutinizing Frankensteinization when
it was a distant flight of fancy. But becoming a Frankenstein monster of hormones and surgery is
here and celebration is mandatory. Dialing down one's own ability to notice things to the level of
a Daily Kos commenter becomes a matter of survival. This new subject matter reflects the aesthetics
of culture that snapped his leash: lifeless and brutal in its insipid repetition.
Stories motivated by political disappointment are doomed to be forgotten as the election cycle
resets. Cyberpunk, on the other hand, is more popular now than even during its literary heyday of
the 80s. The blockbuster Ghost in the Shell hit theaters earlier this year and will be followed
by a sequel to the seminal Blade Runner in October. Their combined budget probably exceeds
that of every cyberpunk film that came before (there aren't many.) Cyberpunk 2077 is set to
cost around $100 million, making it the most expensive role-playing video game ever made. If we put
on our cyberpunk goggles, all of this means something. Capitalism is a computer that processes desire.
Cyberpunk is not becoming marketable because it offers a solution for society. The message is
clear that, in face of inexorable rot, the individual loses his sanity or loses his soul. What the
genre does offer is a third choice: to view breakneck dehumanization as a roller coaster ride. There
is grim exhilaration in the acceptance that an awesome decline cannot be stopped. A future that was
once dark and hopeless is now dark and beautiful when one dives headlong into it. Ugliness becomes
thrilling and alienation becomes adventure. The homogenous, numbing light of Brave New World's
dystopia is replaced by the dreamy atmosphere of neon-lit alleys. Sisyphus can't change his fate,
but he can refuse to nod and clap, blank-eyed, at the world's loss of meaning.
Robert Mariani is the opinion editor at The Daily Caller and the co-founder of Jacobite
, a magazine of the post-political right. Follow him on Twitter
@robert_mariani
"... Russell Brand discusses with Yanis Varoufakis what happens when you take on the political, financial and media elite, and how radical reform can occur. Through accounts of his confrontations with the IMF, European institutions and the German government they examine where true power lies and how it is wielded. ..."
"... The 'gurus' of the dominant economic system 'teach' us how economy should be treated, based on mathematical models that assume standard conditions that, essentially, do not exist in the real world. This kind of peculiar 'determinism' in economics is already considered obsolete in other scientific fields. ..."
"... Mainstream economics, dominated by the neoliberal perception, is full of assumptions that are not applicable in the real world, yet being used to justify the satisfaction of the interests of the elites. ..."
"... Almost everywhere, neoliberal policies imposed through IMF have brought unprecedented disaster. Despite the obvious failure, financial technocrats assume that all cases are similar, imposing the same recipe in every region. Their models are full of assumptions in every level and that's why the fail miserably. Yet, despite the obvious disaster, the neoliberal priesthood demands from societies to adopt its models through simple faith. ..."
Russell Brand discusses with Yanis Varoufakis what happens when you take on the political, financial
and media elite, and how radical reform can occur. Through accounts of his confrontations with the
IMF, European institutions and the German government they examine where true power lies and how it
is wielded.
In a particular part of the interview, Varoufakis explains simply why economics is not science:
I call it organized religion with equations, superstition. The only way to become free of superstition
is through overcoming. But you need to study. I've always pissed off my academic colleagues and other
economists who actually believe that is real science what they are doing.
Our mathematical models of the weather can be judged by objective reality. If I am a meteorologist
and come up with a prediction that tomorrow there is going to be a heatwave in Leicester square,
all we have to do is to wait until tomorrow to see if I'm right or wrong. The weather will either
confirm or junk my theories about it.
And by the way, this is exactly the process of how real science progress. Try – fail - come with
an improved idea, and so on. Real scientists abolish old theories even if they work well with new
ones that explain better the nature, the world, etc.
Varoufakis continues:
Let's say that I have the same kind of computer model and actual machine and data mining that
the meteorologist does, but instead of using it to predict the weather I use it to predict the stock
exchange. And suppose that I was somebody very highly respected as a predictor of stock exchange
changes and let's say that today, I were to predict that tomorrow is going to be a major crash in
the stock exchange. There might be because I predicted it! In society and in the economy, our beliefs
about the phenomenon under study are part of the phenomenon under study.
The last paragraph above depicts soundly why mainstream economics are far from the concept of
modern science. The 'gurus' of the dominant economic system 'teach' us how economy should be treated,
based on mathematical models that assume standard conditions that, essentially, do not exist in the
real world. This kind of peculiar 'determinism' in economics is already considered obsolete in other
scientific fields.
In Quantum Mechanics, for example, Heisenberg's uncertainty principle not only acknowledges that
the observer affects the final situation of a physical system but also embeds this interference mathematically.
As a consequence, the final situation of a physical system can be determined only in statistical
terms.
Mainstream economics, dominated by the neoliberal perception, is full of assumptions that are
not applicable in the real world, yet being used to justify the satisfaction of the interests of
the elites.
Almost everywhere, neoliberal policies imposed through IMF have brought unprecedented disaster.
Despite the obvious failure, financial technocrats assume that all cases are similar, imposing the
same recipe in every region. Their models are full of assumptions in every level and that's why the
fail miserably. Yet, despite the obvious disaster, the neoliberal priesthood demands from societies
to adopt its models through simple faith.
Which shows that the only and real target of the mainstream economics, is simply retain the domination
of a small elite on the top of the economic hierarchy, at the expense of the majority of the people.
Noah Smith has a nice summation * of his critique of macroeconomics, which mainly comes down,
as I read it, as an appeal for researchers to stay close to the ground. That's definitely good
advice for young researchers.
But what about economists trying to provide useful advice, directly or indirectly, to policy
makers, who need to make decisions based on educated guesses about the whole system? Smith says,
"go slow, allow central bankers to use judgment and simple models in the meantime." That would
be better than a lot of what academic macroeconomists do in practice, which is to castigate central
bankers and other policymakers for not using elaborate models that don't work. But is there really
no role for smart academics to help out in this process? And if so, what does this say about the
utility of what the profession does?
The thing is, those simple models have done pretty darn well since 2008 - and central bankers
who used them, like Ben Bernanke, did a lot better than central bankers like Jean-Claude Trichet
who based their judgements on something else. So surely at least part of the training of macroeconomists
should prepare them to be helpful in applying simple models, maybe even in making those simple
models better.
Reading Smith, I found myself remembering an old line ** from Robert Solow in defense of "fancy"
economic theorizing:
"In economics I like a man to have mastered the fancy theory before I trust him with simple
theory because high-powered economics seems to be such an excellent school for the skillful use
of low-powered economics."
OK, can anyone make that case about modern macroeconomics? With a straight face? In practice,
it has often seemed that expertise in high-powered macroeconomics - mainly meaning dynamic stochastic
general equilibrium - positively incapacitates its possessors from the use of low-powered macroeconomics,
largely IS-LM and its derivatives.
I don't want to make a crude functional argument here: research that advances knowledge doesn't
have to provide an immediate practical payoff. But the experience since 2008 has strongly suggested
that the research program that dominated macro for the previous generation actually impaired the
ability of economists to provide useful advice in the moment. Mastering the fancy stuff made economists
useless at the simple stuff.
A more modest program would, in part, help diminish this harm. But it would also be really
helpful if macroeconomists relearned the idea that simple aggregate models can, in fact, be useful.
Dynamic stochastic general equilibrium modeling is a branch of applied general equilibrium
theory that is influential in contemporary macroeconomics. The DSGE methodology attempts to explain
aggregate economic phenomena, such as economic growth, business cycles, and the effects of monetary
and fiscal policy, on the basis of macroeconomic models derived from microeconomic principles.
some variants include different assumptions
But common assumptions include
No banks
No nominal prices
Micro founding with a single representative agent
An infinite time horizon
A fixed inter temporal fiscal budget
Continuous market clearance
No private debt
some variants include different assumptions
But common assumptions include
No banks
No nominal prices
Micro founding with a single representative agent
An infinite time horizon
A fixed inter temporal fiscal budget
Continuous market clearance
No private debt
The IS–LM model, or Hicks–Hansen model, is a macroeconomic tool that demonstrates the relationship
between interest rates and real output, in the goods and services market and the money market
(also known as the assets market). The intersection of the "investment–saving" (IS) and "liquidity
preference–money supply" (LM) curves is the "general equilibrium" where there is simultaneous
equilibrium in both markets. Two equivalent interpretations are possible: first, the IS–LM model
explains changes in national income when the price level is fixed in the short-run; second, the
IS–LM model shows why the aggregate demand curve shifts. Hence, this tool is sometimes used not
only to analyse the fluctuations of the economy but also to find appropriate stabilisation policies.
The model was developed by John Hicks in 1937, and later extended by Alvin Hansen, as a mathematical
representation of Keynesian macroeconomic theory. Between the 1940s and mid-1970s, it was the
leading framework of macroeconomic analysis. While it has been largely absent from macroeconomic
research ever since, it is still the backbone of many introductory macroeconomics textbooks.
A number of readers, both at this blog and other places, have been asking for an explanation
of what IS-LM is all about. Fair enough – this blogosphere conversation has been an exchange among
insiders, and probably a bit baffling to normal human beings (which is why I have been labeling
my posts "wonkish").
[IS-LM stands for investment-savings, liquidity-money -- which will make a lot of sense if
you keep reading.]
So, the first thing you need to know is that there are multiple correct ways of explaining
IS-LM. That's because it's a model of several interacting markets, and you can enter from multiple
directions, any one of which is a valid starting point.
My favorite of these approaches is to think of IS-LM as a way to reconcile two seemingly incompatible
views about what determines interest rates. One view says that the interest rate is determined
by the supply of and demand for savings – the "loanable funds" approach. The other says that the
interest rate is determined by the tradeoff between bonds, which pay interest, and money, which
doesn't, but which you can use for transactions and therefore has special value due to its liquidity
– the "liquidity preference" approach. (Yes, some money-like things pay interest, but normally
not as much as less liquid assets.)
How can both views be true? Because we are at minimum talking about *two* variables, not one
– GDP as well as the interest rate. And the adjustment of GDP is what makes both loanable funds
and liquidity preference hold at the same time....
"... Dynamic stochastic general equilibrium modeling is a branch of applied general equilibrium theory that is influential in contemporary macroeconomics. The DSGE methodology attempts to explain aggregate economic phenomena, such as economic growth, business cycles, and the effects of monetary and fiscal policy, on the basis of macroeconomic models derived from microeconomic principles. ..."
"... expertise in high-powered macroeconomics - mainly meaning dynamic stochastic general equilibrium - positively incapacitates its possessors from the use of low-powered macroeconomics, largely IS-LM and its derivatives. ..."
A number of readers, both at this blog and other places, have been asking for an explanation
of what IS-LM is all about. Fair enough – this blogosphere conversation has been an exchange among
insiders, and probably a bit baffling to normal human beings (which is why I have been labeling
my posts "wonkish").
[IS-LM stands for investment-savings, liquidity-money -- which will make a lot of sense if
you keep reading.]
So, the first thing you need to know is that there are multiple correct ways of explaining
IS-LM. That's because it's a model of several interacting markets, and you can enter from multiple
directions, any one of which is a valid starting point.
My favorite of these approaches is to think of IS-LM as a way to reconcile two seemingly incompatible
views about what determines interest rates. One view says that the interest rate is determined
by the supply of and demand for savings – the "loanable funds" approach. The other says that the
interest rate is determined by the tradeoff between bonds, which pay interest, and money, which
doesn't, but which you can use for transactions and therefore has special value due to its liquidity
– the "liquidity preference" approach. (Yes, some money-like things pay interest, but normally
not as much as less liquid assets.)
How can both views be true? Because we are at minimum talking about *two* variables, not one
– GDP as well as the interest rate. And the adjustment of GDP is what makes both loanable funds
and liquidity preference hold at the same time.
Start with the loanable funds side. Suppose that desired savings and desired investment spending
are currently equal, and that something causes the interest rate to fall. Must it rise back to
its original level? Not necessarily. An excess of desired investment over desired savings can
lead to economic expansion, which drives up income. And since some of the rise in income will
be saved – and assuming that investment demand doesn't rise by as much – a sufficiently large
rise in GDP can restore equality between desired savings and desired investment at the new interest
rate.
That means that loanable funds doesn't determine the interest rate per se; it determines a
set of possible combinations of the interest rate and GDP, with lower rates corresponding to higher
GDP. And that's the IS curve.
Meanwhile, people deciding how to allocate their wealth are making tradeoffs between money
and bonds. There's a downward-sloping demand for money – the higher the interest rate, the more
people will skimp on liquidity in favor of higher returns. Suppose temporarily that the Federal
Reserve holds the money supply fixed; in that case the interest rate must be such as to match
that demand to the quantity of money. And the Fed can move the interest rate by changing the money
supply: increase the supply of money and the interest rate must fall to induce people to hold
a larger quantity.
Here too, however, GDP must be taken into account: a higher level of GDP will mean more transactions,
and hence higher demand for money, other things equal. So higher GDP will mean that the interest
rate needed to match supply and demand for money must rise. This means that like loanable funds,
liquidity preference doesn't determine the interest rate per se; it defines a set of possible
combinations of the interest rate and GDP – the LM curve.
And that's IS-LM:
[Graph]
The point where the curves cross determines both GDP and the interest rate, and at that point
both loanable funds and liquidity preference are valid.
What use is this framework? First of all, it helps you avoid fallacies like the notion that
because savings must equal investment, government spending cannot lead to a rise in total spending
– which right away puts us above the level of argument that famous Chicago professors somehow
find convincing. And it also gets you past confusions like the notion that government deficits,
by driving up interest rates, can actually cause the economy to contract.
Most spectacularly, IS-LM turns out to be very useful for thinking about extreme conditions
like the present, in which private demand has fallen so far that the economy remains depressed
even at a zero interest rate. In that case the picture looks like this:
[Graph]
Why is the LM curve flat at zero? Because if the interest rate fell below zero, people would
just hold cash instead of bonds. At the margin, then, money is just being held as a store of value,
and changes in the money supply have no effect. This is, of course, the liquidity trap.
And IS-LM makes some predictions about what happens in the liquidity trap. Budget deficits
shift IS to the right; in the liquidity trap that has no effect on the interest rate. Increases
in the money supply do nothing at all.
That's why in early 2009, when the Wall Street Journal, the Austrians, and the other usual
suspects were screaming about soaring rates and runaway inflation, those who understood IS-LM
were predicting that interest rates would stay low and that even a tripling of the monetary base
would not be inflationary. Events since then have, as I see it, been a huge vindication for the
IS-LM types – despite some headline inflation driven by commodity prices – and a huge failure
for the soaring-rates-and-inflation crowd.
Yes, IS-LM simplifies things a lot, and can't be taken as the final word. But it has done what
good economic models are supposed to do: make sense of what we see, and make highly useful predictions
about what would happen in unusual circumstances. Economists who understand IS-LM have done vastly
better in tracking our current crisis than people who don't.
Dynamic stochastic general equilibrium modeling is a branch of applied general equilibrium
theory that is influential in contemporary macroeconomics. The DSGE methodology attempts to explain
aggregate economic phenomena, such as economic growth, business cycles, and the effects of monetary
and fiscal policy, on the basis of macroeconomic models derived from microeconomic principles.
"expertise in high-powered macroeconomics - mainly meaning dynamic stochastic general equilibrium
- positively incapacitates its possessors from the use of low-powered macroeconomics, largely
IS-LM and its derivatives."
Brad has a fine little logic ox calculation
This is his best side
The deflection point in his zero lower bound graph
That shows a fed helpless as the real rate climbs as the deflation rate climbs ...
and his little set of equations that generate
A run away deflation
Using a Harmless looking Taylor rule
with too low...for his logic toy system...
(2%) A target inflation rate
If
The neutral rate of the system is dwelling down around one percent
In a depressed economy, with short-term nominal interest rates
at their zero lower bound, ample cyclical unemployment, and excess capacity,
increased government purchases would be neither offset by the monetary
authority raising interest rates nor neutralized by supply-side bottlenecks.
Then even a small amount of hysteresis-even a small shadow cast on future
potential output by the cyclical downturn-means, by simple arithmetic, that
expansionary fiscal policy is likely to be self-financing. Even if it is not, it is
highly likely to pass the sensible benefit-cost test of raising the present value
of future potential output. Thus, at the zero bound, where the central bank
cannot or will not but in any event does not perform its full role in stabilization
policy, fiscal policy has the stabilization policy mission that others have
convincingly argued it lacks in normal times. Whereas many economists
have assumed that the path of potential output is invariant to even a deep
and prolonged downturn, the available evidence raises a strong fear that
hysteresis is indeed a factor. Although nothing in our analysis calls into question
the importance of sustainable fiscal policies, it strongly suggests the need
for caution regarding the pace of fiscal consolidation.
Yes yes my fellow home makers
If macro conditions are right ...
even a small Amount of hysteresis can turn the project into a self financing gig
Fiscal Policy in a Depressed Economy
By J. Bradford DeLong and Lawrence H. Summers
Abstract
In a depressed economy, with short-term nominal interest rates at their zero lower bound, ample
cyclical unemployment, and excess capacity, increased government purchases would be neither offset
by the monetary authority raising interest rates nor neutralized by supply-side bottlenecks. Then
even a small amount of hysteresis-even a small shadow cast on future potential output by the cyclical
downturn-means, by simple arithmetic, that expansionary fiscal policy is likely to be self-financing.
Even if it is not, it is highly likely to pass the sensible benefit-cost test of raising the present
value of future potential output. Thus, at the zero bound, where the central bank cannot or will
not but in any event does not perform its full role in stabilization policy, fiscal policy has
the stabilization policy mission that others have convincingly argued it lacks in normal times.
Whereas many economists have assumed that the path of potential output is invariant to even a
deep and prolonged downturn, the available evidence raises a strong fear that hysteresis is indeed
a factor. Although nothing in our analysis calls into question the importance of sustainable fiscal
policies, it strongly suggests the need for caution regarding the pace of fiscal consolidation.
Thus, at the zero bound, where the central bank cannot or will not but in any event does not perform
its full role in stabilization policy, fiscal policy has the stabilization policy mission that
others have convincingly argued it lacks in normal times....
-- DeLong and Summers
[ I find such a rationale for fiscal policy to foster growth only convincing in a limited and
possible even politically self-defeating way, and would argue the rationale importantly undervalues
fiscal policy as a growth driver. The paper is clear and important though as a beginning rationale
for fiscal policy use. ]
I find such a rationale for fiscal policy to foster growth only convincing in a limited and
possibly even politically self-defeating way, and would argue the rationale importantly undervalues
fiscal policy as a growth driver. The paper is clear and important though as a beginning rationale
for fiscal policy use.
"... the experience since 2008 has strongly suggested that the research program that dominated macro
for the previous generation actually impaired the ability of economists to provide useful advice in
the moment. Mastering the fancy stuff made economists useless at the simple stuff. ..."
Macroeconomics: The Simple and the Fancy
By Paul Krugman
Noah Smith has a nice summation * of his critique of macroeconomics, which mainly comes down,
as I read it, as an appeal for researchers to stay close to the ground. That's definitely good
advice for young researchers.
But what about economists trying to provide useful advice, directly or indirectly, to policy
makers, who need to make decisions based on educated guesses about the whole system? Smith says,
"go slow, allow central bankers to use judgment and simple models in the meantime." That would
be better than a lot of what academic macroeconomists do in practice, which is to castigate central
bankers and other policymakers for not using elaborate models that don't work. But is there really
no role for smart academics to help out in this process? And if so, what does this say about the
utility of what the profession does?
The thing is, those simple models have done pretty darn well since 2008 - and central bankers
who used them, like Bernanke, did a lot better than central bankers like Trichet who based their
judgements on something else. So surely at least part of the training of macroeconomists should
prepare them to be helpful in applying simple models, maybe even in making those simple models
better.
Reading Smith, I found myself remembering an old line ** from Robert Solow in defense of "fancy"
economic theorizing:
"In economics I like a man to have mastered the fancy theory before I trust him with simple
theory because high-powered economics seems to be such an excellent school for the skillful use
of low-powered economics."
OK, can anyone make that case about modern macroeconomics? With a straight face? In practice,
it has often seemed that expertise in high-powered macroeconomics - mainly meaning dynamic stochastic
general equilibrium - positively incapacitates its possessors from the use of low-powered macroeconomics,
largely IS-LM and its derivatives.
I don't want to make a crude functional argument here: research that advances knowledge doesn't
have to provide an immediate practical payoff. But the experience since 2008 has strongly
suggested that the research program that dominated macro for the previous generation actually
impaired the ability of economists to provide useful advice in the moment. Mastering the fancy
stuff made economists useless at the simple stuff.
A more modest program would, in part, help diminish this harm. But it would also be really
helpful if macroeconomists relearned the idea that simple aggregate models can, in fact, be useful.
Dynamic stochastic general equilibrium modeling is a branch of applied general equilibrium
theory that is influential in contemporary macroeconomics. The DSGE methodology attempts to explain
aggregate economic phenomena, such as economic growth, business cycles, and the effects of monetary
and fiscal policy, on the basis of macroeconomic models derived from microeconomic principles.
Dynamic stochastic general equilibrium is a pseudoscience.
The problem with most neoclassical economics is that they are very bad mathematicians :-)
See, for example an interesting discussion at:
Why Neoclassical Economists Didnt See the Great Recession Coming by Prof Steve Keen
Uploaded on Jul 12, 2011
Mainstream "Neoclassical" Economists famously did not see the Great Recession coming, and when
you look at their theories, it's no wonder. Their favourite model prior to the crisis goes by
the name of "Dynamic Stochastic General Equilibrium", or DSGE. These models imagined that the
entire economy could be modeled as a single individual. Yet neoclassical researchers proved decades
ago that even a single market can't be modeled that way. I explain this proof while outlining
the fundamental truth that "Neoclassical Economists Don't Understand Neoclassical Economics".
The IS–LM model, or Hicks–Hansen model, is a macroeconomic tool that shows the relationship
between interest rates and real output, in the goods and services market and the money market
(also known as the assets market). The intersection of the "investment–saving" (IS) and "liquidity
preference–money supply" (LM) curves is the "general equilibrium" where there is simultaneous
equilibrium in both markets. Two equivalent interpretations are possible: first, the IS–LM model
explains changes in national income when the price level is fixed in the short-run; second, the
IS–LM model shows why the aggregate demand curve shifts. Hence, this tool is sometimes used not
only to analyse the fluctuations of the economy but also to find appropriate stabilisation policies.
"... What supply-demand-equilibrium economists never understood is that the price mechanism DESTABILIZES
the economy. The sequence is as follows: price up - rhoF down - employment down - wage rate down - rhoF
down - employment down - and so on. In other words, the market economy is inherently unstable. ..."
Think deeper
Comment on Bradford DeLong on 'RETHINK 2%'
"In order to tell the politicians and practitioners something about causes and best means,
the economist needs the true theory or else he has not much more to offer than educated common
sense or his personal opinion." (Stigum)
The fact of the matter is that economists do NOT have the true theory. More precisely, economists
do not know how the price- and profit mechanism works. The four main approaches ― Walrasianism,
Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally
inconsistent, and all got profit wrong.
Because of this economic policy guidance never had sound scientific foundations. This holds
also for the RETHINK 2% letter to the Federal Reserve Board of Governors#1 which in turn is based
on Josh Bivens's article.#2
Note for a start that Josh Bivens does not mention profit ― the pivotal variable of economics
― once. From this follows that his underlying profit theory is false. And from this in turn follows
that his whole argument is false. ALL models that do not explicitly define macroeconomic profit
are false.
The elementary version of the correct objective, systemic, behavior-free, macrofounded employment
equation is shown on Wikimedia.#3 This equation says ― among other things ― that an increase of
the factor cost ratio rhoF=W/PR leads to higher employment. The ratio rhoF embodies the price
mechanism.
In order to focus on the crucial point imagine the FED has the means to directly influence
the price P and increases it by 2%, all other variables unchanged. The correct macroeconomic employment
equation tells us that employment falls. Bad move.
Next try. The FED sets the change of price to zero and instead increases the wage rate W by
2 %. The correct macroeconomic employment equation tells us that employment rises. Good move.
What supply-demand-equilibrium economists never understood is that the price mechanism
DESTABILIZES the economy. The sequence is as follows: price up - rhoF down - employment down -
wage rate down - rhoF down - employment down - and so on. In other words, the market economy is
inherently unstable.
#4 Standard employment theory is false. The proposal to get the economy going by increasing
price inflation is the direct result of the complete lack of understanding how the market economy
works.
"... Economics is a corrupt pseudo-science that gives a pseudo-scientific justification for the
greed and rapacity of One Percenters. Its methodological flaws are glaring. It's time economists went
back to the social science faculty, where they belong. ..."
Our politicians have been brainwashed by neoliberal economists.
These economists produce models that factor-in all the upsides to globalisation, but fail to
model any of the crippling, expensive-to-treat consequences of shutting down entire towns in places
like Michigan or Lancashire.
They assume people live frictionless lives; that when the European ship-building industry moves
to Poland, riveters in Portsmouth can just up-sticks and move to Gdansk with no problem. They
encourage a narrative that implies such an English riveter are lazy if he fails to seize this
opportunity.
(Let's drop a few economists in Gdansk with £100 in their pockets, and see how their families
do.)
Economics is a corrupt pseudo-science that gives a pseudo-scientific justification for
the greed and rapacity of One Percenters. Its methodological flaws are glaring. It's time economists
went back to the social science faculty, where they belong.
Relations between the disciplines have not always been so distant. Scholastic natural lawyers
trained in the tradition of Aristotle and Aquinas developed defenses of private property and free
trade that influenced authors such as Grotius, who in the seventeenth century laid the groundwork
of the modern law of nations and thus the basis of modern trade. John Locke subsequently wrote an
incisive account of the natural right to property as the source of economic prosperity, and Adam
Smith, who wrote a treatise of moral philosophy before authoring The Wealth of Nations ,
described what he called a system of natural liberty as the matrix of genuine wealth. Although in
the nineteenth century both moral philosophy and economics in the English-speaking world developed
under the influence of utilitarianism, contemporary theory in both natural-law moral philosophy and
economics emphasizes the centrality of the human person and the practical choices he makes concerning
human goods or values. In this regard, the question of the relation of natural law to economics is
on the one hand the extent to which economic calculations can be based on notions of objective good
established by practical moral reason, and on the other hand the extent to which practical judgments
by individuals about their good can be informed by an awareness of global consequences.
Philosophy of Economics
"Philosophy of Economics" consists of inquiries concerning
(a) rational choice,
(b) the appraisal of economic outcomes, institutions and processes, and
(c) the ontology of economic phenomena and the possibilities of acquiring knowledge of them.
Although these inquiries overlap in many ways, it is useful to divide philosophy of economics
in this way into three subject matters which can be regarded respectively as branches of action theory,
ethics (or normative social and political philosophy), and philosophy of science.
Economic theories of rationality, welfare, and social choice defend substantive philosophical
theses often informed by relevant philosophical literature and of evident interest to those interested
in action theory, philosophical psychology, and social and political philosophy.
Economics is of particular interest to those interested in epistemology and philosophy of science
both because of its detailed peculiarities and because it possesses many of the overt features of
the natural sciences, while its object consists of social phenomena.
James Stoner is Professor in the Department of Political Science at Louisiana State University.
He sits on the editorial board of Public Discourse .
The papers presented at the Natural Law and Economics Conference can be found on-line at the
conference website .
Humans exist in, for all practical purposes, a closed system - the earth.
There are resources available within that system and various means for humans to avail themselves
of those resources.
Economics is supposed to be the study of the management of available resources in the most
adventageous manner.
To do that properly, economics must start with the examination of the whole system.]
Natural Law and Economics: Total Strangers or Separated Lovers?
by James Stoner
"A recent conference at Princeton University asked whether in the midst of current economic
challenges natural law philosophy might not provide a better foundation for the practice of economics
than the utilitarian account of value that currently underwrites it.
"Relations between the disciplines have not always been so distant. Scholastic natural lawyers
trained in the tradition of Aristotle and Aquinas developed defenses of private property and free
trade that influenced authors such as Grotius, who in the seventeenth century laid the groundwork
of the modern law of nations and thus the basis of modern trade. John Locke subsequently wrote
an incisive account of the natural right to property as the source of economic prosperity, and
Adam Smith, who wrote a treatise of moral philosophy before authoring The Wealth of Nations, described
what he called a system of natural liberty as the matrix of genuine wealth. Although in the nineteenth
century both moral philosophy and economics in the English-speaking world developed under the
influence of utilitarianism, contemporary theory in both natural-law moral philosophy and economics
emphasizes the centrality of the human person and the practical choices he makes concerning human
goods or values. In this regard, the question of the relation of natural law to economics is on
the one hand the extent to which economic calculations can be based on notions of objective good
established by practical moral reason, and on the other hand the extent to which practical judgments
by individuals about their good can be informed by an awareness of global consequences."
"Philosophy of Economics" consists of inquiries concerning (a) rational choice, (b) the appraisal
of economic outcomes, institutions and processes, and (c) the ontology of economic phenomena and
the possibilities of acquiring knowledge of them. Although these inquiries overlap in many ways,
it is useful to divide philosophy of economics in this way into three subject matters which can
be regarded respectively as branches of action theory, ethics (or normative social and political
philosophy), and philosophy of science. Economic theories of rationality, welfare, and social
choice defend substantive philosophical theses often informed by relevant philosophical literature
and of evident interest to those interested in action theory, philosophical psychology, and social
and political philosophy. Economics is of particular interest to those interested in epistemology
and philosophy of science both because of its detailed peculiarities and because it possesses
many of the overt features of the natural sciences, while its object consists of social phenomena.
Parable: A friend stopped by at a small forest service museum in the great northwest. From
the informational displays about forest management, there is nothing about a forest that cannot
be improved by cutting down trees.
With economics there is nothing about the economy that cannot be improved by wage cuts and
redistributing wealth upwards.
As General Sherman aptly observed:
"There is no property without a government."
The rules for our "Market Economy" are not divine nor set in stone.
In the US, the rules are the product of we the people.
We the people have control over the rules that govern rights to property and obligations to society.
If DeLong's view is correct, that under current rules wealth will become concentrated into the
hands of a few, then it is up to we the people to modify the rules to produce a more equitable,
just and economically viable set of rules
the message to take from this, is that as long the economy is viewed as ideally implemented when
people and firms selfishly acquire as much wealth as possible with no consideration for the plight
of their fellow humans, ...then that the economy will decay and many people will suffer
it is truly the job of the government to manage the economy in such a way as to maximize utility
for all
it is truly to job of economists to advise on how to do this
"... GR: Then in the beginning of the 2000s comes the beginning of your work with Professor Raghuram Rajan on "rules of the game." You looked at who's setting the rules of the game, who is influencing the rules ofthe game, and what we learn. ..."
"... GR: For decades, economists and other scholars dedicated a lot of intellectual energy to look at the relationship between companies, shareholders and executives, and between shareholders and boards. Maybe there's not enough intellectual energy going into the question of who sets the rules of the game that determine the outcomes and the dynamics in finance? ..."
"... GR: When it comes to politics, many times data aremuch more complicated and debatable, and ambiguous in many ways. When you deal with numbers and with asset prices, maybe it's easier to go with the data than when you go into the realms of politics. ..."
"... GR: Let's talk a little bit about the research that will be presented in this conference. I'll start with the most politically-sensitive paper that we have, a very interesting paper looking into the Obama administration and more than 2,000 meetings that President Obama and his chief aides had with businessmen over the last eight years. I don't know if you could call it crony capitalism, but whatever is happening out there didn't start in the Trump administration. ..."
"... GR: Another paper looks again at the United States and the way that decisions on bailouts of banks were decided after the financial crisis. Can you elaborate a bit on that? ..."
"... GR: When you're ignoring politics, the outcome many times would be to give more power in the market of ideas and in policies to vested interests, to the powerful? ..."
"... GR: Luigi Zingales, thank you very much. ..."
Ahead of the Stigler Center'sconference on the political economy of finance, we interviewed
Stigler Center Director Luigi Zingales about the motivation behind the first-of-its-kind conference.
On June 1-2, the Stigler Center will host a
first-of-its-kind conference focusing on the role of politics in finance research. In the last
twenty years, political considerations have played an increasingly important role in financial economics:
from the design of the rules that make financial markets viable to politically-motivated changes
in bankruptcy law, from political connections in firms to the effects of political uncertainty on
investments. Yet up until now, no conference has been dedicated to it.
Ahead of this conference, we interviewed University of Chicago Booth School of Business Professor
and Stigler Center Director Luigi Zingales [also, one of the editors of this blog] about the motivation
behind it and the political economy of finance.
https://www.youtube.com/embed/jB1b2T0QtFk
The following is a transcript of the interview, slightly edited for clarity:
Guy Rolnik: I was surprised to understand that, actually, there are not many conferences
on the politics of finance.
GR: Why is it that there aren't many conferences on the political economy of finance? You would
think that politics has a lot to do with finance.
LZ: I think historically, people have not looked at that aspect a lot. I would like to divide
the brief history of the academic field of finance into three periods: I would call the first one-that
started in the late '50s-the Modigliani and Miller period. Modigliani and Miller, to simplify to
the extreme, said that the way you slice a pizza does not change the size of the pizza. This is a
period in which basically finance is irrelevant, and the only frictions that matter are probably
only tax frictions.
Then, starting with the '70s, people realized: "Wait a second. If you start to divide a pizza
before you produce the pizza, maybe this will have some impact on how the pizza is produced." This
is what in jargon goes under "agency," or "asymmetric information." Essentially, the way you allocate
the cash flows of the firm has some impact on the way the firm is run.
However, all this is in the context of, "The external rules are fixed. We're in a very predetermined
society and the rules are fixed. That's what we do."
Starting with the '90s and then the 2000s, people realized that the rules are not fixed, that
actually the changing nature of the rules is very important, and of course, political gain is what
makes the rules change.
GR: So this is where the 2008 financial crisis comes in, and after the financial crisis people
started to develop a lot of interest in the role of politics in financial crises and the role of
politics in finance.
LZ: To be honest, I think things started before the financial crisis. I think probably the intellectual
origin of all this is the theory of incomplete contracts developed by Grossman and Hart, where because
the cash flow is bargain ex post, then the rules are more fluid. Then this call for renegotiation,
or re-discussion, which is to a large degree about politics, comes into the game.
One of the early papers about this is a paper by Patrick Bolton and Howard Rosenthal-a finance
guy and a political scientist-looking at how renegotiation of debt and the rules for bankruptcy change
dramatically with the business cycle. Every major financial crisis in the United States had the bankruptcy
rules restated to some extent, or reshaped.
Traditionally, finance people thought about bankruptcy as a given. Now [they] realize it is not
a given, that the rules change. How do they change? They're politically determined. Of course, for
the misbeliever, the financial crisis brought this to an attention that could not be ignored.
We've seen the work by Amir Sufi and Atif Mian and Francesco Trebbi looking at the political determinants
of the intervention on TARP, and the work that Amit Seru and co-authors have done on the politics
around regulation and how ineffective regulation is because of political constraints.
I think that by the beginning of the second decade of the 21st century, politics has become mainstream
and was overdue to have a conference dedicated to it.
GR: Then in the beginning of the 2000s comes the beginning of your work with Professor
Raghuram Rajan on "rules of the game." You looked at who's setting the rules of the game, who is
influencing the rules ofthe game, and what we learn.
LZ: I think that in the late '90s and early 2000, there was a big interest inwhy countries are
not more financially developed. Thanks to the work of Andrei Shleifer and Robert Vishny and others,
there was this importance of the law as a major factor.
Raghuram and I asked the very simple question: if it is as simple as importing a code from another
country, why don't more countries do it? It cannot be just a lack of technical expertise. Lawyers
are expensive but can be imported. In fact, Russia did import the best lawyers from the United States.
I'm not sure it was a big success.
The conclusion was, no, it's lack of political will. We started to open the debate for, say, "Look,
finance does benefit most people, but hurts others." So there is a political economy even with [the]
introduction of financial laws.
GR: For decades, economists and other scholars dedicated a lot of intellectual energy to
look at the relationship between companies, shareholders and executives, and between shareholders
and boards. Maybe there's not enough intellectual energy going into the question of who sets the
rules of the game that determine the outcomes and the dynamics in finance?
LZ: I think that the role of conferences like the one here at the Stigler Center is to bring together
scholars who work in a certain area, and also give confidence that this area is important, and attract
more research.
You're absolutely right, people tend to research where the data are. The famous old joke about
economists, that they look where the light is, not where they lost the key, has some element of truth.
In finance, there are things that we can observe very well and compensation is one. You're going
to have a lot of papers about managerial compensation.
But I think what is important is that even data are endogenous, in a sense. Compustat ExecuComp,
which is the primary data source to study this stuff, was created in the early '90s as a result of
academic interest in executive compensation.
Going back in history, CRSP, the Center for Research in Security Prices here at Chicago, which
is the main data source for security prices research, was created by Jim Lorie, a faculty here, who
saw people like Eugene Fama and others interested in this topic and said, "We have to create a data
set to analyze."
The role of academia is, in a sense, to open new avenues and then have a data provider follow.
GR: When it comes to politics, many times data aremuch more complicated and debatable,
and ambiguous in many ways. When you deal with numbers and with asset prices, maybe it's easier to
go with the data than when you go into the realms of politics.
LZ: There are two aspects: one, there are fewer data coming from thepolitical world than from
the asset pricing world, even from corporate finance. Even those data tend not to be disclosed and
available as much as data on companies. Data on lobbying now start to be widely available. Data on
campaign contributions start to be available. The data on corporate donations tend to be more difficult.
They're not as established.
Then there is a more difficult problem to tackle: in a sense, politics is much more fluid. Whenever
data are available, the deals move somewhere else. As researchers, we're always fighting the last
war because we look at what happened in the past, but politics run ahead.
GR: Let's talk a little bit about the research that will be presented in this conference.
I'll start with the most politically-sensitive paper that we have, a very interesting
paper looking into the Obama administration
and more than 2,000 meetings that President Obama and his chief aides had with businessmen over the
last eight years. I don't know if you could call it crony capitalism, but whatever is happening out
there didn't start in the Trump administration.
LZ: Certainly. I think it's actually very healthy, and one of the goals of this conference is
to bring this research from analyzing foreign countries to analyzing the United States. It's much
easier to point fingers toward other people. When
Ray Fisman
wrote the first paper on the political connections of Suharto, everybody clapped. Why? Because
it's Indonesia and corruption in Indonesia is something that we think is granted.
Now, when people apply the same technique to the United States of America, a lot of people [are]
up in arms and say, "Oh, it's impossible. This is not corruption." But if it worked as a technique
for Suharto, why can't it work for Trump, or for Obama, or for people before?
I don't think that these results are specific to the Obama administration. I think that the data
are better in recent years, and so, the paper analyzed that rather than analyzing George W. Bush,
or Bill Clinton.
GR: Another paper looks again at the United States and the way that decisions on bailouts
of banks were decided after the financial crisis. Can you elaborate a bit on that?
LZ: Again, I think that it's not surprising to international scholars that the allocation of aid,
the allocation of credit, and particularly the allocation of bailout credit to banks is very politically-determined.
This research is showing that surprise, surprise, without a doubt, in the United States the same
happens. I think it's a good example [that]what we've learned analyzing countries around the world
can be applied to the United States.
GR: We do look internationally at this conference, and we have an interesting paper on Chile.
Chile is a very interesting case for many reasons. One of them, of course, is that for many decades,
Chile was the "poster child" of a successful market economy in South America. Recently, people have
been looking into the details of what's happening in this economy, and they see some other perspectives
on Chile that were not as salient as before.
LZ: I will distinguish two things: First of all, I think that Chile is a fantastic example of
the difference between being pro-market and being pro-business. I think that Chile has been very
much pro-business, but there is no doubt that it was a huge success in terms of growth. On the other
hand, I think there is not enough antitrust policies, or attention to political connections. The
result is that the income distribution is extremely unequal, and this really puts, in my view, bounds
on future growth.
I think one needs to reconsider the limitations of looking only at micro-measures of market flexibility,
and not at the political economy of the country.
In addition, like in many countries, [in Chile] we have a phenomenon where privatizations on the
one hand improved efficiency-because the government is not very good at running things-but were probably
done to the benefit of some people. One of the major mines was sold to the then son-in-law of Pinochet
who now, ironically, was found to [have] actually [paid] money to the son of the current president,
[Michelle] Bachelet. This shows that it's not right or left, it is basically crony capitalism.
GR: And China?
LZ: China is a phenomenal example. There is a very exciting paper looking at the way loans are
made, and the political incentives, not only the economic incentives, that are present in China.
We tend to look at China with too much of a Western view, not realizing that in China, in every
major company there is a representative of the Communist Party who basically oversees the company.
These guys tend to have political incentives that are different than the standard market incentives.
I think understanding better the interaction between the two is a fascinating topic.
GR: To sum up our discussion: politics is key when it comes to finance, and we should research
the relationship between the political world and finance more. Are there any specific things that
you think are under-researched today, or over-researched? From a societal point of view, what would
be the right research agenda when it comes to finance today?
LZ: First of all, it's very difficult to ask an academic what is the right research agenda because
most of the people will answer what they're doing this moment, so I don't want to fall into this
trap. In general, the connection between finance and politics has been under-researched for years,
and the goal of this conference is precisely to motivate more research. I think there is a need to
apply more creative and different approaches.
I think that generally in academia, what tends to be overdone is research that's based on data
that areeasily available, with techniques that are fairly well-established, because the cost of production
is low, the value added is also low, but also, the risks tend to be low.
I think that what good researchers should do is to be more ambitious, take more risks-especially
after you get tenure, there is no justification not to take more risks.
GR: Do economists need help from other disciplines when they're going into the realm of political
economy of finance?
LZ: I think economists need help in other disciplines regardless. There was a long period in which
economists were sort of colonialists, and they were moving to other fields, ignoring, or not really
understanding the other fields, but just trying to grab some of those questions.
I think that those times, by and large, are gone. I think there is a lot of good research interacting
psychology with economics. I think that is less so, for example, in sociology. I think that sociologists
and economists tend to not interact a lot, and I think there are great opportunities there.
I think also with political scientists, there are more economists acting as political scientists-there
is a bit less of an integration. I think that would be helpful, especially in areas like finance.
I think if you are in the political economy section of an economics department, you naturally interact
with political scientists.
When you come to business school, and you do finance, or you do IO, you tend to be less well-integrated.
GR: Some economists shy away from politics for many reasons, but correct me if I'm wrong: the
deeper we go into the political economy of finance, we'll see that politics has a lot of influence
on the outcomes of the financial markets, and it will force us to think much more about politics.
LZ: I would also say the opposite. I think that economists, and academics in general, have a huge
impact on what happens in the political world. Not immediately, not individually, as they had in
academia by themselves, but the academic thinking isa crucial part in shaping politics.
It's very hard to do lobbying without some ideas to support the lobbying. My fear is that academics
are not sufficiently aware of their impact. Jean-Paul Sartre used to say you cannot not choose because
not choosing is choosing not to choose. I would like to paraphrase and say you cannot ignore politics
because ignoring politics is choosing a particular political perspective of ignoring it. You are
announcing a particular view, you're not abstaining from it.
The attitude of many academics that say "I do science, I have nothing to do with politics"-they
are doing politics in another way.
GR: When you're ignoring politics, the outcome many times would be to give more power in
the market of ideas and in policies to vested interests, to the powerful?
LZ: I think that that could be an outcome. It's not necessarily an outcome, but that could be
an outcome. I'm just saying that you should be aware of the consequences of your actions because
not acting is an action.
GR: Luigi Zingales, thank you very much.
LZ: You're welcome.
Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted
by special interests. The posts represent the opinions of their writers, not those of the University
of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy .
That was my point for a long time. Inability to challenge the underlying assumptions
of the neoclassical economics and current neoliberal polices (such as Washington consensus) sooner
of later backfire both in economics and politics, because politics and economics are intrinsically
connected.
to the extent that "pure economics" is a pseudo-science (with bunch of complex mathematical
masturbations, much like geocentric theory of movement of planets; which actually did predicted
certain movements of plants accurately. using overcomplicated math stuff -- epicycles)
But political posturing often prevent such a reevaluation, even when people understand that
something is wrong with the current state of economics.
Much like that fact that the USA pretentions of the world hegemony make deviations from pre-existing
policies a sign of "weakness". But is a dialectical way, the obsessive desire to project strength
is a serious weakness in itself ;-)
And it looks like this inability and lack of desire to challenge the fundamental assumptions
is a very serious problem not only with the US elite, but with the American society as a whole.
Col. Jessep: [from the witness stand] *You want answers?*
Kaffee: *I want the truth!*
Col. Jessup: [from the witness stand] *You can't handle the truth!*
Emong other things it led to the economic policies that on "being disastrous" scale are probably
close the policies that led to Iraq war (remember neocons boasting before this war that we will
be greeted with flowers and the cost will be minimal and democracy will flourish in Iraq). The
results of outsourcing of manufacturing is very similar to the real result obtains due to the
Iraq war.
So there is an important question that the article missed. Can the American elite face the
truth?
That answer is: "No". That's why neoclassical economics while discredited as a theory remain
dominant as a civil religion of neoliberalism, indoctrination into which is a prerequisite to
obtaining an academic degree, and students are indoctrinated into this this bunch of mathiness
each year. Compare with Steve Keen "Debunking economics" (
https://www.amazon.com/Debunking-Economics-Revised-Expanded-Dethroned/dp/1848139926 ). Much
like Marxism was obligatory in the USSR and can't graduate without passing exams on Marxist political
economy.
But, truth be told, neoclassical economics has a strong political undercurrent because historically
it emerged (like neoliberalism in late 30th early 40th) as an alternative to Marxism. And to certain
extent it did has its value while Marxism and Marxist theory of value were not discredited (that
means up to late 40th, early 60th).
Another point is that the US neoliberal elite demonstrated willingness and ability to engage
in self-defeating behavior because they do not want to look weak or challenge the postulated of
neoliberalism. That's the same behavior the Politburo was engaged in the USSR.
I would shy from using the term "decline od neoliberalism" because it has a flavor of "doom
and gloom" (and haw we can speak about decline if a realistic alternative does not exist?), but
neoliberalism really faces the crisis of confidence. Neoliberal myths such a "Greed is good",
"Casino capitalism is virtuous", "Entrepreneurship is the ultimate value and the source of material
reward", "free market", "free trade", "labor market", "poor are guilty of their own fate because
they lack responsibility", "rising stock market tide lifts all boats", etc are dispelled.
Promises of "prosperity for all" are not delivered (at least to the lower 80% of population.)
Basically the same situation that existed with Brezhnev socialism in the USSR with the communist
ideology stating with 70th.
Instead of the USSR alcoholism epidemic we have opioids and meth epidemic with the same or
similar social roots.
That worldview had derived from this conviction that American power implies commitment to global
hegemony, and this commitment expressed the nation's enduring devotion to its founding ideals
of freedom and democracy.
That also means that election of Trump will not result in proper actions that can change the
course of "battleship America" and can rectify the current difficulties. Much like the election
of Barack Obama before him.
"... By Jason Smith, a physicist who messes around with economic theory. He graduated from the University
of Texas at Austin with a degree in math and a degree in physics, and received his Ph.D. from the University
of Washington in theoretical physics. Follow him on Twitter: @infotranecon. Originally published at
Evonomics ..."
"... The New Industrial State ..."
"... I think the tradition of economic thinking has been really influential. I think it's actually
a thing that people on the left really should do - take the time to understand all of that. There is
a tremendous amount of incredible insight into some of the things we're talking about, like non-zero-sum
settings, and the way in which human exchange can be generative in this sort of amazing way. Understanding
how capitalism works has been really, really important for me, and has been something that I feel like
I'm a better thinker and an analyst because of the time and reading I put into a lot of conservative
authors on that topic. ..."
Posted on
May 17, 2017 by Yves
Smith By Jason Smith, a physicist who messes around with economic theory. He graduated from
the University of Texas at Austin with a degree in math and a degree in physics, and received his
Ph.D. from the University of Washington in theoretical physics. Follow him on Twitter: @infotranecon.
Originally published at
Evonomics
The inspiration for this piece came from a
Vox podcast with Chris Hayes of MSNBC. One of the topics they discussed was which right-of-center
ideas the left ought to engage. Hayes says:
The entirety of the corpus of [Friedrich] Hayek, [Milton] Friedman, and neoclassical economics.
I think it's an incredibly powerful intellectual tradition and a really important one to understand,
these basic frameworks of neoclassical economics, the sort of ideas about market clearing prices,
about the functioning of supply and demand, about thinking in marginal terms.
I think the tradition of economic thinking has been really influential. I think it's actually
a thing that people on the left really should do - take the time to understand all of that. There
is a tremendous amount of incredible insight into some of the things we're talking about, like
non-zero-sum settings, and the way in which human exchange can be generative in this sort of amazing
way. Understanding how capitalism works has been really, really important for me, and has been
something that I feel like I'm a better thinker and an analyst because of the time and reading
I put into a lot of conservative authors on that topic.
Putting aside the fact that the left has fully understood and engaged with these ideas, deeply
and over decades (it may be dense writing, but it's not exactly quantum field theory), I can hear
some of you asking: Do I have to?
The answer is: No.
Why? Because you can get the same understanding while also understanding where these ideas fall
apart ‒ that is to say understanding the limited
scope of market-clearing prices and supply and demand – using information theory.
Prices and Hayek
Friedrich Hayek did have some insight into prices having something to do with information, but
he got the details wrong and vastly understated the complexity of the system. He saw market prices
aggregating information from events: a blueberry crop failure, a population boom, or speculation
on crop yields. Price changes purportedly communicated knowledge about the state of the world.
However, Hayek was writing in a time before information theory. (Hayek's The Use of Knowledge
in Society was written in 1945, a just few years before Claude Shannon's A Mathematical Theory
of Communication in 1948.) Hayek thought a large amount of knowledge about biological or ecological
systems, population, and social systems could be communicated by a single number: a price. Can you
imagine the number of variables you'd need to describe crop failures, population booms, and market
bubbles? Thousands? Millions? How many variables of information do you get from the price of blueberries?
One. Hayek dreams of compressing a complex multidimensional space of possibilities that includes
the state of the world and the states of mind of thousands or millions of agents into a single dimension
(i.e. price), inevitably losing a great deal of information in the process.
... ... ...
The market as an algorithm
The picture above is of a functioning market as an algorithm matching distributions by raising
and lowering a price until it reaches a stable price. In fact, this picture is of a specific machine
learning algorithm called
Generative
Adversarial Networks (GAN, described in this
Medium article or in the original paper
) that has emerged recently. Of course, the idea of the market as an algorithm to solve a problem
is not new. For example
one of the best blog posts of all time (in my opinion) talks about linear programming as an algorithm,
giving an argument for why planned economies will likely fail, but the same argument implies we
cannot check the optimality of the market allocation of resources, therefore claims of markets
as optimal are entirely faith-based. The Medium article uses a good analogy using a painting, a forger,
and a detective, but I will recast it in terms of the information theory description.
Instead of the complex multidimensional distributions, here we have blueberry buyers and blueberry
sellers. The "supply" ( B from above) is the generator G , the demand A is the
"real data" R (the information the deep learning algorithm is trying to learn). Instead of
the random initial input I - coin tosses or dice throws - we have the complex, irrational,
entrepreneurial, animal spirits of people. We also have the random effects of weather on blueberry
production. The detector D (which is coincidentally the terminology Fieltiz and Borchardt
used) is the price p . When the detector can't tell the difference between the distribution
of demand for blueberries and the distribution of the supply of blueberries (i.e. when the price
reaches a relatively stable value because the distributions are the same), we've reached our solution
(a market equilibrium).
Note that the problem the GAN algorithm tackles can be represented by the two-player
minimax game from game theory.
The thing is that with the wrong settings, algorithms fail and you get garbage. I know this from
experience in my regular job researching machine learning, sparse reconstruction, and signal processing
algorithms. Therefore depending on the input data (especially data resulting from human behavior),
we shouldn't expect to get good results all of the time. These failures are exactly the failure of
information to flow from the real data to the generator through the detector – the failure of information
from the demand to reach the supply via the price mechanism.
When asked by Quora what the recent and upcoming breakthroughs in deep learning are, Yann LeCun,
director of AI research at Facebook and a professor at NYU, said:
The most important one, in my opinion, is adversarial training (also called GAN for Generative
Adversarial Networks). This is an idea that was originally proposed by Ian Goodfellow when he
was a student with Yoshua Bengio at the University of Montreal (he since moved to Google Brain
and recently to OpenAI).
This, and the variations that are now being proposed is the most interesting idea in the last
10 years in ML, in my opinion.
Research into these deep learning algorithms and information theory may provide insight into economic
systems.
An Interpretation of Economics for the Left
So again, Hayek had a fine intuition: prices and information have some relationship. But he didn't
have the conceptual or mathematical tools of information theory to understand the mechanisms of that
relationship - tools that emerged with Shannon's key paper in 1948, and that continue to be elaborated
to this day to produce algorithms like generative adversarial networks.
The understanding of prices and supply and demand provided by information theory and machine learning
algorithms is better equipped to explain markets than arguments reducing complex distributions of
possibilities to a single dimension, and hence, necessarily, requiring assumptions like rational
agents and perfect foresight. Ideas that were posited as articles of faith or created through incomplete
arguments by Hayek are not even close to the whole story, and leave you with no knowledge of the
ways the price mechanism, marginalism, or supply and demand can go wrong. Those arguments assume
and (hence) conclude market optimality. Leaving out the failure modes effectively declares many social
concerns of the left moot by fiat. The potential and actual failures of markets are a major concern
of the left, and are frequently part of discussions of inequality and social justice.
The left doesn't need to follow Chris Hayes' advice and engage with Hayek, Friedman, and neoclassical
economics. The left instead needs to engage with a real world vision of economics that recognizes
the limited scope of ideal markets and begins with imperfection as the more useful default scenario.
Understanding economics in terms of information flow is one way of doing that.
Is this just my lack of formal education or is this article very complicated? Honestly I did
not understand it at all. Is there any way to explain this different? ( a link to a different
way of describing informationtheory / free market theory)
Thanks Julia
To put it in more layman-friendly terms: price settings are based on information the suppliers
gather regarding the market, both demand side and supply side (sales forecasts, commodity pricing,
consumer confidence number, focus group information, etc). Demanders do the same. However, they
can never have absolute, complete information for either side. So prices, and idea of what prices
should be, in a free market never represent a true optimal price, but rather a best guess.
This pokes a few holes in neoclassical economic assumptions:
– Most obviously, prices cannot be optimal in a free market.
– Supply and demand changes cannot account entirely for changes in price, as refinements to the
information flow can affect them as well.
– Information asymmetry corrupts prices, and can be used to exploit consumers.
– Information is dependent on a large enough sample size, so neoclassical economics is useless
in markets with limited transactions. An easy example of this are those kind of items on shows
like Antique Roadshow, where there's so few of the items out there that the expert says, "This
is a guess, but really it could go for almost any amount at auction."
So the Left can use this to argue for non-market price controls (to account for the lack of
free market price optimization) and for forcing corporations to have better fiscal transparency
and more strict anti-trust laws (to increase information flow and to prevent information asymmetry).
Local prices for gasoline look a lot more like looting and chaos to me than any kind of correspondence
to "markets." Yesterday at the RaceTrac at the end of my street, "regular" dropped four cents
from morning to evening, reflecting the pricing at the two other "service stations" at the intersection.
A month or so ago (I got tired of keeping a little record of the changes) the price jumped 25
cents overnight. None of these moves seemed to correspond with the stuff I was reading about in
the market conditions around the planet and just in the US - supply and demand? More like the
Useless Looters at BP and Shell and others just spin an arrow on a kid's game board to pick the
day's price point (that sick phrase), or somebody in the C-Suite decided the "Bottom Line" needed
a goose to pump the bonus generator up a bit.
The fraud is everywhere, the looting and scamming too. Seems to me that searching for some
"touchstone" to make sense of It All is an exercise in futility.
Gasoline runs into a different limitation with free market economics, which is that consumers
need to be able to freely enter and leave the market in question in order for the free market
to function (which is why privatized healthcare doesn't work). Outside of a few urban areas with
robust public transportation, most Americans are immediately dependent on gasoline in order to
survive. Even those who do have access to a Metro are still dependent on the shipping that uses
gasoline. So they can raise prices with a greater confidence that the number of consumers will
not drop off as significantly as with other industries.
"This pokes a few holes in neoclassical economic assumptions:"
In neoclassical economics, these "holes" are pretty much understood as the prerequisites for
"perfect competition", as opposed to imperfect competition or monopolies.
When politics is mixed with economics, these are ignored, as they are in the interest of the
ruling class.
PKMKII said it very well, and here's another way to look at it: Centrally-planned economies
(say, some Politburo minister in the former Soviet Union) fail because a central bureaucrat cannot
possibly guess the demand and distribution for all products (say, metal bathtubs) across an economy
in a given year. He guesses, poorly, and either the shortages or the oversupply make our history
books.
Market economics makes a better guess, because pricing gives a dynamic estimate of what the
supply and demand really are. That this estimate is generally *better* has been (mis)represented
as that this estimate is somehow PERFECT - the best estimate that can possibly exist! As the article
describes, this assessment (that only a market economy can generate maximal wealth and optimal
wealth distributions) is FALSE.
The economics underlying communist central planning failed because they couldn't provide the
optimization that comes from valid pricing function. With Shannon's information theory and advanced
analytics, it is possible to create a more optimal economy than our current, simplistic market/pricing
function provides.
Ever since Samuelson's Economics in 1948, we've worshipped a market god based on scanty math.
The first step in moving beyond Samuelson is recognizing that progress is indeed still possible,
and then making the choice and determining the steps to pursue it.
Not just communist central planning. John Kenneth Galbraith's The New Industrial State
makes a special space in society for industries in The Planning Sector. These were the very
large businesses that worked with huge capital bases, long lead times, populations comparable
to small nations. Planning, both input and output, was key to these businesses because there was
too much at stake to risk losing it to the whims of any market. Communist societies were extreme
examples, as they were betting the entire national economy, but the parallels with huge "private"
firms were quite exact.
The Planning Sector businesses failed when they had to slough off all the activities that were
too hard to plan; then they morphed into the Finance/Insurance/Real Estate Sector.
I don't think it is a lack of formal education. It is simply written in a way that is not easy
to understand. I have my master's in engineering, and I'm still not sure exactly what this passage
is trying to say:
"If you randomly generated thousands of messages from the distribution of possible messages, the
distribution of generated messages would be an approximation to the actual distribution of messages.
If you sent these messages over your noisy communication channel that met the requirement for
faithful transmission, it would reproduce an informationally equivalent distribution of messages
on the other end."
From that point on I simply skimmed it and, if I'm not mistaken, the author also assigns positions
to Hayek that seem to be a little more extreme than the positions he actually held.
If you randomly generated thousands of messages from the distribution of possible messages,
the distribution of generated messages would be an approximation to the actual distribution
of messages.
You can only get to the true distribution assuming an infinite number of samples, everything
else is asymptotic approximation to the true posterior distribution. This is true for any mathematical
function approximated numerically were closed solutions are not possible to find (ie. not integrable).
But this is relevant to the second phrase because:
If you sent these messages over your noisy communication channel that met the requirement
for faithful transmission, it would reproduce an informationally equivalent distribution of
messages on the other end.
A noisy communication channel introduces random bits of information which are not part of the
original distribution, but because that noise is random, you would get a message that is an approximation
of the true distribution of the original message being transmitted (is informationally equivalent)
as the noise is distributed 'randomly' .
However, this is only true when the number of information bits approach infinity (for large
numbers), BE WARE! Indeed that randomness can be very skewed for small samples. this is relevant
and interesting because complex systems were you have a large number of variables are not easy
to converge with, even when you are aware of the whole system variables (is a mathematically intractable
problem).
You can think as market pricing (in an ideal world free of politics and power games, which
is not) as a convergence to a complex multidimensional problem, and even though we know that we
are NOT aware of all the variables at play for a given product, hence this supposedly God like
attributes of market price discovery are unwarranted.
"Because the information flow from A can never be greater than A's total information, and
will mostly be less than that total, the observed prices in a real economy will most likely fall
below the ideal market prices."
Surely not. Post-industrial economies feature an asymmetry: individual consumers, catered to
predominantly by large nationwide publicly-traded suppliers.
Because of the superior knowledge possessed by suppliers, further leveraged by advertising
and publicity which exploits human psychological foibles such as peer pressure and herding, prices
in the economy are almost certainly too high versus the ideal of complete information flow (while
the price of labor is almost certainly too low).
Nowhere are prices higher than in the nonnegotiable, monopoly services of government. Not only
does it charge astronomical property taxes which mean that there's really no such thing as secure
property title without income, but also it compels hapless working schmoes to "invest" 15.3% of
their income for their entire working lives at approximately zero return.
With respect, it is not empirically incorrect that immigration lowers wages. The historical
experience is quite clear, that when governments force population growth, whether through increased
immigration or via incentives to increase the local fertility rate, wages for the many fall and
profits for the few increase.
Sure more workers means more competition for jobs, but can also result in an increase in the
number of jobs – BUT ONLY OVER TIME AND ONLY IF NEEDED INVESTMENTS ARE MADE AND THERE IS ENOUGH
MARGINAL CAPACITY TO INVEST AND TECHNOLOGY AND RESOURCES ARE NOT ENTERING THE AREA OF DIMINISHING
RETURNS. Which is not guaranteed, especially if the immigration level is massive and constantly
increasing.
The United States from around 1929 to 1970 had very low immigration, and, starting from a low
level, wages soared. Starting in 1970, the borders to the overpopulated third world have been
progressively opened, and wages have started to diverge from productivity and are now starting
to decline in absolute terms. Other nations that recently increased the rate of immigration and
have seen significant falls in wages are: South Africa, the Ivory Coast, England, Australia, and
Singapore – and even some provinces of India, where immigration from Bangladesh has been used
to make certain that wages stay near subsistence. Yes immigration was not the only thing going
on there, but when rapid forced increases in the supply of labor are always followed by falls
in wages, well, the empirical evidence is hardly to be dismissed out of hand.
Remember, no society in all of history has run out of workers. When the headlines say that
immigrants are needed to end a labor 'shortage' what is really meant is a 'shortage' of workers
who have no option but to accept low wages. However, the only reason that workers can get high
wages is that there is a 'shortage' of workers forced to take low wages. It is thus essentially
tautological that when immigration is said to eliminate a labor shortage, it is lowering wages,
because a labor 'shortage' is in fact what high wages are based on.
They're arguing that you can't empirically say that immigration decreases wages, because
there are simply too many variables in an economy to be able to say definitively if it's a cause
or a correlation, i.e. does the immigration decrease wages, or does another socio-economic factor
simultaneously decrease wages and cause an influx of immigrants? This is why economics is treated
as a soft science, as you can't remove variables in a lab setting the way you can with other sciences.
"BUT ONLY OVER TIME AND ONLY IF NEEDED INVESTMENTS ARE MADE AND THERE IS ENOUGH MARGINAL CAPACITY
TO INVEST AND TECHNOLOGY AND RESOURCES ARE NOT ENTERING THE AREA OF DIMINISHING RETURNS."
Nope. Once immigrants arrive, demand increases instantly, even before they get a job.
Wow. Just wow. A complete, through, and total BS assertion of some kind of economic theory.
I am simply stunned at his verbal density of discourse, blithe refusal to explain, and simply
name dropping facts, ideas, and concepts that are absolutely not related except in being part
of the English language.
I know this is close to an ad hominum attack; I haven't given any specific rebuttal. But I
don't have the tools at my disposal right now to avenge what I see as an assault on my analytic
abilities.
If not a specific rebuttal, what *kinds* of things in the article do you disagree with? Perhaps
this posting is just a step to some greater knowing. Neoclassical Economics has been taught as
"factual and beyond dispute" my whole career - I'm sure that Alchemy and Leechbooks were taught
similarly in earlier ages. How might you suggest that we move forward to something better?
"It ain't what you don't know that gets you into trouble. It's what you know for sure that
just ain't so." ~ Mark Twain
"Wow. Just wow. A complete, through, and total BS assertion of some kind of economic theory.
I am simply stunned at his verbal density of discourse, blithe refusal to explain, and simply
name dropping facts, ideas, and concepts that are absolutely not related except in being part
of the English language."
Yeah that is a pretty good summation of my experience wrt Austrians over almost 2 decades in
a nutter shell[ ] kudos.
Now if only the neoclassicals would abandon the individual and consider vectors in distribution
and how groups affect information.
disheveled .. throws toys out of play pen and hurrumphs away . victoriously .
In my limited experience the prices we accept are more to do with contentment than information.
We are aware that we can never have perfect information; bounded rationality being our situation*.
So as buyers, we end up going with contentment or at least convenience; price too high, content
to leave it on the shelf. Price too low and the reaction might be the same because it is too good
to be true, or of suspect quality. You can have a bargain staring you in the face and, but you
are content because of lack of interest or knowledge.
Good luck to those who try to quantify contentment!
.And then there is the tyranny of choice; not content!
Pip Pip!
* When it comes to the prices people are prepared to pay for products such as cosmetics and
super-cars the rule seems to be unbounded irrationality, but hopefully contentment is achieved
anyway.
when it comes to the political application of this 'theoretical' argument I think it will be
easily dismissed as more leftist academic pedantry, 'immanentizing the eschaton'- all the comments
reflecting the advantages of imperfect information evidence.
This is a wonderful, cogent explanation of a very mathematically complex subject, which is
Information Theory, that has been used to make profound contributions well beyond telephonic communication
for which Claude Shannon developed it, when he discovered it trying to code the English language,
and which he failed to do.
R.A. Fisher was also brilliant. His work has had implications in probability, and statistics,
economics, and perhaps most profoundly in genetics.
The neoclassical analysis also doesn't account for single supplier, multiple demand market
situations. If blueberries both have the consumer market, but also an industrial market (dye purpose,
maybe), then the blueberry supplier has to balance both of those demands, which may end up favoring
one or the other, or some state that isn't ideal for either demand market. The universal example
is the private property of the business itself. The owner isn't just in the market of whatever
service or widget they make, but also in the commercial real estate market. This is especially
problematic with housing, as high rents + vacancies create the impression of scarcity and value
to prospective buyers.
Good work. Now add the delays in information transfer, and fear and greed buying motivations
based on multiple information streams, coupled with information conflicts (injected noise), and
you are getting closer to the real world.
Information conflicts are the differing explanations of the Trump/Corey affair. There is much
noise in the information stream.
Stable prices mean a balance of crop failures and crop booms (supply), population declines
and population booms (demand), speculation and risk-aversion (demand)
This is a good example because it's easy to understand appealing, I fear, to our neoclassical
prejudices.
It's a bad example because it doesn't seem very multidimensional; appealing to our neoclassical
prejudices it collapses easily into "How many blueberry buyers?" and "How many blueberries?"
Trying to imagine something more multidimensional there might be a preference for big blueberries
because they're big there might be a preference for small blueberries because people think that
they're wild, so they must be tastier. If the markets were segregated, there could be a market-clearing
price for big blueberries, and another for small blueberries. But the markets probably aren't
segregated, and the prices would play back and forth against each other.
Maybe good too in dealing with prices of different goods, not just The Price. Neoclassical prices
are meant to be the information that tells me whether to buy dish soap or a new overcoat instead.
Stable prices mean a balance of crop failures and crop booms (supply), population declines
and population booms (demand), speculation and risk-aversion (demand)
There are no stable prices. With this analysis, the steps to include feedback is clear, and
if the feedback is non-linear, non-linear feedback is a characteristic of chaotic systems.
Temporary stability only in a non-linear system, with tipping points etc.
Chris Hayes is an idiot. What kind of person can repeatedly visit the post-industrial wasteland
of the rust belt for town halls with Bernie Sanders and then say "what we need more of is the
philosophy of free-markets"?
But even with that being said, Hayes somehow is still by far the most worthwhile personality
on MSNBC.
I think the tradition of economic thinking has been really influential. I think it's actually
a thing that people on the left really should do - take the time to understand all of that. There
is a tremendous amount of incredible insight into some of the things we're talking about, like
non-zero-sum settings, and the way in which human exchange can be generative in this sort of amazing
way. Understanding how capitalism works has been really, really important for me, and has been
something that I feel like I'm a better thinker and an analyst because of the time and reading
I put into a lot of conservative authors on that topic.
While I agree with much of the argument Hayes is making – know thy enemy, etc. – he gets one
huge thing wrong here that is very troubling: equating capitalism with markets. "Understanding
how capitalism works has been really, really important for me " I'm amazed at how often this trips
up otherwise smart people. There is no capitalism in mainstream neoclassical economics (no government
either, and you can't have capitalism without government). And get any business person talking
freely and they will tell you that everyone in business hates super-competitive markets of the
kind fetishized by economists, and that profitability is all about finding niches and other ways
to avoid competition.
I think it's important to recognize where information theory and the principle of maximum entropy
does succeed in economics and that is as a method of doing statistical inference in economics.
For those interested, I would recommend looking at the increasing amount of information theoretic
research coming out of the Economics Department at the New School for Social Research and UMKC.
You can find many good working papers by myself, Duncan Foley, Paulo dos Santos, Gregor Semieniuk,
and others on the NSSR Repec page
https://ideas.repec.org/s/new/wpaper.html
.
At Bell Labs, plaques and a statue of Shannon occupy places of honor, in more prominent places
than the tributes to other prominent people (including 8 Nobel Prize winners in science).
Here's a presentation by Prof. Christopher Sims of Princeton, at Bell Labs. "Information Theory
in Economics" https://youtu.be/a8jt_TmwQ-U
– critique of the optimizing rational behavior models, noting people are bandwidth limited
("Rational Inattention"). Non-gaussian! Brings up example of monopolist of with no high capacity
limit vs. customers.
"... But making the observation that there are no markets as defined makes little dint on a faith-based theory like neoliberalism, especially a theory whose Church encompasses most university economics departments, most "working" economists, numerous well-funded think tanks, and owns much/most of our political elite and so effectively promotes the short-term interests of our Power Elite. ..."
Phillip Mirowski challenged the left to directly attack and defeat the neoliberal belief that
markets are information processors that can know more than any person could ever know and solve
problems no computer could ever solve.
Sorry for the long quote - I am loathe to attempt to paraphrase Hayek
"This is particularly true of our theories accounting for the determination of the systems of
relative prices and wages that will form themselves on a well functioning market. Into the determination
of these prices and wages there will enter the effects of particular information possessed by
every one of the participants in the market process – a sum of facts which in their totality cannot
be known to the scientific observer, or to any other single brain.
It is indeed the source of
the superiority of the market order, and the reason why, when it is not suppressed by the powers
of government, it regularly displaces other types of order, that in the resulting allocation of
resources more of the knowledge of particular facts will be utilized which exists only dispersed
among uncounted persons, than any one person can possess.
But because we, the observing scientists,
can thus never know all the determinants of such an order, and in consequence also cannot know
at which particular structure of prices and wages demand would everywhere equal supply, we also
cannot measure the deviations from that order; nor can we statistically test our theory that it
is the deviations from that "equilibrium" system of prices and wages which make it impossible
to sell some of the products and services at the prices at which they are offered." [Extract from Hayek's Nobel Lecture]
This just hints at Hayek's market supercomputer idea -- I still haven't found a particular writing
which exposits the idea -- so this will have to do.
Sorry - another quote from the Hayek Nobel Lecture [I have no idea how to paraphrase stuff
like this!]:
"There may be few instances in which the superstition that only measurable magnitudes can be important
has done positive harm in the economic field: but the present inflation and employment problems
are a very serious one. Its effect has been that what is probably the true cause of extensive
unemployment has been disregarded by the scientistically minded majority of economists, because
its operation could not be confirmed by directly observable relations between measurable magnitudes,
and that an almost exclusive concentration on quantitatively measurable surface phenomena has
produced a policy which has made matters worse."
I can't follow Hayek and I can't follow Jason Smith. The first quote above sounds like a "faith
based" theory of economics as difficult to characterize as it is to refute. The second quote throws
out Jason Smith's argument with a combination of faith based economics and a rejection of the
basis for Smith's argument - as "scientistically minded."
I prefer the much simpler answer implicit in Veblen and plain in "Industrial Prices and their
Relative Inflexibility." US Senate Document no. 13, 74th Congress, 1st Session, Government Printing
Office, Washington DC. Means, G. C. 1935 - Market? What Market? Can you point to one? [refer to
William Waller: Thorstein Veblen, Business Enterprise, and the Financial Crisis (July 06, 2012)
It might be interesting if Jason Smith's information theory approach to the market creature
could prove how the assumed properties of that mythical creature could be used to derive a proof
that the mythical Market creature cannot act as an information processor as Mirowski asserts that
Hayek asserts.
So far as I can tell from my very little exposure to Hayek's market creature it
is far too fantastical to characterize with axioms or properties amenable to making reasoned arguments
or proofs as Jason Smith attempts. Worse - though I admit being totally confused by his arguments
- Smith's arguments seem to slice at a strawman creature that bears little likeness to Hayek's
market creature.
The conclusion of this post adds a scary thought: "The understanding of prices and supply and
demand provided by information theory and machine learning algorithms is better equipped to explain
markets than arguments reducing complex distributions of possibilities to a single dimension,
and hence, necessarily, requiring assumptions like rational agents and perfect foresight." It
almost sounds as if Jason Smith intends to build a better Market as information processor
religion -- maybe
tweak the axioms a little and bring in Shannon. Jason Smith is not our St. George.
But making the observation that there are no markets as defined makes little dint on a faith-based
theory like neoliberalism, especially a theory whose Church encompasses most university economics
departments, most "working" economists, numerous well-funded think tanks, and owns much/most of
our political elite and so effectively promotes the short-term interests of our Power Elite.
Some interesting notes about difficulty of comparing GDP of various countries, in this case the
USA and Russia.
Notable quotes:
"... Russia's overall GDP PPP places it slightly below Germany - 6th place in the world ..."
"... But the US GDP is of an different structure. Compared it is overblown with pure financial sales and "hedonistic adjustments". More is blown by the culture. In the US much more everyday things relies on money. In case of case they are all worth nothing. Furthermore, if it comes to conflicts than the whole US Infrastructure has to be "revalued", and i doubt that it can withheld some stress tests. ..."
"... Over the years, the Pentagon encouraged Congress to move parts of national security spending out of its budget to the extent that almost half is found outside the DOD. The USA really spends over a trillion dollars a year. For example, nuclear weapons research, testing, procurement, and maintenance is found in the Dept of Energy budget. ..."
"... [AKA "SmoothieX12"] ..."
"... No serious analyst takes US GDP as 18 trillion dollars seriously. A huge part of it is a creative bookkeeping and most of it is financial and service sector. ..."
"... In general, overall power of the state (nation) is not only in its "economic" indices. I use Barnett's definition of national power constantly, remarkably Lavrov's recent speech in the General Staff Academy uses virtually identical definition. ..."
Russia spent almost 5.4% of GDP on military spending. The US last year spent 3.3% and with Trump's
proposed increase this number will increase by a few decimal points.
Russia is a middle income country while the US is a rich country, in the top 10 of GDP per
capita. If oil prices don't substantially improve and Russia continues to spend the way it does
on the military it will simply go broke.
Goods and services in Russia are considerably less expensive than in the West (and this includes
the cost of producing fighter jets or rockets), so for such purposes GDP PPP is a better indicator
than is nominal GDP. In terms of GDP PPP, Russia is of course not on par with the United States
but is considerably higher than Mexico. It is in the same neighborhood as places such as Hungary.
Russia's overall GDP PPP places it slightly below Germany - 6th place in the world
:
Russia is a middle income country while the US is a rich country, in the top 10 of GDP per
capita.
But the US GDP is of an different structure. Compared it is overblown with pure financial
sales and "hedonistic adjustments". More is blown by the culture. In the US much more everyday
things relies on money. In case of case they are all worth nothing. Furthermore, if it comes to
conflicts than the whole US Infrastructure has to be "revalued", and i doubt that it can withheld
some stress tests.
If oil prices don't substantially improve and Russia continues to spend the way it does
on the military it will simply go broke
No country that relies on oil ( Russia do not) has made substantial improvements. Normally
they are problem states where the problems made by oil are solved by money.
So from my point of view the opposite is true. Russia has made the big mistake to open itself
to the west and was bitten. Now they readjust (with a border to china). Thank's to the US Oligarchs
which thrown away that chance for they're primitive Neanderthal tribe thinking.
Over the years, the Pentagon encouraged Congress to move parts of national security spending
out of its budget to the extent that almost half is found outside the DOD. The USA really spends
over a trillion dollars a year. For example, nuclear weapons research, testing, procurement, and
maintenance is found in the Dept of Energy budget.
And as others have noted, GDP is a measure of activity, not prosperity. For example, mortgage
refinancing creates lots of GDP, but no real wealth. Hurricanes and arson are good for GDP too!
Stupid beyond belief. Countries can't go broke doing something, if they control the natural and
human resources they need to accomplish it. In addition, you apparently did not read Smoothie's
explanation of why just comparing the sums spent is silly.
"Russia is a middle income country while the US is a rich country, in the top 10 of GDP per
capita." this is very funny, how about the 20 trillions of US national debt and it is skyrocketing
fast? If you only count asset without counting liability US maybe in the top 10 GDP per capita,
but if you count net asset the US is in the negative GDP per capita, a broke nation. Perhaps it
is American Exceptionalism logic, claiming credit where credit is not due, living in a world detached
from reality.
"If oil prices don't substantially improve and Russia continues to spend the way it does
on the military it will simply go broke." this is even funnier, Russian does not use USD in
Russia, nor Russian government pay its MIC in USD, meanwhile Russian Central Bank can print Ruble
thru the thin air just like the Fed, why does oil price have any relationship with Russian internal
spending? Another example of "completely triumphalist and detached from Russia's economic realities"
which is defined by meaningless Wall Street economic indices and snakeoil economic theories and
rhetoric taught in the western universities.
P.S. No serious analyst takes US GDP as 18 trillion dollars seriously. A huge part of it
is a creative bookkeeping and most of it is financial and service sector. Out of very few
good things Vitaly Shlykov left after himself was his "The General Staff And Economics", which
addressed the issue of actual US military-industrial potential.
Then come strategic, operational and technological dimensions. You want to see operational
dimension -- look no further than Mosul which is still, after 6 months, being "liberated". Comparisons
to Aleppo are not only warranted but irresistible.
In general, overall power of the state (nation) is not only in its "economic" indices.
I use Barnett's definition of national power constantly, remarkably Lavrov's recent speech in
the General Staff Academy uses virtually identical definition.
"... By Amit Bhaduri, Professor Emeritus, Jawaharlal Nehru University and Visting Professor, Council for Social Development. Originally published at the New Economic Perspectives website ..."
"... why do we accept the artificial devolution of political economy into economics and politics? ..."
"... gets interest from ..."
"... Economics should be transferred to the divinity school. Then it will be untouchable! ..."
Yves here. I'm using the original headline from INET even though "false
arrogance" seems like rhetorical overkill. After all, arrogance and hubris are
closely related phenomena (my online thesaurus list "arrogance" as the first
synonym for "hubris"). But in Greek tragedies, the victims of hubris were all
legitimately accomplished, yet let their successes go to their heads. Thus the
use of "false arrogance" presumably means that economists' high opinion of
themselves is not warranted.
By Amit Bhaduri, Professor Emeritus,
Jawaharlal Nehru University and Visting Professor, Council for Social
Development. Originally published at the
New Economic Perspectives website
The problem of any branch of knowledge is to systematize a set of particular
observations in a more coherent form, called hypothesis or 'theory.' Two
problems must be resolved by those attempting to develop theory: (1) finding
agreement on what has been observed; (2) finding agreement on how to
systematize those observations.
In economics, there would be more agreement on the second point than on the
first. Many would agree that using the short-hand rules of mathematics is a
convenient way of systematizing and communicating knowledge - provided we have
agreement on the first problem, namely what observations are being
systematized. Social sciences face this problem in the absence of controlled
experiments in a changing, non-repetitive world. This problem may be more acute
for economics than for other branches of social science, because economists
like to believe that they are dealing with quantitative facts, and can use
standard statistical methods. However, what are quantitative facts in a
changing world? If one is dealing with questions of general interest that arise
in macroeconomics, one has to first agree on 'robust' so-called 'stylized'
facts based on observation: for example, we can agree that business cycles
occur; that total output grows as a long term trend; that unemployment and
financial crisis are recurring problems, and so on.
In the view of the economic world now dominant in major universities in the
United States - with its ripple effect around the world - is these are
transient states, aberrations from a perfectly functioning equilibrium system.
The function of theory, in this view, is to systematize the perfectly
functioning world as a deterministic system with the aid of mathematics. One
cannot but be reminded of the great French mathematician Laplace, who claimed
with chilling arrogance, two centuries after Newton, that one could completely
predict the future and the past on the basis of scientific laws of motion - if
only one knew completely the present state of all particles. When emperor
Napoleon asked how God fitted into this view, Laplace is said to have replied
that he did not need that particular hypothesis. Replace 'God' by
'uncertainty', and you are pretty close to knowing what mainstream
macro-economists in well-known universities are doing with their own variety of
temporal and inter-temporal optimization techniques, and their assumption of a
representative all knowing, all-seeing rational agent.
Some find this extreme and out-dated scientific determinism difficult to
stomach, but are afraid to move too far away, mostly for career reasons. They
change assumptions at the margin, but leave the main structure mostly
unchallenged. The tragedy of the vast, growing industry of 'scientific'
knowledge in economics is that students and young researchers are not exposed
to alternative views of how problems may be posed and tackled.
This exclusion of alternative views is not merely a question of vested
interest and the ideological view that we live in the best of all possible
worlds where optimum equilibria rule, except during transient moments. It
stems, also, from a misplaced notion of the aesthetics of good theory: Good
theory is assumed to be a closed axiomatic system. Its axioms can, at best, be
challenged empirically - e.g. testing the axiom of individual rationality by
setting up experimental devices - but such challenges hardly add up to any
workable alternative way of doing macro-economics.
There is however an alternative way, or, rather, there are alternative ways.
We must learn to accept that when undeniable facts stare us in the face and
shake up our political universe - e.g. growing unemployment is a problem, and
money and finance have roles beyond medium of payment in an uncertain world
shaken by financial crises - they are not transient problems; they are a part
of the system we are meant to study. It is no good saying my axiomatic system
does not have room for them. Instead, the alternative way is to take each
problem and devise the best ways in which we are able to handle them
analytically. Physicist Feynman (economist Dow (1995) made a similar
distinction) had made a distinction between the Greek way of doing mathematics
axiomatically, and the Babylonian way, which used separate known results
(theorems) without necessarily knowing the link among them. We must accept this
Babylonian approach to deal with macro-economic problems, without pretending
that it must follow from some grand axiom.
Awareness of history must enter economic theory by showing that concepts
such as cost, profit, wage, rent, and even commercial rationality have
anthropological dimensions specific to social systems. The humility to accept
that economic propositions cannot be universal would save us from
self-defeating arrogance.
I can't tell you how much I agree with the article.
For example, what CRITERIA are used that something is a "good" job. Before you
even start to debate the "facts" at least set up the criteria by which you will
evaluate them. It seems evident to me (pension, "good" – what is "good" health
care) but apparently, one of the "pre-eminent" economists, at least according
to another economist, thinks part time jobs are just as good as retail .
It works for me as an executive summary, but almost every paragraph would
probably require a similarly-sized essay to explain it. I agree with its
judgment that too many economists view the world as being governed by some
sort of universal economic law (or "laws"), when in reality those laws work
in very limited circumstances. Whether it's possible there could be such
laws some day, I don't have an opinion one way or another, and nothing in
this article sheds much light on that issue.
It's my experience that the overwhelming number of economists don't know
squat about employment/ unemployment, including why and employer hires and
why people look for and accept jobs. I assume this is because all of these
things are rare event in the personal lives of economists, who spend little
time looking for or between jobs. An economist is either employed, or he/she
is not an economist, and so once they gain experience with the above, they
are no longer in a position where they can speak about it among others still
in the field.
pension + black lung = good job? I mean if we're saying coal mining is a
"good job" now noone who can do better wants it though, that's what a
"good job" it is. Compensation matters but so do working conditions, and by
the way externalities matter, and "coal mining" as a good job certainly
doesn't account for that and the whole community being a cancer cluster etc.
As an economist, now semi retired (author, handyman, carer ), I can speak
of my own experiences.
I think one aspect of my degree course was a lack of normative studies
and not enough, 'well that is the mainstream theory, now this is what we
observe in practice' (and why eg control fraud, captured political
interests)
We were also mispoken to about how private banks create money, taxes fund
government spending and so on.
My choice to study economics was regretted years later, yet it gave me a
lift up career-wise.
It now seems sad that the profession has become mis-trusted and
denigrated. We don't all think alike.
When I studied economics, I realized how absurd a lot of it was so I
answered according to what the prof wanted to see.
However, I'm under the impression that my education in a Cdn
university was way less dogmatic than in the US.
Externalities were discussed, as was the dubious quality of GDP
growth. I had a book on the history of the Cdn financial system. It
explained very well how we went from gold standard to current system..
and how the leading countries used devaluations (France, UK, US) to their
advantage.
The problem with objective economists is that they realize that there
exists something called the law of unintended consequences. Once you
realize there are too many variables to control, you become a leaf in the
wind. And no one likes ambivalent people. They want leaders who KNOW the
answers. So leaders who appear to have answers are chosen.
Well said. I always appreciated having my undergraduate economic
theory class delivered by an active duty Marine Corp Major. A hardened
realist with a talent for illuminating theory.
No offense to Dean Baker, but what doesn't Krugman NOT get wrong? His
public disagreement with Real Economist, Steve Keen, would have been
hilarious had it not been so pathetic in demonstrating either what a sheer
idiot he is, or professional liar, whatever the case may be. (Krugman was
claiming that banks do not create credit as Krugman has no understanding of
that rather simple fractional reserve banking system. I once wrote to
Krugman to correct him on his supply-and-demand
theory
as to the
cause of that incredible spiking upwards of oil/energy costs around 2008,
even though the Baltic Exchange Index ad pretty much collapsed, with an
incredible number of oil tankers floating off the coasts of Singapore and
Malaysia, in an inactive state – – attempting to explain to him about
Goldman Sachs and Morgan Stanley, et al., speculating up the prices on ICE
via commodity futures speculation or wash sales, and he didn't get that
either!)
But this reminds me of a local (Seattle) witless talk show (KIRO radio
station: the John and Curley Show) where the two snarky hosts, as ignorant
as can be, go on and on about their love of globalization, scoffing at those
who don't understand that offshoring manufacturing (they ignored all the
other categories) jobs to China and elsewhere was most clever, and "freed up
America to manufacture high-end goods" - evidently ignorant of the fact as
to where most chip fabs are located, and that 70% to 100% of many auto parts
and aircraft parts are manufactured overseas, shipped back to America only
for assembling purposes.
That ultra-boondoggle, the F-35, is manufactured across 9 foreign
countries plus America - wonder why it's such a cluster screw-up, huh?
A further aside: I don't see all Greek tragedies as turning on hubris.
Where is the hubris, say, of Oedipus? He is the King, there is a plague, the
people call on him for help, he helps. And the plague is vanquished (mind
you, he and his family – the ones still living – are in a mess. But that –
Sophocles seems to be saying – is Life).
The important thing according to the Greek scholar Michael Scott is to
recognize that Greek theater and Greek democracy are joined at the hip.
The former educated the electorate in the difficult choices they would
have to make as managers of their own political existence. We have
political theater today but no-one considers it instruction in one's
civic duty.
"We" here can say it to each other, over and over, in different and
ever-better-documented ways, that almost all economics and the "findings" it
generates, and almost all economists and their credentials, are BS, MS, Ph.D
(bullish!t, more sh!t, piled higher and deeper). But how to reach a larger, and
large enough, set of people who actually have votes that count and can "call
bullsh!t" and demand and get an end to the "policies" that are built on and
gather "legitimacy" from the "findings" of all those faux 'economists?" Who
after all do have those (feedback-loop-granted) "credentials," and so many
sous-chefs to keep pumping out the mega-gallons of Bernays sauce to make the
sh!t sandwiches seem au courant, de rigeur, and somehow palatable?
Agreed, I think that's the issue. Debating whether or not economics is a
science plays right into the prevailing power structure. Rather, the
question is why do we accept the artificial devolution of political economy
into economics and politics? There are lots of quantitative (and
qualitative) "facts" in the world about economics; it can be a scientific
discipline like any other. The important civic debate is the political part:
what values should guide our interpretation and implementation of those
economic understandings?
why do we accept the artificial devolution of political economy
into economics and politics?
This is the right question if we change "why to we accept" to "how is
it that we now have" – that is, if we ask an empirical, historical
question and not a metaphysical or psychological question. In an academic
sense, I would say the answer has to do with a long battle within
economics that was decisively won in the 50s or 60s by one "school" to
the extent that they could ostracize and ignore alternative "schools"
without much effective criticism, and an implicit "bargain" with
sociology and political science to craft an academic division of labor.
And then, inertia and serious pushback against any and all challengers.
In the non-academic world, the answer has to do with a certain
confluence of interest between neoclassical economics and existing social
and economic power.
"But how to reach a larger, and large enough, set of people who
actually have votes that count and can "call bullsh!t" and demand and get
an end to the "policies" that are built on and gather "legitimacy" from
the "findings" of all those faux 'economists?"
I think one method, to move in that direction, is to make a very small
number of very specific demands. Single payer healthcare, and a living wage.
We demand them!! Why don't we have them??!!
When the "economists" tie themselves up into illogical pretzels, trying
to "explain" why we can't have these nice things, they destroy their
credibility– to the point where their dogma is revealed as false and
inhuman. Then, we can shake off their dead hand and begin to build a new
society on more rational and humane principles.
I understand and share your frustration with a brand of economics
being used as a cudgel to tell us we cannot have nice things even as each
individual US state's GDP is the equivalent to that of (at least) a
medium EU nation which individually can afford far better health
insurance schemes than we do. It should be the economists' job to smooth
the way, to find ways so that we can have nice things not just leave it
at can't.
I disagree with washunate that to engage with economists who are
failing is a waste of time that plays into the hands of the prevailing
power structure. Neoliberal economists should be hearing from us that
they are not scientists no matter how much math they dress their pet
theories with. The greatest glory of a science is the predictive powers
of its foundational theories and in that regard neoliberal economics
fails spectacularly. It is not by any definition a science and they
should hear it as often as possible. Of course they know this in their
bones but their theories give their funders significant political cover
as they seek more undeserved goods for themselves. It is our job to
remind everyone who will hear that neoliberal theories are fiction not
science.
Why don't we have universal health care? Sadly, I think the answer is
quite simple – the elasticity of demand for health is infinite as the
alternative is death. Hence, Genentech can and does charge $20,000 for a
round of rituxan, which is very effective on non-Hodgkins lymphoma. Is it
worth it? Of course it is – lymphoma is deadly.
My point is that while the social benefit of universal health care is
high, so is the opportunity cost to the healthcare industry. And since
the industry is free to bribe politicians (sans a quid pro quo of course)
we are unlikely to ever get it. As discussed above, economics divorced
from politics is useless.
wow pretty awesome that Europe/Great Britain and Japan don't have
politicians . just teasing you, how though did those countries manage
to get around your problem is the question//
The British learned from the washout of the first world war that
the usual politicians could not be trusted to produce a country fit
for heroes as was promised, so they voted for socialism.
As for the Japanese, my memory is that the US set their health
system up! Dang!
The British polititician who lost out big time in that
election that brought the Labour Party's version of socialism
into power, was Winston Churchill – after the end of World War
Two.
It goes to show that you might need one kind of leader in
existential-wartime, and another for peacetime. However,
nowadays how do you know whether the there is an existential
struggle or not?
Yes, hubris was the tragic flaw. Treating it as a mere synonym for arrogance
is a fine example of why to avoid thesaurusi. A good dictionary with synonymies
is more reliable.
Speaking of hubris, there's a recently published book by a "professor of
national security" (good luck with that one!!!), Tom Nichols, titled:
The
Death of Expertise
, and it's a real hoot!
Not because the author got anything right, he got almost everything
completely wrong, and simply for that reason!
At one point in this garbage book by Nichols, he is repeating an exchange
between a political appointee whom he believes to be an "expert" and a grad
student concerning Reagan's spaced-based missile defense {SDI or Star Wars -
in this case I believe it was the space-based platform} of which much of it
turned out to be a hoax meant to mislead the Soviets – – and historically we
know the grad student was correct, and Jastrow, if I recall his name
correctly, was most incorrect – – but you would never know it from this
author! -- !
(If you observe any American space-based missile platforms, please be
sure to let me know!)
Besides acknowledging that economic theory is bound to time and society, it
would also be good to give some fresh thought to familiar economic concepts we
take as Bible-given.
Let's re-examine the ideas of interest [can we do without it], growth [can
we have a no-growth economy], and differential pay [need we pay a much higher
salary for "higher" work],
I would go on to look at profit [should there be profit in all economic
activities, such as health care, education, and others], oligopolies [is it
good to have very large corporations], and competition [should we promote
competition is all aspects of life].
Some of these have been questioned in these pages, such as the question of
oligopoly. I encourage raising more and continued questioning, as we've done
here.
It tends to draw fire when I mention it, but "Sharia or Islamic banking
and finance" is supposed to be done without any interest. And the system
(now under assault by Western interest-holders, by physical violence and
subversion of many types, and co-optation via corruption) kind of relies on
actual trust and risk-sharing. Here's some details for anyone "interested:"
http://www.islamic-banking.com/islamic_banking_principle.aspx
Thank you for your first reference, JTMcPhee, from the Institute of
Islamic Banking. It makes a great deal of sense that lenders bear risk
along with borrowers when we are talking about financing
entrepreneurship. In this view, the lender has
an interest in
rather than
gets interest from
. [I very much suspect that the
former
meaning became detached from the
latter
very
early on in human history, which is why the latter was condemned as
'usury', a result itself of an imbalance of power leading to coercive
lending.]
I wonder, however, about 'consumer lending' where there is clearly no
entrepreneurial risk.
Do you have a useful reference about how this 'consumer lending'
occurs without 'interest' in the Islamic world?
In 1955, the economist Simon Kuznets thought he had found such a law of
motion, one that determined the path of income inequality in a growing economy.
The scant data that he could gather together seemed to suggest that, as a
nation's GDP grows, inequality first rises, then levels off, and ultimately
starts to fall. Despite Kuznets' explicit warnings that his work was 5%
empirical, 95% speculation and "some of it possibly tainted by wishful
thinking", his findings were soon touted as an economic law of motion,
immortalized as "the Kuznets Curve"– resembling an upside-down U on the page –
and has been taught to every economics student for the past half century.
As for the curve's message? When it comes to inequality, it has to get worse
before it can get better, and more growth will make it better. And so the
Kuznets Curve became a perfect justification for trickle-down economics and for
enduring austerity today in the pursuit of making everyone better off some day.
Forty years later, in the 1990s, economists Gene Grossman and Alan Krueger
thought they too had found an economic law of motion, this time about
pollution. And it appeared to follow the very same trajectory as Kuznets' curve
on inequality: first rising then falling as the economy grows. Despite the
familiar caveats that the data were incomplete, and available for local air and
water pollutants only, their findings were quickly labeled the "Environmental
Kuznets Curve". And the message? When it comes to pollution, it has to get
worse before it can get better and – guess what – more growth will make it
better. Like a well-trained child, growth will apparently clean up after
itself.
Except it doesn't.
===================================================================
More fuel to the fire
They both seem typical of the human search for knowledge, with or without
resorting to the Scientific Method.
Typical in that
1. we fail to recognize our knowledge is always partial and limited
1A. Sometimes with the added arrogance of saying we know it's partial and
limited
(Some can't afford that added arrogance, because they have been exposed
already, like, say, fortune tellers)
And yet
2. we use that knowledge as if it's complete and applicable everywhere.
The Greek concept of hubris was not merely arrogance, but involved an INJURY
to others. (I discuss this in J is for Junk Economics.) The main examples were
creditors and land monopolizers - and kings. Nemesis not only fight hubris, but
specifically supported the weak and poor who were the main injured parties. The
iconography is quite similar to Sumerian Nanshe of Lagash.
So the concept of hubris is linked to affluenza: irresponsibility of wealth,
injuring society at large.
My Lord! The best economist on the planet is commenting! Our Economist
God! (As someone here aptly characterized you a few weeks ago when Yves ran
your discussion of Jubilees.)
I'll come right out with it, I'm a Michael Hudson super fan/groupie and
after Yves published one of your articles, which of course, I had already
read being a big fan/internet tube tracker, I suggested we concerned
citizens, get a Michael Hudson fan club going and somehow convince you to
take your stellar, economics distilling/demystifying self on the road along
with other exemplary economists and some musicians and comedians. Like that
stadium event you did in Europe or that Irish Econ Conference, but this
would be for the education of the vast citizenry, hence the addition of a
bit of music/comedy to entice. A touring TED/Coachella or South by Southwest
but for the Economic Edification of the 99%. (You wouldn't neccessarily have
to deliver all of your addresses in person. Some could be taped.)
You would be bigger than Bernie if the millenials became familiar with your
work, but more importantly, you and other like minded economists, could arm
people with the deeper understanding that is essential to overturning the
prevailing paradigm.
Thank You For Your Works!
Hope
ps I looked into getting Economic Rock Star as a website but it is taken.
Yes, 'injury' as in
injustice -- Of course that may entail
physical damage, but the recent tendency to reduce 'injury' to that narrow
sense alone misses most of the point.
Thanks for the connection to 'hubris', concerning which I was Classically
clueless until a few minutes ago. If hubris corresponds to injury in the
proper sense, perhaps 'arrogance' should be paired with 'insult', i.e. the
gratuitous gloating (= self-aggrandizement of the unjust) and gleeful
blaming of the injured that at least in living memory seems almost always to
be packaged with the injustice?
None of these practices is new, although their use has expanded over the
years. What does seem to be new, as Bettina Boxall of the Los Angeles Times
reported this week, is that some California farmers are now experimenting with
flooding fields that have grapevines and almond trees growing on them. And in
general, people in California are paying a lot more attention to groundwater
than they used to.
In 2014, the California Legislature approved a package of
groundwater-management laws - long after most other Western states had done so
- that are now slowwwwwly beginning to take effect. Local
groundwater-management agencies are being formed that will have to come up with
plans to reach groundwater sustainability within 20 years.
========================================================
You can look at this optimistically or pessimistically. With the population
growing year, after year, after year, it doesn't take high intelligence that
water demand will exceed water supply. And yet CA government choose to deal
with this freight train coming down the tracks in ..2014.
> With the population growing year, after year, after year, it doesn't
take high intelligence that water demand will exceed water supply.
Supply is not fixed. A lot of the current "supply" (rainfall) isn't being
retained, stored, or used intelligently. So there's still quite a bit of
room for population growth, particularly in the northern, wetter parts of
the state. Even without artificial restrictions on usage.
On the other had, I agree with the point that humanity should not have as
its primary goal the maximization of population on a single finite sphere.
And thus economics should not have as its primary goal the maximization of
"growth".
"The problem of any branch of knowledge is to systematize a set of
particular observations in a more coherent form, called hypothesis or 'theory.'
Two problems must be resolved by those attempting to develop theory: (1)
finding agreement on what has been observed; (2) finding agreement on how to
systematize those observations."
How will modern economists agree to agree on anything real now that
post-modernist thought and critique has entered the economics field?
"But Foucault had belatedly spotted that post-modernism and "neo-liberal"
free-market economics, which had developed entirely independently of each other
over the previous half-century, pointed in much the same direction. "
http://www.economist.com/node/8401159
adding: The economists who use a post-modernist approach( all is
uncertain and events are transient and therefore immaterial to the core
theory) to defend a scientific determinist* core theory are engaging in
double-think. I'm not an economist so maybe there's a
there
there I
cannot see.
*
"Popper insisted that the term "scientific" can only be applied to
statements that are falsifiable. Popper's book The Open Universe: An
Argument For Indeterminism defines scientific determinism as the claim that
any event can be rationally predicted, with any desired degree of
precision, if we are given a sufficiently precise description of past
events, together with all the laws of nature, a notion that Popper asserted
was both falsifiable and adequately falsified by modern scientific
knowledge.
"In his book, A Brief History of Time, Hawking claims that predictability
is required for 'scientific determinism' (start of chapter 4). He defines
'scientific determinism"" as meaning: 'something that will happen in the
future can be predicted.' "
By measures that register actual human engagement – rather than fake
accounts and bot activity - Facebook does not seem to be growing at all. In
2016, its users generated about 25 percent less original content than in 2015.
The time users spend on Facebook dropped from 24 hours in mid-2015 to 18.9
hours in February, Comscore reported.
========================================
One can only hope.
I am only on Facebook because a friend and co-worker signed me up (without my
knowledge or consent, but I think most people looked upon it like getting a
greeting card) back in the day when the Facebook fad was at its peak. And I was
interested in it as a social and economic phenomenon.
My own anecdotal experience is that the most ardent users (multi daily
postings) have declined by 95%. The occasional 2 or 3 times weekly posters are
down to once monthly, and so on.
And the response to postings seems to have had even greater declines. Even good
friends who I used to TRY and keep up with postings, I scarcely ever bother now
– and when I do open one, people who used to get near 100 "looks" have 2 or 3 –
maybe once in a while for something real (somebody died, instead this is a
picture of a meal I eated) , maybe 5.
Woolworths used to be a juggernaut – so was Sears. Who remembers "My Space"
???
I saw too many people turning into Trump Fraidy Cats before the election
("Vote for Hillary because Trump! He's so awful!") or Vote Shamers ("You're
voting third party? Shame on you!").
After the election, Facebook seemed like a psych ward. Too many sobbing,
crying, and raving loons for my taste.
Cutting back on Facebook is part of my larger goal of spending less time
on social media and more time in social reality.
Bravo, another critical issue absent from MSM or even worse purposefully
being confused.
It would help a lot if people take time to understand the money in itself
that permeates every aspect of life since it is a central feature of any
financial system under any economic system ancient or contemporary.
Here is an simple essay that explains without financial jargon what money is
in itself as a social construct and whom in reality it serves:
Economics isn't economical, it is political-economics. Politics first,
economics second. Politics is the art, not the science, of sharing out the
wealth, power and fame in a society in an organized way. If your politics is
corrupt, then your economics will be corrupt also.
Blame Pythagoras. From Pythagoras and Croesus, we got the idea that value
was a number, and that everything had a value, and that a market (aka city
state) is where the hidden hand determined the relationship between prices,
goods and services. The actual "cost" per capita, of running a subsistence
agrarian society hasn't changed since the days of Babylon. We simply have
more technical bookkeeping (and accounting). A shekel was the weight of 180
grains of dried barley seed. The Babylonians didn't have a primitive society
they had monarchy, theocracy, militarism and receipts. A thing might be
valued in so many shekels of silver, but the receipt accomplished what a
coin would have, because it was honored. Clay money instead of paper money.
You got your receipt for your socialist food dole, went to the temple
granary to pick it up (this was long before Rome), visited the temple
prostitutes (way better than Roman games), then went home. And as has been
pointed out, this was a clay fiat and honesty was just as vanishing then
as now. And yes, it was a debt system, not a credit system. The US and the
world has moved from a credit system to a debt system in the last 100 years.
The Great Whore, Babylon is still awaiting her destiny.
"Daniel reads the words MENE, MENE, TEKEL, PARSIN and interprets them for
the king: MENE, God has numbered the days of your kingdom and brought it to
an end; TEKEL, you have been weighed and found wanting; and PERES, the
kingdom is divided and given to the Medes and Persians."
Having once held a 1776 edition of Wealth of Nations in my hand I recall
Smith was a Moral Philosopher and that Economics was a branch of Moral
Philosophy choosing between Goods and Bads and seeing Utility Functions as
Demand Curves.
Then I recall Keynes, the Mathematician, writing beautiful prose in The
General Theory. Somewhere the Reduced Form Equation boys started to play with
Stochastic Variables to make the R2 fit Deterministic equations replaced Moral
choices and an obsession with Beta proceeded to ignore Alpha.
Economics is something of an academic joke. Steve Keen has introduced some
life into a dead subject with his Hyman MInsky analysis since so much of
Economic Theory as propounded is simply a Java Box running inside the main
system
We must learn to accept that when undeniable facts stare us in the face
and shake up our political universe - e.g.
growing unemployment is a
problem
, and money and finance have roles beyond medium of payment in an
uncertain world shaken by financial crises - they are not transient
problems; they are a part of the system we are meant to study.
I think studying some of these things might be better left to psychologists.
I emphasized the phrase about unemployment as a case in point – it could be
argued that we have the unemployment we have right now thanks to telling
ourselves, collectively, that we can't employ people. Anyone who chooses to
look around and observe can find things we could be paying people to do, like
fixing our streets and bridges, educating our young, exploring space and
advancing science, providing medical care to the significant portion of our
population who don't have access, but we are told that this would be bad for
some reason, and many of us seem to believe this.
I don't know if that confirms the author's ideas or not, but as several of
us have observed now in these comments, our economic problems have less to do
with the dismal science (or lack of it) and more to do with what people are
inclined to believe is true, regardless of the facts.
Actually, economics is more like a branch of medieval scholasticism. It's
about forcing reality to fit dogma by imposing methodological and
epistemological gag rules on its practitioners so that they're blinded to
substance by form - and the non-expert public is bamboozled into mute
acquiescence. Econned, as Yves would say.
Yes, I'm baffled that we hear all this about oh jobs are going away becuz
robots and maybe UBI and on and on when there are SO MANY UNFILLED JOBS staring
us in the face where filling them would be of enormous benefit to all. Are they
looking around at ALL?
As you can see, I'm baffled, too. UBI might be a good idea, and various
forms of technology have certainly eliminated jobs over the years, but when
so much work remains to be done, I don't see how you can argue that we've
reached an age where most of us are truly unemployable.
FTM, what is employment? Put most simply, it is one person or entity who
has money paying someone to perform some task(s), possibly to a minimum
acceptable quality. There are many forms of work we do that no one wants to
pay us to do. My work at an amateur theatre falls into that category, as
does the work of the people in the food bank/soup kitchen next door. Maybe
our concept of what constitutes useful work needs to change, too.
The place to start paying decent wages is for all kinds of
housework, daycare and elder care. All are undervalued and underpaid
while that latter two are essential for a healthy community. None of
these should be consigned to robots as only human contact can do the
job well.
But the irony of basic income is that's one of the things it
does. A huge portion of "housework, daycare, and elder care" is
better done
informally
, outside of the GDP-measured formal
economy of employers and jobs and wages and benefits, especially
given how crappy the formal jobs tend to be in those sectors.
Income supports that lack formal work requirements by definition
create more time for people to do things in the informal economy.
But wouldn't it be better to pay parents and caregivers for
caring? First of all, it's work and deserves to be remunerated
like work. Second, keeping care work in the informal economy
only "works" if people have other income with which to satisfy
their needs and wants. There is no possibility that any basic
income grant will provide a single parent with the funds to
allow them to work taking care of their children, which is the
socially optimal situation in almost all cases.
pretty funny. that's been standard econ cirricuulum at the University of
Magonia for, oh, let's see, 1, 2 3 4 5 6 7 8 9. Nine! Nine years!
Pretty funny. Is this still April 1st? I guess not. Oh well, a day late, a
dollar short (no pun intended) is better than a year late and a grand short, or
a century late and a million short. There's a pattern there! it goes back to
the Testament of Amram, Manuscript B. The Dead Sea Scrolls. That's what we
teach in econo 101 during the "money" unit. Money, at the Universtiy of Magonia,
is an idea that mediates the boundary wtihin a society between cooperation and
conflict.. That's not a theory, it's a reality. Everybody has heard this before
in the peanut gallery so I won't reapeat myself.
They should send a delegation from Harvard to the Universtiy of Magonia for
a seminar in money and economics. hahahaha. That's pretty funny even to think
about. Believe me. They'd learn a few things but they might get ontological
shock and end up like MIT mathematical economist Ed Bucks who spent two months
in the New Hampshire woods looking at deer through binoculars in search of a
theory of economics that could survive a collision with nature AND be
deterministic and mathematically rigorous. He pretty much had a nervous
breakdown and ended up back at MIT sucking up grant money like a baby at his
mamas tits. Many are called, but few are chosen. LOL
Paul Krugman Gets Retail Wrong: They are Not Very Good Jobs
Paul Krugman used his column * this morning to ask why we don't pay as much attention to the
loss of jobs in retail as we do to jobs lost in mining and manufacturing. His answer is that in
large part the former jobs tend to be more white and male than the latter. While this is true,
although African Americans have historically been over-represented in manufacturing, there is
another simpler explanation: retail jobs tend to not be very good jobs.
The basic story is that jobs in mining and manufacturing tend to offer higher pay and are far
more likely to come with health care and pension benefits than retail jobs. A worker who loses
a job in these sectors is unlikely to find a comparable job elsewhere. In retail, the odds are
that a person who loses a job will be able to find one with similar pay and benefits.
A quick look at average weekly wages ** can make this point. In mining the average weekly wage
is $1,450, in manufacturing it is $1,070, by comparison in retail it is just $555. It is worth
mentioning that much of this difference is in hours worked, not the hourly pay. There is nothing
wrong with working shorter workweeks (in fact, I think it is a very good idea), but for those
who need a 40 hour plus workweek to make ends meet, a 30-hour a week job will not fit the bill.
This difference in job quality is apparent in the difference in separation rates by industry.
(This is the percentage of workers who lose or leave their job every month.) It was 2.4 percent
for the most recent month in manufacturing. By comparison, it was 4.7 percent in retail, almost
twice as high. (It was 5.2 percent in mining and logging. My guess is that this is driven by logging,
but I will leave that one for folks who know the industry better.)
Anyhow, it shouldn't be a mystery that we tend to be more concerned about the loss of good
jobs than the loss of jobs that are not very good. If we want to ask a deeper question, as to
why retail jobs are not very good, then the demographics almost certainly play a big role.
Since only a small segment of the workforce is going to be employed in manufacturing regardless
of what we do on trade (even the Baker dream policy will add at most 2 million jobs), we should
be focused on making retail and other service sector jobs good jobs. The full agenda for making
this transformation is a long one (higher minimum wages and unions would be a big part of the
picture, along with universal health care insurance and a national pension system), but there
is one immediate item on the agenda.
All right minded people should be yelling about the Federal Reserve Board's interest rate hikes.
The point of these hikes is to slow the economy and reduce the rate of job creation. The Fed's
concern is that the labor market is getting too tight. In a tighter labor market workers, especially
those at the bottom of the pecking order, are able to get larger wage increases. The Fed is ostensibly
worried that this can lead to higher inflation, which can get us to a wage price spiral like we
saw in the 70s.
As I and others have argued, *** there is little basis for thinking that we are anywhere close
to a 1970s type inflation, with inflation consistently running below the Fed's 2.0 percent target,
(which many of us think is too low anyhow). I'd love to see Krugman pushing the cause of full
employment here. We should call out racism and sexism where we see it, but this is a case where
there is a concrete policy that can do something to address it. Come on Paul, we need your voice.
PK: Consider what has happened to department stores. Even as Mr. Trump was boasting about saving
a few hundred jobs in manufacturing here and there, Macy's announced plans to close 68 stores
and lay off 10,000 workers. Sears, another iconic institution, has expressed "substantial doubt"
about its ability to stay in business.
Overall, department stores employ a third fewer people now than they did in 2001. That's half
a million traditional jobs gone - about eighteen times as many jobs as were lost in coal mining
over the same period.
And retailing isn't the only service industry that has been hit hard by changing technology.
Another prime example is newspaper publishing, where employment has declined by 270,000, almost
two-thirds of the work force, since 2000. ...
(To those that had them, they were probably
pretty decent jobs, albeit much less 'gritty'
than mining or manufacturing.)
There is a lot of elitism to go around. People will be much more reluctant to express publicly
the same as in private (or pseudonymously on the internet?). But looking down on other people
and their work is pretty widespread (and in either case there is a lot of assumption about the
nature of the work and the personal attributes of the people doing it - usually of a derogatory
type in both cases).
I find it plausible that Krugman was referring those widespread stereotypes about job categories
that (traditionally?) have not required a college degree, or have been relatively at the low end
of the esteem scale in a given industry (e.g. in "tech" and manufacturing, QA/testing related
work).
It must be possible to comment on such stereotypes, but there is of course always the risk
of being thought to hold them oneself, or indeed being complicit in perpetuating them.
As a thought experiment, I suggest reviewing what you yourself think about occupations not
held by yourself, good friends, and family members and acquaintainces you like/respect (these
qualifications are deliberate). For example, you seem to think not very highly of maids.
Of course, being an RN requires significantly more training than being a maid, and not just
once when you start in your career. But at some level of abstraction, anybody who does work where
their autonomy is quite limited (i.e. they are not setting objectives at any level of the organization)
is "just a worker". That's the very stereotype we are discussing, isn't it?
Krugman thinks nurses are the equivalent of maids...
[ The problem is that Paul Krugman dismissed the work of nurses and maids and gardeners as
"menial." I find no evidence that Krugman understands that even after conditionally apologizing
to nurses. ]
"... Secondly, in football there's a high ratio of noise to signal: performances are due in part
to luck. This is true not just in football. ..."
"... Thirdly, imagine a top goalkeeper were playing for a better side than Sunderland. His performances
would then make a difference to his team's points: a couple of great saves per game would convert losses
to draws or wins, rather than 4-0 defeats into 2-0 ones. His marginal product would be higher. ..."
"... This tells us that, in teams, an individual's marginal product is beyond his control: if Pickford
had better colleagues, his marginal product would be higher. A similar problem arises in many large
firms. As the late Herbert Scarf wrote: ..."
David Moyes says Jordan Pickford has been a better player than Dele Alli this season. This
set me wondering about marginal productivity theory.
To see my point, think about how we'd test Moyes' claim. We could look at what the two teams
did in games which Alli and Pickford missed. But there are too few of these to draw robust inferences,
and doing so would be impossible for a player who hadn't missed any games*. Instead, we could
compare how Sunderland would have done if Pickford were replaced with a next-best alternative
to how S***s would have done with a next-best replacement for Alli. In effect, we're asking: what
are their marginal products?
I suspect that Pickford's marginal product consists in converting heavy defeats into narrower
ones: this still leaves Sunderland relegated, only with a lesser goal difference. Alli, by contrast,
has converted draws or losses into wins. That's a bigger difference.
This, I think, highlights three problems with marginal productivity analysis.
The first is that marginal product is the result of a hypothetical question. For example, in
considering my own marginal product, I ask: how would the IC do without me? That's a hypothetical
to which we cannot give a precise answer. This is true of much of neoclassical economics. As Noah
says:
Demand curves aren't actually directly observable. They're hypotheticals - "If the price were
X, how much would you buy?"
In this, he's echoing Sraffa:
The marginal approach requires attention to be focused on change, for without change either
in the scale of an industry or in the 'proportions of the factors of production' there can be
neither marginal product nor marginal cost. In a system in which, day after day, production continued
unchanged in those respects, the marginal product of a factor (or alternatively the marginal cost
of a product) would not merely be hard to find - it just would not be there to be found. (Production
of Commodities by Means of Commodities, pv)
Secondly, in football there's a high ratio of noise to signal: performances are due in
part to luck. This is true not just in football.
Consider two men of equal ability who become CFOs of start-ups. One start-up becomes massive,
the other struggles. The man who joined the former will be many times richer than the latter.
But that's more to do with fortune than with human capital or marginal product: firms don't usually
grow big because they've got a slightly better CFO than the firm down the road. Anyone who's mind
isn't befuddled by Randian nonsense will know that our lives and incomes are the product of luck.
But we know that people are terrible at distinguishing luck from skill – in part because they
suffer from the outcome bias.
Thirdly, imagine a top goalkeeper were playing for a better side than Sunderland. His performances
would then make a difference to his team's points: a couple of great saves per game would convert
losses to draws or wins, rather than 4-0 defeats into 2-0 ones. His marginal product would be
higher.
This tells us that, in teams, an individual's marginal product is beyond his control: if
Pickford had better colleagues, his marginal product would be higher. A similar problem arises
in many large firms. As the late Herbert Scarf wrote:
If economists are to study economies of scale, and the division of labor in the large firm,
the first step is to take our trusty derivatives, pack them up carefully in mothballs and put
them away respectfully; they have served us well for many a year. But derivatives are prices,
and in the presence of indivisibilities in production, prices simply don't do the jobs that they
were meant to do. They do not detect optimality; they aren't useful in comparative statics; and
they tell us very little about the organized complexity of the large firm.
For me, flaws such as these mean that marginal product theory doesn't make much sense as an
explanation of wage levels. We should abandon it as a mental model in favour of bargaining (pdf)
models. In these, matches between workers and jobs lead to surpluses, and the surplus is divided
according to the balance of power.
In such models, human capital raises wages insofar as it generates surplus and gives its holders
outside options which enhance their bargaining power. But human capital and "marginal product"
aren't the whole story. All the things that affect bargaining power, such as technology and unions,
also matter. Such models are consistent with the theory that inequality is due to the rise of
superstar firms (pdf). They're also consistent with the fact that minimum wages don't destroy
many jobs. And they help explain rising CEO pay better than marginal product theory.
What I'm appealing for here is for economists to abandon unscientific just-so stories and to
think instead about the real world. In this world, wages are determined not by unobservable entities
such as marginal product but by – among other things – power (pdf).
* S***s did well during Harry Kane's injury. Few would say this is evidence that Kane is a
poor player, and not should they.
See Denis Drew. I guess Keynes was in favor of trade unions but Keynesian economists never discuss
them. Neither do bloviating, blowhards like EMichael.
PGL used to brag about how Hillary supported striking Verizon workers during the election but
that was just a photo-op, like how all of the building trade unions hob-nobbed with Trump. It's
BS. Unions have collapsed under the watch of New Democrats. They've done nothing.
In his final speech Obama said we have to beware of automatization. There's no evidence of
it. It's an excuse. No, the Democrats have sold us out. So what that they raised taxes on the
rich a little. The rich have never had is so good.
"The first is that marginal product is the result of a hypothetical question. For example, in
considering my own marginal product, I ask: how would the IC do without me? That's a hypothetical
to which we cannot give a precise answer. This is true of much of neoclassical economics. As Noah
says:
Demand curves aren't actually directly observable. They're hypotheticals - "If the price were
X, how much would you buy?"
In this, he's echoing Sraffa:
The marginal approach requires attention to be focused on change, for without change either
in the scale of an industry or in the 'proportions of the factors of production' there can be
neither marginal product nor marginal cost. In a system in which, day after day, production continued
unchanged in those respects, the marginal product of a factor (or alternatively the marginal cost
of a product) would not merely be hard to find - it just would not be there to be found. (Production
of Commodities by Means of Commodities, pv)"
It's a cliché that the government builds "bridges to nowhere" that the private sector never
would build. That's true. And it's a credit to the public sector. Bridges to nowhere are what
turn nowheres into somewheres. We need many, many more bridges to nowhere.
Finally, I want to express my annoyance at a trope in punditry about air travel that is as
common as it is mistaken. Here is Kevin Drum:
So flying sucks because we, the customers, have made it clear that we don't care. We love to
gripe, but we just flatly aren't willing to pay more for a better experience. Certain individuals
(i.e., the 10 percent of the population over six feet tall) are willing to pay for legroom. Some
are willing to pay more for extra baggage. Some are willing to pay more for a window seat. But
most of us aren't. If the ticket price on We Care Airlines is $10 more, we click the link for
Suck It Up Airlines. We did the same thing before the web too. As usual, the fault lies not in
the stars, but in ourselves.
Here is Megan McArdle, in a piece titled (by somebody) "Hate Flying? It's Your Fault":
Ultimately, the reason airlines cram us into tiny seats and upcharge for everything is that
we're out there on Expedia and Kayak, shopping on exactly one dimension: the price of the flight.
To win business, airlines have to deliver the absolute lowest fare. And the way to do that is
. . . to cram us into tiny seats and upcharge for everything. If American consumers were willing
to pay more for a better experience, they'd deliver it. We're not, and they don't.
So it is my fault that for my travel needs, I have very few choices of carriers, if I have a strong
preference for few stopovers? As soon as I accept 1-2 additional stops than minimally necessary
(and the corresponding doubling or more of travel time, nevermind increased risk of missing flights,
delays, etc.), I can find more connections.
My problem, if I pay for the trip, is flight availability. It is usually not an option to pay
even twice as much for flying when or how I want or need to.
I know absolutely nothing about the economics of air travel (any experts here?), but how about
airport gates and airport passenger/flight processing capacity as bottlenecks, and long-distance
flights favoring if not requiring larger aircraft (which cannot use every airport for regular
flights). With larger aircraft you have the problem of selling all seats on all flights, which
would seem to favor multi-hop trips via major routes, with all the multiple de/boardings, security
checks, and as we have recently seen increased chances of "re-accommodation".
When I travel for business, my choices are further restricted by "appropriate" departure and arrival
times. Then it also becomes a multivariate problem - arriving one day earlier leads to one more
hotel stay, car rental day, etc.
In my current situation I could "save" the company around a hundred bucks by using a cheaper
carrier that has a direct flight from where I am to where I need to go, and for returning, there
is a multi-hop flight that takes ~3 hours longer to get home than the hundred bucks more expensive
competition (arriving not in the late evening but after midnight), because the first leg of the
flight is in the opposite direction of where I need to go. No thanks, if I can avoid it! I take
the more "expensive" carrier which has direct flights in both directions.
It seems to me it may be a similar problem as the debate over public transit experience vs. driving.
In public transit, unless your travel endpoints are close to a single route, it is usually the
line changes and distance between end stations and the actual destinations that make up half the
total time or more.
The problem can be "addressed" by more N-to-N routes, but then the transit agency has a problem
with getting enough ridership on every route (and where to store all the transit vessels outside
of peak traffic hours, and fleet operation/maintenance overheads, etc.).
Bernanke comes out for NGDP targeting after previously
dismissing the idea when Christina Romer called for a regime
change during his tenure.
sanjait -> Peter
K....
"Eat it Krugman."
It's funny you say this right after the passage about
price level targeting, as if the passage were a refutation of
Krugman somehow.
This is the same Krugman that said in 1998 that forward
guidance could be effective if and only if it were credible,
and who said in 2015 that such credibility would only be
possible with a regime change in Fed policy.
He didn't name level targeting, but it fits his stated
conditions perfectly.
Eat it Peter.
Reply Thursday, April 13, 2017 at 01:02 PM
It's a big deal that Bernanke came out in favor of NGDP
targeting.
Krugman hasn't promoted the idea *at all* at his blog and
he goes out of his way to be dismissive of Scott Sumner and
market monetarists since they are conservative.
I could find evidence on his blog if I wanted to waste the
time.
Sanjait can't or won't understand this fact. Why? Is it a
case of hero-worship?
Krugman has pretty much stopped talking about
monetary/macro policy other than to say that the case for
fiscal expansion "isn't completely absent."
That's the wrong way to put it.
His candidate Hillary said nothing about monetary policy,
tacitly saying that the Fed has done a good job. Her fiscal
expansion plan was such that Alan Blinder said it wouldn't
effect the Fed's reaction function. That's why center-left
Krugman avoids the topic of macro policy and running the
economy hot.
Republican/centrist Bernanke is ahead of Krugman on the
issue?
Why Market Monetarists Must Attack Paul Krugman
Ideas are secondary to tribes.
by Ryan L. Cooper
Paul Krugman, in a post attacking hard money types who are
howling for the Fed to cut back on its easing programs,
writes that folks like Scott Sumner ought to wake up to who
their real allies are:
Actually, before I get there, a word about self-styled
conservative "market monetarists": guys, have you noticed who
your real policy enemies are? People like me, Brad DeLong,
etc. are skeptical about the Fed's ability to offset the
effects of fiscal austerity, but we do want it to try. The
furious academic opposition to quantitative easing is instead
coming from moderate conservative macroeconomists, notably
Taylor and Feldstein. So your problem isn't just that the
GOP's effective leader on economic issues gets his macro from
Francisco D'Anconia; it's that even the not-so-silly wing of
the party is dead set against what you consider reform.
He's right that the opposition to further stimulus from
the Fed is overwhelmingly from the hard money right, but
behind this kind of thinking is an assumption that reasoned
debate is effective-that the way people come to believe stuff
is through argument and evidence.
I think this is wrong. Let me explain. (And yes, I see the
irony.)
People don't come to their beliefs through a disinterested
weighing of all the available evidence. They form them
through emotional processes and then reason backwards to form
support. It sounds foolish described that way but it's
actually not a bad system-reasoning from first principles for
every decision would be almost impossibly difficult. You need
crude, workable heuristics to be able to function.
In addition, most people are invested in one of the great
tribes-you choose a political side, and get a full suite of
opinions to call your own. Paul Krugman is one of the most
prominent members of Team Left in the world; he believes in
universal health insurance, high taxes on the rich, raising
welfare and unemployment benefits, and relief for underwater
mortgages, among many other things. He's your basic American
liberal, and none too ashamed of it; indeed, he's famous for
his snarky aggressiveness.
Most of that is totally anathema to the right. To a first
approximation, if Paul Krugman says it, conservatives will
disagree.
So if Scott Sumner (the preeminent market monetarist) were
to start agreeing with Krugman and spend most of his time
attacking the goldbugs and hard money fanatics on the right,
all the great weight of Krugman's lefty baggage would start
to bear on his reputation. He'd be "the guy that mostly
agrees with Krugman" rather than "the conservative who argues
for monetary stimulus."
The true genius of Sumner is that he has provided a
conservative-coded way to embrace monetary stimulus. He's the
guy who proved that you can favor monetary stimulus and still
hate Paul Krugman. That's huge. It's carved out a big
intellectual space-it's not a coincidence that about the only
"conservative reform" policy that has gotten any traction is
Sumner's NGDP target.
Don't take my word for it, take a look at AEI scholar Jim
Pethokoukis, who has done the rarest of things: changed his
mind on a major issue. He moved from a traditional inflation
paranoia to an advocate of monetary stimulus, and explicitly
mentions Sumner as inspiration. Seen so, regular fights with
Krugman are critical to maintaining Sumner's territory and
credibility.
Now, I don't think Sumner is doing this strategically or
duplicitously. He does it for the same reason as anyone, I
suspect-because Krugman writes stuff that pisses him off and
he wants to pick holes in the argument.
What I'm saying is that that the liberals who value their
conservative allies against goldbuggery and Mellonite
liquidationist thinking (as they ought to) should understand
that the forces of tribalism will totally overwhelm any
reason-based approach. Sumner is right to keep up his
conservative street cred.
But I gather you
believe that the monetary policy of the 70s was fantastic and
really created a fantastic economy that got better as that
decade ended? The Treasury did act to void Brenton Woods and
supporting erosion of Regulation Q causing Fed and shadow
bank money printing leading to high inflation suppressed by
price controls.
Obama had neither option, the shadow banks were sharply
contracting money supply in 2008 to 2010 at a rate faster
than the Fed could print money. Then from 2010 to 2015, the
Fed printed money in lockstep with the shadow banks cutting
money supply.
But you want the central bank of Venezuela where the
president can print money as fast as he needs to to fund
government handouts to keep power.
And your monetary policy theory had demonstrated that it
can deliver fantastic overall economic welfare! The US needs
ano economy like Venezuela has!
So you are saying that if there were more doves on the Fed
board they would have raised rates during the Obama admin?
Lowered them beyond zero? Did more QE? Did less QE?
He took
office in 09 with the rate at .25. Six years later it went to
a half. Another year and it went to .75. QE totaled around $2
Trillion.
A moderately more dovish Fed would have not talked about
tightening at every turn while it kept rates low. This
anti-forward guidance has real effects on inflation
expectations and by extension the real rate of interest.
A
substantially more dovish Fed could have engaged in a regime
change to alter the explicitly or implicit targets. Commonly
discussed options include an increased inflation target, an
inflation level target, and NGDP or NGDP level targets.
My own preference would be for an inflation level target
at an increased rate, in the 3-4% range. I very strongly
believe such a regime would have and would still make a huge
difference.
" I do not believe that "talking about tightening" has
absolutely no effect on the economy.
Tightening does."
I think you meant to say that you DO believe talking about
tightening has NO effect on the economy. Correct?
Either way, I do absolutely and confidently believe that
talking about tightening has an effect on the economy. We can
watch in real time as Fed statements that shift expectations
of future policy stance affect bond rates, equities prices
and exchange rates immediately. That illustrates how they can
tighten merely with words. They did so numerous times in the
ZLB era.
Basically, they allege Sumner is a hippy puncher*.
*In the
original sense of the term: a conservative who would
rhetorically trash liberals before making a liberalish
argument to get conservatives to accept the argument... not
the more recent use of the term, which has become "anyone who
criticizes Bernie."
"It's a big deal that Bernanke came out in favor of NGDP
targeting."
He didn't. He said distinctly positive things
about inflation level targeting in contrast to raising the
inflation rate, and then briefly entertained the notion that
some kind of "mixed" program could also be good, without
providing much specificity.
This is sort of like how you took one paragraph from
Bernie about how the Fed should keep rates low longer, in the
context of an otherwise unrelated rant of an op-ed, and
decided that it showed he agreed with everything you believe
about monetary policy.
Your own perception bias is clear.
"Krugman hasn't promoted the idea *at all* at his blog and
he goes out of his way to be dismissive of Scott Sumner and
market monetarists since they are conservative."
You are right that Krugman has not promoted NGDP targeting
per se. In fact, in the passage from me
you quoted, I already pointed that out.
I also pointed out that Krugman originally presented the
model that explains how credible forward guidance is
necessary in a liquidity trap, and then updated it to claim
that a "regime change" would be necessary to enforce the
credibility.
He admittedly doesn't go deep into how that should play
out, but I'm not the only one who has distinctly read an
argument for price level targeting, or even NGDPLT in
Krugman's discussion of this.
Here's Nick Rowe saying pretty much exactly what I just
said:
And here's *Scott Sumner* endorsing heartily Krugman's
framework analysis arguing for a higher inflation target,
while of course Sumner claims it argues strongly also in
favor of NGDPLT:
If you want to argue Krugman is overly skeptical of the
kind of expectations-drive monetary policies his own model
points towards ... that's probably fair, though in reality
Krugman doesn't ever say they won't work, only that he finds
their reliability questionable *relative to fiscal and
conventional monetary stimulus.* That's a huge distinction,
and the way you fail to recognize it deliberately puts you in
straw-man-humping territory.
Krugman
from 2011, describing (as I explained) how his own model
calls for expectations driven monetary policy to address the
ZLB problem, but expressing skepticism that it could be made
credible in practice given the politics:
Here is Sumner again, from 2014, reacting to Krugman's
presentation on the subject that mentions "regime change".
Sumner, like I did above, notes how Krugman doesn't really go
on to describe what form that is supposed to take, but he
also, like me, sees Krugman's overarching framework as a
great one for explaining why other monetary regimes would be
favorable, including higher inflation, inflation level
targeting or NGDP/NGDPLT.
These guys are way far apart on fiscal policy, and on that
subject I think Sumner is a bit of a twat. That's why they
find reason to disagree so often.
But on monetary stuff they are actually not so far apart.
"That's a huge distinction, and the way you fail to recognize
it deliberately puts you in straw-man-humping territory."
"This is sort of like how you took one paragraph from Bernie
"
Not at all. Not at all. You are completely wrong.
"If you want to argue Krugman is overly skeptical...
though in reality Krugman doesn't ever say they won't
work..."
He says it's worth a try, but that's it. He doesn't
promote it or discuss it very often. Scott Sumner and the
market monetarist people have been actively promoting it.
People can easily compare by skimming through Sumner's blog
versus Krugman's blog in 2016 and 2017.
As soon as Republicans took over in 2010, Krugman pretty
much stopped criticizing the Fed.
Bernanke who was once a Republican is now to the left of
Krugman??? Bernanke favors NGDP targeting over raising the
inflation target, which is now what the "party line" of
center-left economists like Krugman and PGL is. They promote
raising the inflation target over NGDP targeting, as PGL does
to stick it to Sumner, etc.
Bernanke said "no, NGDP targeting should be tried before
raising the inflation target, which has more mixed pros and
cons.
That's why I said "Eat it PGL, eat it Krugman." And of
course PGL doesn't respond. I should have added "Eat it
Sanjait."
Bernanke:
"If the Fed wanted to go farther, it could consider
changing what it targets from inflation to some other
economic variable. There have been many proposals, each with
its own strengths and weaknesses. One possibility that has
some attractive features is a so-called price-level target.
With a price-level target the Fed would commit to making up
misses of its desired inflation level. For example, if
inflation fell below 2 percent for a time the Fed would
compensate by aiming for inflation above 2 percent until
average inflation over the whole period had returned to 2
percent. The adoption of price-level targeting would be
preferable to raising the inflation target, as price-level
targeting is both more consistent with the Fed's mandate to
promote price stability and because it is more similar to an
optimal "make-up" monetary policy. (Following a ZLB episode,
a price-level-targeting central bank would be committed to
making up any shortfall of inflation.)
Price-level targeting does have drawbacks as well. For
example, if a rise in oil prices or another supply shock
temporarily increases inflation, a price-level-targeting
central bank would be forced to tighten monetary policy to
push down subsequent inflation rates, even if the economy
were in a downturn. In contrast, an inflation-targeting
central bank could "look through" a temporary inflation
increase, letting inflation bygones be bygones.
Another alternative would be to try to implement the
optimal "make-up" strategy, in which the Fed commits to
compensating for the effects of the ZLB by holding rates low
for a time after the ZLB no longer binds, with the length of
the make-up period explicitly depending on the severity of
the ZLB episode. KR consider several policies of this type
and show in their simulations that such policies reduce the
frequency of ZLB episodes and largely eliminate their costs,
while keeping average inflation close to 2 percent. The main
challenges for this approach are in communicating it clearly
and ensuring that it is credible, since if market
participants and the public don't believe that the central
bank will carry through on its promise to keep rates low, the
policy won't work. However, the Fed's recent experience with
forward guidance suggests that such commitments by central
banks can be effective. [3] They would probably be even more
effective if the principles of this approach were laid out
and explained in a normal period in which the ZLB was not
binding.
As price-level targeting and "make-up" policies are
closely related, they could be combined in various ways. For
example, by promising to return the price level to trend
after a period at the zero lower bound, the Fed could use the
language of price-level targeting to make precise its
commitment to make up for its inability to respond adequately
during the period when rates are at zero."
Sanders "dont raise rates until we hit 4 percent
unemployement" is essentially forward guidance and yet you
and Krugman go with Hillary who was satisfied with the
Federal Reserve's continued failure.
"It's a big deal that Bernanke came out in favor of NGDP
targeting."
He didn't.
"The adoption of price-level targeting would be preferable
to raising the inflation target, as price-level targeting is
both more consistent with the Fed's mandate to promote price
stability and because it is more similar to an optimal
"make-up" monetary policy. (Following a ZLB episode, a
price-level-targeting central bank would be committed to
making up any shortfall of inflation.)"
Hey dipshit, price level targeting is not the same as NGDPP
targeting, and saying a price-level target "would be
preferable to..." an increased inflation rate is also not an
endorsement of NGDP targeting.
You can say whatever you
want about me but it's pretty clear how you're full of it
here.
Compared to what Bernanke has said before about price-level/NGDP
targeting it is an endorsement. He is basically saying it is
worth a try and preferable to raising the inflation target
which is PGL's and the squishy liberals' answer to Fed fail.
"... He writes a DSGE model where banks hold sovereign debt, so that bad news about a possible future sovereign default both puts a strain on the funding of banks but also induces them to cut their leverage as a precautionary reaction. ..."
"... This channel for the diabolic loop linking banks and sovereign debt fits reasonably well the behavior of credit spreads across Italian banks and firms, and predicts that the ECB's interventions had a small effect. ..."
Luigi Bocola (2014, Penn, Northwestern): Bocola tries to explain the depth of the crisis in Italy
after 2011. He writes a DSGE model where banks hold sovereign debt, so that bad news about a possible
future sovereign default both puts a strain on the funding of banks but also induces them to cut
their leverage as a precautionary reaction.
This channel for the diabolic loop linking banks and sovereign debt fits reasonably well the behavior
of credit spreads across Italian banks and firms, and predicts that the ECB's interventions had a
small effect.
Blanchard (2016), Korinek (2015) and Wren-Lewis (2017) worry that the current standards and editorial
criteria in macroeconomics undermine promising ideas, deter needed diversity in the topics covered,
and impose mindless work on DSGEs that brings little useful knowledge to policy discussions.
Smith (2016) emphasizes that we have far less data than what we would need to adequately test
our models, and Romer (2016) that identification is the perennial challenge for social sciences.
Smith (2014) and Coyle and Haldane (2014) characterize the state of economics, not as the perennial
glass half full and half empty, but rather as two glasses, one full and the other empty. In their
view, applied empirical economists have been celebrating their successes, while macroeconomists lament
their losses.
... ... ...
A related criticism of macroeconomics is that it ignores financial factors. Macroeconomists supposedly
failed to anticipate the crisis because they were enamored by models where financial markets and
institutions were absent, as all financing was assumed to be efficient (De Grawe, 2009, Skidelsky,
2009). The field would be in denial if it continued to ignore these macro-financial links.
One area where macroeconomists have perhaps more of an influence is in monetary policy. Central
banks hire more PhD economists than any other policy institution, and in the United States, the current
and past chair of the Federal Reserve are distinguished academic macroeconomists, as have been several
members of the FOMC over the years. In any given week, there are at least one conference and dozens
of seminars hosted at central banks all over the world where the latest academic research is discussed.
The speeches of central bank governors refer to academic papers in macroeconomics more than those
by any other policymaker.
... ... ...
A separate criticism of macroeconomic policy advice accuses it of being politically biased. Since
the early days of the field, with Keynes and the Great Depression, macroeconomics was associated
with aggressive and controversial policies and with researchers that wore other hats as public intellectuals.
Even more recently, during the rational expectations microfoundations revolution of the 1970s, early
papers had radical policy recommendations, like the result that all systematic aggregate-demand policy
is ineffective, and some leading researchers had strong political views. Romer (2016) criticizes
modern macroeconomics for raising questions about what should be obvious truths, like the effect
of monetary policy on output. He lays blame on the influence that Edward Prescott, Robert Lucas and
Thomas Sargent had on field. Krugman (2009) in turn, claims the problem of macroeconomics is ideology,
and in particular points to the fierce battles between different types of macroeconomists in the
1970s and 1980s, described by Hall (1976) in terms of saltwater versus freshwater camps.
Macroeconomists, instead, are asked to routinely produce forecasts to guide fiscal and monetary
policy, and are perhaps too eager to comply. As I wrote in Reis (2010) " by setting themselves the
goal of unconditional forecasting of aggregate variables, macroeconomists are setting such a high
bar that they are almost sure to fail."
...Forecasting when economic agents themselves are forecasting your forecast to anticipate the
policies that will be adopted involves strategic thinking and game theory that goes well beyond the
standard statistical toolbox. Very few economists that I know of would defend themselves too vigorously
against the frequent criticisms of forecasting failures by economists. As is regularly shown, macroeconomic
forecasts come with large and often serially correlated errors.10
...At the same time, the way that forecasts are mis-read and mis-interpreted is part of the problem.
As much as economists state that their forecasts are probabilities, and come with confidence bands,
they are reported in the media always as point estimates
...Compare how economics does relative to the medical sciences. Analogies across sciences are
always very tricky, and must be taken with a large grain of salt. Moreover, surely economists are
still far from being as useful as dentists, like Keynes dreamed of, let alone to have made a contribution
to human welfare that is close to the one by doctors or biologists. The comparison to make is much
more narrow and limited, restricted only to how economic forecasts compare to medical forecasts.
...Currently, the major and almost single public funder for economic research in the United States
is the National Science Foundation. Its 2015 budget for the whole of social, behavioral and economic
sciences was $276 million. The part attributed to its social and economic sciences group was $98
million.
Krugman's hectoring the French will probably have the same effect as his hectoring the Brits on
Brexit.
'Very knowledgeable persons' just don't know when to shut up.
Apparently it's easier for Krugman to rant about French elections than to tell us what he's
been learning about inequality at his day job at the CUNY Luxembourg Income Study Center!
'Very knowledgeable persons' just don't know when to shut up....
[ The meanness is ceaseless and covers a lack of substance, but the meanness is intolerable.
I will never bother to read another post by this person. ]
Would you prefer that I say: "Though the honorable Mr. Krugman is entitled to use his bully pulpit
at the NY Times any way he sees fit, recent events suggest that current practice has proven to
be less than optimal. The wisdom of using the bully pulpit in such manner should be carefully
reconsidered and, if necessary, modified to achieve the goals that Mr. Krugman professes to espouse...unless,
of course, the goal is in fact to realize the goal that the honorable Mr. Krugman claims to oppose."
T Read the Reis article and I'm much relieved. State-o'-the-art mascro = which didn't even include
financial sectors at the time of the Great Recession (I mean really -how could that be a problem?)
- is now on the right track. Yes, adding more epicycles will do the trick. Because as we all know,
the sun, moon, planets and stars revolve around the earth.
Reply
Wednesday, April 12, 2017 at 06:05 AM libezkova -> T... ,
April 12, 2017 at 08:26 AM
This guy is funny (and actually rather clueless, Summers is much better ) defender of "Flat
Earth" theory:
== quote ==
A related criticism of macroeconomics is that it ignores financial factors. Macroeconomists
supposedly failed to anticipate the crisis because they were enamored by models where financial
markets and institutions were absent, as all financing was assumed to be efficient (De Grawe,
2009, Skidelsky, 2009). The field would be in denial if it continued to ignore these macro-financial
links.
One area where macroeconomists have perhaps more of an influence is in monetary policy. Central
banks hire more PhD economists than any other policy institution, and in the United States, the
current and past chair of the Federal Reserve are distinguished academic macroeconomists, as have
been several members of the FOMC over the years. In any given week, there are at least one conference
and dozens of seminars hosted at central banks all over the world where the latest academic research
is discussed. The speeches of central bank governors refer to academic papers in macroeconomics
more than those by any other policymaker.
... ... ...
A separate criticism of macroeconomic policy advice accuses it of being politically biased. Since
the early days of the field, with Keynes and the Great Depression, macroeconomics was associated
with aggressive and controversial policies and with researchers that wore other hats as public
intellectuals. Even more recently, during the rational expectations microfoundations revolution
of the 1970s, early papers had radical policy recommendations, like the result that all systematic
aggregate-demand policy is ineffective, and some leading researchers had strong political views.
Romer (2016) criticizes modern macroeconomics for raising questions about what should be obvious
truths, like the effect of monetary policy on output. He lays blame on the influence that Edward
Prescott, Robert Lucas and Thomas Sargent had on field. Krugman (2009) in turn, claims the problem
of macroeconomics is ideology, and in particular points to the fierce battles between different
types of macroeconomists in the 1970s and 1980s, described by Hall (1976) in terms of saltwater
versus freshwater camps.
...Macroeconomists, instead, are asked to routinely produce forecasts to guide fiscal and monetary
policy, and are perhaps too eager to comply.
Money quote: "An economics that helps us to live within the doughnut would seek to reduce inequalities
in wealth and income. Wealth arising from the gifts of nature would be widely shared. Money, markets,
taxation and public investment would be designed to conserve and regenerate resources rather than
squander them. State-owned banks would invest in projects that transform our relationship with
the living world, such as zero-carbon public transport and community energy schemes. New metrics
would measure genuine prosperity, rather than the speed with which we degrade our long-term prospects."
Macroeconomists largely stopped paying attention to income distribution and turned their attention
to growth decades ago. Even today, folks like Krugman, who are paid handsomely to study inequality,
don't like to talk about it much.
Before proceeding, I wish to make it quite clear that in referencing Keynes or Keynesianism,
I am referring to John Maynard Keynes of 'The General Theory of Employment, Interest and Money'
(GT) and I am not referring to neo Keynesianism or new Keynesianism or any variant of the so-called
neo classical synthesis (which, imo, is one of the most dishonest actions ever taken by an academic)
devised by Paul Samuelson and others at MIT.
With that said, I would first note that Keynes titled chapter 24 of GT:
"Concluding Notes on the Social Philosophy towards which the General Theory might Lead"
and began the chapter with:
"The outstanding faults of the economic society in which we live are its failure to provide
for full employment and its arbitrary and inequitable distribution of wealth and incomes."
Keynes next remarks on the progress toward equality in Great Britain attained via taxation
of income and inheritance taxes and argues that these measures, in conditions of less than full
employment, are, contrary to common belief, actually conducive to increased investment:
" Thus our argument leads towards the conclusion that in contemporary conditions the growth
of wealth, so far from being dependent on the abstinence of the rich, as is commonly supposed,
is more likely to be impeded by it. One of the chief social justifications of great inequality
of wealth is, therefore, removed. "
Keynes particularly approves of taxing inheritances:
"This particularly affects our attitude towards death duties: for there are certain justifications
for inequality of incomes which do not apply equally to inequality of inheritances."
Keynes then debunks the theory that interest is a reward for saving:
"The justification for a moderately high rate of interest has been found hitherto in the necessity
of providing a sufficient inducement to save. But we have shown that the extent of effective saving
is necessarily determined by the scale of investment and that the scale of investment is promoted
by a low rate of interest, provided that we do not attempt to stimulate it in this way beyond
the point which corresponds to full employment. Thus it is to our best advantage to reduce the
rate of interest to that point relatively to the schedule of the marginal efficiency of capital
at which there is full employment.
"I feel sure that the demand for capital is strictly limited in the sense that it would not
be difficult to increase the stock of capital up to a point where its marginal efficiency had
fallen to a very low figure"
And then Keynes heralds the "euthanasia of the rentier" and "the cumulative oppressive power of
the capitalist to exploit the scarcity-value of capital." because the state can supply adequate
capital:
"Now, though this state of affairs would be quite compatible with some measure of individualism,
yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative
oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards
no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest
because capital is scarce, just as the owner of land can obtain rent because land is scarce. But
whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons
for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine
sacrifice which could only be called forth by the offer of a reward in the shape of interest,
would not exist, in the long run, except in the event of the individual propensity to consume
proving to be of such a character that net saving in conditions of full employment comes to an
end before capital has become sufficiently abundant. But even so, it will still be possible for
communal saving through the agency of the State to be maintained at a level which will allow the
growth of capital up to the point where it ceases to be scarce."
But this "euthanasia" can take place gradually and need not require a revolution:
"I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear
when it has done its work. And with the disappearance of its rentier aspect much else in it besides
will suffer a sea-change. It will be, moreover, a great advantage of the order of events which
I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing
sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain,
and will need no revolution.
"Thus we might aim in practice (there being nothing in this which is unattainable) at an increase
in the volume of capital until it ceases to be scarce, so that the functionless investor will
no longer receive a bonus; and at a scheme of direct taxation which allows the intelligence and
determination and executive skill of the financier, the entrepreneur et hoc genus omne (who are
certainly so fond of their craft that their labour could be obtained much cheaper than at present),
to be harnessed to the service of the community on reasonable terms of reward."
Then keynes notes that although his prescription will entail a greater role for the state and
"a somewhat comprehensive socialisation of investment" , it will not eliminate the role of individual
entrepreneurship:
"In some other respects the foregoing theory is moderately conservative in its implications. For
whilst it indicates the vital importance of establishing certain central controls in matters which
are now left in the main to individual initiative, there are wide fields of activity which are
unaffected. The State will have to exercise a guiding influence on the propensity to consume partly
through its scheme of taxation, partly by fixing the rate of interest, and partly, perhaps, in
other ways. Furthermore, it seems unlikely that the influence of banking policy on the rate of
interest will be sufficient by itself to determine an optimum rate of investment. I conceive,
therefore, that a somewhat comprehensive socialisation of investment will prove the only means
of securing an approximation to full employment; though this need not exclude all manner of compromises
and of devices by which public authority will co-operate with private initiative. But beyond this
no obvious case is made out for a system of State Socialism which would embrace most of the economic
life of the community. It is not the ownership of the instruments of production which it is important
for the State to assume. If the State is able to determine the aggregate amount of resources devoted
to augmenting the instruments and the basic rate of reward to those who own them, it will have
accomplished all that is necessary. Moreover, the necessary measures of socialisation can be introduced
gradually and without a break in the general traditions of society"
And he proceeds to describe the advantages of individualism:
"Let us stop for a moment to remind ourselves what these advantages are. They are partly advantages
of efficiency - the advantages of decentralisation and of the play of self-interest. The advantage
to efficiency of the decentralisation of decisions and of individual responsibility is even greater,
perhaps, than the nineteenth century supposed; and the reaction against the appeal to self-interest
may have gone too far. But, above all, individualism, if it can be purged of its defects and its
abuses, is the best safeguard of personal liberty in the sense that, compared with any other system,
it greatly widens the field for the exercise of personal choice. It is also the best safeguard
of the variety of life, which emerges precisely from this extended field of personal choice, and
the loss of which is the greatest of all the losses of the homogeneous or totalitarian state.
For this variety preserves the traditions which embody the most secure and successful choices
of former generations; it colours the present with the diversification of its fancy; and, being
the handmaid of experiment as well as of tradition and of fancy, it is the most powerful instrument
to better the future.
"Whilst, therefore, the enlargement of the functions of government, involved in the task of adjusting
to one another the propensity to consume and the inducement to invest, would seem to a nineteenth-century
publicist or to a contemporary American financier to be a terrific encroachment on individualism.
I defend it, on the contrary, both as the only practicable means of avoiding the destruction of
existing economic forms in their entirety and as the condition of the successful functioning of
individual initiative."
And furthermore, not only will the prescribed system be to the advantage of all, it will also
forestall the temptation to even more drastic measures and preclude the merchantilist and imperialist
temptations of the recent past:
"War has several causes. Dictators and others such, to whom war offers, in expectation at least,
a pleasurable excitement, find it easy to work on the natural bellicosity of their peoples. But,
over and above this, facilitating their task of fanning the popular flame, are the economic causes
of war, namely, the pressure of population and the competitive struggle for markets. It is the
second factor, which probably played a predominant part in the nineteenth century, and might again,
that is germane to this discussion.
"I have pointed out in the preceding chapter that, under the system of domestic laissez-faire
and an international gold standard such as was orthodox in the latter half of the nineteenth century,
there was no means open to a government whereby to mitigate economic distress at home except through
the competitive struggle for markets. For all measures helpful to a state of chronic or intermittent
under-employment were ruled out, except measures to improve the balance of trade on income account."
The Peoples Republic of China (PRC) began in 1949. Under the leadership of Mao Zedong the PRC
introduced Soviet-style Marxism and other "socialization" programs that resulted in famine and
other catastrophes, although national sovereignty was established.
Upon Mao's death in 1976 chinese leadership became uncertain. During some transition until
roughly 1980 market mechanisms were introduced alongside central planning.
In 1982 Deng Xioping introduced "reform and opening", which meant essentially economic reform
internally and a greater focus on foreign trade. And in 1992 he announced a focus on creating
a "socialist market economy", which entailed state control of primary industries and banking alongside
greater autonomy for secondary commercial enterprises.
Since Deng's reforms, China has far outpaced the rest of the world in economic performance.
Keynes analysed capitalist economies and concluded that "a somewhat comprehensive socialisation
of investment will prove the only means of securing an approximation to full employment; though
this need not exclude all manner of compromises and of devices by which public authority will
co-operate with private initiative. "
The leadership of the PRC analysed and managed the Chinese economy and concluded that a "socialist
market economy" was the proper system.
So from opposite directions Keynes and the Chinese arrived at the same destination. Keynes wanted
to preserve the market mechanism, the Chinese wanted to preserve Marxist socialism. They each
arrived at a centrally-controlled economy with significant market mechanisms.
The Chinese do not believe in this stuff, they have read Leviticus though, and plainly understand
that they can create credit and erase it anytime they want to do so.
There was an article somwhere here today or yesterday that made points about how the Chinese
'manipulate' affecting the Triffin calculus and domestic pricing trends influencing consumption
in order to make a steady growth and transformation of their economic system from where it was
in 1980, for a billion plus people. I wish them success.
If you are an economist who believes that the nongovt financial system is basically the only
functionary that there should be for the handling the creation of credit in society, you are a
shill, not a thoughtful analyst. I doubt you can think outside your blinders.
...Specifically, the Triffin dilemma is usually cited to articulate the problems with the role
of the U.S. dollar as the reserve currency under the Bretton Woods system. John Maynard Keynes
had anticipated this difficulty and had advocated the use of a global reserve currency called
'Bancor'. Currently the IMF's SDRs are the closest thing to the proposed Bancor but they have
not been adopted widely enough to replace the dollar as the global reserve currency.
In the wake of the financial crisis of 2007–2008, the governor of the People's Bank of China
(YES - CHINA) explicitly named the reserve currency status of the US dollar as a contributing
factor to global savings and investment imbalances that led to the crisis. As such the Triffin
Dilemma is related to the Global Savings Glut hypothesis because the dollar's reserve currency
role exacerbates the U.S. current account deficit due to heightened demand for dollars...
...
Implication in 2008 meltdown
In the wake of the financial crisis of 2007–2008, the governor of the People's Bank of China
explicitly named the Triffin Dilemma as the root cause of the economic disorder, in a speech titled
Reform the International Monetary System. Zhou Xiaochuan's speech of 29 March 2009 proposed strengthening
existing global currency controls, through the IMF.[1][2]
This would involve a gradual move away from the U.S. dollar as a reserve currency and towards
the use of IMF special drawing rights (SDRs) as a global reserve currency.
Zhou argued that part of the reason for the original Bretton Woods system breaking down was
the refusal to adopt Keynes' bancor which would have been a special international reserve currency
to be used instead of the dollar...
Thanks for sharing. I think the speech was intended to message about the US being part of the
problem not to give credit to Triffin. But of course I dont know.
I simply want people to put on different thinking caps, so to speak.
Something like that sure enough, but a bit more formalized in the area of exchange rates and maybe
capital controls as well. In any case a pipe dream in my lifetime. What we are attempting to get
that old teaming masses of uneducated voting majority to realize first is that they have been
duped. There are tons of alternatives, too many almost. Sovereigns make their own currencies for
the most part, tax if they will, and regulate. There are a great many ways to play the game. The
idea that industrial policy and capital controls violate some pre-ordained laws of economics is
rubbish. OTOH, no nation is free of the external consequences of their economic and currency policies
if they must depend upon exchange for any of their necessities.
Review of the economics troops
Comment on Noah Smith on 'Keynesian Economics Is Hot Again'
There is Orthodoxy with Walrasian microfoundations and it has been nicely defined by Krugman:
" most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium
world as a starting point."
There is Keynesianism with macrofoundations and they have been nicely defined by Keynes: "Income
= value of output = consumption + investment. Saving = income - consumption. Therefore saving
= investment."
Both, Walrasian microfoundations and Keynesian macrofoundations are provable false. Methodologically
speaking, micro and macro is axiomatically false. It holds, when the premises/axioms/foundational
propositions are false or contain nonentities the WHOLE theory/model/analytical superstructure
is false. This includes ALL variants of IS-LM from Hicks to Krugman.#1
The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually
contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic
concept profit wrong. Because economists lack the true theory their economic policy guidance has
NO sound scientific foundation since Adam Smith/Karl Marx.
There is NO use to combine axiomatically false approaches or to periodically alternate between
them. What Krugman or Christiano are doing is cargo cultic show biz.
Noah Smith maintains: "The right way forward for macro isn't to go all-in on a hot new theory,
or to passionately embrace old paradigms either. The best approach is to adopt more public humility
and caution about their theories, while working to understand microeconomics better."
In view of the fact that the profit theory is false since 200+ years, microfoundations are
false since 140+ years, and macrofoundations are false since 80+ years, the right way forward
for Walrasians and Keynesians is to retire.
Keynesian Economics Is Hot Again
By Noah Smith - Bloomberg
To the growing list of famous mainstream macroeconomists who have publicly criticized their
discipline, add another: In a recent essay, * Lawrence Christiano of Northwestern University argues
that the Great Recession was an "earthquake" that dramatically changed how researchers think about
the U.S. economy.
Christiano is known as a scholar who straddles macroeconomics' great divide. His models adopt
the basic form and some of the bedrock assumptions of the New Classicals, the economists who insisted
in the 1980s that monetary and fiscal policy can't fight recessions. But he also incorporates
some elements of Keynesianism, the idea that aggregate demand shortages exist and can be corrected
by the government stimulus. Perhaps as a result of their centrist take on that long-running debate,
theories inspired by Christiano's have won pride of place in central banks around the world.
But after the Great Recession, Christiano says, the pendulum should swing decisively in the
Keynesian direction:
"The Great Recession was the response of the economy to a negative shock to the demand for
goods all across the board. This is very much in the spirit of the traditional macroeconomic paradigm
captured by the [simple Keynesian] model The Great Recession seems impossible to understand without
invoking shocks in aggregate demand. As a consequence, the modern equivalent of the IS-LM model-the
New Keynesian model-has returned to center stage."
Another way of putting this is that Paul Krugman was right. Krugman has long advocated that
macroeconomists learn to once again think in terms of simple simple Keynesian theory. And when
more fully developed, complex models are needed, Krugman uses the kind of models that Christiano
endorses.
As Christiano mentioned, the New Keynesian revolution isn't so new. Even in the 1990s, economists
like Greg Mankiw and Olivier Blanchard were arguing that monetary policy had real effects on demand.
And at the same time, international macroeconomists were realizing that Japan's post-bubble experience
of slow growth, low interest rates and low inflation implied that demand shortages could last
for a very long time unless the government rode to the rescue. Krugman, Adam Posen, Lars Svensson,
and others were already referring to a Japan-type stagnation as a liquidity trap in the late 1990s,
and warning that standard monetary policy of cutting interest rates wouldn't work in that sort
of situation.
But the profession didn't listen, and only the smallest deviations from the New Classical orthodoxy
were accepted into the mainstream. The idea of fiscal stimulus was still largely taboo. Nobel
prizes were awarded to the economists who made theories in which demand shortages can't exist,
while no Nobels were given to New Keynesians for suggesting otherwise. When the Great Recession
hit, some prominent macroeconomists pooh-poohed the idea that stimulus could help.
Christiano's essay should serve as a needed rebuke to the profession for resisting Keynesian
ideas just when they were needed most. But it also raises an uncomfortable question: Why didn't
macroeconomists catch on until years after disaster struck?
One explanation is sociological. Perhaps the influence of legendary figures like Robert Lucas,
Thomas Sargent and Edward Prescott -- all anti-Keynesians who now have big gold medals from Sweden
-- was enough to scare younger economists away Keynesian ideas. Some of macroeconomics' internal
critics, such as World Bank chief economist Paul Romer, have suggested as much. Political considerations
might have played a role as well -- to many economists on the free-market end of the ideological
spectrum, Keynesianism represents unacceptable government meddling.
But these explanations, by themselves, are unsatisfying. In most scientific fields -- biology
or astronomy, for example -- the weight of evidence is enough to overcome social fads and political
bias. Even in most areas of economics, empirical results gradually push the profession in one
direction or another. For example, relatively few economists now believe a $15 minimum wage is
likely to reduce employment very much; a plurality is uncertain. The steady drumbeat of papers
showing small or zero job losses from minimum-wage hikes probably played a role in altering the
expert consensus.
If economists gravitated toward anti-Keynesian theories, it was at least in part because evidence
wasn't strong enough to push them in the right direction. It's just very hard to assess the impacts
of fiscal stimulus. For example, Japan's tremendous government spending binge in the 1990s looks
to a casual observer like it had no effect, since the economy didn't recover until years later
-- but government spending might have been the only thing saving the country from a deeper recession.
For a great explanation of why macroeconomic evidence is so weak and subject to multiple interpretations,
read this excellent post ** by the University of Oregon's Mark Thoma....
Krugman, who according to his critics should never comment on anything outside of economics, makes
two apt points here about the politics.
Trump gets points for "honesty" not because he's honest, but because he gives voice to the
deplorable instincts of many (which apparently includes a majority of Republican voters). They
like that he expresses the ugly things they are afraid to say themselves.
Also, while Trump is indeed incompetent, his failure to implement policy could instead be attributed
to underlying lack of plausibility behind the GOPs talking points. Their goals are not getting
accomplished because there are fundamental structural flaws underlying them. I'm not sure I agree
with Krugs entirely on this ... but it's an interesting supposition.
I understand that you have zero physics knowledge. You do not need to repeat that.
And my opinion certainly is more credible on issues such as Russia because I can compare views
of two sides of this conflict (remember Latin dictum "Audi alteram partem" ) and you do not and
do not want to do this.
All you do by attacking ilsm, who BTW, unlike you, served his country, is to demonstrate the
level of your indoctrination into jingoism and militarism. Which is impressive, but not so interesting,
other then for study of groupthink.
The only thing you can do on issues of foreigh policy is to regurgitate uncritically the propaganda
taken from CNN. Which actually makes you yet another neoliberal twerp in this forum.
I actually do not even remember when the last time I thought of your posts on issues of foreign
policy as anything worse noting .
At least I studied Russian history and the language.
While your ignorance and jingoism make you a laughing stock for those people who are not indoctrinated
into American exceptionalism.
"This perversion isn't Arrow's fault. He merely helped to prove a mathematical theorem, and was
no blind advocate for markets. Indeed, he actually thought the theorem illustrated the limitations
of capitalism"
This quote illustrates that there is some difference between neoliberalism and neo-classical
economics. Neoliberals do not care about applicability of neo-classical economics or the validity
of generalized stochastic equilibrium.
They used neo-classical theories as a ram to destroy New Deal Capitalism and paid "useful idiots"
outsized amount of money to keep them in power in economics departments.
There is a well known historical narrative which supports your assertion surrounding Austrian
economics and the University of Chicago although as you suggest it goes much deeper than that.
In my view neoliberals are like republicans, in that they make no secret of their allegiances.
I see neoclassicals as even more despicable, because they pretend to be Keynesians and in favor
of the working class, while promoting "free market" solutions.
Neoliberals come right up and punch you in the face. Neoclassicals slink around and stab you
in the back.
It's because Krugman fails to use the terms "job killing tax cuts", "job killing deregulation",
"job killing coal", "job killing cheap oil", "job killing easy credit", "job killing profits".
Followed by simple explanations using real world examples of workers who have lost their jobs
thanks to tax cuts, thanks to deregulation, thanks to high profits, thanks to easy credit.
Krugman has bought into free lunch economics, but simply wants to pick different winners and
losers.
Look at the efforts to repeal Obamacare. That will kill hundreds of thousands of jobs every
quarter, quarter after quarter, unless government bailout the corporations trying to avoid bankruptcy
by slashing payrolls, bailouts funded with easy cheap credit.
Obamacare forced people with income to pay more and more workers to deliver more and more medical
care. Zero sum. The cost to people paying the new taxes and insurance premiums pay the increasing
labor costs of higher employment in health care delivering more health to the consumers most in
need of consuming health care.
If a tax on gasoline was increased to $1 a gallon for Federal and State, every added penny
in revenue from years 1 to 10 will spent in years 2 to 7, with already scheduled maintenance for
the next 18 months done in 12 months. This is forced spending by people who have money most are
not spending on stuff made by local workers.
Re: The ideas of Kenneth Arrow - Steven Durlauf
...............
"Yet the theorem trails a dense cloud of caveats, which Arrow himself recognized could be more
important than the proof itself. For one, it worked only in a perfect world, far removed from
the one humans actually inhabit. Equilibrium is merely one of many conceivable states of that
world; there's no particular reason to believe that the economy would naturally tend toward it.
Beautiful as the math may be, actual experience suggests that its magical efficiency is purely
theoretical, and a poor guide to reality."
...................
"Remarkably, academic macroeconomists have largely ignored these limitations, and continue
to teach the general equilibrium model -- and more modern variants with same fatal weaknesses
-- as a decent approximation of reality. Economists routinely use the framework to form their
views on everything from taxation to global trade -- portraying it as a value-free, scientific
approach, when in fact it carries a hidden ideology that casts completely free markets as the
ideal."
...........................
"This perversion isn't Arrow's fault. He merely helped to prove a mathematical theorem, and
was no blind advocate for markets. Indeed, he actually thought the theorem illustrated the limitations
of capitalism, and he was prescient in understanding how economic inequality might come to impair
the workings of democratic government. Perhaps it would be best to use his own words: "In a system
where virtually all resources are available for a price, economic power can be translated into
political power by channels too obvious for mention. In a capitalist society, economic power is
very unequally distributed, and hence democratic government is inevitably something of a sham.""
......................
https://www.bloomberg.com/view/articles/2017-03-09/the-misunderstanding-at-the-core-of-economics
"This perversion isn't Arrow's fault. He merely helped to prove a mathematical theorem, and was
no blind advocate for markets. Indeed, he actually thought the theorem illustrated the limitations
of capitalism"
This quote illustrates that there is some difference between neoliberalism and neo-classical
economics. Neoliberals do not care about applicability of neo-classical economics or the validity
of generalized stochastic equilibrium.
They used neo-classical theories as a ram to destroy New Deal Capitalism and paid "useful idiots"
outsized amount of money to keep them in power in economics departments.
"... The inevitable failure of economics started with Jevons/Walras/Menger but Arrow gave the final
push with this fundamental methodological specification: "It is a touchstone of accepted economics that
all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging
economic research, in peer review of papers and research, and in promotions, includes the criterion
that in principle the behavior we explain and the policies we propose are explicable in terms of individuals,
not of other social categories." (Arrow, 1994) ..."
"... The definition of the subject matter translates into the following hard core propositions,
a.k.a. axioms: "HC1 economic agents have preferences over outcomes; HC2 agents individually optimize
subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant
knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium
states." (Weintraub, 1985) ..."
"... Obviously, this axiom set contains THREE NONENTITIES: (i) constrained optimization (HC2), (ii)
rational expectations (HC4), (iii) equilibrium (HC5). Every theory/model that contains a nonentity is
A PRIORI false. By consequence, General Equilibrium theory of the Arrow-Debreu type and its offspring
until DSGE/RBC/New Keynesianism is scientifically worthless. ..."
How Arrow pushed economics over the cliff
Comment on Steven Durlauf on 'Kenneth Arrow and the golden age of economic theory'
The inevitable failure of economics started with Jevons/Walras/Menger but Arrow gave
the final push with this fundamental methodological specification: "It is a touchstone of accepted
economics that all explanations must run in terms of the actions and reactions of individuals.
Our behavior in judging economic research, in peer review of papers and research, and in promotions,
includes the criterion that in principle the behavior we explain and the policies we propose
are explicable in terms of individuals, not of other social categories." (Arrow, 1994)
The definition of the subject matter translates into the following hard core propositions,
a.k.a. axioms: "HC1 economic agents have preferences over outcomes; HC2 agents individually
optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4
agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed
with reference to equilibrium states." (Weintraub, 1985)
Obviously, this axiom set contains THREE NONENTITIES: (i) constrained optimization (HC2),
(ii) rational expectations (HC4), (iii) equilibrium (HC5). Every theory/model that contains
a nonentity is A PRIORI false. By consequence, General Equilibrium theory of the Arrow-Debreu
type and its offspring until DSGE/RBC/New Keynesianism is scientifically worthless.
Re: The ideas of Kenneth Arrow - Steven Durlauf
...............
"Yet the theorem trails a dense cloud of caveats, which Arrow himself recognized could be more
important than the proof itself. For one, it worked only in a perfect world, far removed from
the one humans actually inhabit. Equilibrium is merely one of many conceivable states of that
world; there's no particular reason to believe that the economy would naturally tend toward
it. Beautiful as the math may be, actual experience suggests that its magical efficiency is
purely theoretical, and a poor guide to reality."
...................
"Remarkably, academic macroeconomists have largely ignored these limitations, and continue
to teach the general equilibrium model -- and more modern variants with same fatal weaknesses
-- as a decent approximation of reality. Economists routinely use the framework to form their
views on everything from taxation to global trade -- portraying it as a value-free, scientific
approach, when in fact it carries a hidden ideology that casts completely free markets as the
ideal."
...........................
"This perversion isn't Arrow's fault. He merely helped to prove a mathematical theorem,
and was no blind advocate for markets. Indeed, he actually thought the theorem illustrated
the limitations of capitalism, and he was prescient in understanding how economic inequality
might come to impair the workings of democratic government. Perhaps it would be best to use
his own words: "In a system where virtually all resources are available for a price, economic
power can be translated into political power by channels too obvious for mention. In a capitalist
society, economic power is very unequally distributed, and hence democratic government is inevitably
something of a sham.""
......................
https://www.bloomberg.com/view/articles/2017-03-09/the-misunderstanding-at-the-core-of-economics
"I Suspect the Major Reason for the Rise in Concentration Is Technological Change, Particularly
in IT"
Posted on April 7, 2017 by ProMarket writers
In this installment of ProMarket's interview series on concentration in America, Chicago
Booth professor Steven Kaplan discusses the reasons for the rise in concentration. "Overall,
the increases in concentration from technology and regulation are positive while the increase
from rent seeking is a negative."
[The article linked above entirely misses "how economic inequality might come to impair the
workings of democratic government." Kaplan is very tentative about linking inequality to concentration
and is generally less concerned with inequality per se than monopoly rent seeking. As long
as all the sharks in the tank are free then everything is OK.]
Walmart, Home Depot and various chains/licensees are examples of concentration that didn't
arise because of network effects. Rather, they used their advantage of overwhelming amounts
of capital backing to under-price and/or outlast smaller competitors.
As a result we have wealth moving from the top 20% to the top 0.1%, wealth less geographically
disbursed and fly-over country deteriorating.
Gee - I heart what? Maybe you missed my Econospeak post where I noted how they abused transfer
pricing. Something to do with Hong Kong sourcing affiliates. I'd explain it to you all over
again but you would get angry as you usually do when you cannot grasp simple concepts.
Network effects? How about economy of scale, not least management at scale enabled by IT? Not
just in retail, IT has significantly increased management efficiency, i.e. raised the thresholds
of size and complexity where an organization becomes unmanageable (which I would define as
taking on more size or complexity leads to a *reduction* or at least no increment in output/profit).
According to a number of claims I read long ago, Walmart's power over suppliers derived in
large part from the volume they could command. Capital or not, they will not order more volume
than they can sell - so they have to be able to sell that much stuff, and profitably, to begin
with.
For classical economists, it was a factor of production, and the source of "rent."
..............
In reality, however, land and capital are fundamentally distinctive phenomena. Land is permanent,
cannot be produced or reproduced, cannot be 'used up' and does not depreciate. None of these features
apply to capital. Capital goods are produced by humans, depreciate over time due to physical wear
and tear and innovations in technology (think of computers or mobile phones) and they can be replicated.
In any set of national accounts, you will find a sizeable negative number detailing physical
capital stock 'depreciation': net, not gross capital investment is the preferred variable used
in calculating a nations's output. When it comes to land, net and gross values are equal.
machines coal mines hay fields rain forests
glacial lakes these are physical constructs
that society
ie acting at the social level
can capitalize
By adding labor
produces product that exchanges
on markets for more then the labor
costs
Noah Smith says important things in his post. Economists have hidden behind "forecasting is not
our job" defense for too long. I would like to add that as with any model, in sample and out of
sample testing is very important. Economists never do that. The latest attempt to add variables
to explain the events of the last decade is another exercise in over fitting models. Pathetic.
"Macroeconomists typically respond that forecasting isn't their job. The economy has all kinds
of things going on at any given time, they say -- too much randomness and noise to allow a reliable
forecast. The best they can do, macroeconomists will say, is to predict the effects of specific
policies.
This defense is weak. If the economy is dominated by random noise, that noise will also permeate
the data that is used to validate macroeconomic models. If forecasting is impossible, then picking
the right policy-evaluation model will also be impossible. Also, the inability to forecast is
often a clue that a model is just plain wrong."
Can I try another tack? People expect us to be good forecasters. We're not. The old adage applies
- "why do economists forecast? To make the weather man look good".
"My favorite paper in this literature is by Refet Gurkaynak, Burcin Kisacikoglu, and Barbara Rossi.
In 2013, they took some of the most advanced modern macroeconomic models then available -- called
DSGE, for dynamic stochastic general equilibrium -- and tested them against some very simple models
called autoregressive (AR) models."
Noah and I share one thing in common - a certain disdain for these overly complex and highly
unrealistic DSGE models. Of course they missed the Great Recession. Many of them rely on assumptions
that markets are perfect and instantly clear. If one ignore an issue - that issue can come back
to bite you fast.
I share your skepticism of the DSGE models. However, the problems are more basic and applies across
model types.
1) very few papers come up with models to forecast. instead of testing the ability to forecast,
they quantify how well past data is fit. Then they will produce some bogus looking charts of impulse
responses to one variable holding all else equal. The impulse response charts are the most useless
output in econ papers.
2) It is far easier to produce a model with good in sample forecasts. It is far more difficult
to produce true good out of sample forecasts. I have really not seen economists do out of sample
forecasting in an honest way.
Forecasting markets is a fools task
As a scientist
Like alchemy its goal is gold
out of lead
when market systems
are inherently historistic
and thus radically uncertain
at time intervals long enough
to be meaningful
to macro forecasting
"... As with any major reform movement, the corporate backlash was predictable. In Neo-classical Economics, Gaffney reveals that this backlash took two main forms. The first was the Red Scare (1919-1989), overseen by J Edgar Hoover as Assistant Attorney General and later as FBI director. ..."
"... The second was more insidious and involved the deliberate reframing of the classical economic theory developed by Adam Smith, Locke, Hume, and Ricardo as so-called neoclassical economics. ..."
Why do American children study Karl Marx, the villain we love to hate, in school? Yet Henry George,
whose views on land and tax reform gave rise to the Progressive and Populist movements of the
1900s, is totally absent from US history books.
During the 1890s George, author of the 1879 bestseller Progress and Poverty, was the third
most famous American, after Mark Twain and Thomas Edison. In 1896 he outpolled Teddy Roosevelt
and was nearly elected mayor of New York.
In Neo-classical Economics as a Stratagem Against Henry George (2007), University of California
economist Mason Gaffney argues that George and his Land Value Tax pose a far greater threat than
Marx to America's corporate elite.
America's enormous concentration of wealth has always depended on the inherent right of the
wealthy elite to seize and monopolize vast quantities of land and natural resources (oil, gas,
forests, water, minerals, etc) for personal profit.
Adopting an LVT, which is far easier than launching a violent revolution, would essentially
negate that right. What's more, every jurisdiction that has ever implemented an LVT finds it works
exactly the way George predicted it would. Productivity, prosperity, and social wellbeing flourish,
while inflation, wealth inequality, and boom and bust recessions and depressions virtually vanish.
When Progress and Poverty first came out in 1879, it started a worldwide reform movement that
in the US manifested in the fiercely anti-corporate Populist Movement in the 1880s and later the
Progressive Movement (1900-1920). Many important anti-corporate reforms came out of this period,
including the Sherman Antitrust Act (1890), a constitutional amendment allowing Americans to elect
the Senate by popular vote (prior to 1913 the Senate was appointed by state legislators), and
the country's first state-owned bank, The Bank of North Dakota (1919).
The Corporate Elite Strikes Back
As with any major reform movement, the corporate backlash was predictable. In Neo-classical
Economics, Gaffney reveals that this backlash took two main forms. The first was the Red Scare
(1919-1989), overseen by J Edgar Hoover as Assistant Attorney General and later as FBI director.
The second was more insidious and involved the deliberate reframing of the classical economic
theory developed by Adam Smith, Locke, Hume, and Ricardo as so-called neoclassical economics.
The latter totally negates Adam Smith's basic differentiation between "land", a limited, non-producible
resource. and "capital", a reproducible result of past human production. Smith, Locke, Hume, and
Ricardo all held that individuals have no right to seize and monopolize scarce natural resources,
such as land, minerals, water, and forests. They believed that because these resources are both
limited and essential for human survival, they should belong to the public.
Neoclassical economics, which first developed in the 1890s, was based on the premise that growth
and development can only occur if a handful of rent-seekers are allowed to monopolize scarce land
and natural resources for their personal profit. Henry George, who publicly debated the early
pioneers of neoclassical economics, claimed the science of economics was being deliberately distorted
to discredit him. Gaffney agrees. Because George's proposal to replace income and sales tax with
single land value taxed is based on logical concepts of land, capital, labor, and rent advanced
by Adam Smith, Locke, Hume, and Ricardo, they all had to be discredited.
Gaffney believes neoclassical economic theory undermines George's arguments for a single Land
Value Tax in two basic ways: 1) by claiming that land is no different from other capital (ironically
Marx made the identical argument) and 2) by portraying the science of economics as a series of
hard choices and sacrifices that low and middle income people must make. Some examples:
If we want efficiency, we must sacrifice equity.
To attract business, we must lower taxes and shut libraries and defund schools.
To prevent inflation, we must keep a large number of Americans unemployed.
To create jobs, we must destroy the environment and pollute the air, water, and food chain.
To raise productivity, we must fire people.
Gaffney's book traces the phenomenal public support Georgism enjoyed before the tenets of neoclassical
economics took hold in American universities. In addition to inspiring the Populist and Progressive
movements, an LVT to fund irrigation projects in California's Central Valley made California the
top producing farm state. In 1916 the first federal income tax law was introduced by Georgist
members of Congress (Henry George Jr and Warren Bailey) and included virtually no tax on wages.
In 1934 Georgist Upton Sinclair was almost elected governor of California.
Gaffney also identifies the robber barons whose fortunes financed the economics departments of
the major universities who went on to substitute neooclassical economics for classical economic
theory. At the top of this list were
Ezra Cornell (owner of both Western Union and Associated Press) – founder of Cornell University
John D Rockefeller – helped fund the University of Chicago and installed his cronies in its
economics department.
J. P Morgan – investment banker and early funder of Columbia University
B&O Railroad – John Hopkins University
Southern Pacific Railroad – Stanford University
The final section of Gaffney's book lays out the tragic economic, political, and social consequences
of allowing the Red Scare and neoclassical economics to stifle America's movement for a single
Land Value Tax:
Economic Consequences
The corporate elite has privatized, or is privatizing, most of the public domain (including
fisheries, the public airwaves, water, offshore oil and gas, and the right to clean air) without
compensation to the public.
The rate of saving and capital formation continues to fall rapidly. This is the main reason
there is no recovery.
Although profits soar, corporations have no incentive to invest in expansion and jobs. Instead
they invest their profits in real estate, derivatives, and commodities speculation.
American capital is decayed and obsolete. The US has lost much of its steel and auto industries.
Power plants and oil refineries are ancient and polluting. Most public capital (infrastructure)
is old and crumbling.
The number of American farms has fallen from 6 million in 1920 to 1 million in 2007.
The USA, once so self-sufficient, has grown dangerously dependent on importing raw materials
and foreign manufacturers.
The US financial system is a shambles, supported only by loading trillions of dollars of bad
debts onto the taxpayers.
Real wage rates have continued to fall since 1975,
Unemployment has risen to chronically high levels.
Inequality in wealth and income continues to increase rapidly.
Political Consequences
The corporate elite has nullified all the Progressive Era electoral reforms by pouring money
into politics and "deep lobbying," at all levels of government, including our institutions of
higher learning and our public schools.
The corporate elite continue to pour ever more of our tax money into prisons.
Social Consequences
Homelessness has risen to new heights, in spite of decades of subsidies to home-building and,
favorable tax treatment of owner-occupied homes
Hunger is rampant.
Street begging, once rare, is everywhere
Americans have experienced a sharp loss of community, honor, duty, loyalty and patriotism.
In the shadow world between crime and business there is now the vast, gray underground economy
that includes tax evasion, tax avoidance, and drug-dealing.
The US which once led the world in nearly every endeavor, has fallen far behind in infant survival,
in longevity, in literacy, in numeracy, in mental health.
American education no longer leads the world. Privatized education in the form of commercial
TV has largely superseded public education.
"... 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.
"... "Trust in institutions generally has taken a body blow over the past few years. The Edelman global survey suggests that public trust in businesses, government, NGOs and the media has fallen sharply. In 2016, only around half of the general public trusted these bodies. ..."
"... ... What is true of institutions appears to be true too of the economics profession. A recent poll by YouGov in the UK asked the general public how much they trusted various professions. Economists were towards the bottom of this list, well below scientists, historians, weather forecasters and even sports commentators." ..."
"... While the net approval of economic policy fell sharply in the Great Recession, it had been moving down since the early 2000s. In the past few years, households' assessment of economic policy got back to around its average historical level. Yet that still leaves slightly more people saying economic policy is doing a poor job than a good job. The large gap between today and the late-1990s sure looks like more than a messaging problem. ..."
... "how central banks could regain the public's trust by changing the way they communicate."
Well worth a read. It also fits in the avalanche of commentary on how economists should engage with
the public as experts and how much trust economists deserve. Some examples online from just the past
few days
here and
here.
I can see many reasons why central banks and economists should engage with the public. (And that's
even without getting into communication policy tools, like forward guidance, a topic I'll leave to
the
experts
.) I wrote in an earlier post about
a Fed Up event hosted by
the Kansas City Fed. And as
Steve Williamson
points out in his post on Haldane's speech, Reserve Banks in the United States do many forms
of community outreach. (A point Haldane does acknowledge too.) What's less clear to me is whether
better communication is sufficient for raising trust. Nowhere in his speech does Haldane
show that a lack of communication caused the reduced trust in central banks. In fact, central-bank
communication has dramatically risen. So was it the wrong kind or too little, too late? Even so,
I struggle to imagine the community round table, social media campaign, or gaming app that would
have convinced regular folks that the AIG bailout was a winner. And wouldn't it have been more bizarre
if the public's confidence in central banks and economists had not taken a hit in the financial
crisis? I get it that technocratic credibility and the independence it allows are crucial ingredients
to monetary policy, but isn't that earned by outcomes not words?
Trust slipping away? ...
How much has trust in central banks declined? Haldane's
Chart 12 shows trends across various countries since 1999, though the down-trending measure for
the United States is about its economic leadership in general. This reminded me of
analysis done by
Richard Curtin with the Michigan Survey. That survey asked U.S. households how their confidence
in the Federal Reserve had changed after some major events: stock market crash of 1987, financial
crisis/early recovery, and then later in this recovery. At each point, more people said their confidence
in the Fed had fallen relative to five years earlier than had increased, but the net decline in confidence
was sharpest around the financial crisis. Curtin also noted, not surprisingly, that individuals'
confidence in the Fed (or the lack thereof) and their outlook for the economy were strongly correlated.
Even so, I don't have a sense from any of these data what is the appropriate level of trust or
confidence in central banks and how far we are from it now. Maybe with Greenspan, or as his biographer
dubbed him, "
The Man Who Knew ," the public put too much trust in the Fed? And for an institution that got
its start on a
fake duck hunt
in 1910, the complicated relationship with trust and transparency goes way back.
A bigger problem? ...
Are the concerns now about damaged trust only limited to central banks? Haldane argues that institutions,
experts, and economists have all lost ground:
"Trust in institutions generally has taken a body blow over the past few years. The Edelman
global survey suggests that public trust in businesses, government, NGOs and the media has fallen
sharply. In 2016, only around half of the general public trusted these bodies.
... What is true of institutions appears to be true too of the economics profession.
A recent poll by YouGov in the UK asked the general public how much they trusted various professions.
Economists were towards the bottom of this list, well below scientists, historians, weather forecasters
and even sports commentators."
Central banks, which are institutions full of economists, are thus in for it. It is worth pointing
out that politicians scored even lower than economists in trust and civil servants only a bit better,
so economic policy, in general, faces a confidence deficit. But is this really new? Since 1970, the
Michigan survey has asked households:
"As to the economic policy of the government - I mean steps taken to fight inflation or unemployment
- would you say the government is going a good job, only fair, or a poor job?"
While the net approval of economic policy fell sharply in the Great Recession, it had been
moving down since the early 2000s. In the past few years, households' assessment of economic policy
got back to around its average historical level. Yet that still leaves slightly more people saying
economic policy is doing a poor job than a good job. The large gap between today and the late-1990s
sure looks like more than a messaging problem.
What can words achieve? ...
Much of Haldane's speech focuses on how inaccessible the communications of central banks, including
the media coverage of monetary policy, are for the general public. Seems like this tells us something
about central banks as well as who finds central banks interesting. An FOMC statement via tweetstorm
(shudder, at that canoe) might be more accessible but that doesn't guarantee a wider audience.
Attention
is a scarce resource. Plus simpler words could make it harder not easier to get the intended
message across.
Finally, pivoting back to how economists communicate in general ... a while ago I got interested
in the econ-blogosphere and econ-Twitter. Has reading economics with the technical jargon stripped
off and more personal views added on raised my confidence in economists? No, not really, but that
wasn't my goal. I went online to sample from a wider range of views about what was not working in
the economy. I was also interested in economics for a larger audience. Last year on staff at the
Council of Economic Advisers I got the chance to do a lot more writing, largely for non-economists.
It's hard to filter through research and convey findings in an accessible way ... and don't forget
the tradeoffs. Accessible often means trimming off nuance and taking a reasoned stand on debates
far from settled among economists. Even after all that simplifying, I once heard our economic reports
referred to as "vegetables" by White House staff ... as in good for you, but not necessarily what
you want to eat. Initially, I was a bit deflated but being good for people seems to me like a more
important goal for experts than being the next Elvis.
PS: Haldane refers to Elvis several times, including his title. On that fun note, I'll add that
Jessie J's Price Tag in 2011 struck me as a good Fed song: "Why is everybody so serious;
Acting so damn mysterious ... It's not about the money money money; We don't need your money money
money; We just wanna make the world dance ..."
"... In the 1960's Mr. Tobin's sophisticated Keynesianism made him the best-known intellectual opponent
of Milton Friedman, then the advocate of a rival (and rather naïve) doctrine known as monetarism ..."
James Tobin -- Yale professor, Nobel laureate and adviser to John F. Kennedy -- died yesterday.
He was a great economist and a remarkably good man; his passing seems to me to symbolize the passing
of an era, one in which economic debate was both nicer and a lot more honest than it is today.
Mr. Tobin was one of those economic theorists whose influence reaches so far that many people
who have never heard of him are nonetheless his disciples. He was also, however, a public figure,
for a time the most prominent advocate of an ideology we might call free-market Keynesianism --
a belief that markets are fine things, but that they work best if the government stands ready
to limit their excesses. In a way, Mr. Tobin was the original New Democrat; it's ironic that some
of his essentially moderate ideas have lately been hijacked by extremists right and left.
Mr. Tobin was one of the economists who brought the Keynesian revolution to America. Before
that revolution, there seemed to be no middle ground in economics between laissez-faire fatalism
and heavy-handed government intervention -- and with laissez-faire policies widely blamed for
the Great Depression, it was hard to see how free-market economics could survive. John Maynard
Keynes changed all that: with judicious use of monetary and fiscal policy, he suggested, a free-market
system could avoid future depressions.
What did James Tobin add? Basically, he took the crude, mechanistic Keynesianism prevalent
in the 1940's and transformed it into a far more sophisticated doctrine, one that focused on the
tradeoffs investors make as they balance risk, return and liquidity.
In the 1960's Mr. Tobin's sophisticated Keynesianism made him the best-known intellectual
opponent of Milton Friedman, then the advocate of a rival (and rather naïve) doctrine known as
monetarism . For what it's worth, Mr. Friedman's insistence that changes in the money supply
explain all of the economy's ups and downs has not stood the test of time; Mr. Tobin's focus on
asset prices as the driving force behind economic fluctuations has never looked better. (Mr. Friedman
is himself a great economist -- but his reputation now rests on other work.) ...
Why Were Economists as a Group as Useless Over 2010 -2014 as Over 1929-1935?
by J. Bradford DeLong
April 01, 2017 at 07:04 AM
Let us start with two texts this morning:
Paul Krugman: Don't Blame Macroeconomics (Wonkish And Petty): "Robert Skidelsky... argues,
quite correctly in my view, that economists have become far too inward-looking...
...But his prime examples of economics malfeasance are, well, terrible.... [The] more or less
standard model of macroeconomics when interest rates are near zero [is] IS-LM in some form....
[And] policy had exactly the effects it was "supposed to." Now, policymakers chose not to believe
this.... And yes, some economists gave them cover. But that's a very different story from the
claim that economics failed to offer useful guidance...
Simon Wren-Lewis: Misrepresenting Academic Economists: "The majority of academic macroeconomists
were always against austerity...
...Part of the problem is a certain disregard for consensus among economists. If you ask most
scientists how a particular theory is regarded within their discipline, you will generally get
a honest and fairly accurate answer.... Economists are less likely to preface a presentation of
their work in the media with phrases like 'untested idea' or 'minority view'.... Part of Brad's
post it seems to me is simply a lament that Reinhart and Rogoff are not even better economists
than they already are. But there is also a very basic information problem: how does any economist,
let alone someone who is not an economist, know what the consensus among economists is? How do
we know that the people we meet at the conferences we go to are representative or not?...
"Mainstream", "academic", and "majority" are doing an awful lot of work here for both Paul
and Simon. So let me repeat something I wrote last December, in response to Paul's liking to say
that macroeconomics has done fine since 2007. Certainly Jim Tobin's macroeconomics has. John Maynard
Keynes's macroeconomics has. Walter Bagehot, Hyman Minsky, and Charlie Kindleberger's macroeconomics
has done fine.
But Bagehot and Minsky influenced the then top-five American economics departments--Chicago,
MIT, Harvard, Princeton, Yale--only through Kindleberger. Charlie went emeritus from MIT in 1976
and died in 1991, and MIT made a decision--a long series of repeated decisions, in fact--that
there was no space on its faculty for anybody like Charlie.
When Robert Skidelsky says "macroeconomics", he means the macroeconomics of RBC and DSGE and
ratex and the Great Moderation.
And he is right: Alesina and Ardagna and Reinhart and Rogoff each had more influence on what
policymakers and journalists thought about the effects of fiscal policy than did Paul Krugman
and company, (including me). While the Federal Reserve went full-tilt into quantitative easing
(but not stamped money or helicopter money), it did so in the face of considerable know-nothing
opposition. And the ECB lagged far behind in terms of even understanding its mission. Why? Because
economists Taylor, Boskin, Calomiris, Lucas, Fama, and company had almost as much or even more
impact as did Paul Krugman and company.
"Basic macro" did fine. But basic macro was not the really-existing macro that mattered.
And let me repeat part of my public intellectuals paper: In the last days before the coming
of the Roman Empire, Marcus Tullius Cicero in Rome wrote to his BFF correspondent Titus Pomponius
Atticus in Athens:
You cannot love our dear [Marcus Porcius] Cato any more than I do; but the man–although employing
the finest mind and possessing the greatest trustworthiness–sometimes harms the Republic. He speaks
as if we were in the Πολιτεια of Plato, and not in the sewer of Romulus
I like this blogger Campbell. Stephen Williamson should be excommunicated from the Economics Guild.
He should receive a letter of reproach from former CEA Chairs. (I'm thinking about the DeLong-SWL
debate.)
"Thus it's worth peering into [Williamson's] intellectual journey. First, after QE, despite
high unemployment and a weak economy, he repeatedly predicted that inflation would rise. When
it didn't happen, he changed his mind, which is what one should do. Only, he couldn't concede
that standard Keynesian liquidity trap analysis was largely correct. That would be equivalent
to surrendering his army to the evil of evils, Paul Krugman. Much easier to venture into the wilderness,
and instead conclude, not that inflation wasn't rising despite low interest rates because the
economy was still depressed, and banks were just sitting on newly printed cash, but rather that
inflation was low because interest rates were low!
Fortunately, not all of Macro went in this direction, as Larry Christiano, a mainstream economist,
discusses the Keynesian Revival* due to the Great Recession."
Lawrence J. Christiano Northwestern University Federal Reserve Bank of Minneapolis
February 2017
EXECUTIVE SUMMARY
The Great Recession was particularly severe and has endured far longer than most recessions.
Economists now believe it was caused by a perfect storm of declining home prices, a financial
system heavily invested in house-related assets and a shadow banking system highly vulnerable
to bank runs or rollover risk. It has lasted longer than most recessions because economically
damaged households were unwilling or unable to increase spending, thus perpetuating the recession
by a mechanism known as the paradox of thrift. Economists believe the Great Recession wasn't foreseen
because the size and fragility of the shadow banking system had gone unnoticed.
The recession has had an inordinate impact on macroeconomics as a discipline, leading economists
to reconsider two largely discarded theories: IS-LM and the paradox of thrift. It has also forced
theorists to better understand and incorporate the financial sector into their models, the most
promising of which focus on mismatch between the maturity periods of assets and liabilities held
by banks.
"... And that's the reason UK economics students revolted: "Few mainstream economists predicted the global financial crash of 2008 and academics have been accused of acting as cheerleaders for the often labyrinthine financial models behind the crisis. Now a growing band of university students are plotting a quiet revolution against orthodox free-market teaching, arguing that alternative ways of thinking have been pushed to the margins. ..."
"... why economists failed to warn about the global financial crisis and for having too heavy a focus on training students for City jobs. ..."
"... But the answer to their question is very simple. Neoliberals are in power and they dictate what is to be taught in Economics courses. They also promote and sustain "willing charlatans" like Mankiw, who poisons and indoctrinates students with neoclassical junk. ..."
So true; "SWL has never addressed what is happening in the real world."
And that's the reason UK economics students revolted: "Few mainstream economists predicted
the global financial crash of 2008 and academics have been accused of acting as cheerleaders for
the often labyrinthine financial models behind the crisis. Now a growing band of university students
are plotting a quiet revolution against orthodox free-market teaching, arguing that alternative
ways of thinking have been pushed to the margins.
Economics undergraduates at the University of Manchester have formed the Post-Crash Economics
Society, which they hope will be copied by universities across the country. The organisers criticise
university courses for doing little to explain why economists failed to warn about the global
financial crisis and for having too heavy a focus on training students for City jobs."
https://www.theguardian.com/business/2013/oct/24/students-post-crash-economics
But the answer to their question is very simple. Neoliberals are in power and they dictate what is to be taught in Economics courses. They also promote and sustain "willing charlatans" like Mankiw, who poisons and indoctrinates
students with neoclassical junk.
"... Ironic that Krugman is cited as a voice for reform - he represents the neo-Keynesian hell we've got stuck in. ..."
"... I'm an economics student at the University of Glasgow, in second year as part of a compulsory course we were taught about alternative economic theories in comparison to Neoclassical models. ..."
"... The course has only been running for a few years but in response students have set up a very similar society to promote alternative thinking on economics. Even just half a semester on Post-Keynesian Economic theory has really opened our eyes to the alternatives within economics. ..."
"... I studied neoclassical 'economics' (it really isn't economics, just garbage) for five years. Began to take my graduate degree in the autumn of 2008 when everything was falling apart and I had no idea why. No clue whatsoever. After my masters degree in neoclassical 'economics' I still had no clue what had happened. ..."
"... Orthodox economics: Ignore money. Hence, ignore debt. Let the overall leverage of the economy increase until Ponzi finance fails and financial crisis begins. The debt deflation that follows means money gets even more concentrated towards the financial/political elite than before the crisis. Neo-feudalism makes way - finally war. ..."
"... Orthodox economists don't understand capitalism. They can't. The long time failed axioms underlying everything else in their theories don't allow them to do that. ..."
I'm an economics student at the University of Glasgow, in second year as part of a compulsory
course we were taught about alternative economic theories in comparison to Neoclassical models.
The course has only been running for a few years but in response students have set up a
very similar society to promote alternative thinking on economics. Even just half a semester on
Post-Keynesian Economic theory has really opened our eyes to the alternatives within economics.
I studied neoclassical 'economics' (it really isn't economics, just garbage) for five years.
Began to take my graduate degree in the autumn of 2008 when everything was falling apart and I
had no idea why. No clue whatsoever. After my masters degree in neoclassical 'economics' I still
had no clue what had happened.
Then I stumbled across Post-Keynesian economics and it took me about six months to dismiss
the neoclassical garbage. If I hadn't studied that garbage for five years it would have taken
me a few days.
Orthodox economics: Ignore money. Hence, ignore debt. Let the overall leverage of the economy
increase until Ponzi finance fails and financial crisis begins. The debt deflation that follows
means money gets even more concentrated towards the financial/political elite than before the
crisis. Neo-feudalism makes way - finally war.
Then the cycle starts again.
Orthodox economists don't understand capitalism. They can't. The long time failed axioms
underlying everything else in their theories don't allow them to do that.
"... This has echoes of a protest by students in 2011 at Harvard when a group of students walked out of the lectures by Dr Gregory Manilow. What has happened to them? ..."
"... Good for them. The economics profession has been dominated by neoliberal theoreticians for far too long. It needs bringing back to the real world. ..."
"... i went to the LSE to study maths and statistics with a sprinkling of economics (my first taste of it at the time). after a few months i was of the opinion it is based on terrible assumptions. e.g. the needs of the average consumer, which are then blown up into fantastical macroeconomical proportions which only led to flawed arguments. The subsequent financial crisis only backed this up. ..."
What a ghastly indictment of Manchester, and other economics departments - obviously being
very economic with their subject. Sounds a bit like the Natural Sciences departments being run
by creationists.
This should be the first class for the whole students in economics.
What are the limits in ecology ecosystem? And what are the needs/capacities for human flourishing?
Adventures in New Economics 2: Donut Economics, Kate Raworth
This is an open/complex map with a compass in values that I've built trying to go through both
main concepts. It's valid for personal development / companies / communities / nations / whole
planet.
This has echoes of a protest by students in 2011 at Harvard when a group of students walked
out of the lectures by Dr Gregory Manilow. What has happened to them?
I personally have observed in other disciplines that teaching tends to be a generation behind
current thinking, Particularly when it has more to do with ideology than science.
Some ten years ago, a movement called the Post-Autistic Ecomoncs Movement had a considerable
influence in Europe but has no doubt disappeared in the face of the greed which is central supporting
feature of today's neoliberalism.
i went to the LSE to study maths and statistics with a sprinkling of economics (my first
taste of it at the time). after a few months i was of the opinion it is based on terrible assumptions.
e.g. the needs of the average consumer, which are then blown up into fantastical macroeconomical
proportions which only led to flawed arguments. The subsequent financial crisis only backed this
up.
I commend this thinking by the students but if I was one of their parents forking out 27k i
would probably tell them to pass the exams they need to and get out and start earning.
LSE is a godawful uni also, unless you have given spawn to gordon gekko dont bother with it.
Alternative theories and models??? Well they are currently practiced by North Korea and these
students will be more than welcomed by the Kim family to ply their trade there.
Actually, "alternative theories" were practiced by South Korea, which has been quite a success
story. It's not either the status quo or state communism, you know.
For an understanding of how we came to have thrust upon us the "Dismal Science" of neo-classical
economics, which took shape in the 1880's - 1890's, I recommend reading "The Corruption of Economics"
by Mason Gaffney.
Essentially, economic thinking was hijacked by the robber barons who through building and funding
universities were able to subvert the teaching of economics to suit their own agenda. Classical
economics with a sound basis of three factors of production was replaced by voodhoo economics
which reduced the three factors of production to only two. Whereas once "land" was a factor of
production in its own right alongside "capital" and "labour", it was magicked away to be incorporated
as "capital" for the purpose of the land owning robber barons.
As anyone with a few braincells would know, "land" is a distinct factor of production in its
own right, and not only that, it is the primary factor since neither "capital" or "labour" would
exist without it. But "land" can exist without both the other two factors which makes it unique
and makes it primary and yet voodhoo economics has managed to hide this fact so well through the
employment of clever mathematics to create an illusion of being a solid discipline.
Neoclassical economics is the idiom of most economic discourse today. It is the paradigm
that bends the twigs of young minds. Then it confines the florescence of older ones, like chicken-wire
shaping a topiary. It took form about a hundred years ago, when Henry George and his reform
proposals were a clear and present political danger and challenge to the landed and intellectual
establishments of the world. Few people realize to what a degree the founders of Neoclassical
economics changed the discipline for the express purpose of deflecting George, discomfiting
his followers, and frustrating future students seeking to follow his arguments. The stratagem
was semantic: to destroy the very words in which he expressed himself.
To most modern readers, probably George seems too minor a figure to have warranted such an
extreme reaction. This impression is a measure of the neo-classicals' success: it is what they
sought to make of him. It took a generation, but by 1930 they had succeeded in reducing him
in the public mind. In the process of succeeding, however, they emasculated the discipline,
impoverished economic thought, muddled the minds of countless students, rationalized free-riding
by landowners, took dignity from labor, rationalized chronic unemployment, hobbled us with
today's counterproductive tax tangle, marginalized the obvious alternative system of public
finance, shattered our sense of community, subverted a rising economic democracy for the benefit
of rent-takers, and led us into becoming an increasingly nasty and dangerously divided plutocracy.
Not one economics graduate have I met that has heard of Henry George but yet they have all
heard of Karl Marx. The robber barons and their useful idiots have certainly achieved what they
set out to do.
As clarification the two paragraphs in italics are excerpts from the "Corruption of Economics"
by Mason Gaffney. The link to Henry George's "Progress and Poverty" is,
http://www.henrygeorge.org/pcontents.htm
"... Then Economic History was virtually withdrawn from university Economics and other courses so that only the"lies" would be taught backed up by unquestioned (i.e. purely deductive) Mathematics. It is an academic crime ..."
If a viable economic solution emerged from the universities - one which remedied the classical
models and trumped the broken neo-liberal systems, how would we recognise it?
To provide some context - and I am in no way qualified to discuss this topic really but, the
first machines to produce logic emerging from Bletchley park were not fully recognised for their
potential - the computer revolution took place elsewhere. The UK is absolute rubbish at recognising
innovation!
Good luck to the students. I hope many more get involved in this debate.
I taught Economics for forty years and over 30 of those to Singaporean scholars destined to
Oxford, Cambridge and Ivy League universities; in all those years I was aware of the lies I had
to teach in order to pass university entrance exams.
I attempted to follow the thesis that every economic theory however old or new was attempting
to answer a unique contemporary economic problem and therefore only Economic History was of relevance
in understanding a theory be Adam Smith or Keynes or even (unacademically) Thatcherism.
My students found all such information useless to passing Economics exams but interesting for
"life".
Then Economic History was virtually withdrawn from university Economics and other courses
so that only the"lies" would be taught backed up by unquestioned (i.e. purely deductive) Mathematics.
It is an academic crime.
"... Neoliberal economics not only led to the crash of 2007/8 it is continuing to wreak havoc. A
good current example is pension schemes - something we will depend on one day. They are valued using
the purest form of free market thinking: the efficient markets hypothesis - the idea that asset markets
always perfectly embody all relevant information. It is akin to belief in magic. ..."
"... It is amazing to read how narrow economics education is in modern Britain. It is not only intellectually
unenlightened and literally dangerous, given the power many economics graduates can wield, amplified
by the extraordinary sums and resources they manage, it also does a great disservice to people who are
entitled to a proper education which, clearly, they are not receiving in this monotheistic model. ..."
"... It reminds me precisely of the so-called "religious education" I received in Ireland which
was nothing of the sort. All I got was instruction in Catholic doctrine and ethics; there was no instruction
in the beliefs of any other Christian sects, let alone what goes on in the other major world religions
such as Hinduism, Judaism, or Islam. What I know about them I taught myself in later life. ..."
"... It seems that the same shameful parochial narrowness, intellectual provincialism, and "one
true religion" ethic prevails in British economic so-called "education". ..."
"... On another matter, the revelation that economists "ignore empirical evidence that contradicts
mainstream theories" destroys any notion that economics is a science, a silly claim I have always opposed.
All that it reveals is that economists have no idea what science is. ..."
Neoliberal economics not only led to the crash of 2007/8 it is continuing to wreak havoc.
A good current example is pension schemes - something we will depend on one day. They are valued
using the purest form of free market thinking: the efficient markets hypothesis - the idea that
asset markets always perfectly embody all relevant information. It is akin to belief in magic.
Yet many professionals who run pension schemes and the government regulator all support it's
use because it suits them - it deflects responsibility from them while they continue to be paid.
It's effects on society are disastrous as it leads us to believe are insolvent. The government
and actuarial profession accepted all this and enshrined it in law.
A topical example is the universities pension scheme the USS which BBC Newsnight and Radio
4 have just told us has a 'black hole' of a deficit.
Many of us thought that the EMH would ditched after its spectacular failure but no. Zombie
theories continue on their path of destruction.
It is amazing to read how narrow economics education is in modern Britain. It is not only
intellectually unenlightened and literally dangerous, given the power many economics graduates
can wield, amplified by the extraordinary sums and resources they manage, it also does a great
disservice to people who are entitled to a proper education which, clearly, they are not receiving
in this monotheistic model.
It reminds me precisely of the so-called "religious education" I received in Ireland which
was nothing of the sort. All I got was instruction in Catholic doctrine and ethics; there was
no instruction in the beliefs of any other Christian sects, let alone what goes on in the other
major world religions such as Hinduism, Judaism, or Islam. What I know about them I taught myself
in later life.
It seems that the same shameful parochial narrowness, intellectual provincialism, and "one
true religion" ethic prevails in British economic so-called "education". Intellectuals ought
to be utterly ashamed to propagate such blinkered views. Anyone who has never heard of Keynes
is culturally illiterate; that an economics student, in particular, has never heard of Keynes
is a disgrace.
On another matter, the revelation that economists "ignore empirical evidence that contradicts
mainstream theories" destroys any notion that economics is a science, a silly claim I have always
opposed. All that it reveals is that economists have no idea what science is.
Delong is a typical neoliberal stooge, not that different from Mankiw, or Summers
Note that the terms "neoliberalism", "neo-classical economics" and "financial oligarchy" were
never used...
Notable quotes:
"... "DeLong's takeaway is that economists do need to recognize that they operate in a political environment (the sewers of Romulus) in which their work will be seized upon by interested groups, with real practical outcomes. " ..."
"... UE's conclusion is that mainstream economics needs to be taken down several notches, which would open more space for alternative approaches to economics and, indeed, alternative approaches to policy that place more weight on human outcomes, broadly understood, than the formalistic criteria of efficiency, etc. ..."
"... Simon-Wren Lewis (SWL) and Chris Dillow have both recently argued that criticising economics for the 2008 financial crisis distracts from the real source of the blame, which is banks, and therefore undermines the progressive cause. While I don't disagree that the banks deserve blame, I want to push back a bit on their argument that economics as a discipline has little to do with regressive ideas. ..."
"... Consider the case of monopoly. The economics textbooks may be against monopoly, but this is largely on the grounds that it reduces consumer welfare by increasing prices. Building on this logic, the Chicago School of anti-trust regulation has shifted the focus of anti-trust law to lowering prices for consumers. As this recent article on Amazon details, this has hidden other forms of monopoly abuse such as predatory pricing, market dominance and reduced bargaining power for workers, consumers and smaller companies. ..."
"... Or consider Reinhart and Rogoff's famous '90% debt threshold', where their statistics purportedly showed that after a country reaches 90% of sovereign debt, its growth would stall. This was used by many politicians, including George Osborne, to justify austerity - until it was revealed to be based on 'statistical errors'. Sure, R & R received a fair amount of flak for this, but they have been incredibly stubborn about the result. Where was the formal, institutional denunciation of such a glaring error from the economics profession, and of the politicians who used it to justify their regressive policies? Why are R & R still allowed to comment on the matter with even an ounce of credibility? The case for austerity undoubtedly didn't hinge on this research alone, but imagine if a politician cited faulty medical research to approve their policies - would institutions like the BMA not feel a responsibility to condemn it? (Answer: yes, even when the politician was in another country). ..."
"... There are many more examples like this, such as Andrei Shleifer, who despite being prosecuted for fraud in post-Soviet Russia was awarded the John Bates Clark medal, probably the second most prestigious prize in the discipline, was subsequently allowed to publish papers in respected journals about how well privatisation went in Russia, and was eventually bailed out of the case by his incredibly wealthy university to the tune of $26 million. This is not to mention the disastrous Russian privatisation as a whole and the role of certain economists/economic ideas in it. ..."
"... Even worse were the Chicago boys, who advised Augusto Pinochet's horrific economic policies (and no, they were not just humble advisors, they were knee deep in the absolute worst excesses of the regime.) Without any substantive ethical code and without procedures for weeding out corrupt, dishonest or discredited work, the profession creates an environment where people can act like this and get away with it, all under the banner of the intellectual credibility 'economics' seems to confer on people. ..."
"... Mainstream economists have used mathematics to hide ideology. ..."
"... They have cherry-picked mathematical constructions with highly restrictive, idealized properties and then wedged-in economic parameters to fit their purposes. That is the case with the neoclassical production function and with the Arrow-Debreu general equilibrium model. The objective was to "prove" that economies free from government control were "natural" and best. They have been sophists from their first emergence. ..."
"... Science is not capable of devising a theory that adequately explains all the human elements and serendipitous effects of an economy - and may never be capable. However, humans are capable of organizing a society according to their needs and wants. They do it on a corporate scale all the time. It isn't perfect but it works pretty well. ..."
"... Mainstream economists have fought against a managed economy because it would reduce the influence of themselves and their plutocrat sponsors. ..."
"DeLong's takeaway is that economists do need to recognize that they operate in a political
environment (the sewers of Romulus) in which their work will be seized upon by interested groups,
with real practical outcomes. "
Economics: Part of the Rot, Part of the Treatment, or Some of Each?
Is mainstream economics, with its false certitudes and ideological biases, one of the reasons
for the dismal state of policy debate in countries like the UK and the US, or are its rigorous
methods an important antidote to the ruling political foggery? That's being debated right now,
live online.
Our starting point is a post on Unlearning Economics, dated March 5, which argues that the
flaws of mainstream economics contribute to lousy policy on several fronts: downplaying the role
of monopoly, cheerleading for the shareholder value imperative in the corporate world, knee-jerk
support for trade agreements under the banner of comparative advantage, and regressive macroeconomic
policy, among others. A particularly pointed paragraph brought up the Reinhart-Rogoff 90% affair
and accused the economics profession of dereliction of duty by not taking action to rebuke the
wrongdoers:
Where was the formal, institutional denunciation of such a glaring error from the economics
profession, and of the politicians who used it to justify their regressive policies?
UE's conclusion is that mainstream economics needs to be taken down several notches, which
would open more space for alternative approaches to economics and, indeed, alternative approaches
to policy that place more weight on human outcomes, broadly understood, than the formalistic criteria
of efficiency, etc.
Simon Wren-Lewis responded by arguing that UE has it exactly backwards. Restricting himself
to UE's critique of macroeconomics, SWL says, yes, reactionary politicians have invoked "economics"
to support austerity, but "real" economists for the most part have not gone along. True, there
were a few, like Reinhart and Rogoff and those in the employ of the British financial sector ("City
economists") who took a public stand against sensible Keynesian policies in the wake of the financial
crisis, but they were a minority, and, in any case, what would you want to do about them? Economists,
like professionals in any field, will disagree sometimes, and having a centralized agency to enforce
a false consensus would ultimately work against progressives and dissenters, not for them. Let's
put the blame where it really belongs, says SWL-on the politicians and pundits who have brushed
aside decades of theoretical and empirical work to promulgate a reactionary, fact-free discourse
on economic policy.
Yes-but, adds Brad DeLong. He largely agrees with SWL, but delves more deeply into the Reinhart-Rogoff
affair. He shows that, even without the famed Excel glitch, a cursory look would reveal that R-R
were trumpeting nonexistent results:
The 90% debt cliff was an artifact of the way R-R set up their bins. Replace binning with
a continuous relationship between growth and debt and the cliff disappears.
The correlation between growth and debt supported no particular causal interpretation,
and R-R provided no other evidence to support their particular causal argument.
The correlation itself was so weak that the practical implication of R-R's claim was nil.
Fiscal stimulus that could make or break a recovery was being rejected on the basis of future
economic growth effects that would be too small to measure.
So the R-R claim that fiscal consolidation was necessary and urgent was unfounded from the
get-go, and these two were both respected mainstream economists, so what can we infer? DeLong's
takeaway is that economists do need to recognize that they operate in a political environment
(the sewers of Romulus) in which their work will be seized upon by interested groups, with real
practical outcomes. In this situation, the profession as a whole has a responsibility to assess
high profile but dubious work. Although he isn't explicit, my reading is that DeLong wants some
sort of professional quality control, but not institutionalized in the way UE seems to call for.
"reactionary politicians have invoked "economics" to support austerity, but "real" economists
for the most part have not gone along. True, there were a few, like Reinhart and Rogoff and those
in the employ of the British financial sector ("City economists") who took a public stand against
sensible Keynesian policies in the wake of the financial crisis, but they were a minority, and,
in any case, what would you want to do about them? Economists, like professionals in any field,
will disagree sometimes, and having a centralized agency to enforce a false consensus would ultimately
work against progressives and dissenters, not for them. Let's put the blame where it really belongs,
says SWL-on the politicians and pundits who have brushed aside decades of theoretical and empirical
work to promulgate a reactionary, fact-free discourse on economic policy."
Simon-Wren Lewis (SWL) and Chris Dillow have both recently argued that criticising economics
for the 2008 financial crisis distracts from the real source of the blame, which is banks, and
therefore undermines the progressive cause. While I don't disagree that the banks deserve blame,
I want to push back a bit on their argument that economics as a discipline has little to do with
regressive ideas.
But firstly, it is my view that criticising economics needn't have an ideological motivation.
Many critics, myself included, simply believe that neoclassical economics has severe shortcomings
and that in order to understand the economic system properly we need better ideas. In many cases
criticisms of neoclassical economics are so abstract that it's not even clear to me what the political
implications of either side would be (e.g. the fact that Arrow-Debreu equilibrium might be unstable
has no bearing on my view of whether capitalism itself is). I respect both SWL and Dillow immensely,
but taken alone I consider this line of argument a rather feeble attempt to shut down an important
scientific and philosophical debate.
Despite this, the point has some force to it: why devote so much intellectual effort to criticising
economics when we could be devoting it to getting the big banks and other corporate wrongdoers?
And here I think SWL and Dillow both paper over the extent to which economics has served those
in power, as I will try to illustrate with a number of examples. To be clear, I'm not 'blaming'
economists for all of these occurrences, but I do think the discipline seems to eschew responsibility
for them, and that progressive economists have a blind spot when it comes to the practical consequences
of their discipline.
Economics in Practice
I've always acknowledged that economists themselves are probably more progressive than they're
usually given credit for. Nevertheless, the absence of things like power, exploitation, poverty,
inequality, conflict, and disaster in most mainstream models - centred as they are around a norm
of well-functioning markets, and focused on banal criteria like prices, output and efficiency - tends
to anodise the subject matter. In practice, this vision of the economy detracts attention from
important social issues and can even serve to conceal outright abuses. The result is that in practice,
the influence of economics has often been more regressive than progressive.
Consider the case of monopoly. The economics textbooks may be against monopoly, but this
is largely on the grounds that it reduces consumer welfare by increasing prices. Building on this
logic, the Chicago School of anti-trust regulation has shifted the focus of anti-trust law to
lowering prices for consumers. As this recent article on Amazon details, this has hidden other
forms of monopoly abuse such as predatory pricing, market dominance and reduced bargaining power
for workers, consumers and smaller companies.
Similarly, textbook ideas about profit maximisation and rational agents responding to incentives
featured prominently in the promotion of shareholder value by Milton Friedman and other economists,
which has been dominant over the past few decades and has been instrumental in increasing inequality
and corporate short-termism. The potential macroeconomic impacts of corporate concentration have
also been ignored by discipline until very recently - a consequence, perhaps, of the narrowing
of particular subfields and the neglection of more critical systemic analysis (something similar
could perhaps be said for the 2016 Prize in contract theory, though I am no expert in this area).
One type of institution which is dominated by economic ideas is central banks, yet many of
their policies have had regressive elements. For instance, SWL praises economists at the Bank
of England for implementing Quantitative Easing, but forgets that the Bank itself admitted that
this has disproportionately benefited the wealthy. This problem goes even deeper: as J W Mason
has argued, inflation targeting - a key central bank policy across the world - in practice results
in workers' wages being kept down and their jobs being made more insecure in the name of combating
inflation. In both cases what is painted as a relatively benign process - reducing interest rates
and managing inflation, respectively - actually has quite serious social consequences, which generally
aren't discussed in class or by policymakers.
In the realm of international trade, economists have been all too inclined to support trade
deals - often quite vociferously - on the basis of simple ideas like comparative advantage, while
ignoring (a) the actual details of the trade deals, which as Dean Baker frequently points out,
tend to favour the rich and corporations and (b) their own more complex economic models, which
as Dani Rodrik frequently points out, do imply that trade will harm some people while benefitting
others. Uneven and unfair international trade has been a key element of the harm to workers over
the past few decades, and was undoubtedly a factor in the election of Trump.
Global trade institutions like the IMF and World Bank have been dominated by economics since
their inception, and using economics they inflicted massive pain through their free market 'structural
adjustment' policies, which can only be described as regressive but which were fundamentally based
on context-free neoclassical ideas about markets. True, these institutions may have softened somewhat
in recent years, but that doesn't undo the harm they have caused. In fact, even their more recent
'bottom up' policies such as microcredit and Randomised Control Trials - both inspired by economic
ideas - often seem to have benefited global and local elites at the expensive of the poorest.
As Jamie Galbraith once noted in the context of the financial crisis, the discipline just has
a blind spot for how ideas interact with power to produce unfair outcomes, sometimes taking the
form of outright abuse and fraud. Which leads me nicely to my next argument.
Abusing Economics
Economists may complain that economic ideas have been misused by vested interests, and that
this isn't their responsibility. But a huge problem with the discipline of economics is that it
has virtually no institutional shields against mistakes and wrongdoing. Merton and Scholes won
the biggest prize in the profession for their model of financial markets - which had become commonly
adopted in options trading - in 1997. A year later those same economists required a hefty bailout
when the use of their model was implicated in the collapse of the hedge fund Long-Term Capital
Management, where they were both partners. Was the prize revoked? No. Were they discredited? No.
Actually, even the model is still widely used, despite massively underestimating fat tails and
therefore being implicated in a number of other financial crises, including 2008.
Or consider Reinhart and Rogoff's famous '90% debt threshold', where their statistics purportedly
showed that after a country reaches 90% of sovereign debt, its growth would stall. This was used
by many politicians, including George Osborne, to justify austerity - until it was revealed to
be based on 'statistical errors'. Sure, R & R received a fair amount of flak for this, but they
have been incredibly stubborn about the result. Where was the formal, institutional denunciation
of such a glaring error from the economics profession, and of the politicians who used it to justify
their regressive policies? Why are R & R still allowed to comment on the matter with even an ounce
of credibility? The case for austerity undoubtedly didn't hinge on this research alone, but imagine
if a politician cited faulty medical research to approve their policies - would institutions like
the BMA not feel a responsibility to condemn it? (Answer: yes, even when the politician was in
another country).
There are many more examples like this, such as Andrei Shleifer, who despite being prosecuted
for fraud in post-Soviet Russia was awarded the John Bates Clark medal, probably the second most
prestigious prize in the discipline, was subsequently allowed to publish papers in respected journals
about how well privatisation went in Russia, and was eventually bailed out of the case by his
incredibly wealthy university to the tune of $26 million. This is not to mention the disastrous
Russian privatisation as a whole and the role of certain economists/economic ideas in it.
Even worse were the Chicago boys, who advised Augusto Pinochet's horrific economic policies
(and no, they were not just humble advisors, they were knee deep in the absolute worst excesses
of the regime.) Without any substantive ethical code and without procedures for weeding out corrupt,
dishonest or discredited work, the profession creates an environment where people can act like
this and get away with it, all under the banner of the intellectual credibility 'economics' seems
to confer on people.
And this leads me to my last point, which is the rhetorical power that invoking 'economics'
has in contemporary politics. 'You don't understand economics' is - rightly or wrongly - a common
refrain of those attacking progressive policies such as Ed Miliband's proposed energy price freeze,
the minimum wage, or fiscal expansion. As with the above abuses of economics, those such as SWL
complain (perhaps correctly) that these are inaccurate representations of the field.
But these same economists then invoke 'economics' in a similar way to justify their own policies.
In my opinion, this only reinforces the dominance of economics and narrows the debate, a process
which is inherently regressive. The case against austerity does not depend on whether it is 'good
economics', but on its human impact. Nor does the case for combating climate change depend on
the present discounted value of future costs to GDP. Reclaiming political debate from the grip
of economics will make the human side of politics more central, and so can only serve a progressive
purpose.
Think about how Republicans use "Science" and scientists fight back against their misuse. In recent
decades Republicans have left the field and now "scientist" has become a bad word for them.
Mainstream economists have used mathematics to hide ideology.
They have cherry-picked mathematical constructions with highly restrictive, idealized properties
and then wedged-in economic parameters to fit their purposes. That is the case with the neoclassical
production function and with the Arrow-Debreu general equilibrium model. The objective was to
"prove" that economies free from government control were "natural" and best. They have been sophists
from their first emergence.
In the 1950s, Arrow and others proved a theorem that, many economists believe, put a rigorous
mathematical foundation beneath Adam Smith's idea of the invisible hand. The theorem shows --
in a highly abstract model -- that producers and consumers can match their desires perfectly,
given a particular set of prices.
In this rarified atmosphere of "general equilibrium," economic activity might take place efficiently
without any central coordination, simply as a result of people pursuing their self-interest.
It's an insight that economists have used to argue for de-unionization, globalization and financial
deregulation, all in the name of removing various frictions or distortions that prevent markets
from achieving the elusive equilibrium.
Yet the theorem trails a dense cloud of caveats, which Arrow himself recognized could be more
important than the proof itself. For one, it worked only in a perfect world, far removed from
the one humans actually inhabit.
Equilibrium is merely one of many conceivable states of that world; there's no particular reason
to believe that the economy would naturally tend toward it. Beautiful as the math may be, actual
experience suggests that its magical efficiency is purely theoretical, and a poor guide to reality.
Remarkably, academic macroeconomists have largely ignored these limitations, and continue to
teach the general equilibrium model -- and more modern variants with same fatal weaknesses --
as a decent approximation of reality.
Economists routinely use the framework to form their views on everything from taxation to global
trade -- portraying it as a value-free, scientific approach, when in fact it carries a hidden
ideology that casts completely free markets as the ideal.
Thus, when markets break down, the solution inevitably entails removing barriers to their proper
functioning: privatize healthcare, education or social security, keep working to free up trade,
or make labor markets more "flexible."
Those prescriptions have all too often failed, as the 2008 financial crisis eloquently demonstrated.
The result is widespread distrust of economic experts and rejection of globalization.
In his recent book "Economism: Bad Economics and the Rise of Inequality," James Kwak credits
conservative think tanks funded by corporations and the wealthy for spreading the oversimplified
belief in markets as wise machines for producing optimal social outcomes. He certainly has a point,
yet such propaganda stemmed from an intellectual model that had been lurking at the center of
economics all along -- and remains there now, still widely revered.
This perversion isn't Arrow's fault. He merely helped to prove a mathematical theorem, and
was no blind advocate for markets. Indeed, he actually thought the theorem illustrated the limitations
of capitalism, and he was prescient in understanding how economic inequality might come to impair
the workings of democratic government.
Perhaps it would be best to use his own words: "In a system where virtually all resources are
available for a price, economic power can be translated into political power by channels too obvious
for mention. In a capitalist society, economic power is very unequally distributed, and hence
democratic government is inevitably something of a sham."
Comment on Simon Wren-Lewis on 'On criticizing the existence of mainstream economics'
There is no such thing as economics, there are FOUR economixes and they are constantly played
against each other. First, there is theoretical and political economics. The crucial distinction
within theoretical economics is true/false, the crucial distinction within political economics
good/bad. Economics exhausts itself since 200+ years in crossover discussion, that is, by NOT
keeping science and politics properly apart. As a result, it got neither science nor politics
right.
Heterodox economists say that orthodox economics is false and in this very general sense they
are right. Heterodox economists have debunked much of Orthodoxy but this has not enabled them
to work out a superior alternative. The proper task of Heterodoxy is not the repetitive critique
of Orthodoxy but to fully replace it, that is, to perform a paradigm shift: "The problem is not
just to say that something might be wrong, but to replace it by something ― and that is not so
easy." (Feynman)
Because Heterodoxy has never developed a valid alternative it advocates pluralism, more precisely,
the pluralism of false theories. The argument boils down to: if Orthodoxy is allowed to sell their
rubbish in the curriculum, Heterodoxy must also be allowed to sell their rubbish. Economics is
not so much a heroic struggle about scientific truth but about a better place at the academic
trough.
The fact of the matter is that neither Orthodoxy nor Heterodoxy has the true theory and that,
by consequence, the political arguments of BOTH sides have NO sound scientific foundation.
Traditional Heterodoxy knows quite well that it has nothing to offer in the way of progressive
science and therefore argues for dumping scientific standards altogether and to focus on politics
pure and simple: "The case against austerity does not depend on whether it is 'good economics',
but on its human impact. Nor does the case for combating climate change depend on the present
discounted value of future costs to GDP. Reclaiming political debate from the grip of economics
will make the human side of politics more central, and so can only serve a progressive purpose."
This is a good idea, economists should no longer pretend to do science but openly push their
respective political agendas, after all, this is what they have actually done the past 200+ years.
Neither Orthodoxy nor traditional Heterodoxy satisfies the scientific criteria of material and
formal consistency. So, both, orthodox and heterodox economists have to get out of science because
of incurable incompetence.
It was John Stuart Mill who told economists that they must decide themselves between science
and politics: "A scientific observer or reasoner, merely as such, is not an adviser for practice.
His part is only to show that certain consequences follow from certain causes, and that to obtain
certain ends, certain means are the most effectual. Whether the ends themselves are such as ought
to be pursued, and if so, in what cases and to how great a length, it is no part of his business
as a cultivator of science to decide, and science alone will never qualify him for the decision."
Both, orthodox and heterodox economists violate the principle of the separation of science
and politics on a daily basis. Economics is what Feynman famously called cargo cult science and
neither right wing nor left wing economic policy guidance has a sound scientific foundation since
Adam Smith/Karl Marx. It is high time that economics frees itself from the corrupting grip of
politics.
Science is not capable of devising a theory that adequately explains all the human elements
and serendipitous effects of an economy - and may never be capable. However, humans are capable
of organizing a society according to their needs and wants. They do it on a corporate scale all
the time. It isn't perfect but it works pretty well.
Mainstream economists have fought against a managed economy because it would reduce the
influence of themselves and their plutocrat sponsors.
"The story of inequality they tell is also one which is essentially technology based (IT and
outsourcing), as they find that inequality is almost entirely driven by changes in between firm
inequality. They deserve credit for presenting an interesting set of facts.
However, while intriguing, I'm not yet totally convinced this is the key to understanding inequality.
Macromon [sic] also had an excellent discussion of this research awhile back...
...
I took issue with this comment "Since 1980, income inequality has risen sharply in most developed
economies". As my blog readers know, income inequality has not risen dramatically in Germany,
France, Japan, or Sweden according to Alvaredo et al.. Thus, this comment threw me: "This means
that the rising gap in pay between firms accounts for the large majority of the increase in income
inequality in the United States. It also accounts for at least a substantial part in other countries,
as research conducted in the UK, Germany, and Sweden demonstrates." Right, but the increases in
inequality in Germany and Sweden have been quite minor relative to the US, and are also associated
with changes in top marginal tax rates. So, between firm inequality isn't actually explaining
much is what I'm hearing.
"the profession as a whole has a responsibility to assess high profile but dubious work."
As in that awful paper by Gerald Friedman. Peter Dorman ripped it. I ripped. And yes the Romers
ripped it.
That is what economists are suppose to do. But you have whined about this for the last 14 months.
Reply Monday, March 27, 2017 at 07:47 AM
Yes it was a priority to demonize Friedman b/c he was coming from the left and was supposedly
supporting Bernie Sanders. It was a way for the center-left to discredit Bernie Sanders and call
him "unPresidential" and "unserious" as Hillary did.
Meawhile PGL continuously name-drops Mankiw as if he has a man crush on him.
"... You don't need to look very far to see the neoliberal ideal; it is all around us: everything a commodity, including human beings; massive differentials in life chances; sweat shops for producers juxtaposed with unimaginable wealth for the owners of capital; everybody on their own, the rolling back of collective provision and no such thing as society. ..."
"... Instead, the neoliberals talk of freedom and choice, but in reality it is freedom for the few to exploit the many and the choice to take whatever crumbs are offered to you or starve. ..."
"... Agree, but it's not that they don't talk about it. The use mathematics as a way to underscore what is essentially an ideological position. It gives them an aura of objectivity, impartiality and scientific truth which, given their prepositions about utility maximization and unbounded growth, they frankly don't have. ..."
Keynes viewed economics as a branch of philosophy. At its heart are two questions - What is
the nature of man? and What sort of society should we create? The focus on mathematical models,
based upon free-market theories, has long been a victory for ivory towers over reality. Sure,
they have an important role to play, but when they are at the centre of what is taught at universities
something has gone wrong.
The neoliberals also have strong views on the kind of society they would like to create, but
they don't talk about it often, because very few people would vote for it.
You don't need to look very far to see the neoliberal ideal; it is all around us: everything
a commodity, including human beings; massive differentials in life chances; sweat shops for producers
juxtaposed with unimaginable wealth for the owners of capital; everybody on their own, the rolling
back of collective provision and no such thing as society.
Instead, the neoliberals talk of freedom and choice, but in reality it is freedom for the
few to exploit the many and the choice to take whatever crumbs are offered to you or starve.
Agree, but it's not that they don't talk about it. The use mathematics as a way to underscore
what is essentially an ideological position. It gives them an aura of objectivity, impartiality
and scientific truth which, given their prepositions about utility maximization and unbounded
growth, they frankly don't have.
"... Few mainstream economists predicted the global financial crash of 2008 and academics have been accused of acting as cheerleaders for the often labyrinthine financial models behind the crisis. Now a growing band of university students are plotting a quiet revolution against orthodox free-market teaching, arguing that alternative ways of thinking have been pushed to the margins. ..."
"... Our starting point is a post on Unlearning Economics, dated March 5, which argues that the flaws of mainstream economics contribute to lousy policy on several fronts: downplaying the role of monopoly, cheerleading for the shareholder value imperative in the corporate world, knee-jerk support for trade agreements under the banner of comparative advantage, and regressive macroeconomic policy, among others. A particularly pointed paragraph brought up the Reinhart-Rogoff 90% affair and accused the economics profession of dereliction of duty by not taking action to rebuke the wrongdoers: ..."
"... Simon Wren-Lewis responded by arguing that UE has it exactly backwards. Restricting himself to UE's critique of macroeconomics, SWL says, yes, reactionary politicians have invoked "economics" to support austerity, but "real" economists for the most part have not gone along. True, there were a few, like Reinhart and Rogoff and those in the employ of the British financial sector ("City economists") who took a public stand against sensible Keynesian policies in the wake of the financial crisis, but they were a minority, and, in any case, what would you want to do about them? Economists, like professionals in any field, will disagree sometimes, and having a centralized agency to enforce a false consensus would ultimately work against progressives and dissenters, not for them. Let's put the blame where it really belongs, says SWL-on the politicians and pundits who have brushed aside decades of theoretical and empirical work to promulgate a reactionary, fact-free discourse on economic policy. ..."
So true; "SWL has never addressed what is happening in the real world."
And that's the reason UK economics students revolted: "Few mainstream economists predicted
the global financial crash of 2008 and academics have been accused of acting as cheerleaders for
the often labyrinthine financial models behind the crisis. Now a growing band of university students
are plotting a quiet revolution against orthodox free-market teaching, arguing that alternative
ways of thinking have been pushed to the margins.
Economics undergraduates at the University of Manchester have formed the Post-Crash Economics
Society, which they hope will be copied by universities across the country. The organisers criticise
university courses for doing little to explain why economists failed to warn about the global
financial crisis and for having too heavy a focus on training students for City jobs."
https://www.theguardian.com/business/2013/oct/24/students-post-crash-economics
pgl is a classic example. He regularly preaches what theory says but is clueless to explain
what's really happening.
Economics: Part of the Rot, Part of the Treatment, or Some of Each?
Is mainstream economics, with its false certitudes and ideological biases, one of the reasons
for the dismal state of policy debate in countries like the UK and the US, or are its rigorous
methods an important antidote to the ruling political foggery? That's being debated right now,
live online.
Our starting point is a post on Unlearning Economics, dated March 5, which argues that
the flaws of mainstream economics contribute to lousy policy on several fronts: downplaying the
role of monopoly, cheerleading for the shareholder value imperative in the corporate world, knee-jerk
support for trade agreements under the banner of comparative advantage, and regressive macroeconomic
policy, among others. A particularly pointed paragraph brought up the Reinhart-Rogoff 90% affair
and accused the economics profession of dereliction of duty by not taking action to rebuke the
wrongdoers:
Where was the formal, institutional denunciation of such a glaring error from the economics
profession, and of the politicians who used it to justify their regressive policies?
UE's conclusion is that mainstream economics needs to be taken down several notches, which
would open more space for alternative approaches to economics and, indeed, alternative approaches
to policy that place more weight on human outcomes, broadly understood, than the formalistic criteria
of efficiency, etc.
Simon Wren-Lewis responded by arguing that UE has it exactly backwards. Restricting himself
to UE's critique of macroeconomics, SWL says, yes, reactionary politicians have invoked "economics"
to support austerity, but "real" economists for the most part have not gone along. True, there
were a few, like Reinhart and Rogoff and those in the employ of the British financial sector ("City
economists") who took a public stand against sensible Keynesian policies in the wake of the financial
crisis, but they were a minority, and, in any case, what would you want to do about them? Economists,
like professionals in any field, will disagree sometimes, and having a centralized agency to enforce
a false consensus would ultimately work against progressives and dissenters, not for them. Let's
put the blame where it really belongs, says SWL-on the politicians and pundits who have brushed
aside decades of theoretical and empirical work to promulgate a reactionary, fact-free discourse
on economic policy.
Yes-but, adds Brad DeLong. He largely agrees with SWL, but delves more deeply into the Reinhart-Rogoff
affair. He shows that, even without the famed Excel glitch, a cursory look would reveal that R-R
were trumpeting nonexistent results:
The 90% debt cliff was an artifact of the way R-R set up their bins. Replace binning with
a continuous relationship between growth and debt and the cliff disappears.
The correlation between growth and debt supported no particular causal interpretation,
and R-R provided no other evidence to support their particular causal argument.
The correlation itself was so weak that the practical implication of R-R's claim was nil.
Fiscal stimulus that could make or break a recovery was being rejected on the basis of future
economic growth effects that would be too small to measure.
So the R-R claim that fiscal consolidation was necessary and urgent was unfounded from the
get-go, and these two were both respected mainstream economists, so what can we infer? DeLong's
takeaway is that economists do need to recognize that they operate in a political environment
(the sewers of Romulus) in which their work will be seized upon by interested groups, with real
practical outcomes. In this situation, the profession as a whole has a responsibility to assess
high profile but dubious work. Although he isn't explicit, my reading is that DeLong wants some
sort of professional quality control, but not institutionalized in the way UE seems to call for.
"... It was an eye opener that Universities are teaching only the neo-liberal model as the core syllabus. This is not education but indoctrination. Fair play to the group then who were passionate about the need for change and realise that it is up to them to effect that change. Good luck to them, I hope that they are successful in re-claiming education as a means of furthering understanding through questioning prevailing orthodoxy. ..."
"... Good luck. You may need it. You will be surprised at how much opposition you encounter and how remorseless and relentless it is. Look up the book "Political economy now!", about the experience at the University of Sydney. ..."
"... Economics is so discredited a subject that even students who have barley started studying realise that - with a few exceptions like Stiglitz or Schiller - it is total fabricated bullshit paid for by people with enough money to benefit from the lies it spreads. ..."
"... One of the biggest lies ever told the free market, as its never ever been a reality. ..."
"... Economists, like scientists and the rest of us, are always employed by someone and therein lies the problem: the conflict between what we believe to be the truth and what we are paid to do (or teach) to keep our job. Many economists (like investors & politicians) knew the crash would burst at some point but only those who enjoyed a seat outside the system would benefit from its prediction. ..."
Few mainstream economists predicted the global financial crash of 2008 and academics have been accused
of acting as cheerleaders for the often labyrinthine financial models behind the crisis. Now a growing
band of university students are plotting a quiet revolution against orthodox free-market teaching,
arguing that alternative ways of thinking have been pushed to the margins.
Economics undergraduates at the University of Manchester have formed the
Post-Crash Economics Society ,
which they hope will be copied by universities across the country. The organisers criticise university
courses for doing little to explain why economists failed to warn about the global financial crisis
and for having too heavy a focus on training students for City jobs.
A growing number of top economists, such as Ha-Joon Chang, who teaches economics at Cambridge
University, are backing the students.
Next month the society plans to publish a manifesto proposing sweeping reforms to the University
of Manchester's curriculum, with the hope that other institutions will follow suit.
Joe Earle, a spokesman for the Post-Crash
Economics Society and
a final-year undergraduate, said academic departments were "ignoring the crisis" and that, by neglecting
global developments and critics of the free market such as Keynes and Marx, the study of economics
was "in danger of losing its broader relevance".
Chang, who is a reader in the political economy of development at Cambridge, said he agreed with
the society's premise. The teaching of economics was increasingly confined to arcane mathematical
models, he said. "Students are not even prepared for the commercial world. Few [students] know what
is going on in China and how it influences the global economic situation. Even worse, I've met American
students who have never heard of Keynes."
In June a network of young economics students, thinkers and writers set up
Rethinking Economics , a campaign group
to challenge what they say is the predominant narrative in the subject.
Earle said students across Britain were being taught neoclassical economics "as if it was the
only theory".
He said: "It is given such a dominant position in our modules that many students aren't even aware
that there are other distinct theories out there that question the assumptions, methodologies and
conclusions of the economics we are taught."
Multiple-choice and maths questions dominate the first two years of economics degrees, which Earle
said meant most students stayed away from modules that required reading and essay-writing, such as
history of economic thought. "They think they just don't have the skills required for those sorts
of modules and they don't want to jeopardise their degree," he said. "As a consequence, economics
students never develop the faculties necessary to critically question, evaluate and compare economic
theories, and enter the working world with a false belief about what economics is and a knowledge
base limited to neoclassical theory."
In the decade before the 2008 crash, many economists dismissed warnings that property and stock
markets were overvalued. They argued that markets were correctly pricing shares, property and exotic
derivatives in line with economic models of behaviour. It was only when the US sub-prime mortgage
market unravelled that banks realised a collective failure to spot the bubble had wrecked their finances.
In his 2010 documentary Inside Job, Charles Ferguson highlighted how US academics had produced
hundreds of reports in support of the types of high-risk trading and debt-fuelled consumption that
triggered the crash.
Some leading economists have criticised university economics teaching, among them Paul Krugman,
a Nobel prize winner and professor at Princeton university who has attacked the complacency of economics
education in the US.
In an article for the New York Times in 2009,
Krugman wrote
: "As I see it, the economics profession went astray because economists, as a group, mistook
beauty, clad in impressive-looking mathematics, for truth."
Adam Posen, head of the Washington-based thinktank the Peterson Institute, said universities ignore
empirical evidence that contradicts mainstream theories in favour of "overly technical nonsense".
City economists attacked Joseph Stiglitz, the former World Bank chief economist, and Olivier Blanchard,
the current International Monetary Fund chief economist, when they criticised western governments
for cutting investment in the wake of the crash.
A Manchester University spokeman said that, as at other university courses around the world, economics
teaching at Manchester "focuses on mainstream approaches, reflecting the current state of the discipline".
He added: "It is also important for students' career prospects that they have an effective grounding
in the core elements of the subject.
"Many students at Manchester study economics in an interdisciplinary context alongside other social
sciences, especially philosophy, politics and sociology. Such students gain knowledge of different
kinds of approaches to examining social phenomena many modules taught by the department centre
on the use of quantitative techniques. These could just as easily be deployed in mainstream or non-mainstream
contexts." Since you're here
we've got a small favour to ask. More people are reading the Guardian than ever, but far fewer
are paying for it. Advertising revenues across the media are falling fast. And unlike many news organisations,
we haven't put up a paywall – we want to keep our journalism as open as we can . So you can see why
we need to ask for your help. The Guardian's independent, investigative journalism takes a lot of
time, money and hard work to produce. But we do it because we believe our perspective matters – because
it might well be your perspective, too.
If everyone who reads our reporting, who likes it, helps to support it, our future would be much
more secure.
I particularly like: Anyone who believes exponential growth can go on forever in a finite
world is either a madman or an economist. and
Economists are like computers. They need to have facts punched into them.
But my favourite is Mathematics brought rigor to Economics. Unfortunately, it also brought
mortis.
Good luck to this group. They are on the right lines.
Agreed, but they are fighting an uphill battle. Just look at how few (accademic) heterodox economists
actually work in economics departments. I think almost every heterdox economist I know works in
an non-economics school/faculty (i.e. schools/facultues of the environment, sustainability, sociology,
land use etc).
I spoke with some of the Post Crash group at a Peoples Assembly meeting recently. It was an
eye opener that Universities are teaching only the neo-liberal model as the core syllabus. This
is not education but indoctrination. Fair play to the group then who were passionate about the
need for change and realise that it is up to them to effect that change. Good luck to them, I
hope that they are successful in re-claiming education as a means of furthering understanding
through questioning prevailing orthodoxy.
Well said that man. Very well said. Unquestioning indoctrination has led us (all countries in
the world be they active participants or 'victims) to this sorry pass.
Basic economics should include the very basic idea that money is no more and no less than a
tool. If you strip money / the tool away from folk then they will either try and take your tool
from you or, if life becomes savage enough, they will fall by the wayside.
Does this generation and successive ones really want to walk over the bodies of others?
Without a profound readjustment and realignment of economic thinking, that is precisely what
is in store. Indeed, it is what has been set in motion already. Time for an urgent re-think before
more bodies litter the highways.
I heard recently about one man who had had such a re-think.
He was an American financial executive who was asked why he was taking early retirement and
going off to live in a little valley in the hills.
He replied: "Well, it is a lovely property with great scenery, fertile land and its own microhydroelectricity-----but
the really big attraction is that it puts 300 miles of armed hillbillies between me and the nearest
city"!!.
I do hope the chap in question doesn't end up regretting that he has deliberately placed himself
into a situation where there are 300 miles of armed hillbillies between himself and the nearest
city.
Good luck. You may need it. You will be surprised at how much opposition you encounter and
how remorseless and relentless it is. Look up the book "Political economy now!", about the experience
at the University of Sydney.
Exactly - the clue is in this statement from the University authorities...
It is also important for students' career prospects that they have an effective grounding
in the core elements of the subject.
Or in other words...
Students should be familar with the free market fair tales thrown up by rich, greedy bankers
and the right wing in order to earn money pandering the "correct" line
Economics is so discredited a subject that even students who have barley started studying
realise that - with a few exceptions like Stiglitz or Schiller - it is total fabricated bullshit
paid for by people with enough money to benefit from the lies it spreads.
One of the biggest lies ever told the free market, as its never ever been a reality.
Restrictions or prejudices ensure this, so such a philosophy deserves tearing up just like
their supporters who believe community and care are bad ideals. They call it socialism but it
is far from being a dirty word as it is about looking after all people on a more equal level,
so as to ensure the most vulnerable people in society are not left in a helpless and hopeless
position.
I heard recently about one man who had had such a re-think.
He was an American financial executive who was asked why he was taking early retirement and going
off to live in a little valley in the hills.
He replied: "Well, it is a lovely property with great scenery, fertile land and its own microhydroelectricity-----but
the really big attraction is that it puts 300 miles of armed hillbillies between me and the nearest
city"!!.
Thatcherist 'Reaganomics' was their response to the hissy fit Maggie threw at the 'grubby little
terrorist' Nelson Mandela when he started to put the kibosh on the elites cash cow of South African
apartheid, 4 decades of 'starving the beast' and media complicity in pushing the benefits of supply
side while pruning demand to the core by cutting back public investment which is the only source
of high velocity currency in a debt based economy where cash is simply printed to commission public
gods, services and infrastructure for a civilised society and withdrawn through tax to mitigate
inflation.
Only as we approach their ideology of fiscal apartheid do the courtiers perceive that without
demand a bleak future awaits everyone but the very few already excessively wealthy.
Economists, like scientists and the rest of us, are always employed by someone and therein
lies the problem: the conflict between what we believe to be the truth and what we are paid to
do (or teach) to keep our job. Many economists (like investors & politicians) knew the crash would
burst at some point but only those who enjoyed a seat outside the system would benefit from its
prediction.
"... Lately certain unrepentant members of that disgraced profession, some of whom claim to be the consciences of the liberal establishment, have been expressing concern about the disrepute of the 'experts' and the need to allow the technocrats to take control of policy and the economy. ..."
"... Brad DeLong, by the way, banned me from his site comments noting, 'Alan Greenspan never made a decision with which I disagreed.' Since then even Alan Greenspan has admitted he does not agree with some of his decisions, in a sniveling and sneaky kind of a non-apologetic way. ..."
"... But the specific factual point from Brad's piece that got me going was this: ..."
"... "Merton and Scholes's financial math was correct, and the crash of their hedge fund did not require any public-money bailout" ..."
"... I think it is less than trivial to know where and how the B-S risk model fails as math, as illustrated so well by Benoit Mandelbrot in his book The Misbehaviour of Markets. The math fails in its selection choice of variables and assumptions. Naseem Taleb has made a cottage industry and a personal fortune understanding this error. ..."
Ok I have to admit that the title alone got me into a cranky mood. Lately certain unrepentant
members of that disgraced profession, some of whom claim to be the consciences of the liberal establishment,
have been expressing concern about the disrepute of the 'experts' and the need to allow the technocrats
to take control of policy and the economy.
Granted, they may look like the lesser of two evils in some cases, as in the current nascent administration,
and in their own minds. But their policy consensus and economic recommendations of the past
thirty years or so, starting with the Fed chairmanship of Alan Greenspan at least, only look good
in their own selective memories. Brad DeLong, by the way, banned me from his site comments noting,
'Alan Greenspan never made a decision with which I disagreed.' Since then even Alan Greenspan
has admitted he does not agree with some of his decisions, in a sniveling and sneaky kind of a non-apologetic
way.
For everyone else this cycle of growing inequality, policy skews to the wealthy few, and asset
bubbles and bust that serve as wealth transfer mechanisms has been particularly trying.
But the specific factual point from Brad's piece that got me going was this:
"Merton and Scholes's financial math was correct, and the crash of their hedge fund did not
require any public-money bailout"
Yeah, right. Let's put aside the nicety of a Fed brokered bailout of LTCM by Wall Street money
as technically not requiring public bailout money, in order to save the financial system from an
epic overleveraged mispricing of risk based on that correct math.
I think it is less than trivial
to know where and how the B-S risk model fails as math, as illustrated so well by Benoit Mandelbrot
in his book The Misbehaviour of Markets. The math fails in its selection choice of variables
and assumptions. Naseem Taleb has made a cottage industry and a personal fortune understanding this
error.
And what makes it most egregious is that the error hs been known among those with mathematical
minds for some time. I myself read Mandelbrot's book in 2001 and said, 'holy shit.'
Let's be clear. This was not some dumb error on the part of these fellows, or some sneaky
trick. They could not resolve their math without making a certain assumption, and they did
it openly and consciously. And as the write of the essay below notes, there has not been anything
better produced yet to his knowledge.
It is not the theory itself that is 'bad.' It is the use and misuse to which it is put by
opportunists and financial predators in misrepresenting it.
But the people who use the assumptions on risk contained in the model don't care. Like
the efficient market hypothesis, it is an intellectual fig leaf that covers an epic era of
looting and plundering bases on what is essentially a con game. If you assume that risk is a rare
event, you can persuade the regulators and the very important people to let you run on leverage at
extreme levels, especially if you can use other people's money.
Like some of the other accepted truths from the turn of the century greed is good crowd, it is
a meme with which to silence the protests and permit the widespread mispricing of risk in order to
reap enormous short term profits for a very few wealthy insiders. This had been going on for
so long that it is almost accepted as a normal way of doing business.
Here is what an essay in
Criticality had to say about the Merton-Scholes math. I suppose that the sophist would
say that the math was indeed right. It was just the assumptions they used to construct the
model was wrong. So 3+5 does equal 8. Its just that in the real world case there
were three more factors that were tossed aside and ignored because they messed up the path to the
more easily determined and reassuring result.
"This implies that rather than extreme market moves being so unlikely that they make little contribution
to the overall evolution, they instead come to have a very significant contribution. In a normally
distributed market, crashes and booms are vanishingly rare, in a pareto-levy one crashes occur
and are a significant component of the final outcome.
It has taken years for this to be taken
seriously, and in the mean time financial theory has gone on using the assumption of normally
distributed returns to derive such results as the Black-Scholes option pricing equation, ultimately
winning an Nobel Prize in Economics for the discoverers Scholes and Merton (Black having already
died), not to mention Modern Portfolio theory (also winning Nobels). That modern finance ignored
Mandelbrot's discovery and went onto honor those working under assumptions shown to be false has
clearly annoyed Mandelbrot immensely and as mentioned previously he spends much of the book telling
us of his prior discoveries and how he was ignored.
It is like allowing tobacco companies to widely distribute their products while a bevy of hired gun
experts and media pundits and PR organizations promote the theory that tobacco is not a highly addictive
substance that causes a wide range of debilitating diseases, including cancer. They know
damn well that it is and it does, but they do not give a damn as long as the money is rolling in.
And pity the fool who tries to stand up and tell the truth.
And so to has it been with the Banks.
Indeed, the PR campaign and political donations they handled through their intermediaries during
the 1990s to deregulate and overturn Glass-Steagal has to be one of the great propaganda accomplishments
of the twentieth century. And the follow on campaign for the US to invade Iraq in retribution
for 9/11 is not far behind it for the twenty first.
The greater point is not that the B-S model is based on faulty assumptions that greatly diminish
the potential risks. Rather it is how such 'laws' of economics are so often of a dodgy, optionated
and theoretical nature such that taking them as a given in forming public policy is a huge mistake
in judgement.
Why? Because they may embody assumptions about what is true, and what is a priority, and
what our principles and objectives may be, and propagate those assumptions (biases) into a general
policy of our society that ends up causing great harm to many innocent participants. Indeed,
as Obama said, there is a great need to discussion and understanding. It is just that it cannot
be monopolized by a particular group of insiders who adhere to certain assumptions and professional
courtesies of their own, dare I say it, class.
So there are my two corrections to the mainstream media and their writing of the public record-
to suit themselves and their wealthy patrons. It seems like modern America spends an
enormous amount of its intellectual capital and time on finding ways to scam the public. If
we could somehow reorder the paybacks on financial corruption to even a third of what it is today
we could probably cure cancer in five years or less. That is what it would take to 'make
America great again,' for real and not just in the funny papers.
I would like to again stress that I am not finding fault with either of the two bloggers involved,
both of whom I enjoy and admire for what they do. Mark Thoma is a class act, and even when
he disagrees is very fair and open minded about it. And he keeps this site in his blogroll
despite some special interests who have argued for its removal. That is more than I can say
for some others.
Rather, I am trying to correct a couple of things from the broader media that seem to be factually
wrong, purposely, and further, to help caution the reader that things that appear in the mainstream
media written by bona fide members of the certified and qualified professional establishment
cannot always be taken at face value.
The deterioration of the quality of the news is startling. I think it has a lot to do with
the takeover of the media by a relatively few number of large corporations (thank you Slick Willy)
Yeah, there is a lot of nutty stuff on the internet and in blogs. I spend a lot of time assessing
it and avoiding it where I can. But to say that the mainstream is somehow authoritative, objective
and pure is self-serving baloney at best, and a thin veneer for official propaganda when it serves
the purpose at worst.
36%-40% going to "financial institutions"
51%-52% going to "individuals", i.e. mostly "rich individuals"
5%-9% going to "manufacturing/productive industry".
It's hardly surprising we're such an unproductive - fiancialised and individualised nation is
it? Nor is it surprising that London generally "flourishes" as one of the most financialised and
individualised cities in the world.
This isn't 'freedom'. It's reaping what we have sowed for the last thirty plus years of neoliberal
politics and economics. It's as centrally planned as anything under the Soviet Union, only with capitalist
distribution, i.e. it is pure state capitalism, or engineered capitalism, and yet they tell us society
cannot be 'engineered', or 'structured', and that this is utopian dreaming. They are the utopian
dreamers.
London is the financial arm of the Washington consensus - a part of the EU, and a part of the
UK, but barely so - or semi-detached. The City of London from which all financial capital flows is
effectively a tax haven, no different to the Channel Islands. It's all a huge political and social
mess - exactly what the economic elite want.
Brad DeJong is staunch despicable neoliberal, but something he has the courage to admit obvious
things...
Notable quotes:
"... Simon needs to face that fact squarely, rather than to dodge it. The fact is that the "mainstream
economists, and most mainstream economists" who were heard in the public sphere were not against austerity,
but rather split, with, if anything, louder and larger voices on the pro-austerity side. ..."
"... When Unlearning Economics seeks the destruction of "mainstream economics", he seeks the end
of an intellectual hegemony that gives Reinhart and Rogoff's very shaky arguments a much more powerful
institutional intellectual voice by virtue of their authors' tenured posts at Harvard than the arguments
in fact deserve. ..."
and then there is Reinhart and Rogoff, where I think Unlearning Economics is right.
So Unlearning Economics is batting 0.170 in their examples of "mainstream economics considered
harmful". But there is that one case. And I do not think that Simon Wren-Lewis handles that one
case well. And he needs to--I need to. And, since neither he nor I have, this is a big problem.
Let me put it this way: Carmen Reinhart and Ken Rogoff are mainstream economists.
The fact is that Carmen Reinhart and Ken Rogoff were wrong in 2009-2013. Yet they had much
more influence on economic policy in 2009-2013 than did Simon Wren-Lewis and me. They had influence.
And their influence was aggressively pro-austerity. And their influence almost entirely destructive.
Simon needs to face that fact squarely, rather than to dodge it. The fact is that the "mainstream
economists, and most mainstream economists" who were heard in the public sphere were not against
austerity, but rather split, with, if anything, louder and larger voices on the pro-austerity
side. (In my humble opinion, Simon Wren-Lewis half admits this with his denunciations of
"City economists".)
When Unlearning Economics seeks the destruction of "mainstream economics", he seeks the
end of an intellectual hegemony that gives Reinhart and Rogoff's very shaky arguments a much more
powerful institutional intellectual voice by virtue of their authors' tenured posts at Harvard
than the arguments in fact deserve.
Simon Wren-Lewis, in response, wants to claim that strengthening the "mainstream" would somehow
diminish the influence of future Reinharts and Rogoffs in analogous situations. But the arguments
for austerity that turned out to be powerful and persuasive in the public sphere came from inside
the house!
Next American Economics Association meeting should be held in Youngstown so economists can admire
the fruit of their labors. See all the destroyed buildings, the raging heroin epidemic and mass
poverty your support of de-industrialization and free trade brought to America.
Every regional meeting should be held in any number of America's thousands of destroyed dilapidated
cities - E. St. Louis, Rochester, Cleveland, Greensboro NC, San Bernadino - there are so many
de-industrialized ghettoes from which to choose!
Tom aka Rusty -> Next AEA meeting should be held in Youngstown so economists can admire the fruit
of their labors... ,
March 26, 2017 at 09:41 AM
I've been recommending Detroit for years.
libezkova -> Tom aka Rusty ... March 26, 2017 at 03:34 PM
That might not help. Those guy have no morals. Simply none. Nothing is left from 10 commandment
in their brains. They have only "Greed is good" etched in it.
Just look at Mankiw. Noting can stop him from cashing in on all this neoclassical crap.
Or, for a change, Krugman's behavior during elections. What a despicable neoliberal stooge
he proved to be. His dirty attacks on Sanders should probably be re-printed as a leaflet and distributed
nationwide -- as a warning.
It is so difficult to understand that "when nothing left on the left, working class and lower
middle class turns to far right." ?
What a despicable stooge of financial oligarchy. Another Rubin's boy, much like Summers...
And now he has the audacity to criticize Trump, the person he was working to put in power for
more then a decade. I do not defend Trump, but it is important to ask a simple question: Are the
members of the criminal Clinton gang (who essentially practiced racketeering via Clinton Foundation)
and "over-connected" to intelligence services Obama paragons of virtue?
Are they conceptually any different from Trump ?
In the past they practices the same dirty neoliberal tricks as Trump tying to squeeze the majority
of population in favor of financial oligarchy (Obama "non-prosecution" after 2008 is a telling
example, and shows who he really is), but probably with more polish and better PR. That's the
only difference.
Discussions of neoliberalism, on both the left and the right, suffer from what Paul Krugman and
others have called "zombie" ideas. These are economic concepts that have been long discredited,
but continue to shamble on. On the right, a central zombie idea is that reduced state regulation
of markets leads to sustainable economic growth. If you believe this, then the rise of neoliberalism
is a no-brainer.
Neoliberalism is simply the economic philosophy that works. But why should anyone believe this?
The idea that unleashing free markets then leads to good economic times should never have survived
the Great Depression, and should surely be killed for good by the Great Recession and its aftermath.
"... 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.
"
"... My main problem with the site, though, isn't aesthetic. It's the idea that the public will buy a "just the facts" approach. Many readers will suspect that what they're getting is not a simple recounting of incontrovertible facts, but a mix of received wisdom, theory, and carefully cloaked ideology. And they won't entirely be wrong about that. ..."
EconoFact is a non-partisan publication designed to bring key facts and incisive analysis to the
national debate on economic and social policies. It is written by leading academic economists from
across the country who belong to the EconoFact Network...
Our mission at EconoFact is to provide data, analysis and historical experience in a dispassionate
manner...Our guiding ethos is a belief that well meaning people emphasizing different values can
arrive at different policy conclusions. However, if in the debate we as a society can't agree on the
relevant facts, then the nation itself loses a common base for constructive debate and policy will
suffer.
EconoFact does not represent any partisan, personal or ideological point of view...Our network of
economists might disagree with each other on policy recommendations, but all will similarly rely on
widely agreed upon facts in their analysis.
My main problem with the site, though, isn't aesthetic. It's the idea that the public will
buy a "just the facts" approach. Many readers will suspect that what they're getting is not a simple
recounting of incontrovertible facts, but a mix of received wisdom, theory, and carefully cloaked
ideology. And they won't entirely be wrong about that.
"... "Equitable Growth in Conversation" is a recurring series where we talk with economists and other social scientists to help us better understand whether and how economic inequality affects economic growth and stability. ..."
"... In this installment, Equitable Growth's Research Director John Schmitt talks with economist William A. Darity Jr. ("Sandy"), the Samuel DuBois Cook Professor of Public Policy at Duke University's Sanford School of Public Policy, about the importance of stratification economics in understanding U.S. economic growth and inequality. Read their conversation below. ..."
"Equitable Growth in Conversation" is a recurring
series where we talk with economists and other social scientists to help us better
understand whether and how economic inequality affects economic growth and stability.
In this installment, Equitable Growth's Research
Director John Schmitt talks with economist William A. Darity Jr. ("Sandy"), the
Samuel DuBois Cook Professor of Public Policy at Duke University's Sanford School of
Public Policy, about the importance of stratification economics in understanding U.S.
economic growth and inequality. Read their conversation below.
John Schmitt: I have not too many questions,
but hopefully we'll have a good conversation. You are the founder of stratification
economics, which you pioneered with a group that includes Darrick Hamilton, James
Stewart, Gregory Price, and others. How would you describe the main features of
stratification economics? And how would you differentiate them from the kind of
standard, neoclassical economics that most of us were taught in graduate school or in
undergraduate economics classes?
Sandy Darity:
So, I think the core of
stratification economics offers a structural rather than a behavioral explanation for
economic inequality between socially identified groups-whether they're racial groups,
ethnic groups, gender groups, or groups that are differentiated on some other basis
such as religious affiliation, for that matter. Stratification economics goes against
the grain of trying to argue that the kinds of differences that we observe and
economic outcomes are attributable to cultural practices or some forms of
dysfunctional behavior on the part of the group that's in the relatively inferior
position.
We argue instead that economists and other social
scientists have to look at social structures and policies to really explain why those
differences exist. What might be unique about stratification economics is the
particular way in which it offers the structural analysis of these kinds of
inequalities, and that particular way is by focusing on the importance of
relative group position
from the standpoint of participants in our social world.
That persons compare themselves against others is based
on research on happiness, which suggests that the major factor in determining whether
a person reports feeling happy is actually their perception of their position in
comparison with others-not their absolute position, but their relative position. What
stratification economics brings on the scene is a specific view of exactly with whom
individuals are comparing themselves.
Not only are folks making comparisons with individuals
who they perceive as being part of their own social group, but they also are making
comparisons about
their group's
position.
The cross-group comparisons are made against the social
groups that are "the other" for them. It's those two sets of comparisons that drive
behavior and drive people to actually act in ways that are supportive of the status
of their relevant social group. I think traditional economics doesn't pay much
attention to the comparative dimension, and it certainly doesn't pay much attention
to the comparative dimension in terms of an individual's sense of group identity or
group affiliation.
I do want to add that a lot of this work is deeply
collaborative. And I think it's important that my collaborators be recognized,
particularly [associate professor of economics and urban policy] Darrick Hamilton at
the New School, Mark Paul, who is a postdoctoral fellow here at the Cook Center at
Duke, and Khai Zaw, who is a statistical researcher at the Cook Center, who all have
worked very closely with me.
And there's a string of folks who have been involved in
various dimensions of the development of stratification economics as a field, among
them economists Greg Price [Morehouse College], James Stewart [Pennsylvania State
University], Patrick Mason [Florida State University], Marie Mora [University of
Texas at Rio Grande Valley], Alberto Dávila [University of Texas at Rio Grande
Valley], Sue Stockly [Eastern New Mexico University], and Stephanie Seguino
[University of Vermont].
So even though I don't think stratification economics
is sweeping the economics profession, there's actually a significant core of folks
who are embracing the approach, and, hopefully, the numbers will grow.
Schmitt: So, you make the comment about where
conventional economics falls short. Can you give an example or two of a social or
economic problem where you think that the tools developed in stratification economics
give a better explanation for an economic or social phenomenon than the standard
economics view?
Darity:
One example would be the
persistence of discrimination under competitive conditions. In standard economics,
there's very little room or terrain for trying to explain why we might observe
sustained discriminatory practices by one group toward the other, particularly
discriminatory practices that have economic content.
In stratification economics, it's fairly
straightforward to try to come up with an explanation that makes some sense. Because
of the emphasis in stratification economics on what we might call tribal
affiliation-or team affiliation or group affiliation-to the extent that people value
those kinds of affiliations and the position of their team, group, or tribe, then
they will engage in collaborative ways, whether those collaborative ways are fully
conscious or whether they are implicit.
They'll engage in collaborative ways to preserve the
position of their group. And so discrimination can be something that's sustained. And
even more strongly than that, stratification economics would suggest that if the
difference between the two groups narrows, the group on top will intensify its
discriminatory practices. If it becomes harder to exclude the out-group because the
out-group is becoming better educated or has other kinds of indicators that suggest
that it is comparably productive to members of the in-group, then the in-group will
intensify the degree of discrimination that it practices toward the out-group. I
think that conventional economics would never actually see that phenomenon.
Schmitt: You've described stratification
economics as combining influences from economics, sociology, and social psychology,
and it's obvious in a lot of what you just described about the persistence of
discrimination. What led you to blend those things together? What are the influences
or the ways that brought you to piece the various parts of this together?
Darity:
You said at the outset that I
was the founder of stratification economics-I think it's maybe more accurate to say
that I'm the person who gave this set of ideas a label. But I don't think that these
ideas originated with me, and I think that to a large extent, I've synthesized ideas
from others. But I do think that these ideas from others are extremely powerful and
influenced the way in which I began to think about this. I've long been wanting to
bypass arguments for intergroup inequality that are predicated on the notion that
there's something fundamentally inferior about one of the two groups.
So from economics, for example, you could draw upon the
work of the idiosyncratic early 20th century economist Thorstein Veblen, who, for
example, in
The Theory of the Leisure Class
, talks about the significance of
comparisons within your group versus comparisons vis-a-vis the group that is supposed
to be outside of yours. And that translated into the forgotten theory of
consumption-aggregate consumption in economics-that the late economist James
Duesenberry developed, called the relative income hypothesis. People frequently
discard that one when they think about theories of aggregate consumption, but that's
a body of work that influenced my way of thinking about some of these issues.
From sociology, I think that the most important
contribution probably is Herbert Blumer's 1958 essay on prejudice as a function of
relative group position. He challenged the view that prejudice is something that we
can identify as some sort of individual defect, arguing instead that prejudice is
really something that's functional for preserving or extending the relative position
of an advantaged social group. That, to me, is very much stratification economics,
without the label.
Then there's a whole body of work about notions of
individual productivity being influenced by the context in which people are
performing tasks. This might include employment in a hostile workplace environment
for an individual from a group that is subjected to stigma, which will affect the
individual's capacity to perform. And it's not just the question of what educational
credentials they have, or what kind of training they have, or what kind of motivation
they have. It's also a question of the atmosphere in which they are functioning. And
so from social psychology, I took the phenomenon that has been developed by
researchers such as Claude Steele [emeritus professor at Stanford and former vice
chancellor and provost at the University of California, Berkeley] of stereotype
threat as another dimension, or angle, for thinking about how individual productivity
can be distorted or reduced as a consequence of the social climate that they face. In
short, in the jargon we frequently use in economics, individual productivity is
endogenous.
Schmitt: In a lot of your recent work, you've
turned your attention to the issue of wealth inequality. What led you to make that a
focus? And what do you think are the most important findings from that research?
Darity:
My turn to the focus on wealth
inequality came about for two reasons. One is because of an increasing recognition
that these types of disparities are the most important indicator of differences in
economic well-being. The second reason is because the work that I have begun to do on
reparations kept pointing me back to the racial wealth gap as the most important
manifestation of the effects of racism and discrimination over time in the United
States.
Those two considerations kept directing me toward an
emphasis on wealth inequality. But it is also my sense that all economic
inequalities-particularly group-based economic inequalities unfortunately-have been
assigned to be the purview of labor economists.
Of course, the work that labor economists do can point
us toward some explanations for disparities that are associated with earnings and
occupational status, but their perspective doesn't take us very far in explaining
wealth inequalities.
Stratification economics offered a relatively simple
but, I think, much more powerful explanation for why we observe wealth inequality in
general but also wealth inequality by race. One of the big findings that has emerged
from our work, which is now being replicated in other people's research, is a very
simple but important conclusion that education in and of itself does not eliminate
racial economic disparity.
There are tons of people who focus on education as the
answer. I certainly think improving education for everyone is a great idea, but it's
not going to close the racial wealth gap. Thus far, it has not eliminated
discriminatory differences in wages or in unemployment rates. Simply put, education
is far from enough to solve the kinds of disparities that we are concerned about.
Schmitt: You did your Ph.D. at the
Massachusetts Institute of Technology in the late 1970s, so you've been in the
business for a little while. What's your take on how the economics profession has
developed, say over the past 30 years or so? Do you think that it is moving in a good
direction, bad direction, indifferent? Do you think it is more or less open to some
of the ideas that we've been talking about right now?
Darity:
That's a tough one. I don't
know that in my experience it's been particularly open to any of these ideas. I think
that there's been a greater receptiveness or interest in these ideas from scholars in
other disciplines. To be frank, I think that the economics profession has a certain
anti-intellectualism. That's a pretty strong statement, but I mean that in the sense
that if you think about intellectual activity as involving wide-ranging curiosity and
also wide-ranging interests in research unbounded by disciplinary lines, I think the
economists are very, very inclined to be somewhat incurious and to treat every
problem from the standpoint of a fixed package of ideas.
In that sense, I think there's a certain
anti-intellectualism, and therefore, very little receptiveness to ideas that go
outside of the standard box. I'm not sure the conditions are a lot different now in
the economics profession; I mean, there's a sense in which I think it's long been
that way, particularly ever since the quantification revolution in economics that
largely was spearheaded by one of my mentors, [the late Nobel Laureate] Paul
Samuelson. The process of making economics appear to be more of a mathematical
science was accompanied by driving out some of the more interesting ideas and
approaches, rather than incorporating them into the process of making it a
mathematical science.
Schmitt: Do you take any comfort from the rise
of informational economics, or search models, or the rise of the importance of
behavioral economics?
Darity:
If you are talking about
search models that are associated with search and employment, I'm not a real
enthusiast for imperfectionism. Because the implication is that if we did not have
those frictions, if we did not have those imperfections, then everything would be
glorious. But it is my view that a smoothly functioning market economy would still
generate high degrees of inequality, and certain kinds of inequities, because those
processes pay very little attention to inherited advantages and disadvantages. I
don't necessarily see imperfectionist approaches as providing a solution. I
particularly don't like search theories of unemployment because I think what they say
is people are out of work because they are looking for work, rather than people are
looking for work because they are out of work.
Stratification economics actually attempts to be
somewhat of a departure from behavioral economics. Behavioral economics, to my way of
understanding it, suggests that people actually behave irrationally, and so it's
trying to explore and understand irrational behavior, whereas the whole historical
thrust of much of economics has been oriented toward suggesting that there is
rationality to people's behavior. Stratification economics accepts the premise that
there's a rationality to behavior, but it also presumes that there is rationality to
the behavior of social groups, as well as individuals. It's a rationality that's
predicated on the notion that these groups frequently, or typically, act as if they
view themselves as being in competition with one another.
Schmitt: One of the things that's important for
us at the Washington Center for Equitable Growth is to look at the rise of inequality
from a high level, beginning at the end of the 1970s to an extremely high level now,
based on almost any metric you want to use. Do you have a working model in your mind
for what explains that big increase in inequality over this period? And do you have
any guidance as to what policymakers could do to turn things around?
Darity:
One of the things that I
mentioned at the start of our conversation was the importance of social structures
and policies. And I think that the run-up in inequality that we've observed in recent
years is closely tied to a set of social policies that have produced virtually
unlimited capacity to generate extraordinary levels of wealth. One is a form of
profit sharing, which is what we call super salaries for high-level executives at the
nation's most highly resourced corporations. Another is the deregulation of the
financial markets, while maintaining a moral hazard problem, in the sense that the
investment bankers can anticipate that they'll be bailed out in the event of a
crisis. And a third is the reform of the tax system, where we've moved from having
marginal tax rates for folks at the upper end of the income distribution, in the
vicinity of 90 percent to less than 30 percent today. The Great Recession also
contributed to a greater explosion or extension of inequality, both in wealth and in
income.
In short, I think we can look directly at a set of
policies and, more recently, at the advent of the Great Recession to understand the
rise in economic inequality.
Schmitt: So my last question: Do you have any
advice for a young person who wants to get a Ph.D. in economics? Or a Ph.D. in a
social science? In particular, do you recommend studying economics?
Darity:
I definitely don't want to
forsake the economics profession. I still have hope that there will be other, younger
economists who will try to bring very fresh perspectives to the way in which we
conduct economic research. I would encourage folks to go into the field, but I'd want
them to have their eyes open. I think that they need to be very selective about which
institutions they choose to attend to try to do their work.
If graduate students have ideas that are not
conventional or are unorthodox, then they need to have their eyes set on trying to
identify departments that have the flexibility and open-mindedness to allow them to
pursue the kind of approaches that they want to undertake. There are some, and it's
not just departments that we view as being explicitly heterodox. I think that there
are some departments that are more conventional, where there are faculty members who
are extremely open-minded, in comparison with other places.
A new graduate student really has to make a very
careful choice about which department to go to, and once there, who they should work
with in that department. I would say that's the research that needs to be done
carefully, rather than telling people they shouldn't go into economics.
Schmitt: Thank you so much, Sandy, for your
time.
Darity:
Thanks for inviting me to do
this. Take care.
"... Of course, I should admit that I am not an entirely disinterested observer of this engagement, because in the early 1970s, long before I discovered the Samuelson article that Nick is challenging, Earl Thompson had convinced me that Hume's account of PSFM was all wrong, the international arbitrage of tradable-goods prices implying that gold movements between countries couldn't cause the relative price levels of those countries in terms of gold to deviate from a common level, beyond the limits imposed by the operation of international commodity arbitrage. ..."
I think Nick Rowe is a great economist; I really do. And
on top of that, he recently has shown himself to be a very
brave economist, fearlessly claiming to have shown that Paul
Samuelson's classic 1980 takedown ("A Corrected Version of
Hume's Equilibrating Mechanisms for International Trade") of
David Hume's classic 1752 articulation of the
price-specie-flow mechanism (PSFM) ("Of the Balance of
Trade") was all wrong. Although I am a great admirer of Paul
Samuelson, I am far from believing that he was error-free.
But I would be very cautious about attributing an error in
pure economic theory to Samuelson. So if you were placing
bets, Nick would certainly be the longshot in this match-up.
Of course, I should admit that I am not an entirely
disinterested observer of this engagement, because in the
early 1970s, long before I discovered the Samuelson article
that Nick is challenging, Earl Thompson had convinced me that
Hume's account of PSFM was all wrong, the international
arbitrage of tradable-goods prices implying that gold
movements between countries couldn't cause the relative price
levels of those countries in terms of gold to deviate from a
common level, beyond the limits imposed by the operation of
international commodity arbitrage.
And Thompson's reasoning
was largely restated in the ensuing decade by Jacob Frenkel
and Harry Johnson ("The Monetary Approach to the Balance of
Payments: Essential Concepts and Historical Origins") and by
Donald McCloskey and Richard Zecher ("How the Gold Standard
Really Worked") both in the 1976 volume on The Monetary
Approach to the Balance of Payments edited by Johnson and
Frenkel, and by David Laidler in his essay "Adam Smith as a
Monetary Economist," explaining why in The Wealth of Nations
Smith ignored his best friend Hume's classic essay on PSFM.
So the main point of Samuelson's takedown of Hume and the PSFM was not even original. What was original about
Samuelson's classic article was his dismissal of the
rationalization that PSFM applies when there are both
non-tradable and tradable goods, so that national price
levels can deviate from the common international price level
in terms of tradables, showing that the inclusion of
tradables into the analysis serves only to slow down the
adjustment process after a gold-supply shock.
So let's follow Nick in his daring quest to disprove
Samuelson, and see where that leads us.
Q: The neoclassical theory of the firm does not consider political engagement by corporations.
How big of an omission do you think this is?
The problems in expanding the theory of the firm to consider political engagements are considerable.
Of course, political engagement by firms can be viewed as merely rent-seeking. Unavoidably, this
produces waste... (and possibly also corrupt[s] the political system).
But before one jumps to the conclusion that therefore corporations should be denied the right
to influence political decisions in the interests of efficiency, more must be considered. For
example, this week, over one hundred public corporations, most of them high-tech firms, filed
a brief opposing the legality of the executive order signed by President Trump barring various
immigrants. 1) This can be viewed as collective action by firms in defense of capitalism
and the free flow of goods and services. Those opposed to firms lobbying regulatory agencies would
probably approve this defense by corporations of human rights. Nor was this case unique. Corporations,
like Apple, Facebook, and Google, have regularly defended human rights.
What this implies is that any absolute, prophylactic rule against political engagement may be
undesirable. How then should we distinguish between "good" and "bad" political engagements by
corporations? One approach might be to refine the rules of corporate governance and give shareholders
greater rights in the process. To the extent that shareholders are diversified, they should rationally
oppose rent-seeking by competing firms, as such activity just raises the costs for both sides.
Conversely, however, in concentrated industries where collusion is more likely than competition,
diversified shareholders might rationally support rent-seeking (and even reduced competition)
by the firms in which they invest. Some empirical evidence suggests that investors in the highly
concentrated airline industry have behaved this way. Hence, stronger corporate governance may
supply a partial answer sometimes, but hardly always. At best, it can add transparency to the
process, thereby making rent-seeking less feasible.
Theorists of the firm who wish to restrict political engagements by firms face a serious problem
that they have not yet recognized: at least in the United States, corporate political engagement
may be protected by the First Amendment. This means that reforms such as disclosure are possible
(and, I think, desirable), but stricter, prophylactic rules are probably not. ...
It seems to me that the problem is this direct political intervention by corporations. They should
be allowed to make donations to charities specifically set up to support civil liberties, human
rights etc. (e.g. Amnesty, ACLU) and to allow those organizations to list their support. It is
not clear that they should be allowed to act politically in their own right.
So, medical provider corporations should not be allowed to oppose the repeal of Obamacare because
they want to keep getting paid by patients getting needed medical care at their clinics and hospitals
by doctors and nurses?
Should the AMA be allowed to oppose repeal because it's doctor members want to continue to
get paid?
Should nurses unions be allowed to oppose repeal because they want to continue getting paid?
Perhaps you seek a return of slavery to cut living costs by forcing doctors and nurses, farmers,
cooks, to work for nothing to benefit consumers?
Or do you believe government can charge nothing while paying those delivering government services
good middle class incomes that defined the American Dream in the 60s?
In the 60s, everyone understood good incomes required high prices and taxes. Conservatives
sold everyone, including 99% of economists on the free lunch of high incomes and low prices and
taxes. TANSTAAFL. Since Reagan, 90% are either no better off or worse off from low prices and
taxes.
And that applies to businesses. 90% of businesses are worse off or just holding their own as
a result of the political economics of low prices and low taxes.
The modern small business startup is the guy who signs up with Uber and Lyft and then struggles
to find ways to be paid by customers without paying the rent seekers more than he might get in
business profit.
But again, small businesses have been brainwashed into supporting the policies that hurt them
but benefit just 10% of businesses, mostly rentier businesses.
The problem I see is with the education of the people, including people in business, that free
lunches are possible. That cutting prices, and taxes are prices, will increase incomes, whether
workers or businesses.
Eliminating business lobbying while individuals continue seeking free lunch government will
not make anyone better off. TANSTAAFL
There are plenty of individuals involved (and employee organizations as well). Companies do not
need to be involved. The key point here should always be non-profit and public purpose.
"Conversely, however, in concentrated industries where collusion is more likely than competition,
diversified shareholders might rationally support rent-seeking (and even reduced competition)
by the firms in which they invest. Some empirical evidence suggests that investors in the highly
concentrated airline industry have behaved this way."
The airline industry has lost money since deregulation, and that is after hundreds of billions
in government bailouts and confiscation of shareholder "value".
Yes, there are a number of rent seekers who have profited, but those are the M&A rent seekers,
bankruptcy rent seekers, the restructuring rent seekers, ...
While the aircraft industry has consolidated to be dominated by only two, neither Boeing nor
Airbus reap economic profit, and their business profits are not stellar, and that is due to strong
government support keeping them from insolvency.
"corporate political engagement may be protected by the First Amendment"
Corporations are created by state law (with just a few federal exceptions), so surely at the
state level it would be possible to alter incorporation statutes so that corporations clearly
do not have a right to political engagement.
Paul Krugman is taking some guff for this column where he argues that the US economy is now
at potential, or full employment, so any shift in the federal budget toward deficit will just
crowd out private demand.
Whether higher federal spending (or lower taxes) could, in present conditions, lead to higher
output is obviously a factual question, on which people may read the evidence in different ways.
As it happens, I don't agree that current output is close to the limits of current productive
capacity. But that's not what I want to write about right now. Instead I want to ask: What concretely
would crowding out even mean right now?
Below, I run through six possible meanings of crowding out, and then ask if any of them gives
us a reason, even in principle, to worry about over-expansionary policy today. (Another possibility,
suggested by Jared Bernstein, is that while we don't need to worry about supply constraints for
the economy as a whole, tax cuts could crowd out useful spending due to some unspecified financial
constraint on the federal government. I don't address that here.) Needless to say, doubts about
the economic case for crowding-out are in no way an argument for the specific deficit-boosting
policies favored by the new administration.
The most straightforward crowding-out story starts from a fixed supply of private savings.
These savings can either be lent to the government, or to business. The more the former takes,
the less is left for the latter. But as Keynes pointed out long ago, this simple loanable-funds
story assumes what it sets out to prove. The total quantity of saving is fixed only if total income
is fixed. If higher government spending can in fact raise total income, it will raise total saving
as well. We can only tell a story about government and business competing for a given pool of
saving if we have already decided for some other reason that GDP can't change.
The more sophisticated version, embodied in the textbook ISLM model, postulates a fixed supply
of money, rather than saving. [1] In Hicks' formulation, money is used both for transactions and
as the maximally liquid store of wealth. The higher is output, the more money is needed for transactions,
and the less is available to be held as wealth. By the familiar logic of supply and demand, this
means that wealthholders must be paid more to part with their remaining stock of money. The price
wealthholders receive to give up their money is interest; so as GDP rises, so does the interest
rate.
Unlike the loanable funds story with fixed saving, this second story does give a logically
coherent account of crowding out. In a world of commodity money, if such ever was, it might even
be literally true. But in a world of bank-created credit money, it's at best a metaphor. Is it
a useful metaphor? That would require two things. First, that the interest rate (whichever one
we are interested in) is set by the financial system. And second, that the process by which this
happens causes rates to systematically rise with demand. The first premise is immediately rejected
by the textbooks, which tell us that "the central bank sets the interest rate." But we needn't
take this at face value. There are many interest rates, not just one, and the spreads between
them vary quite a bit; logically it is possible that strong demand could lead to wider spreads,
as banks stretch must their liquidity further to make more loans. But in reality, the opposite
seems more likely. Government debt is a source of liquidity for private banks, not a use of it;
lending more to the government makes it easier, not harder, for them to also lend more to private
borrowers. Also, a booming economy is one in which business borrowers are more profitable; marginal
borrowers look safer and are likely to get better terms. And rising inflation, obviously, reduces
the real value of outstanding debt; however annoying this is to bankers, rationally it makes them
more willing to lend more to their now less-indebted clients. Wicksell, the semi-acknowledged
father of modern central banking theory, built his big book around the premise that in a credit-money
system, inflation would give private banks no reason to raise interest rates.
And in fact this is what we see. Interest rate spreads are narrow in booms; they widen in crises
and remain wide in downturns.
So crowding out mark two, the ISLM version, requires us to accept both that central banks cannot
control the economically relevant interest rates, and that private banks systematically raise
interest rates when times are good. Again, in a strict gold standard world there might something
to this - banks have to raise rates, their gold reserves are running low - but if we ever lived
in that world it was 150 or 200 years ago or more.
A more natural interpretation of the claim that the economy is at potential, is that any further
increase in demand would just lead to inflation. This is the version of crowding out in better
textbooks, and also the version used by MMT folks. On a certain level, it's obviously correct.
Suppose the amount of money-spending in an economy increases. Then either the quantity of goods
and services increases, or their prices do. There is no third option: The total percent increase
in money spending, must equal the sum of the percent increase in "real" output and the percent
increase in average prices. But how does the balance between higher output and higher prices play
out in real life? One possibility is that potential output is a hard line: each dollar of spending
up to there increases real output one for one, and leaves prices unchanged; each dollar of spending
above there increases prices one for one and leaves output unchanged. Alternatively, we might
imagine a smooth curve where as spending increases, a higher fraction of each marginal dollar
translates into higher prices rather than higher output. [2] This is certainly more realistic,
but it invites the question of which point exactly on this curve we call "potential". And it awakens
the great bane of postwar macro – an inflation-output tradeoff, where the respective costs and
benefits must be assessed politically.
Crowding out mark three, the inflation version, is definitely right in some sense - you can't
produce more concrete use values without limit simply by increasing the quantity of money borrowed
by the government (or some other entity). But we have to ask first, positively, when we will see
this inflation, and second, normatively, how we value lower inflation vs higher output and income.
In the post-1980s orthodoxy, we as society are never supposed to face these questions. They
are settled for us by the central bank. This is the fourth, and probably most politically salient,
version of crowding out: higher government spending will cause the central bank to raise interest
rates. This is the practical content of the textbook story, and in fact newer textbooks replace
the LM curve - where the interest rate is in some sense endogenous - with a straight line at whatever
interest rate is chosen by the central bank. In the more sophisticated textbooks, this becomes
a central bank reaction function - the central bank's actions change from being policy choices,
to a fundamental law of the economic universe. The master parable for this story is the 1990s,
when the Clinton administration came in with big plans for stimulus, only to be slapped down by
Alan Greenspan, who warned that any increase in public spending would be offset by a contractionary
shift by the federal reserve. But once Clinton made the walk to Canossa and embraced deficit reduction,
Greenspan's fed rewarded him with low rates, substituting private investment in equal measure
for the foregone public spending. In the current contest, this means: Any increase in federal
borrowing will be offset one for one by a fall in private investment - because the Fed will raise
rates enough to make it happen.
This story is crowding out mark four. It depends, first, on what the central bank reaction
function actually is - how confident are we that monetary policy will respond in a direct, predictable
way to changes in the federal budget balance or to shifts in demand? (The more attention we pay
to how the monetary sausage gets made, the less confident we are likely to be.) And second, on
whether the central bank really has the power to reliably offset shifts in fiscal policy. In the
textbooks this is taken for granted but there are reasons for doubt. It's also not clear why the
actions of the central bank should be described as crowding out by fiscal policy. The central
bank's policy rule is not a law of nature. Unless there is some other reason to think expansionary
policy can't work, it's not much of an argument to say the Fed won't allow it. We end up with
something like: "Why can't we have deficit-financed nice things?" "Because the economy is at potential
– any more public spending will just crowd out private spending." "How will it be crowded out
exactly?" "Interest rates will rise." "Why will they rise?" "Because the federal reserve will
tighten." "Why will they tighten?" "Because the economy is at potential."
Suppose we take the central bank out of the picture. Suppose we allow supply constraints to
bind on their own, instead of being anticipated by the central planners at the Fed. What would
happen as demand pushed up against the limits of productive capacity? One answer, again, is rising
inflation. But we shouldn't expect prices to all rise in lockstep. Supply constraints don't mean
that production growth halts at once; rather, bottlenecks develop in specific areas. So we should
expect inflation to begin with rising prices for inputs in inelastic supply - land, oil, above
all labor. Textbook models typically include a Phillips curve, with low unemployment leading to
rising wages, which in turn are passed on to higher prices.
But why should they be passed on completely? It's easy to imagine reasons why prices don't
respond fully or immediately to changes in wages. In which case, as I've discussed before, rising
wages will result in an increase in the wage share. Some people will object that such effects
can only be temporary. I'm not sure this makes sense - why shouldn't labor, like anything else,
be relatively more expensive in a world where it is relatively more scarce? But even if you think
that over the long-term the wage share is entirely set on the supply side, the transition from
one "fundamental" wage share to another still has to involve a period of wages rising faster or
slower than productivity growth - which in a Phillips curve world, means a period above or below
full employment.
We don't hear as much about the labor share as the fundamental supply constraint, compared
with savings, inflation or interest rates. But it comes right out of the logic of standard models.
To get to crowding out mark five, though, we have to take one more step. We have to also postulate
that demand in the economy is profit-led - that a distributional shift from profits toward wages
reduces desired investment by more than it increases desired consumption. Whether (or which) real
economies display wage-led or profit-led demand is a subject of vigorous debate in heterodox macro.
But there's no need to adjudicate that now. Right now I'm just interested in what crowding out
could possibly mean.
Demand can affect distribution only if wage increases are not fully passed on to prices. One
reason this might happen is that in an open economy, businesses lack pricing power; if they try
to pass on increased costs, they'll lose market share to imports. Follow that logic to its endpoint
and there are no supply constraints - any increase in spending that can't be satisfied by domestic
production is met by imports instead. For an ideal small, open economy potential output is no
more relevant than the grocery store's inventory is for an individual household when we go shopping.
Instead, like the household, the small open economy faces a budget constraint or a financing constraint
- how much it can buy depends on how much it can pay for.
Needless to say, we needn't go to that extreme to imagine a binding external constraint. It's
quite reasonable to suppose that, thanks to dependence on imported inputs and/or demand for imported
consumption goods, output can't rise without higher imports. And a country may well run out of
foreign exchange before it runs out of domestic savings, finance or productive capacity. This
is the idea behind multiple gap models in development economics, or balance of payments constrained
growth. It also seems like the direction orthodoxy is heading in the eurozone, where competitiveness
is bidding to replace inflation as the overriding concern of macro policy.
Crowding out mark six says that any increase in demand from the government sector will absorb
scarce foreign exchange that will no longer be available to private sector. How relevant it is
depends on how inelastic import demand is, the extent to which the country as a whole faces a
binding budget or credit constraint and, what concrete form that constraint faces - what actually
happens if international creditors are stiffed, or worry they might be? But the general logic
is that higher spending will lead to a higher trade deficit, which at some point can no longer
be financed.
So now we have six forms of crowding out:
1. Government competes with business for fixed saving.
2. Government competes with business for scarce liquidity.
3. Increased spending would lead to higher inflation.
4. Increased spending would cause the central bank to raise interest rates.
5. Overfull employment would lead to overfast wage increases.
6. Increased spending would lead to a higher trade deficit.
The next question is: Is there any reason, even in principle, to worry about any of these outcomes
in the US today? We can decisively set aside the first, which is logically incoherent, and confidently
set aside the second, which doesn't fit a credit-money economy in which government liabilities
are the most liquid asset. But the other four certainly could, in principle, reflect real limits
on expansionary policy. The question is: In the US in 2017, are higher inflation, higher interest
rates, higher wages or a weaker balance of payments position problems we need to worry about?
Are they even problems at all?
First, higher inflation. This is the most natural place to look for the costs of demand pushing
up against capacity limits. In some situations you'd want to ask how much inflation, exactly,
would come from erring on the side of overexpansion, and how costly that higher inflation would
be against the benefits of lower unemployment. But we don't have to ask that question right now,
because inflation is by conventional measures, too low; so higher inflation isn't a cost of expansionary
policy, but an additional benefit. The problem is even worse for Krugman, who has been calling
for years now for a higher inflation target, usually 4 percent. You can't support higher inflation
without supporting the concrete action needed to bring it about, namely, a period of aggregate
spending in excess of potential. [2] Now you might say that changing the inflation target is the
responsibility of the Fed, not the fiscal authorities. But even leaving aside the question of
democratic accountability, it's hard to take this response seriously when we've spent the last
eight years watching the Fed miss its existing target; setting a new higher target isn't going
to make a difference unless something else happens to raise demand. I just don't see how you can
write "What do we want? Four percent! When do we want it? Now!" and then turn around and object
to expansionary fiscal policy on the grounds that it might be inflationary.
OK, but what if the Fed does raise rates in response to any increase in the federal budget
deficit, as many observers expect? Again, if you think that more expansionary policy is otherwise
desirable, it would seem that your problem here is with the Fed. But set that aside, and assume
our choice is between a baseline 2018-2020, and an alternative with the same GDP but with higher
budget deficits and higher interest rates. (This is the worst case for crowding out.) Which do
we prefer? In the old days, the low-deficit, low-interest world would have been the only respectable
choice: Private investment is obviously preferable to whatever government deficits might finance.
(And to be fair, in the actual 2018-2020, they will mostly be financing high-end tax cuts.) But
as Brad DeLong points out, the calculation is different today. Higher interest rates are now a
blessing, not a curse, because they create more running room for the Fed to respond to a downturn.
[3] In the second scenario, there will be some help from conventional monetary policy in the next
recession, for whatever it's worth; in the first scenario there will be no help at all. And one
thing we've surely learned since 2008 is the costs of cyclical downturns are much larger than
previously believed. So here again, what is traditionally considered a costs of pushing past supply
constraints turns out on closer examination to be a benefit.
Empirical studies reporting false reports are an unfortunate
fact of life. I'm surprised that Noah Smith did not cite John
Ioannnidis's paper on biomedical studies: "Why most published
research findings are false." journals.plos.org/plosmedicine/article?id=10.1371/journal.pmed.0020124
Usually the problem is misuse of statistical methods, for
example by data dredging or other data-dependent activities,
rather than say misinterpreting the results of a significance
test.
He spent the primary railing against Bernie Sanders, who polled much better against Trump than
Hillary and who had much better policy proposals than Hillary. Now he complains about what he
himself promoted.
So now the Republicans and Democrats can go back to playing Good Cop/Bad Cop - just like the
last 30 or so years. And Krugman can go back to pretending to fight the right wing while at the
same time guarding against any success of the left wing.
Neoliberal Democrats seem impervious about killing jobs (or driving down wages) with "free" trade
agreements. But now you want us to bleed for the health-insurance industry.
Why should the average American family pay $10,000/year (your 5% of GDP) to support a completely
useless industry (health-care insurance)? And you wonder why Hillary lost the election.
If you're concerned about jobs, there are plenty more useful things to do, like renewable energy,
energy-conservation, refurbishing the electrical grid to support renewable energy, not to mention
traditional infrastructure; then there's water conservation, scientific research etc.
You can advocate all you want. There is going to be another four years of Republican majorities
in the house and they are not going to go for Medicare For All. There are plenty of issues where
the majority of people want things:
1. Taxing the rich
2. Not increasing the military budget
3. Keeping abortion legal
4. Medicare for all
Failing to advocate for MFA just blatantly demonstrates, to the Average American, that the Democratic
Party is beholden to Wall Street (and keep people away from the voting-booth.
Until Pk (and the Democratic party-establishment) understands this simple truth, they will
keep flounder in the desert. And the more "Bernie-bashing" they do (especially quoting MFA), the
more they will alienate the average American.
"This is a guy who has a prestigious academic record and a huge international reader base. He
could do or go pretty much anywhere he wants."
You're absolutely correct, Paul, and many other "prominent" people (some I know personally)
that I used to respect, went "all in" on Hillary Clinton (and what she represents, i.e. neoliberal
wisdom).
All of them are very well off, and seem to be isolated from us "workin' stiffs". They seem
to all get their information from the corporate media.
Only Paul can explain his decision to crusade against (in spite of earlier writings) Medicare-For-All
and anything else proposed by Bernie.
Krugman mocked Sanders for promoting the idea of medicare-for-all in the primary debates. This
was unadulterated partisan hippy bashing that contradicted his earlier columns.
He is paying attention. He is not blocking it out. Show us one article from Krugman where he said
single payer was bad policy. Just one. It does not exist.
Paul Krugman, Bernie Sanders, and Medicare for All
By DEAN BAKER
Paul Krugman weighs in * this morning on the debate between Bernie Sanders and Hillary Clinton
as to whether we should be trying to get universal Medicare or whether the best route forward
is to try to extend and improve the Affordable Care Act. Krugman comes down clearly on the side
of Hillary Clinton, arguing that it is implausible that we could get the sort of political force
necessary to implement a universal Medicare system.
Getting universal Medicare would require overcoming opposition not only from insurers and drug
companies, but doctors and hospital administrators, both of whom are paid at levels two to three
times higher than their counterparts in other wealthy countries. There would also be opposition
from a massive web of health-related industries, including everything from manufacturers of medical
equipment and diagnostic tools to pharmacy benefit managers who survive by intermediating between
insurers and drug companies.
Krugman is largely right, but I would make two major qualifications to his argument. The first
is that it is necessary to keep reminding the public that we are getting ripped off by the health
care industry in order to make any progress at all. The lobbyists for the industry are always
there. Money is at stake if they can get higher prices for their drugs, larger compensation packages
for doctors or hospitals, or weaker regulation on insurers.
The public doesn't have lobbyists to work the other side. The best we can hope is that groups
that have a general interest in lower health care costs, like AARP, labor unions, and various
consumer groups can put some pressure on politicians to counter the industry groups. In this context,
Bernie Sanders' push for universal Medicare can play an important role in energizing the public
and keeping the pressure on.
Those who think this sounds like stardust and fairy tales should read the column by Krugman's
fellow New York Times columnist, health economist Austin Frakt. Frakt reports ** on a new study
that finds evidence that public debate on drug prices and measures to constrain the industry had
the effect of slowing the growth of drug prices. In short getting out the pitchforks has a real
impact on the industry's behavior.
The implication is that we need people like Senator Sanders to constantly push the envelope.
Even if this may not get us to universal Medicare in one big leap, it will create a political
environment in which we can move forward rather than backward.
The other point has to do with an issue that Krugman raises in his blogpost *** on the topic.
He argues that part of the story of lower health care costs in Canada and other countries involves
saying "no," by which he means refusing to pay for various drugs and treatments that are considered
too expensive for the benefit they provide.
While there is some truth to this story, it is important to step back for a moment. In the
vast majority of cases, the drugs in question are not actually expensive to manufacture. The way
the drug industry justifies high prices is that they must recover their research costs. While
the industry does in fact spend a considerable amount of money on research (although they likely
exaggerate this figure), at the point the drug is being administered this is a sunk cost. In other
words, the resources devoted to this research have already been used; the economy doesn't somehow
get back the researchers' time and the capital expended if fewer people take a drug that is developed
from their work.
Ordinarily economists treat it as an absolute article of faith that we want all goods and services
to sell at their marginal cost without interference from the government, like a trade tariff or
quota. However in the case of prescription drugs, economists seem content to ignore the patent
monopolies granted to the industry, which allow it to charge prices that are often ten or even
a hundred times the free market price. (The hepatitis C drug Sovaldi has a list price in the United
States of $84,000. High quality generic versions are available in India for a few hundred dollars
per treatment.) In this case, we are effectively looking at a tariff that is not the 10-20 percent
that we might see in trade policy, but rather 1,000 percent or even 10,000 percent.
This sort of gap between price and marginal cost leads to exactly the sort of distortions that
economists predict when the government intervenes in a market with trade tariffs, except the distortions
are hugely larger with drugs. Companies have incentive to engage in massive marketing efforts,
they push their drugs for conditions for which they may not be appropriate, and they conceal evidence
suggesting their drugs may be less effective than advertised, or possibly even harmful. They also
lobby politicians for ever longer and stronger patent protection, and they use the legal system
to harass potential competitors, both generic and brand. Even research is distorted by this incentive
structure, with large portions of the industry's budget being devoted to developing copycat drugs
to gain a share of a competitor's patent rents.
Perhaps the worst part of this story is that the patent monopolies put us in a situation where
we might have to say no. The industry's monopoly allows it to say that it will not turn over a
life-saving drug for less than $100,000, $200,000, or whatever price tag it chooses. However,
if there was no patent monopoly, we would be looking at buying this drug at its cost of production.
That will rarely be more than $1,000 and generally much less. At those prices, it will rarely
make sense to say no. (The same issue arises with most medical equipment – once we have the technology,
producing a magnetic resonance imaging scanner is relatively cheap, as would be the cost of an
individual screening.)
We do have to pay for the research, but the way we are now doing it is incredibly backward.
It is like paying the firefighters when they show up at the burning house with our family inside.
Of course we would pay them millions to save our family (if we had the money), but it is nutty
to design a system that puts us in this situation.
We should be looking for a system that pays for the research upfront. There are various mechanisms
to accomplish this goal. (Here's **** my plan for a system of publicly funded clinical trials.)
Obviously overhauling our system for financing drug research is not something that is done overnight,
but it is an issue that needs attention. The current system is incredibly wasteful and it needlessly
puts in a situation where we have to say no in contexts where the costs to society of administering
treatment are actually very low.
This doesn't mean that we would pay for everything for everybody. There are some procedures
that actually are very expensive, for example surgeries requiring many hours of the time of highly
skilled surgeons. But we should be trying to design a system that minimizes these sorts of situations,
rather than making them an everyday occurrence.
My column * and Bernie Sanders' plan crossed in the mail. But the Sanders plan in a way reinforces
my point that calls for single-payer in America at this point are basically a distraction. Again,
I say this as someone who favors single-payer - but it's just not going to happen anytime soon.
Put it this way: for all the talk about being honest and upfront, even Sanders ended up delivering
mostly smoke and mirrors - or as Ezra Klein says, puppies and rainbows. ** Despite imposing large
middle-class taxes, his "gesture toward a future plan", as Ezra puts it, relies on the assumption
of huge cost savings. If you like, it involves a huge magic asterisk.
Now, it's true that single-payer systems in other advanced countries are much cheaper than
our health care system. And some of that could be replicated via lower administrative costs and
the generally lower prices Medicare pays. But to get costs down to, say, Canadian levels, we'd
need to do what they do: say no to patients, telling them that they can't always have the treatment
they want.
Saying no has two cost-saving effects: it saves money directly, and it also greatly enhances
the government's bargaining power, because it can say, for example, to drug producers that if
they charge too much they won't be in the formulary.
But it's not something most Americans want to hear about; foreign single-payer systems are
actually more like Medicaid than they are like Medicare.
And Sanders isn't coming clean on that - he's promising Medicaid-like costs while also promising
no rationing. The reason, of course, is that being realistic either about the costs or about what
the system would really be like would make it a political loser. But that's the point: single-payer
just isn't a political possibility starting from here. It's just a distraction from the real issues.
"... Sociologists spend their careers trying to understand how societies work. And some of the most pressing problems in big chunks of the United States may show up in economic data as low employment levels and stagnant wages but are also evident in elevated rates of depression, drug addiction and premature death. In other words, economics is only a piece of a broader, societal problem. So maybe the people who study just that could be worth listening to. ..."
"... "Once economists have the ears of people in Washington, they convince them that the only questions worth asking are the questions that economists are equipped to answer," said Michèle Lamont, a Harvard sociologist and president of the American Sociological Association. "That's not to take anything away from what they do. It's just that many of the answers they give are very partial." ..."
"... For starters, while economists tend to view a job as a straightforward exchange of labor for money, a wide body of sociological research shows how tied up work is with a sense of purpose and identity. ..."
"... "Wages are very important because of course they help people live and provide for their families," said Herbert Gans, an emeritus professor of sociology at Columbia. "But what social values can do is say that unemployment isn't just losing wages, it's losing dignity and self-respect and a feeling of usefulness and all the things that make human beings happy and able to function. ..."
"... That seems to be doubly true in the United States. For example, Ofer Sharone, a sociologist at the University of Massachusetts, Amherst, studied unemployed white-collar workers and found that in the United States, his subjects viewed their ability to land a job as a personal reflection of their self-worth rather than a matter of arbitrary luck. They therefore took rejection hard, blaming themselves and in many cases giving up looking for work. In contrast, in Israel similar unemployed workers viewed getting a job as more like winning a lottery, and were less discouraged by rejection. ..."
"... By and large, 'librul' economists ignore distribution...preferring to concentrate on growth from policies like corporate-negotiated 'free' trade and trickle down monetary policy that favors the Wall Street banking cartel. ..."
"... BTW what happened to Krugman's perfunctory twice a year column on inequality? ..."
"... The nicotine addict cares about as much about 'risk under uncertainty' as Harford. ..."
What if Sociologists Had as Much Influence as
Economists? https://nyti.ms/2m9yDHL via
@UpshotNYT
NYT - NEIL IRWIN - MARCH 17, 2017
Walk half a city block in downtown Washington, and there is a good chance that you will pass an
economist; people with advanced training in the field shape policy on subjects as varied as how
health care is provided, broadcast licenses auctioned, or air pollution regulated.
Turn on cable news, and the guests who opine on the weighty public policy questions of the
day quite often have some title like "chief economist" underneath their name. And there are economists
sprinkled throughout the government - there is an entire council of them advising the president
in most administrations, if not yet in this one.
But as much as we love economics here - this column is named Economic View, after all - there
just may be a downside to this one academic discipline having such primacy in shaping public policy.
They say when all you have is a hammer, every problem looks like a nail. And the risk is that
when every policy adviser is an economist, every problem looks like inadequate per-capita gross
domestic product.
Another academic discipline may not have the ear of presidents but may actually do a better
job of explaining what has gone wrong in large swaths of the United States and other advanced
nations in recent years.
Sociologists spend their careers trying to understand how societies work. And some of the most
pressing problems in big chunks of the United States may show up in economic data as low employment
levels and stagnant wages but are also evident in elevated rates of depression, drug addiction
and premature death. In other words, economics is only a piece of a broader, societal problem.
So maybe the people who study just that could be worth listening to.
"Once economists have the ears of people in Washington, they convince them that the only questions
worth asking are the questions that economists are equipped to answer," said Michèle Lamont, a
Harvard sociologist and president of the American Sociological Association. "That's not to take
anything away from what they do. It's just that many of the answers they give are very partial."
As a small corrective, I took a dive into some sociological research with particular relevance
to the biggest problems facing communities in advanced countries today to understand what kinds
of lessons the field can offer. In 1967, Senator Walter Mondale actually proposed a White House
Council of Social Advisers that he envisioned as a counterpart to the well-entrenched Council
of Economic Advisers. It was never created, but if it had been, this is the sort of advice it
might have been giving recent presidents.
For starters, while economists tend to view a job as a straightforward exchange of labor for
money, a wide body of sociological research shows how tied up work is with a sense of purpose
and identity.
"Wages are very important because of course they help people live and provide for their families,"
said Herbert Gans, an emeritus professor of sociology at Columbia. "But what social values can
do is say that unemployment isn't just losing wages, it's losing dignity and self-respect and
a feeling of usefulness and all the things that make human beings happy and able to function.
That seems to be doubly true in the United States. For example, Ofer Sharone, a sociologist
at the University of Massachusetts, Amherst, studied unemployed white-collar workers and found
that in the United States, his subjects viewed their ability to land a job as a personal reflection
of their self-worth rather than a matter of arbitrary luck. They therefore took rejection hard,
blaming themselves and in many cases giving up looking for work. In contrast, in Israel similar
unemployed workers viewed getting a job as more like winning a lottery, and were less discouraged
by rejection.
It seems plausible that this helps explain why so many Americans who lost jobs in the 2008
recession have never returned to the labor force despite an improved job market. Mr. Sharone is
working with career counselors to explore how to put this finding to work to help the long-term
unemployed. ...
By and large, 'librul' economists ignore distribution...preferring to concentrate on growth from
policies like corporate-negotiated 'free' trade and trickle down monetary policy that favors the
Wall Street banking cartel.
BTW what happened to Krugman's perfunctory twice a year column on inequality?
Why
Mainstream Economists' Theory of Finance is Useless
by Ismael Hossein-Zadeh
"A major reason for these economists' bewilderment in the
face of financial bubbles and bursts is that, according to
their theoretical shibboleth, expansion of finance/fictitious
capital on a macro or national level is not supposed to
deviate much from that of industrial/real capital, as the
magnitude of the former is essentially determined or limited
by the requirements of the real sector of the economy.
The theory maintains that there is an auspicious synergy
between the financial and real sectors of an economy: finance
capital tends to shadow industrial capital as if its main
function is to grease the wheels of the real sector, that is,
of manufacturing and commercial undertakings -just as it was
more or less the case in the early stages of capitalism, when
there was not yet a large, independent financial sector.
Oh that is my sin. I'm an economist and PeterK hates people
who can actually do analysis. That explains a lot.
libezkova -> pgl...
, -1
The real question is: can quasi religious analysis from the
positions of neoclassical economics be called analysis. Or is
this a new type of Lysenkoism?
"... it is only because mean spirited supply side economists show up on tv and in the media all
the time ..."
"... this is because these are the people the billionairs want to see quoted all the time as they
think it serves their bottom line ..."
"... the one mistake this article makes is assuming that the ones it identifies as economists are
representatives of the true science of economics ..."
"... those economists who do so need to be ashamed of themselves ..."
"What if Sociologists Had as Much Influence as Economists? - NYTimes"
it is only because mean spirited supply side economists show up on tv and in the media
all the time
this is because these are the people the billionairs want to see quoted all the time as
they think it serves their bottom line
however I do not believe they portray the truth about economics and in a just society they
wouldn't even get through their courses
so there is no conflict between economics and sociology
the one mistake this article makes is assuming that the ones it identifies as economists
are representatives of the true science of economics
if economics is involved in maximizing "utility" for everyone, how can so called "economists"
justify policies that harm large portions of the population, harm the environment, deplete natural
resources, keep people in poverty, deny healthcare, propagate wars, advance demagoguery
those economists who do so need to be ashamed of themselves
Making a combined comment on the links about sociological
explanation (NYTimes, Understanding Society, and Tim
Harford):
I want to point out that monocausal explanation in society
is fairly useless, especially in a society-in-crisis, for at
least two very DIFFERENT reasons: 1. complexities, which are
analytical things about lots of specifics, and 2. common
emergence of agreement, a central moral thing about trust.
These sound high-falutin', but they are just shorthand for
two different things which keep coming up in our
conversations everywhere:
there are so many connections and relationships, that
people can find ways to get around certain policies, and
the real determiner of decisions is what everybody
AGREES to be true, -- or has voted upon under majority
rules -- even though what everybody agrees to be true, may
be false.
So therefore, the vested interests of the status quo, at
any moment, are engaged in two very different efforts:
providing so much complicated information and false
information that most people stay confused, and
buying votes, buying elections, buying lobbyists.
Any operating political hack knows this, will tell you
this is his/her job.
This has been going on since the middle of the 18th
Century, perhaps longer. And of course, we see where all this
has led us.
My point in making the distinction, the distinction about
finding 2. common agreement to get anything done under 1.
conditions of complexity & uncertainty, is to get it out of
the way, to clear the floor, to make a very different point:
A majority of the people don't ever have the analytical
skills to sort it out. As follows:
A majority of the people don't have the analytical skills to
sort out the lies. How do we deal with this?
First, realize has little to do with the level of
intelligence or education.
It appears to be a difference in HOW people take
"information" into themselves. There is a big difference
between "orality" and "literacy" cultures. Trump's speeches
give a very good illustration of this, perhaps a perfect
example.
The distinction was first emphasized by Walter Ong in his
perennial book Orality and Literacy (1982). Here is an
adaptation of his list of some traits of "oral" culture:
1. Sounded word is itself power, an action-event. Words
are not taken in as mere signs.
2. Your knowledge is limited to what you can personally
recall: To retain & retrieve information, without reading &
writing, you must think in mnemonic patters shaped for ready
oral recurrence. Thus, heavily rhythmic, balanced,
repetitious. Use of antitheses, alliterations & assonances,
epithetic or other formulary expressions, standard thematic
settings ("the assembly, the meal, the duel, the hero's
helper", etc.) proverbs, etc. This even determines syntax.
3. The logic of argument is additive rather than
subordinative. Use of the conjunction "and", instead of
dependent clauses.
4. The discourse is aggregative rather than analytic:
Elements of thought are clusters, parallel terms, antithetic
terms, recurrent epithets such as "brave" soldier,
"beautiful" princess, etc., and these couplings are rarely
dismantled.
5. Redundant or "copious": Heavy use of repetition because
spoken words evaporate, which would prevent the continuity
that is required for thinking. It also helps overcome the
problem that members of the same audience have different
comprehension levels; and helps overcome acoustical lapses in
the assembly hall.
6. The resulting culture tends to conservative or
traditionalist: Use of repetition accentuates the learning of
ages, to the detriment of new discoveries and innovations.
7. Close to the human lifeworld.
8. Agonistically toned: Knowledge is situated within a
context of STRUGGLE in the lifeworld. Use of challenges,
riddles, proverbs, struggles, descriptions of violence. The
flip-side of this is heavy use of extreme praise: "fantastic,
beautiful", etc.
9. Empathetic & participatory, rather than objectively,
scientifically distanced.
10. Homeostatic: Oral societies live in a present which
keeps itself in equilibrium by sloughing off memories which
no longer have present relevance.
11. Situational rather than abstract.
12. Verbomotor lifestyle: In oral society, courses of
action and attitudes toward issues depend significantly more
on effective use of words and thus on human interaction, and
significantly less on non-verbal, often largely visual input
from the "objective" world of print or things. In addition,
oral folk commonly manifest their schizoid tendencies by
extreme external confusion, leading often to violent action,
including mutilation of self and others: going "berserk,
amok".
13. Noetic role of heroic "heavy" figures, and of the
fantastic & bizarre.
14. Orality, community and the sacred: it is all combined.
Note that Ong's brilliant list describes the cognitive
style of Trump's speeches, of Fox News reportage, and
describes the thought processes and speech-styles of many
voters.
"... Economist James K. Galbraith disputes these claims of the benefit of comparative advantage. He states that "free trade has attained the status of a god" and that ". . . none of the world's most successful trading regions, including Japan, Korea, Taiwan, and now mainland China, reached their current status by adopting neoliberal trading rules." He argues that ". . . comparative advantage is based upon the concept of constant returns: the idea that you can double or triple the output of any good simply by doubling or tripling the inputs. But this is not generally the case. For manufactured products, increasing returns, learning, and technical change are the rule, not the exception; the cost of production falls with experience. With increasing returns, the lowest cost will be incurred by the country that starts earliest and moves fastest on any particular line. Potential competitors have to protect their own industries if they wish them to survive long enough to achieve competitive scale."[42] ..."
"... Galbraith, as always, is very succinct and readable. I well remember sitting in an economics lecture in the 1980's when the Professor mentioned Galbraith and described him as with distain someone 'who's ideas were more popular with the public than with economists'. The snigger of agreement that ran around the students in the hall made me realise just how ingrained the ideology of economics was as I'm pretty sure I was the only one of the students who'd actually read any Galbraith. ..."
"... I'd also recommend Ha-Joon Chang as someone who is very readable on the topic of the many weaknesses of conventional ideas on comparative advantage. ..."
"... "The modern conservative is engaged in one of man's oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness." ..."
"... I've noticed many experts are especially bad at verbosity. Maybe they think somehow that quantity of words is a form of potency. Maybe that's it. Also individuals with a grievance who write posts about their grievance. I know when I have a grievance it's hard to shut up. I'm just being honest. I'll keep rambling and rambling, repeating myelf and fulminating. Thankfully I know better than to write like that. ..."
"... Thing 13: Making rich people richer doesn't make the rest of us richer. Trickle down economics doesn't work because wealth doesn't trickle down. It trickles up, which is why the rich are the rich in the first place ..."
"... Thing 23: Good economic policy does not require good economists. Most of the really important economic issues, the ones that decide whether nations sink or swim, are within the intellectual reach of intelligent non-economists. Academic Economics with a capital "E" has remarkably little to say about the things that really matter. Concerned citizens need to stop being intimidated by the experts here. ..."
"... Although Ha Joon Chang is an excellent economist, I would also strongly recommend Michael Hudson, Michael Perelman, Steve Keen and E. Ray Canterbery - they are really great, along with Samir Amin of Senegal. ..."
"... A major issue is that those incapable politicians do rely upon experts, but they have consistently selected experts not on their track record (such as how good economists were at predicting the evolution of the economy, or how good political scientists were at predicting the evolution of communist or Arab societies), but on whether pronouncements of experts corresponded to their ideological preconceptions and justified their intended policies. ..."
"... A bit like rejecting physicians' diagnoses when they do not suit you and preferring the cure of a quack. ..."
"... This is not restricted to economists, it pervasive in science in general. I can't remember how many times I got a paper for peer review where I couldn't figure out what the person was trying to say because they layered the jargon ten levels deep. ..."
"... I think it is as simple as: if you create something that justifies the behaviors of the rich and powerful, you have something to sell and willing buyers. If you create something that delegitimizes the behaviors of the rich and powerful, you not only have no willing patrons but you have made powerful enemies. ..."
"... It is the law of supply and demand for pretentious bullshit. ..."
"... Leave workers exposed to starvation long enough and they'll work for next- to-nothing. The solution to James O'Connor's Fiscal Crisis of the State is to clean house in a big way, a very big way. Put everyone out on the street and start all over again. (Everyone but the 1% of course.) ..."
"... It's Andrew Mellon's advice for getting out of the Depression: "liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people." ..."
"... The Reserve Army of Labor saves the Capitalist Day, once again. (Except for the little problem that the 1% won't accept their own liquidation, so Goldman Sachs and the rest must be exempted from the purging–which means that the purging can't work.) ..."
"... Not too long before he died, Paul Samuelson said: "Maybe I was wrong on the subject of jobs offshoring." (I.e., maybe offshoring all the jobs and dismantling the US economy wasn't so intelligent after all!) ..."
"... C. Wright Mills called them "crackpot realists." ..."
"... It's all a part and parcel of the meritocracy. If you don't have a degree in Econ, your opinion doesn't matter about why your job moved to China. If you don't have a degree in Urban Planning, you don't get to comment on how the city wants to tear down the park and put up condos. ..."
"... Their advice helped lead to this 2008 Financial Crisis. The promise of neoliberalism was faster growth. It did not happen. Quite the opposite. It gave the rich intellectual cover to loot society. That"s what this was always about. ..."
"... Then there's the matter of the Iraq War. Another example. Many foreign policy "experts", particularly affiliated with the neoconservative assured the American people that invading Iraq would be easy to do and lead to lots of long term benefits. Others insisted, despite evidence to the contrary, that Saddam was developing weapons of mass destruction. Now look at where we are. No WMDs, long and cost war, with no long-term solutions. Many of said "experts" later endorsed Clinton. ..."
"... We do not need pro-Establishment experts who sell themselves out to enrich themselves. We need experts who act in the public interest. ..."
First, to explain our basic concepts and most important insights in plain English. Famously,
Paul Samuelson, the founder of modern macroeconomics, was asked whether economics told us anything
that was true but not obvious. It took him a couple of years, but eventually he gave an excellent
and topical example – simply the theory of comparative advantage.
Similarly, I often say that the most useful thing I did in my 6 years as Chief Economist at
DWP was to explain the lump of labour fallacy – that there isn't a fixed number of jobs in the
economy, and increased immigration or more women working adds to both labour demand and labour
supply – to six successive Secretaries of State. So that's the first.
Second is to call bullshit.
O.K. I call bullshit. What Portes explained "to six successive Secretaries of State" was
a figment of the imagination of a late 18th century Lancashire magistrate, a self-styled "
friend
to the poor " who couldn't understand why poor people got so upset about having their wages cut
or losing their jobs - to the extent they would go around throwing rocks through windows, breaking
machines and burning down factories - when it was obvious to him that it was all for the best
and in the long run we would all be better off or else dead.
I call bullshit because what Portes explained to six successive Secretaries of State was
simply the return of the repressed - the obverse of "Say's Law" (which was neither Say's nor a Law)
that "supply creates its own demand," which John Maynard Keynes demolished in The General Theory
of Employment, Interest and Money and that John Kenneth Galbraith subsequently declared "
sank without trace " in the wake of Keynes's demolition of it.
I call bullshit because when Paul Samuelson resurrected the defunct fallacy claim that
Portes explained to six successive Secretaries of State, he did so on the condition that governments
pursued the sorts of "Keynesian" job-creating policies that the discredited principle of "supply
creates its own demand" insisted were both unnecessary and counter-productive.
But the lump of labor argument implies that there is only so much useful remunerative work
to be done in any economic system, and that is indeed a fallacy . If proper and sound
monetary, fiscal, and pricing policies are being vigorously promulgated , we need not resign
ourselves to mass unemployment. And although technological unemployment is not to be shrugged
off lightly, its optimal solution lies in offsetting policies that create adequate job
opportunities and new skills.
[Incidentally, as Robert Schiller has noted, the promised prevention of mass unemployment by vigorous
policy intervention did not imply the preservation of wage levels. Schiller cited the following passage
from the Samuelson textbook, " a decrease in the demand for a particular kind of labor because of
technological shifts in an industry can he adapted to - lower relative wages and migration of labor
and capital will eventually provide new jobs for the displaced workers."]
I call bullshit because what Portes explained to six successive Secretaries of State was
not even Paul Samuelson's policy-animated zombie lump-of-labour fallacy but a supply-side, anti-inflationary
retrofit cobbled together by Richard Layard and associates and touted by Tony Blair and Gerhard Schroeder
as the Third Way " new supply-side
agenda for the left. " Central to that agenda were tax cuts to promote economic growth and
"active labour market policies" to foster non-inflationary expansion of employment by making conditions
more "flexible" and lower-waged:
Part-time work and low-paid work are better than no work because they ease the transition from
unemployment to jobs.
Encourage employers to offer 'entry' jobs to the labour market by lowering the burden of tax
and social security contributions on low-paid jobs.
Adjustment will be the easier, the more labour and product markets are working properly. Barriers
to employment in relatively low productivity sectors need to be lowered if employees displaced
by the productivity gains that are an inherent feature of structural change are to find jobs elsewhere.
The labour market needs a low-wage sector in order to make low-skill jobs available.
I call bullshit because in defending the outcomes of supply-side labour policies, Portes soft-pedaled
the stated low-wage objectives of the Third Way agenda. In a
London Review of Books review, Portes admitted that "it may drive down wages for the low-skilled,
but the effect is small compared to that of other factors (technological change, the national minimum
wage and so on)." In the Third Way supply-side agenda, however, a low-wage sector was promoted as
a desirable feature - making more low-skill jobs available - not a trivial bug to be brushed aside.
In other words, in "driving down wages for the low skilled" the policy was achieving exactly what
it was intended to but Portes was "too discreet" to admit that was the stated objectives of the policy.
Economist James K. Galbraith disputes these claims of the benefit of comparative advantage.
He states that "free trade has attained the status of a god" and that ". . . none of the world's
most successful trading regions, including Japan, Korea, Taiwan, and now mainland China, reached
their current status by adopting neoliberal trading rules." He argues that ". . . comparative
advantage is based upon the concept of constant returns: the idea that you can double or triple
the output of any good simply by doubling or tripling the inputs. But this is not generally
the case. For manufactured products, increasing returns, learning, and technical change are
the rule, not the exception; the cost of production falls with experience. With increasing
returns, the lowest cost will be incurred by the country that starts earliest and moves fastest
on any particular line. Potential competitors have to protect their own industries if they
wish them to survive long enough to achieve competitive scale."[42]
Galbraith also contends that "For most other commodities, where land or ecology places limits
on the expansion of capacity, the opposite condition – diminishing returns – is the rule. In
this situation, there can be no guarantee that an advantage of relative cost will persist once
specialization and the resultant expansion of production take place. A classic and tragic example,
studied by Erik Reinert, is transitional Mongolia, a vast grassland with a tiny population
and no industry that could compete on world markets. To the World Bank, Mongolia seemed a classic
case of comparative advantage in animal husbandry, which in Mongolia consisted of vast herds
of cattle, camels, sheep, and goats. Opening of industrial markets collapsed domestic industry,
while privatization of the herds prompted the herders to increase their size. This led, within
just a few years in the early 1990s, to overgrazing and permanent desertification of the subarctic
steppe and, with a slightly colder than normal winter, a massive famine in the herds."
Galbraith, as always, is very succinct and readable. I well remember sitting in an economics
lecture in the 1980's when the Professor mentioned Galbraith and described him as with distain
someone 'who's ideas were more popular with the public than with economists'. The snigger of agreement
that ran around the students in the hall made me realise just how ingrained the ideology of economics
was as I'm pretty sure I was the only one of the students who'd actually read any Galbraith.
I'd also recommend Ha-Joon Chang
as someone who is very readable on the topic of the many weaknesses of conventional ideas on comparative
advantage.
James K Galbraith is the son of the famous New Deal economist John K Galbraith.
John K G:
"The modern conservative is engaged in one of man's oldest exercises in moral philosophy;
that is, the search for a superior moral justification for selfishness."
"In the case of economics there are no important propositions that cannot be stated in plain
language."
"I was an editor of Fortune under Henry Luce, the founder of Time, Inc., who was one of the
most ruthless editors that I have ever known, that anyone has ever known. Henry could look over
a sheet of copy and say, "This can go, and this can go, and this can go," and you would be left
with eight to ten lines which said everything that you had said in twenty lines before.
And I can still, to this day, not write a page without the feeling that Henry Luce is looking
over my shoulder and saying, "That can go." That illuminate one "problem" in our age of internet,
unlimited space to be verbose and no editors that de-obscure the writers "thoughts".
I wonder if this phenomenon – the desirability succinct communication -- was a holdover of
earlier times, when accurate communication made the difference between life and death. Settling
and developing a continent would place a high value on such purposeful human exchanges.
Today, we are awash in branding and marketing intended to maintain the current order. The language
is used to obfuscate, not clarify experience or goals.
An expert in any field that has the ability to communicate in a general , popular mode, is
of great value to society. Truth and understanding is its main function. Knowledge, or insight
that cannot be shared is more often than not just an excuse to hide methods of control and exploitation.
If citizens can't get the generalities right, the specifics will be impossible to comprehend.
Almost everything can go. I remember seeing a video of the photographer William Klein saying
a master photographer is remembered for just a handfull of images. Maybe 10 or 15, tops. Out of
probably at least 100,000 serious photos.
Of course what goes is necessary fertilizer for what doesn't go. You can't avoid it. Hahahah.
But you have to let it go anyway. Or your editor has to be williing to cut.
I've noticed lots and lots of posts here could be a lot better if the post author had said
the same thing in half as many words. Most wouldn't lose any persuasion, if they had any to begin
with. And they'd gain reader attention for the pruning.
I've noticed many experts are especially bad at verbosity. Maybe they think somehow that
quantity of words is a form of potency. Maybe that's it. Also individuals with a grievance who
write posts about their grievance. I know when I have a grievance it's hard to shut up. I'm just
being honest. I'll keep rambling and rambling, repeating myelf and fulminating. Thankfully I know
better than to write like that.
Having saidd all that, Say was rite. If the supply of labor increases, that createes its
own demand for jobs! How is that not completely obvious.
Huffington Post review has a synopsis of the Ha-Joon Change book.
http://www.huffingtonpost.com/ian-fletcher/a-review-of-ha-joon-chang_b_840417.html
My favorite: Thing 13: Making rich people richer doesn't make the rest of us richer. Trickle down economics
doesn't work because wealth doesn't trickle down. It trickles up, which is why the rich are the
rich in the first place
Thanks for the tip PK & thank you fd for the link to the review. I'm going to check this fellow
out; sounds like he has some interesting things to say. One of the "things" that may apply to
the above article:
Thing 23: Good economic policy does not require good economists. Most of the really important
economic issues, the ones that decide whether nations sink or swim, are within the intellectual
reach of intelligent non-economists. Academic Economics with a capital "E" has remarkably little
to say about the things that really matter. Concerned citizens need to stop being intimidated
by the experts here.
Although Ha Joon Chang is an excellent economist, I would also strongly recommend Michael
Hudson, Michael Perelman, Steve Keen and E. Ray Canterbery - they are really great, along with
Samir Amin of Senegal.
A word of warning from the UK. Denigrate experts too much and you end up like us with government
by people who really are inexpert. That is not an improvement.
Ha! I think an anti brexiter just rolled the white eye.
Strange that the awful things that the experts told us all would happen haven't and don't look
like happening since the people called bullshit on the EU mess. Britain with or without those
blokes in dresses up north will do just fine as they steer themselves out of the EU quagmire.
I'll take the people anytime anonymous – they have more common sense than the experts. Didn't
you read the article?
I remember back in the 1980s, when so-called "experts" were prattling about such nonsense as
. . .
"Computers don't make mistakes, humans make mistakes !"
Which was surely untrue as anyone with any real IT expertise back then would have explained
that 97% or more of hardware crashes generate software problems (for obvious reasons).
A major issue is that those incapable politicians do rely upon experts, but they have consistently
selected experts not on their track record (such as how good economists were at predicting the
evolution of the economy, or how good political scientists were at predicting the evolution of
communist or Arab societies), but on whether pronouncements of experts corresponded to their ideological
preconceptions and justified their intended policies.
A bit like rejecting physicians' diagnoses when they do not suit you and preferring the
cure of a quack.
This is not restricted to economists, it pervasive in science in general. I can't remember
how many times I got a paper for peer review where I couldn't figure out what the person was trying
to say because they layered the jargon ten levels deep. This is in chemistry, so things are
typically straightforward, no need for convoluted explanations and massaging of the data.
But people still do it because that's the culture that they've been educated in, a scientific
paper has to be high-brow, using obscure words and complicated sentences.
I think it is as simple as: if you create something that justifies the behaviors of the
rich and powerful, you have something to sell and willing buyers. If you create something that
delegitimizes the behaviors of the rich and powerful, you not only have no willing patrons but
you have made powerful enemies.
It is the law of supply and demand for pretentious bullshit.
So in the end, we wind up with Say's Law anyway, since creating a "low wages" sector is exactly
how Say's Law functions–supply creates its own demand because declining wages means investment
spending can increase, which keeps aggregate demand where it needs to be for full employment.
This is the solution, we are told, to Keynes "sticky prices." Jim Grant makes this very argument
in his book about the "short-lived" crisis of the early 1920s. Leave workers exposed to starvation
long enough and they'll work for next- to-nothing. The solution to James O'Connor's Fiscal Crisis
of the State is to clean house in a big way, a very big way. Put everyone out on the street and
start all over again. (Everyone but the 1% of course.)
It's Andrew Mellon's advice for getting out of the Depression: "liquidate labor, liquidate
stocks, liquidate farmers, liquidate real estate it will purge the rottenness out of the system.
High costs of living and high living will come down. People will work harder, live a more moral
life. Values will be adjusted, and enterprising people will pick up from less competent people."
The Reserve Army of Labor saves the Capitalist Day, once again. (Except for the little
problem that the 1% won't accept their own liquidation, so Goldman Sachs and the rest must be
exempted from the purging–which means that the purging can't work.)
Not too long before he died, Paul Samuelson said: "Maybe I was wrong on the subject of
jobs offshoring." (I.e., maybe offshoring all the jobs and dismantling the US economy wasn't so
intelligent after all!)
Just finished a book called, The Death of Expertise , by a professor of national security
(oh give me a frigging break!!!!), Tom Nichols.
Biggest pile of crapola I have ever read! The author was also yearning for the days when "experts"
were blindly followed!
It's all a part and parcel of the meritocracy. If you don't have a degree in Econ, your
opinion doesn't matter about why your job moved to China. If you don't have a degree in Urban
Planning, you don't get to comment on how the city wants to tear down the park and put up condos.
The answer is that said "experts" have failed the general public miserably.
Their advice helped lead to this 2008 Financial Crisis. The promise of neoliberalism was
faster growth. It did not happen. Quite the opposite. It gave the rich intellectual cover to loot
society. That"s what this was always about.
Now people wonder, why they don't trust "experts"?
Then there's the matter of the Iraq War. Another example. Many foreign policy "experts",
particularly affiliated with the neoconservative assured the American people that invading Iraq
would be easy to do and lead to lots of long term benefits. Others insisted, despite evidence
to the contrary, that Saddam was developing weapons of mass destruction. Now look at where we
are. No WMDs, long and cost war, with no long-term solutions. Many of said "experts" later endorsed
Clinton.
We do not need pro-Establishment experts who sell themselves out to enrich themselves.
We need experts who act in the public interest.
"... It did not. PR guru John Hill had a plan - and the plan, with hindsight, proved tremendously effective. Despite the fact that its product was addictive and deadly, the tobacco industry was able to fend off regulation, litigation and the idea in the minds of many smokers that its products were fatal for decades. ..."
"... This is the study of how ignorance is deliberately produced; the entire field was started by Proctor's observation of the tobacco industry. The facts about smoking - indisputable facts, from unquestionable sources - did not carry the day. The indisputable facts were disputed. The unquestionable sources were questioned. Facts, it turns out, are important, but facts are not enough to win this kind of argument. ..."
"... Written for and first published in the Financial Times . ..."
"... My book " Messy " is available online in the US and UK or in good bookshops everywhere. ..."
Just before Christmas 1953, the bosses of America's leading tobacco companies met John Hill, the
founder and chief executive of one of America's leading public relations firms, Hill & Knowlton.
Despite the impressive surroundings - the Plaza Hotel, overlooking Central Park in New York - the
mood was one of crisis.
Scientists were publishing solid evidence of a link between smoking and cancer. From the viewpoint
of Big Tobacco, more worrying was that the world's most read publication, The Reader's Digest, had
already reported on this evidence in a 1952 article, "Cancer by the Carton". The journalist Alistair
Cooke, writing in 1954, predicted that the publication of the next big scientific study into smoking
and cancer might finish off the industry.
It did not. PR guru John Hill had a plan - and the plan, with hindsight, proved tremendously effective.
Despite the fact that its product was addictive and deadly, the tobacco industry was able to fend
off regulation, litigation and the idea in the minds of many smokers that its products were fatal
for decades.
So successful was Big Tobacco in postponing that day of reckoning that their tactics have been
widely imitated ever since. They have also inspired a thriving corner of academia exploring how the
trick was achieved. In 1995, Robert Proctor, a historian at Stanford University who has studied the
tobacco case closely, coined the word "agnotology".
This is the study of how ignorance is deliberately produced; the entire field was started by Proctor's
observation of the tobacco industry. The facts about smoking - indisputable facts, from unquestionable
sources - did not carry the day. The indisputable facts were disputed. The unquestionable sources
were questioned. Facts, it turns out, are important, but facts are not enough to win this kind of
argument.
KANSAS CITY, KS-As the debate over the teaching of evolution in public schools continues, a new controversy
over the science curriculum arose Monday in this embattled Midwestern state. Scientists from the
Evangelical Center For Faith-Based Reasoning are now asserting that the long-held "theory of gravity"
is flawed, and they have responded to it with a new theory of Intelligent Falling.
Rev. Gabriel Burdett explains Intelligent Falling.
"Things fall not because they are acted upon by some gravitational force, but because a higher
intelligence, 'God' if you will, is pushing them down," said Gabriel Burdett, who holds degrees in
education, applied Scripture, and physics from Oral Roberts University.
Burdett added: "Gravity-which is taught to our children as a law-is founded on great gaps in understanding.
The laws predict the mutual force between all bodies of mass, but they cannot explain that force.
Isaac Newton himself said, 'I suspect that my theories may all depend upon a force for which philosophers
have searched all of nature in vain.' Of course, he is alluding to a higher power."
Founded in 1987, the ECFR is the world's leading institution of evangelical physics, a branch
of physics based on literal interpretation of the Bible.
According to the ECFR paper published simultaneously this week in the International Journal
Of Science and the adolescent magazine God's Word For Teens! , there are many phenomena
that cannot be explained by secular gravity alone, including such mysteries as how angels fly, how
Jesus ascended into Heaven, and how Satan fell when cast out of Paradise.
The ECFR, in conjunction with the Christian Coalition and other Christian conservative action
groups, is calling for public-school curriculums to give equal time to the Intelligent Falling theory.
They insist they are not asking that the theory of gravity be banned from schools, but only that
students be offered both sides of the issue "so they can make an informed decision."
"We just want the best possible education for Kansas' kids," Burdett said.
Proponents of Intelligent Falling assert that the different theories used by secular physicists
to explain gravity are not internally consistent. Even critics of Intelligent Falling admit that
Einstein's ideas about gravity are mathematically irreconcilable with quantum mechanics. This fact,
Intelligent Falling proponents say, proves that gravity is a theory in crisis.
"Let's take a look at the evidence," said ECFR senior fellow Gregory Lunsden."In Matthew 15:14,
Jesus says, 'And if the blind lead the blind, both shall fall into the ditch.' He says nothing about
some gravity making them fall-just that they will fall. Then, in Job 5:7, we read, 'But mankind is
born to trouble, as surely as sparks fly upwards.' If gravity is pulling everything down, why do
the sparks fly upwards with great surety? This clearly indicates that a conscious intelligence governs
all falling."
Critics of Intelligent Falling point out that gravity is a provable law based on empirical observations
of natural phenomena. Evangelical physicists, however, insist that there is no conflict between Newton's
mathematics and Holy Scripture.
"Closed-minded gravitists cannot find a way to make Einstein's general relativity match up with
the subatomic quantum world," said Dr. Ellen Carson, a leading Intelligent Falling expert known for
her work with the Kansan Youth Ministry. "They've been trying to do it for the better part of a century
now, and despite all their empirical observation and carefully compiled data, they still don't know
how."
"Traditional scientists admit that they cannot explain how gravitation is supposed to work," Carson
said. "What the gravity-agenda scientists need to realize is that 'gravity waves' and 'gravitons'
are just secular words for 'God can do whatever He wants.'"
Some evangelical physicists propose that Intelligent Falling provides an elegant solution to the
central problem of modern physics.
"Anti-falling physicists have been theorizing for decades about the 'electromagnetic force,' the
'weak nuclear force,' the 'strong nuclear force,' and so-called 'force of gravity,'" Burdett said.
"And they tilt their findings toward trying to unite them into one force. But readers of the Bible
have already known for millennia what this one, unified force is: His name is Jesus."
Reporting on cutting-edge advances in economics, this book presents a selection of commentaries
that reveal the weaknesses of several core economics concepts. Economics is a vigorous and progressive
science, which does not lose its force when particular parts of its theory are empirically invalidated;
instead, they contribute to the accumulation of knowledge.
By discussing problematic theoretical assumptions and drawing on the latest empirical research,
the authors question specific hypotheses and reject major economic ideas from the "Coase Theorem"
to "Say's Law" and "Bayesianism." Many of these ideas remain prominent among politicians, economists
and the general public. Yet, in the light of the financial crisis, they have lost both their relevance
and supporting empirical evidence.
This fascinating and thought-provoking collection of 71 short essays written by respected economists
and social scientists from all over the world will appeal to anyone interested in scientific progress
and the further development of economics.
Introduction
Ideas are the drivers behind innovation, may they be political, economic, in the arts or in
science. "Nothing is as powerful as an idea whose time has come" is a popular quote attributed
to Victor Hugo. But what about ideas whose time has already passed? Ideas that might have had
value at a certain point in time but are still sticking around even though we should forget them?
In this book, we collect economic ideas whose time has passed and throw |them into the dustbin
of history. Economics has a sound base of theory supported by empirical research that is taught
the same way all over the world. Yet, according to Popper, we gain scientific progress only by
rejecting specific hypotheses within the theoretical framework. Economics is a vigorous and progressive
science, which does not lose its force when particular parts of its theory are empirically rejected.
Rather, they contribute to the accumulation of knowledge.
We bury ideas from the "Coase Theorem" to "Say's Law" to "Bayesianism". We let established
scientists and lesser known younger colleagues speak. We give voice not only to economists but
also to associates from other social sciences. We let economists from all fields speak and question
ideas. We say goodbye to the positive effects of an abundance of choice; we bid farewell to the
idea that economic growth increases people's well-being. We doubt that CEOs are paid so well merely
because of their talent and question the usefulness of home ownership. Doubting assumptions and
ideas is at the core of economics.
The essays do not idolize models or references and base their content on one single idea that
should be forgotten. They reflect entirely personal views; the book therefore only contains contributions
by single authors. This makes the content parsimonious and distinctive.
When Trump picked Pruitt to Head the EPA he picked a quack
Global Warming Climate Change denier AS WELL AS A Lobbyist
for Big Energy whose goal is antithetical to the mission of
the EPA
We can see that here, Big Energy focusing on State
legislatures, in addition to Congress, to slow or stop
Electric Cars to keep reliance upon petroleum based fuels
while they have friends in high offices to help them advance
their special interest agendas
"This was a period of secularization of US colleges.
Businessmen were replacing clergymen on boards.
They were displaced by others more exclusively attuned to the
Gospel of Wealth.
For example, Professor Allen Eaton was fired from the
University of Oregon for successfully pushing a series of
characteristically Georgist measures: municipal ownership of
the Eugene waterworks; taxation of waterpower sites; direct
election of US Senators; keeping valuable State-owned
timberlands from being given to the Southern Pacific.
Elisha Andrews was forced from Brown University for
favoring populists George and Bryan.
Scott Nearing was fired in 1915 from the University of
Pennsylvania.
Pennsylvania Trustee Joseph Rosengarten explained that
"men holding teaching positions in the Wharton School
introduce there doctrines wholly at variance with those of
its founder and... talk wildly and in a manner entirely
inconsistent with Mr. Wharton's well-known views and in
defiance of the conservative opinions of men of affairs".
His best-known "variant idea" was opposing child labor.
Life under Seelye could be perilous for the truly scholarly.
In 1884, Seelye peremptorily fired one of John B. Clark's
colleagues, the homonymic geologist John Clarke, for
"heterodoxy".
Did plutocrats insure that favorable theories dominated?:
Classicals vs Neoclassicals: Tax and Rent
Posted on 8 January 2011
"At the university I attended, a few of the academics were
strongly influenced by Classical Political Economy,
especially that of Smith and Ricardo. Prior to my student
days, one of them had published a paper in the Cambridge
Journal of Economics entitled "On the origins of the term
'neoclassical'" (no free link available), which is quite well
known in heterodox circles.
In it, he argued that the 'classical' in the term
'neoclassical' is a misnomer and that neoclassical and
classical economics actually have little in common, despite
attempts by neoclassicals to claim Smith, in particular, as
their forefather.
The classical-influenced economists at my university happened
to belong to the Sraffian School. This school attempts to
synthesize Classical value and distribution with Keynesian
output and employment determination, and is also known for
its key role and victory in the Cambridge Capital
Controversy. The school is named after Piero Sraffa, whose
interpretation of Classical Political Economy, particularly
Ricardo's work, has been highly influential.
Sraffians are not the only modern-day economists
influenced by Smith and Ricardo. Another prominent example is
Michael Hudson.
In a recent interview (h/t to Tom Hickey), Hudson
discusses one big difference between the Classical economists
and the neoclassicals: their analysis of taxation as applied
to economic rent.
Hudson touches on a number of noteworthy points during the
interview. He draws attention to a historical correspondence
that would probably surprise many, between high top tax rates
and strong economic growth, and observes that the top rates
were high in the period prior to WWII.
Importantly, the focus of taxation in Classical Political
Economy, which Hudson argues influenced US government policy
in the late 1800s and much of the first half of the 1900s,
was on confiscating economic rents. These rents include
income that derives from ownership of assets that appreciate
in value merely because of the growth in national income
and/or improved public infrastructure, and not due to any
participation in the production process (they arise
especially in the real estate and financial sectors).
It is not mentioned in the interview, but profit, of
course, is also income that derives from the mere ownership
of assets – the means of production.
However, the classical economists were engaged in a class
war with rentiers, not capitalists.
It was Marx who drew this reasoning out to its logical
conclusion, and this probably goes a long way to explaining
why neoclassical theory, rather than being a continuation of
classical economics (as was often claimed once it was
established), was an escape into a different
conceptualization of a capitalist economy that sought to
reframe the distribution of income as the result of marginal
contributions (an attempt that failed and was the chief
target and theoretical casualty of the Cambridge Capital
Controversy).
Even so, there does remain a significant distinction
between profit, which relates to assets employed in the
production process, and economic rents. For this reason, Marx
also distinguished between these two categories of income and
spent a great deal of space in volume 3 of Capital analyzing
the various forms of surplus value, including different types
of rent.
Hudson goes on to stress that the taxation imposed in the
late 1800s and first half of the 1900s was highly
progressive. Initially only the top 1 percent of income
earners were required to submit tax returns. The purpose of
this was to keep taxes on wages and profit low to promote
price competitiveness against lower wage countries.
This can be contrasted with neo-liberal policies of today
which seem to be designed almost with the opposite intent: to
tax wage and profit income (and also consumption) but provide
loopholes or tax breaks for the recipients of economic rents.
Above all, Hudson distinguishes between what the classical
economists meant by the term "free market" and what that term
has come to mean in the neo-liberal period.
Hudson emphasizes that, for the classical economists,
"free market" meant a market unencumbered by rent-based
claims on income that would draw economic activity away from
income production and toward speculation.
The aim of the classical economists was to incentivize
production. This is a very different notion than the
neo-liberal one of labor-market "deregulation" (meaning
regulation in favor of employers over employees), which is
really just code for union smashing and an attack on real
wages, or the neo-liberal deregulation of financial markets,
which is a euphemism for enabling financial parasitism.
Hudson makes another observation in passing. The
observation is not central to his argument in the interview,
but is relevant to current debates over deficits and public
debt, and consistent with MMT.
He notes that immediately prior to the commencement of the
only extended period of high capitalist growth (WWII until
the late 1960s), the US population was not in debt, and in
fact had pent up savings from the war that it was waiting to
spend.
By little or no debt, Hudson clarifies that he means
little or no private debt. There was, of course, a large
public debt – larger as a percentage of GDP than the current
US government "debt".
This public debt did not matter, in spite of the familiar
opposition to deficits and public debt, the echoes of which
can be heard today, simply because the budget deficit shrinks
endogenously once private-sector activity and income growth
resume. This is precisely what happened in the immediate
postwar period.
Today, with the US government the monopoly issuer of its
own flexible exchange-rate fiat currency, public "debt" is –
or rather should be – even less of an issue. Unlike in the
immediate postwar period, the government is not subject to
the constraints of Bretton Woods or a similar
commodity-backed money system. It is free to utilize its
fiscal capacity to the extent necessary to restore full
employment.
Government "debt" is nothing other than the accumulated
net financial wealth of the non-government.
Once the non-government is ready to spend, income growth
will deliver stronger revenues, reducing the deficit. But the
private sector needs to have its debt under control before it
will resume spending at levels sufficient to sustain strong
economic growth.
In addition to the absence of significant private debt at
the end of WWII, there were other factors that contributed to
the strong growth of the immediate postwar period, including
Keynesian demand-management policies, a progressive tax
system, and significant financial regulation.
All these beneficial features of the economy were
gradually undermined, and then exposed to outright attack
from the 1970s onwards.
Hudson discusses how, over time, much of the progressivity
in the tax system was removed, paving the way for the
construction of the inequitable and anti-productive monster
of today.
Keynesian demand-management policies were also largely
eschewed throughout the neo-liberal era on the basis of an
opportunistic misinterpretation of the stagflation of the
1970s. All this took place alongside deregulation of the
financial sector and an aggressive dismantling of worker
employment protections.
The result of this neo-liberal policy mix was an
increasing financialization and "rentification" of the
economy, widening income inequality, and an adherence to
fiscal austerity that directly corresponded, as a matter of
accounting, to an unsustainable build up in the only US debt
that matters – private debt – and culminated in the Global
Financial Crisis and Great Recession.
If the aim is to restore sustainable growth under
capitalism (which is not my preferred social system, but
presumably the one commanding the allegience of
policymakers), the insights obtained from the classical
economists in conjunction with the lessons of the postwar
period would seem to suggest some combination of the
following policy responses: tighter regulations of
speculative activities; a more steeply progressive tax system
targeted at the confiscation of economic rents and the
incentivization of production and consumption; stronger
worker protections; and the abandonment of the faulty
construct of a 'government budget constraint' and a return to
deficit expenditure sufficient to underpin non-government net
saving and full employment.
But the actual policy response has instead been to
manipulate financial markets to engineer a massive transfer
of wealth to the rentiers and exacerbate income and wealth
inequality; to continue with the approach of taxing wage and
profit income along with consumption rather than economic
rents; and possibly even to revert foolishly to austerity
while the private sector remains deeply indebted.
[Were they enticed by the allure of science and
mathematics?]:
Because I said so: the persistence of
mainstream policy advice
Nathaniel Cline Kirsten Ford Matías Vernengo
Abstract:
"The current global crisis has shown the limitations of
the mainstream approach.
We trace the origins of the limitations of the dominant
neoclassical views to the capital debates and to the rise to
dominance of intertemporal general equilibrium.
The limited use of the Arrow-Debreu model, which became
dominant after the capital debates, in terms of policymaking,
is central to understand the persistence of policy guided by
the aggregative model.
We use the International Monetary Fund (IMF) as a case
study of this perplexing continuity of policy advice.
Given our survey, we conclude that even though the economy
is in the midst of the worst capitalist crisis since the
Great Depression, a significant paradigmatic shift in
economics is extraordinarily unlikely."
"Economists have frequently argued in favor of laissez
faire policy, and the reasons underpinning this position have
more often than not been associated to their ideological
perspective.
Whenever the classical authors defended the free market,
however, it was never under the presumption that it would
lead to full utilization of resources or an equitable
distribution of income. The free market was typically
defended as an instrument of modernization, that is, an
institutional innovation of the rising bourgeoisie against
feudal obstacles to economic development.
It was only with the rise of the neoclassical paradigm
that the free market came to be considered a mechanism for
the determination of income shares of the same factors of
production and equated to efficiency in the use of factors of
production.
With this, the free market ceased to be defended as an
instrument of modernization, and instead hailed as a superior
institution in itself.
The Great Depression and the Keynesian Revolution sapped
the faith in free market policies, but did not attack the
core ideas behind the marginalist views of market efficiency.
The attack on the main tenets of neoclassical economics
that started with the Keynesian Revolution in the 1930s and
culminated with the capital debates in the 1960s, showed the
logical limitations of the marginalist approach, and forced
the mainstream into a defensive position.
With the abandonment of the old notion of long run
equilibrium, and the adoption of intertemporal equilibrium,
the efficiency of markets was not seen as the result of the
persistent forces of the economy.
If nothing else, the new notion of equilibrium provided a
logically coherent notion of market efficiency.
Absent solid theoretical foundation, and, oftentimes,
empirical support, the persistence of laissez-faire policy
could at least be anchored to the authority of intertemporal
equilibrium.
The limitations of such a strategy have become
increasingly evident.
The duplicity of a profession that teaches models known to
be logically incorrect, and uses these very models for policy
analysis – even when the actual outcomes do not correspond to
the expected results according to the prescription – is hard
to justify.
The role of the social conflicts of the 1960s, the
inflation of the 1970s, and the rise of several corporate
institutions in the rise of pro-market policies have been
extensively analyzed.
However, the role of the changing attitudes within the
economics profession have seldom emphasized the incisive
effect that the capital debates had in promoting the revival
of the defense of free markets for their own sake.
"The current global crisis has shown the limitations of
the pro-market liberalizing policies of the last few decades,
but from our perspective, it will not be sufficient to
promote a meaningful revision of the foundations of economic
analysis, and the timidity of the IMF rethinking of its
policy stance is a good example of what to expect.
"In the meantime, learning economics at least remains, as
Joan Robinson caustically put it, the best way to avoid being
deceived by economists.
Mainstream (neoclassical) economics originated as a reaction
and defense to the progressive reforms of the late 1800's.
It was sponsored and funded by plutocrats that endowed
private universities like Chicago, Columbia, etc.
Neoclassical economists selected specific mathematic
techniques to convince that free, competitive markets were
natural, efficient and optimal.
When their mathematics was shown to be defective, they
ignored the proof, revised their assumptions to evade or
developed new mathematics that, while not related to the real
world, could at least not be shown to be faulty.
It appears that neoclassical economists are basically
intellectual hit-men for the plutocracy.
If an economist writes a column in MSM, is employed at the
Fed, ECB, IMF, World Bank, or is a professor at an 'elite",
private university - chances are s/he is a neoclassicist and
a hit-wo/man.
Romer says they want to stay in the club, or the church:
Posted on
June 11, 2015
Euler's Theorem Denialism
Paul Romer
The U.S. Department of Energy employs physics Ph.D.s to
manage our nuclear weapons. How would you feel if some of
them wrote blog posts saying that it is possible to build a
perpetual motion machine?
What if they did this to signal their loyalty to some club
of physicists? Wouldn't you wonder why membership in this
club was important enough get them say that they do not
believe the second law of thermodynamics? And what kind of
physics club would use an endorsement of the perpetual motion
machine as a loyalty oath?
In a recent post, David Andolfatto, who is a Vice
President at the Federal Reserve Bank of St. Louis, gives a
brazen display of mathiness–brazen because he denies Euler's
theorem, which for economists is about the same as denying
the second law of thermodynamics is for physicists.
The type of mathiness that is hardest to root out is the
opaque mathiness illustrated by Lucas (2009). It combines
math that is hard to understand with verbal claims that can
be shown to be misleading, but only after a careful analysis
of the math.
By taking advantage of ambiguity and misdirection, its
verbal claims can mislead without saying anything that is
actually false.
Andolfatto's brazen mathiness involves a verbal statement
about a mathematical model that flies in the face of
an impossibility theorem. No model can do what he claims his
does. No model can have a competitive equilibrium with
price-taking behavior and partially excludable nonrival
goods.
If you are not an economist, this would be a model in which
someone who has a monopoly on an idea can charge for its use,
but somehow is unable to influence the price that users have
to pay, which should sound implausible at least.
If you are an economist, you know that there is a very
simple argument based on Euler's theorem that proves this
type of model is impossible. The proof goes back a long way.
I know that Karl Shell invoked it in the late 1960s. I
restated it in the AER article of mine that Andolfatto
quotes, so it was fresh in his memory. Dietz Vollrath has a
recent post that works through the logic again.
In its most general form, the proof relies on a step that
invokes a fact about production processes: If you double all
the rival inputs (the inputs you can touch or stub your toe
on) you double the output. Some economists try to evade the
theorem by denying the possibility of replication.
But Andolfatto's paper makes the required assumption about
production openly–constant returns to scale in rival inputs.
So he's got no wriggle room. I can't for the life of me see
how Andolfatto thinks he can evade Euler's theorem.
It is certainly possible that he is confused. But if you were
confused, wouldn't you try to understand the proof that says
what you want to claim has to be false before you go ahead
and claim it anyway?
So the only conjecture that makes sense to me is that this
is part of being in the club. But if so, there is an
interesting differentiation of roles by status. Lucas knows a
proof when he sees one and is careful to avoid getting caught
saying something that is provably false. He sticks to the
Marshallian framework where nonrival goods are nonexcludable.
Prescott, in his paper with McGrattan (AER 2010) least tries
to cover his tracks by inserting his imaginary input,
location. Then he can simply assert that it does not get
compensation and he can take the income that Euler's Theorem
allocates to location and transfer it to his nonrival inputs.
From Minnesotta types who are so preachy about avoiding free
parameters, you have to admire the audacity of adding an
entirely free variable. But Prescott, like Lucas, he is
careful not to deny Euler's Theorem.
But the next level down in the hierarchy, followers like
Boldrin and Levine are willing to just embarrass themselves:
It is widely believed that competitive equilibrium always
results in prices equal to marginal cost. Hence the belief
that competition is inconsistent with innovation. However
widespread this belief may be, it is not correct. It is true
only in the absence of capacity constraints, (2008, p. 436)
They say they can ignore Euler's Theorem, because in their
bizarro version of a competitive equilibrium, prices for
inputs do not equal marginal products.
But instead of presenting a competitive equilibrium of
this type, they present a model* with an innovator who turns
out to have market power. Their solution? The innovator has
to be a price taker because they say so:
Making the initial single innovator behave competitively
even in the very first period may be a source of
misunderstanding. Since, by necessity, she has a monopoly in
the initial period, why do we not take account of her
incentive to restrict the initial supply ? (Boldrin and
Levine, 2008, p. 438)
So in the analogy from physics, Boldrin and Levine say that
it is possible to build a perpetual motion machine, but to
their credit, at the last moment they back off and invoke the
can-opener joke: "Well we haven't actually built a perpetual
motion machine, so let's just assume that we have one." So
what to make of Andolfatto, who goes all in: "I built one
back in 1999 when I was in graduate school."
It is as if the prophets who lead the Mormon Church never
have to say anything specific about where the Book of Mormon
comes from. Officials at the next level down have to say that
Joseph Smith transcribed it from golden plates that he found
in upstate New York. Regular church members have to say that
it is a literal fact that the gold plates were written in 400
AD by Mormon and Moroni, using a script called reformed
Egyptian, and were held together in a D-ring binder.
The provably false statements that economists like
Andolfatto make (and he is certainly not alone) may be more
than mere signals. They might be an irreversible commitment
to stay at an institution where his club is already in
control because they prevents someone from ever being
employable at a competitive institution where logic is still
valued.
Having a strong affiliation with other members of a
religion can be a good thing, so I would not be bothered to
learn that some of our nuclear physicists are Mormons. But I
would be worried to learn that some of them were members of
the perpetual motion club. And I am worried that some
outposts of the Fed have been permanently colonized by
economists who are on the record as Euler's-Theorem-deniers.
That's good thank you. I am thinking along the same lines:
In some way unregulated finance acts as cancer cells in human
body (while this analogy is definitely superficial it might
be stimulating for thinking about neoliberalism):
1. Uncontrollable growth detached from real economics
("casino capitalism" with its proliferation of hedge funds,
private equity firms, derivatives, credit default swaps and
similar instruments).
2. Suppression of immune system so that this
uncontrollable growth should not be checked (aka
deregulation, capture of economics departments, an army of
neoliberal think tanks)
3. Like cancel creates a blood network to stimulate its
own growth, finance also diverts lion share of resource in
the economy for its own consumption -- casino consumption.
4. Very difficult to fight and can reoccur if treatment
was insufficient or ineffective.
The Traditional analogy is to a parasite,
particularly the type that invades the brain of the host and
tricks the host into feeding the parasite ahead of itself,
even if the host starves itself to death in the process.
Strikes me that if your economic theory cannot deal with
political engagement by corporations, you need to scrap your
economic theory. Crony capitalism is the only sort that has
ever existed and corporations have always engaged in politics
to their own benefit.
While I agree with
you, the statement
that "Crony capitalism
is the only sort that
has ever existed"
might not be
completely true.
There were short
historical periods of
"deviations".
Napoleonic France
and Early New Deal
might well be
considered as
temporary departures
from crony capitalism
model.
Of source later
everything "returned
to normal", but what
was accomplished
initially was
definitely not crony
capitalism. Especially
legislation.
The New Deal was
probably one of the
few successful attempt
in history to reign on
financial sector.
Napoleon was also
extremely suspicious
of financial sector
(which is actually
typical for any
nationalist who just
got political power;
corruption comes later
on)
The New Deal
relegated financial
sector to the
secondary roles for
the next 30 years or
so. Only in 70th they
became reckless again.
Amazing achievement...
Also some
industries, especially
at early stages are
definitely "less
crony" then others. IT
industry probably such
an area after the
introduction of IBM
PCs (August 12, 1981)
till the dot-com boom.
As I have pointed out several times, the corporate form with
its very powerful advantage of limited liability is nothing
more than a license granted by the Sovereign. Once upon a
time it was a very sparingly granted privilege.
So, at a
very fundamental level I wonder if we have reached a point
where it should be granted at all - certainly beyond the
first 10 years of corporate existence.
The essence of the neo-classical theory is the constraint on
choice imposed by given and widely shared technology and
competitive markets for resources and vendors. Political
engagement derives from and is focused on seeking
monopolistic power. The various theories of monopolistic
competition are instructive but fall far short of the
standard sought by neoclassical theory....
-- Joseph Bower
[ Then where does an economist go from here? This is
fascinating. ]
There has been extensive writing about the power and scope of
corporations going back at least to Edward Mason and Carl Kaysen. In a
chapter I wrote,1) I explored the role of large corporations in terms
of their impact on factors other than the product market. Echoing
Kaysen I emphasized location, employment, product line choices,
vendors that because of their scale and scope give firms powers far
beyond those conceived in the neo-classical model and unconstrained by
traditional notions of price competition. The neo-classical model
simply does not comprehend the modern corporation.
But if we are talking about a theory carefully constructed on a set of
axioms, the theory really can't consider political engagements. The
essence of the neo-classical theory is the constraint on choice
imposed by given and widely shared technology and competitive markets
for resources and vendors. Political engagement derives from and is
focused on seeking monopolistic power. The various theories of
monopolistic competition are instructive but fall far short of the
standard sought by neoclassical theory. ...
Monopoly power? I thought 'libruls' didn't about monopoly
power! After all, it is of absolutely no concern to them that
the Fed colludes with the Wall Street banking cartel to
ration credit and low interest rates to their wealthy
clientele, who use the money to speculate, not make
productive investments.
Political Engagement by Corporations Derives from and is
Focused on Seeking Monopolistic Power
-- Joseph Bower
[ While this assertion seems obvious, how to construct a
countervailing response is surely not obvious though the need
seems to have been growing especially since labor unions lost
significance influence in the 1980s. ]
If that is what gets you to sleep at night keep deluding
yourself. Me thinks if you had your way corporate political
spending would be banned but corporate political spending by
organizations more equal than others - unions - would be
acceptable.
Strikes me that if your economic theory cannot deal with
political engagement by corporations, you need to scrap your
economic theory. Crony capitalism is the only sort that has
ever existed and corporations have always engaged in politics
to their own benefit.
As I have pointed out several times, the corporate form with
its very powerful advantage of limited liability is nothing
more than a license granted by the Sovereign. Once upon a
time it was a very sparingly granted privilege.
So, at a
very fundamental level I wonder if we have reached a point
where it should be granted at all - certainly beyond the
first 10 years of corporate existence.
Regulatory capture is an economic theory. The bread and
butter of this excellent blog. Now if you mean the economic
theory taught by Greg Mankiw in his overpriced books - yea,
they are weak narrow subsets of what actual economics do.
That would seem about right. Scrap it. Or at least abandon
mathematical pretense.
The situation in
"But if we are talking about a theory carefully
constructed on a set of axioms, the theory really can't
consider political engagements."
seems to be equivalent to a geometry where some class of
objects, say regular polygons, are empowered with the free
will to change the postulates of the geometry in mid-proof.
Without recognizing sudden rules changes, it seems
economic proofs go astray.
The really interesting stuff looks like it's in the
postulate changing and feedback business anyway.
"The various theories of monopolistic competition are
instructive but fall far short of the standard sought by
neoclassical theory."
I'm curious what he means by the
"standard sought by neoclassical theory". Joan Robinson
coined 'monopolistic competition' and her exposition of the
implications of this concept were well received by even
neoclassical types.
Not to criticize as his research is important. But let's
remember the contributions of the first great woman
economist.
The essence of the neo-classical theory is the constraint on
choice imposed by given and widely shared technology and
competitive markets for resources and vendors. Political
engagement derives from and is focused on seeking
monopolistic power. The various theories of monopolistic
competition are instructive but fall far short of the
standard sought by neoclassical theory....
-- Joseph Bower
[ Then where does an economist go from here? This is
fascinating. ]
That's not so much about Eurocentric modernism as America-centric neoliberalism
Notable quotes:
"... He first caught the scent that something was off as an economics student in India, wondering why, despite his mastery of the mathematics and technology of the discipline, the logic always escaped him. Then one day he had an epiphany: the whole thing was "cockeyed from start to finish." To his amazement, his best teachers agreed. "Then why are we studying economics?" demanded the pupil. "To protect ourselves from the lies of economists," replied the great economist Joan Robinson. ..."
"... Kanth realized that people are not at all like Adam Smith's homo economicus , a narrowly self-interested agent trucking and bartering through life. Smith had turned the human race - a species capable of wondrous caring, creativity, and conviviality - into a nasty horde of instinctive materialists: a society of hustlers. ..."
"... how this way of thinking took hold of us, and how it delivered a society which is essentially asocial - one in which everybody sees everybody else as a means to their own private ends. ..."
"... he argues, consigned us to an endless and exhausting Hobbesian competition. For every expansion of the market, we found our social space shrunk and our natural environment spoiled. For every benefit we received, there came a new way to pit us against each other. Have the costs become too high? ..."
"... "That's our big dream," says Kanth. "Everyone and everything is a stepping stone to our personal glorification." When others get in our way, we end up with a grim take on life described succinctly by Jean Paul Sartre: "Hell is other people." ..."
"... Mr. Kanth makes some valid points, but his criticism of the European Enlightenment is mistaken. Many of the horrors of modernity had their origins in the Counter-Enlightenment and in the Church Inquisitions, not the Enlightenment. The modern police state is a refinement of and a descendant of the struggles against heresy. ..."
"... Agreed. Parramore's phrase 'history of a set of bad ideas' does seem a bit harsh for a description of the Enlightenment. ..."
"... Like most big ideas, the problem isn't with the original idea so much as the corruption of it over the years as it's put into practice. Massive reform is necessary for sure but I'll take the Enlightenment over nasty, brutish, and short any day. ..."
"... I read somewhere that some Native Americans looking down on the ruins of San Fransisco after the great quake of 1906, thought that at last the crazy white people would realize the folly of their ways, and become normal humans. ..."
"... So they were amazed that before the ruins even stopped smoking, the crazy white people, ignoring the obvious displeasure of the Great Spirit, were busy rebuilding the same mess that had just been destroyed. ..."
"... I have a strong suspicion that evil empires do not come to their senses, rather, one way or another, they get flattened. ..."
"... I can remember arguing over this in my philosophy classes way back in the 80's – that Objectivism and the Enlightenment were two sides of the same coin, and that those Enlightenment writers were writing tomes to justify their own greed and prejudices, while cloaking their greed and prejudices in "morality". ..."
"... At the time (I was young) it seemed to me that the Enlightenment was an attempt to destroy the basis of Jesus's and Buddha's philosophy – that the most moral position of humanity was to care for its members, just as clans, tribes, families, and other human societies did. ..."
"... "They didn't accomplish much" meaning they lost militarily to cultures with more aggression and better weapons. ..."
"... It seems to me that humans, as hierarchical mammals, really do have a desire to compete with each other for status and respect. The trouble is in organizing all of society around this one struggle, forcing everyone into explicit competition and making the stakes too high. When the losers can't afford to buy food, when they and their little children live on the street and die in the cold, when their kids can never compete on an equal field to improve their own status, things have gone too far. And in addition to material needs, humans also have a need for independence, an escape from being constantly ordered around by the winners and under someone else's thumb. ..."
"... Note, as an aside, how granting economic rights to outgroups like women and Blacks brought them into the same market competition. Well, a lot of men don't want to compete with women for status. They want to compete with each other. The more competitors you add the harder it is to win. But when all resources ..."
"... I think you're right about that and if we do ever manage to abolish capitalism and develop a less violent and more egalitarian society, there will need to be an outlet for that innate desire. I propose hockey. Beats starting a war . ..."
"... When President Trump defeated his rival in the last election, among the many ways in which the event was captured was a representation of the President as Perseus carrying the head of Medusa (Clinton) in his outstretched left hand. Medusa was a monster gorgon of the Greek mythology; a representation in this case by Clinton (a woman) who dared to take real power in this essentially male world and silenced for trying to participate in the public discourse (election). ..."
"... The point is that what passes as Modernism has never entered modern life. In support of my proposition I cite an encounter between a journalist and Mahatma Gandhi in 1930s: The journalist asked Gandhi, "Mr. Gandhi, what is your opinion of the western civilization?" Gandhi replied instantaneously "It would be a good idea". ..."
"... I think he's right about Eurocentric modernism being incompatible with human civilization. But it can't be just an evolutionary accident that civilization is so aggressive. It served a purpose. We refer to it as 'survival'. I used to tell my daughter not to make fun of those 'dorky little boys' too much because they all had a way of growing up to be very nice men. And I told her women are the reason we have all survived, but men have made it so much easier! And etc. ..."
"... I believe that one element of modern life that should be removed forever is the infinite search for maximizing profits. ..."
"... On more than one occasion I've compared the rent-seeking profit mongers to Molocks that cultivate us milder Eloi and cannabalize us. ..."
"... But the economics profession's problem isn't "blind faith in science." It's a massive failure to apply the scientific method, combined with an expectation that we all put our blind faith in THEM anyway. ..."
"... Essentially a post-modern critique of modernism without all the jargon of p-m critical theory (yay!!). I don't think we have enough data from the pre-modern huddling societies to determine if that's how we want to live. Yes, my boss at work exploits me, but on the other hand, I can walk into an air-conditioned supermarket and survey row after row of steaks that I can afford to buy. I love to drive cars. The cinema is enchanting. Dying of a plague is a very remote possibility. We could give it all up, but there's no guarantee our lives would be richer or fuller–just different, at best. ..."
"... Just how dark were the Dark Ages? Or, to borrow Churchill's phrase, how dark would a NEW Dark Age be? ..."
"... Two possibles: the cargo cult children of Mad Max: Beyond the Thunderdome, or the society depicted in Aldous Huxley's Ape and Essence. At least the Church in Rome and Constantinople provided some kind of lifeline of civilization during the collapse of the Roman Empire. What similar institution have we now? ..."
"... Sounds like bog-standard post-modernist tosh to me, just without the obscure ProfSpeak jargon that usually accompanies it. I fail to see how this is helpful. ..."
"... The only thing missing in this post is Bambi. Of course the Bushmen would kill Bambi dead with spears and roast her flesh over a fire. So would we, actually. hmmmm. ..."
"... I agree dude is right that the values now unraveling (democracy, pluralism, individualism, free speech, international-ism (in both the good and bad ways)) go all the way back to that time. ..."
"... But this article is a perfect example of throwing the baby out with the bathwater. Surely none of the third world cultures he praises got where they are by totally throwing out previous systems, the good parts and bad, every time they faced a crisis. ..."
"... IMO the problem is enlightenment values have been hollowed out, narrowed to only those superficial aspects of those values which benefit the marketplace. Like how real food got turned into Mosanto fast-food so gradually, nobody noticed that the nutrients are missing. ..."
"... Adam Smith had some good points that have been lost along the way, namely penalizing rent seeking. ..."
"... Smith has been seriously misrepresented. The Theory of Moral Sentiments shows a very different side to that presented by those who selectively quote from The Wealth of Nations. ..."
"... It's hard to tell from the rather incoherent summary of what looks like an incoherent argument, but the "everything went wrong after the Enlightenment" meme has been circulating for ages. It was speared pretty effectively by Domenico Losurdo in "War and Revolution" some years ago. The author seems to be jumbling all sorts of arguments together, some valid and some not, but the valid arguments are in general criticisms of liberalism, which is not the same of the Enlightenment. ..."
"... This is a very good point, as the Enlightenment was not merely a straight line connection to the blight of NeoLiberalism ..."
"... The naked embrace of selfishness, while never absent over these centuries, did have countervailing currents and forces with which to contend that were sometimes able to at least minimize the damage. But more recently, with supposedly scientific NeoLiberal economic thought sweeping the field throughout much of the first world, and with the overall decline of religious and moral systems as a counterpoise, things have reached an unlovely pass. ..."
"... homo economicus ..."
"... For further reading, I strongly recommend John Ralston Saul's "Voltaire's Bastards". ..."
"... I think that people who are interested in how the Enlightenment may or may not have contributed to the problems of modernity would do well to read Enemies of the Enlightenment: The French Counter-Enlightenment and the Making of Modernity , by Darrin McMahon. Another book of value is The Enlightenment: And Why It Still Matters , by Anthony Pagden. ..."
"... I should have mentioned that the full title is "Voltaire's Bastards: The Dictatorship of Reason in the West". ..."
Across the globe, a collective freak-out spanning the whole political system is picking up steam
with every new "surprise" election, rush of tormented souls across borders, and tweet from the star
of America's great unreality show, Donald Trump.
But what exactly is the force that seems to be pushing us towards Armageddon? Is it capitalism
gone wild? Globalization? Political corruption? Techno-nightmares?
Rajani Kanth, a political economist, social thinker, and poet , goes beyond any of these
explanations for the answer. In his view, what's throwing most of us off kilter - whether we think
of ourselves as on the left or right, capitalist or socialist -was birthed 400 years ago during the
period of the Enlightenment. It's a set of assumptions, a particular way of looking at the world
that pushed out previous modes of existence, many quite ancient and time-tested, and eventually rose
to dominate the world in its Anglo-American form.
We're taught to think of the Enlightenment as the blessed end to the Dark Ages, a splendid blossoming
of human reason. But what if instead of bringing us to a better world, some of this period's key
ideas ended up producing something even darker?
Kanth argues that this framework, which he calls Eurocentric modernism, is collapsing, and unless
we understand why and how it has distorted our reality, we might just end up burnt to a crisp as
this misanthropic Death Star starts to bulge and blaze in its dying throes.
A Mass Incarceration of Humanity
Kanth's latest book, Farewell to Modernism: On Human Devolution in the Twenty-First Century , tells the history
of a set of bad ideas. He first caught the scent that something was off as an economics student
in India, wondering why, despite his mastery of the mathematics and technology of the discipline,
the logic always escaped him. Then one day he had an epiphany: the whole thing was "cockeyed from
start to finish." To his amazement, his best teachers agreed. "Then why are we studying economics?"
demanded the pupil. "To protect ourselves from the lies of economists," replied the great economist
Joan Robinson.
Kanth realized that people are not at all like Adam Smith's homo economicus , a narrowly
self-interested agent trucking and bartering through life. Smith had turned the human race - a species
capable of wondrous caring, creativity, and conviviality - into a nasty horde of instinctive materialists:
a society of hustlers.
Using his training in history and cultural theory, Kanth dedicated himself to investigating
how this way of thinking took hold of us, and how it delivered a society which is essentially
asocial - one in which everybody sees everybody else as a means to their own private ends. Eurocentric
modernism, he argues, consigned us to an endless and exhausting Hobbesian competition. For every
expansion of the market, we found our social space shrunk and our natural environment spoiled. For
every benefit we received, there came a new way to pit us against each other. Have the costs become
too high?
The Creed of Capture
The Eurocentric modernist program, according to Kanth, has four planks: a blind faith in science;
a self-serving belief in progress; rampant materialism; and a penchant for using state violence to
achieve its ends. In a nutshell, it's a habit of placing individual self-interest above the welfare
of community and society.
To illustrate one of its signature follies, Kanth refers to that great Hollywood ode to the Western
spirit, "The Sound of Music." Early in the film, the Mother Superior bursts into song, calling on
the nun Maria to "climb every mountain, ford every stream."
Sounds exhilarating, but to what end? Why exactly do we need to ford every stream? From the Eurocentric
modernist viewpoint, Kanth says, the answer is not so innocent: we secretly do it so that we can
say to ourselves, "Look, I achieved something that's beyond the reach of somebody else." Hooray for
me!
"That's our big dream," says Kanth. "Everyone and everything is a stepping stone to our personal
glorification." When others get in our way, we end up with a grim take on life described succinctly
by Jean Paul Sartre: "Hell is other people."
Sounds bad, but didn't Eurocentric modernism also give us our great democratic ideals of equality
and liberty to elevate and protect us?
Maybe these notions are not really our salvation, suggests Kanth. He notes that when we replace
the vital ties of kinship and community with abstract contractual relations, or when we find that
the only sanctioned paths in life are that of consumer or producer, we become alienated and depressed
in spirit. Abstract rights like liberty and equality turn out to be rather cold comfort. These ideas,
however lofty, may not get at the most basic human wants and needs. .
... ... ...
Kanth, like many, senses that a global financial crisis, or some other equivalent catastrophe,
like war or natural disaster, may soon produce painful and seismic economic and political disruptions.
Perhaps only then will human nature reassert itself as we come to rediscover the crucial nexus of
reciprocities that is our real heritage. That's what will enable us to survive.
"The Eurocentric modernist program, according to Kanth, has four planks: a blind faith in science;
a self-serving belief in progress; rampant materialism; and a penchant for using state violence
to achieve its ends. In a nutshell, it's a habit of placing individual self-interest above the
welfare of community and society."
Kanth hasn't dealt much with the wild skepticism of Enlightenment and modernist thinkers: That
would put a strain on such simplistic thinking. He's never heard of Kant or Rousseau? Pascal?
He's never even read Matthew Arnold's "Dover Beach"? Dickens? A speech by Abraham Lincoln? The
novels of Jane Austen? Maybe some articles by Antonio Gramsci? The Leopard by Tomasi di Lampedusa?
Anything about Einstein? Or even Freud for that matter? Looked at a painting or etching or work
in ceramic by Picasso?
Just because economics has devolved into looting and excuse-making for looting isn't a critique
of the cultural and scientific flowering that were part of the Enlightenment and Modernism. Are
we really supposed to think that Milton Friedman and his delusions have destroyed all aspects
of the enormous changes since 1600 or so? And I, for one, don't want to backslide into the Baroque–when
states used their power for religious wars so virulent that Silesia and Alsace were depopulated.
Alienation is not the name of a river in Egypt BTW, Did any of your examples lead to anything
other than this?
The sum of individuals adds up to the bizarre creature we call "culture." A flower in the air,
to be sure.
They didn't even have food delivery! This post isn't the best evah in the history of NC - I
mean it shouldn't be censored or taken down or anything and everybody has a right to an opinion,
but "Oy Vey what a shock to a reader's delicate intellectual sensibilities."
You wonder if it's Beer Goggles that are being looked through or if this is a case of transference
and projection. The fact that the post author is a poet raises suspicion, since they aren't the
most reliable sources when it come so sober factual analysis.
Mr. Kanth makes some valid points, but his criticism of the European Enlightenment is mistaken.
Many of the horrors of modernity had their origins in the Counter-Enlightenment and in the Church
Inquisitions, not the Enlightenment. The modern police state is a refinement of and a descendant
of the struggles against heresy.
If one is going to criticize societies for lacking "moral economies", it's not just the European
(and American) based societies that need to be targeted. Other societies have deep failures that
extend back for millennia, such as the caste system of India.
Agreed. Parramore's phrase 'history of a set of bad ideas' does seem a bit harsh for a
description of the Enlightenment.
Been a while since I read Candide , but the end where he meets the world famous sage
and asks for the secret of happiness in a terrible world only to be told 'Tend your own garden'
and then having the gate slammed in his face has always stuck with me.
You could interpret that to mean isolate yourself from your fellow human beings and just look
out for yourself, but I don't think that's what Voltaire was getting at.
Like most big ideas, the problem isn't with the original idea so much as the corruption
of it over the years as it's put into practice. Massive reform is necessary for sure but I'll
take the Enlightenment over nasty, brutish, and short any day.
Perhaps, beyond anthropology, there are lessons in evolutionary biology. Individual humans
are fairly weak animals. Our ancestors were obligated to "huddle" to survive, or as Richard Dawkins
might suggest, huddling, banding together in families and groups, was an evolutionarily successful
strategy. Those well adapted to communal living were more likely to survive, so that tendency
was selected for. However, "cheaters" can also survive. That is, it is not uncommon in the natural
world to find individuals and groups of individuals who cheat the group – expend less energy to
reproduce, such as male sunfish that display the secondary sexual characteristics of females,
so are not driven off by nest building males, make a mad dash in to fertilize eggs when a real
female shows up, but provides no protection for the young – the adult male does that. In human
culture, there are also cheaters, those who provide little to the larger society, yet reap a disproportionate
level of resources.
So, learning more of our cultural roots and adopting positive measures for social cohesion
is a good idea, but much like Jesus' view that the poor will always be with us, cheaters, from
banksters to dictators, will too.
As Kanth sees it, most of our utopian visions carry on the errors and limitations born of
a misguided view of human nature. That's why communism, as it was practiced in the Soviet Union
and elsewhere, projected a materialist perspective on progress while ignoring the natural human
instinct for autonomy- the ability to decide for ourselves where to go and what to say and
create. On flip side, capitalism runs against our instinct to trust and take care of each other.
I think this paragraph speaks volumes for transitioning to a society with a BGI with libertarian
socialist leanings. Let people be free to create what they are passionate about while allowing
humans to express their innate desire to care for one another without it signifying weakness or
at their time own personal expense. I don't think this approach necessarily precludes rockets
to Mars either. The engineers who are passionate will still get together and build one. It may
take a little longer if they can't convince others to help but hopefully this will foster more
cooperative approaches and less viewing of other humans as consumables.
Libertarianism and libertarian socialism are two different things. Libertarianism is a less
authoritative conservatism while libertarian socialism is a less authoritative social democracy.
Think Chomsky, not Ron Paul. Or think of it as a more relaxed Bernie who thinks things should
be done on a smaller, more local scale.
Kanth, like many, senses that a global financial crisis, or some other equivalent catastrophe,
like war or natural disaster, may soon produce painful and seismic economic and political disruptions.
Perhaps only then will human nature reassert itself as we come to rediscover the crucial nexus
of reciprocities that is our real heritage. That's what will enable us to survive.
I read somewhere that some Native Americans looking down on the ruins of San Fransisco
after the great quake of 1906, thought that at last the crazy white people would realize the folly
of their ways, and become normal humans.
So they were amazed that before the ruins even stopped smoking, the crazy white people,
ignoring the obvious displeasure of the Great Spirit, were busy rebuilding the same mess that
had just been destroyed.
I have a strong suspicion that evil empires do not come to their senses, rather, one way
or another, they get flattened.
I can remember arguing over this in my philosophy classes way back in the 80's – that Objectivism
and the Enlightenment were two sides of the same coin, and that those Enlightenment writers were
writing tomes to justify their own greed and prejudices, while cloaking their greed and prejudices
in "morality".
At the time (I was young) it seemed to me that the Enlightenment was an attempt to destroy
the basis of Jesus's and Buddha's philosophy – that the most moral position of humanity was to
care for its members, just as clans, tribes, families, and other human societies did.
The most frequent response from professors and classmates to my thesis? But those clans, tribes,
families, etc., didn't accomplish much, did they? As if the only reason for humanity's existence
was to compete against itself
Needless to say, I didn't stick with Philosophy ..
And we need new syntheses, at which this is an attempt.
It's not a stretch to say the trend since the renaissance has been to exalt the individual.
Kanth is aiming for a communitarian philosophy. An interesting departure point for discussion.
I don't see what people find so offensive.
"They didn't accomplish much" meaning they lost militarily to cultures with more aggression
and better weapons.
It seems to me that humans, as hierarchical mammals, really do have a desire to compete
with each other for status and respect. The trouble is in organizing all of society around this
one struggle, forcing everyone into explicit competition and making the stakes too high. When
the losers can't afford to buy food, when they and their little children live on the street and
die in the cold, when their kids can never compete on an equal field to improve their own status,
things have gone too far. And in addition to material needs, humans also have a need for independence,
an escape from being constantly ordered around by the winners and under someone else's thumb.
Capitalism made the stakes too high. But it was designed by the winners.
You might argue that there were plenty of "hopeless losers" in the systems that preceded capitalism
- the orphans, elderly crones, and beggars without livelihoods who used to wander the hedgerows
in medieval times. We have more resources now which also means no excuses.
Note, as an aside, how granting economic rights to outgroups like women and Blacks brought
them into the same market competition. Well, a lot of men don't want to compete with women for
status. They want to compete with each other. The more competitors you add the harder it is to
win. But when all resources are restricted to the market, it's unjust to exclude any
group from access. Once again the stakes are too high. Social democracies are better places to
live for exactly this reason.
It seems to me that humans, as hierarchical mammals, really do have a desire to compete
with each other for status and respect.
I think you're right about that and if we do ever manage to abolish capitalism and develop
a less violent and more egalitarian society, there will need to be an outlet for that innate desire.
I propose hockey. Beats starting a war .
When President Trump defeated his rival in the last election, among the many ways in which
the event was captured was a representation of the President as Perseus carrying the head of Medusa
(Clinton) in his outstretched left hand. Medusa was a monster gorgon of the Greek mythology; a
representation in this case by Clinton (a woman) who dared to take real power in this essentially
male world and silenced for trying to participate in the public discourse (election).
I take this example to point out that both Lynn Parramore and Rajni Kanth declaring in a version
of mumbo-jumbo are sadly wrong-modernism has always been skin-deep excepting in accommodating
the technological element in the tone of life. Voltaire and Rousseau aside, both Kanth and Parramore
know which side of the mumbo-jumbo bread is their butter; even bemoaning the collapsing supposed
ruins of modernism they do not fail to take advantage! "Eurocentric modernism has unhinged us
from our human nature" asserts Kanth in his "book" but I would like to bluntly ask him: Please
define your "us" and "our" in that proposition and clarify if poor Indians like Yours Truly find
a dot in that set.
The point is that what passes as Modernism has never entered modern life. In support of
my proposition I cite an encounter between a journalist and Mahatma Gandhi in 1930s: The journalist
asked Gandhi, "Mr. Gandhi, what is your opinion of the western civilization?" Gandhi replied instantaneously
"It would be a good idea".
It does not at all. This is the price one pays as an innocent reader by reading social science
mumbo jumbo which is so irksome. It lacks the grace of the real mumbo jumbo too. Kanth is bluffing;
the author misunderstands his stupid linguistic constructions of Kanth and incomprehension and
chaos follow. The whole article seems to be a bluff about a bluff(the book).
I think he's right about Eurocentric modernism being incompatible with human civilization.
But it can't be just an evolutionary accident that civilization is so aggressive. It served a
purpose. We refer to it as 'survival'. I used to tell my daughter not to make fun of those 'dorky
little boys' too much because they all had a way of growing up to be very nice men. And I told
her women are the reason we have all survived, but men have made it so much easier! And etc.
We have been very successful as a species; surviving all of our own inquisitions, pogroms,
hallucinations and yes, this is a serious situation we are in. We might even try to guide ourselves
out of it, using science and technology, as we huddle.
I suspect there was a fatal error long, long ago: you lend me your ram so my ewe can have offspring.
If there are twins, we each get one; if not, we agree upon future breeding rights and grazing
areas. After generations of this sort of breeding activity, I have in my mind the notion that
there is a 'natural increase' from lending or swapping.
Along comes a scribe with a tablet, whom I have now hired to list the number of my flocks (wealth
on the hoof); I lend you forms of wealth (rams, ewes, oxen, axes, boats) , and the scribe assumes
there must be some 'natural increase' as the outcome of this lending and swapping. Consequently,
the scribe carves cuneiform markings to represent what we might call 'compound interest' that
result from lending and swapping of non-biological resources - despite the fact that if you sit
two clay tablets in the sun, they do not (and never will!) create an additional clay tablet. Ditto
heaps of dollar bills; it's not the money that creates increase; it's the assumption of 'increase'
(originating in breeding activity of flocks and herds) that makes the money generate surplus -
not any property of those scraps of paper themselves.
BTW: FWIW, double entry bookkeeping seems to trace the earliest period of modernism, which
IMVHO adds heft to Kanth's argument about something shifting probably earlier than 400 years
ago.
It's possible that Michael Hudson has covered this; if so, I've not had time to read it yet.
I hope to in future. David Graeber's work on redemption ('buying back' someone enslaved or indentured)
and his anthropological findings also lend heft to Kanth's analysis.
"He first caught the scent that something was off as an economics student in India, wondering
why, despite his mastery of the mathematics and technology of the discipline, the logic always
escaped him. Then one day he had an epiphany: the whole thing was "cockeyed from start to finish.""
But the economics profession's problem isn't "blind faith in science." It's a massive failure
to apply the scientific method, combined with an expectation that we all put our blind faith in
THEM anyway.
I think our problems do not stem from any theories or ideologies, they are the predictable
result of human nature – specifically of the fact that the balance between the loving side of
human nature and the aggressive side is not evenly distributed among individuals. It is precisely
the most aggressive among us who most desire, and work the hardest, to dominate and control others.
I had the same experience as he had with economics with law, ok I only studied it when studying
business and that does not a lawyer make, but it made no sense for me. But I do think I maybe
just have the wrong kind of brain for it, expect a logic that isn't there.
Essentially a post-modern critique of modernism without all the jargon of p-m critical theory
(yay!!). I don't think we have enough data from the pre-modern huddling societies to determine
if that's how we want to live. Yes, my boss at work exploits me, but on the other hand, I can
walk into an air-conditioned supermarket and survey row after row of steaks that I can afford
to buy. I love to drive cars. The cinema is enchanting. Dying of a plague is a very remote possibility.
We could give it all up, but there's no guarantee our lives would be richer or fuller–just different,
at best.
Just how dark were the Dark Ages? Or, to borrow Churchill's phrase, how dark would a NEW Dark
Age be? I don't think you can get rid of Modernism very easily, for certain parts would survive.
Science and tech, for example. Ideas of surveillance and control. But along with this, new prejudices,
new superstitions, perhaps? What perverse new form of religion or philosophy might arise from
the ashes of our civilization?
Two possibles: the cargo cult children of Mad Max: Beyond the Thunderdome,
or the society depicted in Aldous Huxley's Ape and Essence. At least the Church in Rome and Constantinople
provided some kind of lifeline of civilization during the collapse of the Roman Empire. What similar
institution have we now?
Sounds like bog-standard post-modernist tosh to me, just without the obscure ProfSpeak jargon
that usually accompanies it. I fail to see how this is helpful.
The only thing missing in this post is Bambi. Of course the Bushmen would kill Bambi dead with
spears and roast her flesh over a fire. So would we, actually. hmmmm.
To illustrate one of its signature follies, Kanth refers to that great Hollywood ode to
the Western spirit, "The Sound of Music." Early in the film, the Mother Superior bursts into
song, calling on the nun Maria to "climb every mountain, ford every stream."
Sounds exhilarating, but to what end? Why exactly do we need to ford every stream? From
the Eurocentric modernist viewpoint, Kanth says, the answer is not so innocent: we secretly
do it so that we can say to ourselves, "Look, I achieved something that's beyond the reach
of somebody else." Hooray for me!
Many would part company with Kanth over the above characterization. There are many reasons
why people climb mountains and ford streams that do not include, or even consider, that element
of exclusive personal achievement. Some might even aver that climbing and fording and so many
other human activities are done "because it is there", while others appreciate a spiritual or
other inspirational aspect.
Will we climbers and forders be told that we are selfish or otherwise deficient or on the wrong
side of history or whatever the mal du jour is because we like a little bit of hygge
or Gemütlichkeit as we live our lives?
Quite that is indeed the point where I stopped reading and started skimming someone who mistakes
metaphors in a musical for physical actions is not going to enlighten my world (no matter how
much I dislike the film).
climbing every mountain and fording every stream is probably impossible in the literal sense
(aren't there way too many streams for this? and mountains probably too), and certainly it is
impossible in the metaphoric one.
I don't see why poor Julie Andrews, of all people, has to be singled out here as exemplifying
malign post-Enlightenment discourses of proprietorship and exploitation. That's just mean
. Surely those ideologies are better examined through a close reading of the Shamen's inexcusable
'90s electro hit "Move Every Mountain"?
I agree dude is right that the values now unraveling (democracy, pluralism, individualism,
free speech, international-ism (in both the good and bad ways)) go all the way back to that time.
But this article is a perfect example of throwing the baby out with the bathwater. Surely none
of the third world cultures he praises got where they are by totally throwing out previous systems,
the good parts and bad, every time they faced a crisis.
IMO the problem is enlightenment values have been hollowed out, narrowed to only those superficial
aspects of those values which benefit the marketplace. Like how real food got turned into Mosanto
fast-food so gradually, nobody noticed that the nutrients are missing.
While it's obvious how this thesis deflates modern capitalism, it would also appear to me that
the idea of refocusing on "kinship and community" would present a challenge to the "global solidarity"
mentality underlying most leftist thinking as well. You cannot simultaneously have an emphasis
on the huddled community, while also arguing that workers worldwide have a deeper and more important
connection than the business owner and his or her employees (assuming both are from within the
same community, natch). Either you assume humans have a universal commonness, which effectively
obliterates the notion of community, or you accept humans tend towards tribalism, which both discounts
any notion of creating a global, uniform leftist economics, but also suggests a troubling tendency
towards xenophobia.
Good point, "kinship and community" are analogous to tribalism and nationalism on a larger
scale unless you rephrase it to mean kinship with your family and neighbors on the local level,
and with humanity on a national/global level. Unfortunately, some of our current liberal globalists
seem to be forgetting the part about local kinship and community while embracing global humanity.
I dunno, may have something to do with cheaper labor abroad.
Partly, but there's also an association in the minds of many liberals and leftists of localized
control and thinking equating with oppression, historically. Things like segregation, discrimination,
violations of the separation of church and state, anti-labor employment & worksite laws, etc.
I think Kanth is quick to criticize materialism and scientific progress for all our ills while
seeming to have missed the horrid standards of living in his anthropological studies prior to
scientific progress with enlightenment principles over theocracy. I'd like to know what the longevity
of per-enlightenment citizens was compared to today. In fact, longevity in this country around
1900 was still in the mid 40's for most.
What I find would have been a better argument is to focus his critique not on scientific progress,
but on how there always seems to be a certain small minority of the population which seems to
have an out sized voice in how we choose to self govern. What we seem to be losing today is the
silent majority of voices who are for universal health care, not eroding further entitlements,
bodily security as well as economic security while still being able to encourage those who chose
to take risks and put themselves through more work and strain to be fairly rewarded.
The problem as I see it today, is that the pendulum, both politically, and socially, has swung
too far towards the selfish individualist.
The problem with how science is seen in a modernist context is two-fold. The "blind faith"
leads people to see it as all-encompassing, all-powerful, and not recognizing its scope and where
that scope ends. Ergo, anything that is successfully sold to the public and TPTB as "science"
gets said treatment and is viewed as being unquestionable (like, say, neoclassical economics).
Bruno Latour has been on this for decades in 1991 the book "We Have Never Been Modern" This has been followed by many other books, prizes, invited lectures, and thought exhibition
called Reset Modernity. The book, published last year, is related to the exhibition with that
title. Published by MIT press with 60 authors.
Reset Modernity
Reset Modernity!
Edited by Bruno Latour and Christophe Leclerc
Overview
Modernity has had so many meanings and tries to combine so many contradictory sets of attitudes
and values that it has become impossible to use it to define the future. It has ended up crashing
like an overloaded computer. Hence the idea is that modernity might need a sort of reset. Not
a clean break, not a "tabula rasa," not another iconoclastic gesture, but rather a restart
of the complicated programs that have been accumulated, over the course of history, in what
is often called the "modernist project." This operation has become all the more urgent now
that the ecological mutation is forcing us to reorient ourselves toward an experience of the
material world for which we don't seem to have good recording devices.
Reset Modernity! is organized around six procedures that might induce the readers to reset
some of those instruments. Once this reset has been completed, readers might be better prepared
for a series of new encounters with other cultures. After having been thrown into the modernist
maelstrom, those cultures have difficulties that are just as grave as ours in orienting themselves
within the notion of modernity. It is not impossible that the course of those encounters might
be altered after modernizers have reset their own way of recording their experience of the
world.
At the intersection of art, philosophy, and anthropology, Reset Modernity! has assembled
close to sixty authors, most of whom have participated, in one way or another, in the Inquiry
into Modes of Existence initiated by Bruno Latour. Together they try to see whether such a
reset and such encounters have any practicality. Much like the two exhibitions Iconoclash and
Making Things Public, this book documents and completes what could be called a "thought exhibition:"
Reset Modernity! held at ZKM | Center for Art and Media Karlsruhe from April to August 2016.
Like the two others, this book, generously illustrated, includes contributions, excerpts, and
works from many authors and artists.
Seems to me that the insight into the relevancy of anthropology vis a vis economics is a product
of science. And Adam Smith had some good points that have been lost along the way, namely penalizing rent
seeking.
Smith has been seriously misrepresented. The Theory of Moral Sentiments shows a very different
side to that presented by those who selectively quote from The Wealth of Nations.
It's hard to tell from the rather incoherent summary of what looks like an incoherent argument,
but the "everything went wrong after the Enlightenment" meme has been circulating for ages. It
was speared pretty effectively by Domenico Losurdo in "War and Revolution" some years ago. The
author seems to be jumbling all sorts of arguments together, some valid and some not, but the
valid arguments are in general criticisms of liberalism, which is not the same of the Enlightenment.
This is a very good point, as the Enlightenment was not merely a straight line connection to
the blight of NeoLiberalism. Rather, there were those, such as Burke, or some of our "Founding
Fathers" who were students of history, and while discriminating observers of the deleterious elements
of human nature, they were also cognizant of the more helpful elements of that same human nature.
They, however, tended toward the view that those helpful elements required deliberate nurturance
in order to come to the fore. Some of this nurturance could be achieved by partially neutralizing
the deleterious elements by balancing interests (you weren't going to get rid of the propensities,
but you could limit the scope of their play by pitting societal forces one against the other in
political structures, vide the doctrine of separation of powers), while nurturance could
also be achieved through perpetuation of those societal institutions that address the individual
conscience and behaviors like religious doctrine and examples.
The naked embrace of selfishness, while never absent over these centuries, did have countervailing
currents and forces with which to contend that were sometimes able to at least minimize the damage.
But more recently, with supposedly scientific NeoLiberal economic thought sweeping the field throughout
much of the first world, and with the overall decline of religious and moral systems as a counterpoise,
things have reached an unlovely pass.
But it would be incorrect to solely blame Enlightenment themes for where we are today. Much
of what was presumed to be necessary to the proper, humane functioning of the ideal Enlightenment
society has been pushed aside in favor of the degraded every-man-for-himself, homo economicus
scourge that holds sway.
Joseph de Maistre, the conservative critic of Enlightenment values, deserves far more blame
for the horrors of modernity than do Voltaire or his like minded colleagues. And I can't even
find de Maistre mentioned in the index of Saul's book.
Thanks for mentioning Joseph de Maistre. I have never heard of him. I think you'd enjoy this
book, nonetheless. Saul doesn't actually "blame" Voltaire. He blames those who came after Voltaire.
For that matter, the bulk of the book is about the 20th century's (mis)interpretation of the Enlightment
project. I should have mentioned that the full title is "Voltaire's Bastards: The Dictatorship
of Reason in the West".
Interesting story Waring told when I heard her speak in Toronto – As she boarded a bus at the
airport to travel to her hotel, and a young man (20s) recognized her because the film is shown
to high school students throughout Canada.
And Capital Institute's John Fullerton
FIELD GUIDE TO A REGENERATIVE
ECONOMY Primarily due to reading George Monbiot's inane rejection of the work of Allan Savory
and Capital Institute's work with Grasslands LLC. Brought to me this morning by Nicole Foss and
the Guardian.
And for farmer's and lovers of the land, I couldn't help but hear Wendell Berry, "It all turns
on affection."
Interesting to have these things intersect with this morning's coffee. Thank you.
Please note that Hudson refers to "internal" debt -- debt that is hold by Us citizents. This debt
probally does not matter. But the US debt to china is completly different story. it matters.
Notable quotes:
"... In it, he argued that the 'classical' in the term 'neoclassical' is a misnomer and that neoclassical and classical economics actually have little in common, despite attempts by neoclassicals to claim Smith, in particular, as their forefather. ..."
"... In a recent interview (h/t to Tom Hickey), Hudson discusses one big difference between the Classical economists and the neoclassicals: their analysis of taxation as applied to economic rent. ..."
"... Hudson touches on a number of noteworthy points during the interview. He draws attention to a historical correspondence that would probably surprise many, between high top tax rates and strong economic growth, and observes that the top rates were high in the period prior to WWII. ..."
"... Importantly, the focus of taxation in Classical Political Economy, which Hudson argues influenced US government policy in the late 1800s and much of the first half of the 1900s, was on confiscating economic rents. These rents include income that derives from ownership of assets that appreciate in value merely because of the growth in national income and/or improved public infrastructure, and not due to any participation in the production process (they arise especially in the real estate and financial sectors). ..."
"... However, the classical economists were engaged in a class war with rentiers, not capitalists. ..."
"... It was Marx who drew this reasoning out to its logical conclusion, and this probably goes a long way to explaining why neoclassical theory, rather than being a continuation of classical economics (as was often claimed once it was established), was an escape into a different conceptualization of a capitalist economy that sought to reframe the distribution of income as the result of marginal contributions (an attempt that failed and was the chief target and theoretical casualty of the Cambridge Capital Controversy). ..."
"... Above all, Hudson distinguishes between what the classical economists meant by the term "free market" and what that term has come to mean in the neo-liberal period. ..."
"... Hudson emphasizes that, for the classical economists, "free market" meant a market unencumbered by rent-based claims on income that would draw economic activity away from income production and toward speculation. ..."
"... The aim of the classical economists was to incentivize production. This is a very different notion than the neo-liberal one of labor-market "deregulation" (meaning regulation in favor of employers over employees), which is really just code for union smashing and an attack on real wages, or the neo-liberal deregulation of financial markets, which is a euphemism for enabling financial parasitism. ..."
"... He notes that immediately prior to the commencement of the only extended period of high capitalist growth (WWII until the late 1960s), the US population was not in debt, and in fact had pent up savings from the war that it was waiting to spend. ..."
"... By little or no debt, Hudson clarifies that he means little or no private debt. There was, of course, a large public debt – larger as a percentage of GDP than the current US government "debt". ..."
"... This public debt did not matter, in spite of the familiar opposition to deficits and public debt, the echoes of which can be heard today, simply because the budget deficit shrinks endogenously once private-sector activity and income growth resume. This is precisely what happened in the immediate postwar period. ..."
"... Government "debt" is nothing other than the accumulated net financial wealth of the non-government. ..."
"... Once the non-government is ready to spend, income growth will deliver stronger revenues, reducing the deficit. But the private sector needs to have its debt under control before it will resume spending at levels sufficient to sustain strong economic growth. ..."
"... In addition to the absence of significant private debt at the end of WWII, there were other factors that contributed to the strong growth of the immediate postwar period, including Keynesian demand-management policies, a progressive tax system, and significant financial regulation. ..."
"... Hudson discusses how, over time, much of the progressivity in the tax system was removed, paving the way for the construction of the inequitable and anti-productive monster of today. ..."
"... The result of this neo-liberal policy mix was an increasing financialization and "rentification" of the economy, widening income inequality, and an adherence to fiscal austerity that directly corresponded, as a matter of accounting, to an unsustainable build up in the only US debt that matters – private debt – and culminated in the Global Financial Crisis and Great Recession. ..."
"... But the actual policy response has instead been to manipulate financial markets to engineer a massive transfer of wealth to the rentiers and exacerbate income and wealth inequality; to continue with the approach of taxing wage and profit income along with consumption rather than economic rents; and possibly even to revert foolishly to austerity while the private sector remains deeply indebted. ..."
"At the university I attended, a few of the academics were strongly influenced by Classical
Political Economy, especially that of Smith and Ricardo. Prior to my student days, one of them
had published a paper in the Cambridge Journal of Economics entitled "On the origins of the term
'neoclassical'" (no free link available), which is quite well known in heterodox circles.
In it, he argued that the 'classical' in the term 'neoclassical' is a misnomer and that
neoclassical and classical economics actually have little in common, despite attempts by neoclassicals
to claim Smith, in particular, as their forefather.
The classical-influenced economists at my university happened to belong to the Sraffian School.
This school attempts to synthesize Classical value and distribution with Keynesian output and
employment determination, and is also known for its key role and victory in the Cambridge Capital
Controversy. The school is named after Piero Sraffa, whose interpretation of Classical Political
Economy, particularly Ricardo's work, has been highly influential.
Sraffians are not the only modern-day economists influenced by Smith and Ricardo. Another prominent
example is Michael Hudson.
In a recent interview (h/t to Tom Hickey), Hudson discusses one big difference between
the Classical economists and the neoclassicals: their analysis of taxation as applied to economic
rent.
Hudson touches on a number of noteworthy points during the interview. He draws attention
to a historical correspondence that would probably surprise many, between high top tax rates and
strong economic growth, and observes that the top rates were high in the period prior to WWII.
Importantly, the focus of taxation in Classical Political Economy, which Hudson argues
influenced US government policy in the late 1800s and much of the first half of the 1900s, was
on confiscating economic rents. These rents include income that derives from ownership of assets
that appreciate in value merely because of the growth in national income and/or improved public
infrastructure, and not due to any participation in the production process (they arise especially
in the real estate and financial sectors).
It is not mentioned in the interview, but profit, of course, is also income that derives from
the mere ownership of assets – the means of production.
However, the classical economists were engaged in a class war with rentiers, not capitalists.
It was Marx who drew this reasoning out to its logical conclusion, and this probably goes
a long way to explaining why neoclassical theory, rather than being a continuation of classical
economics (as was often claimed once it was established), was an escape into a different conceptualization
of a capitalist economy that sought to reframe the distribution of income as the result of marginal
contributions (an attempt that failed and was the chief target and theoretical casualty of the
Cambridge Capital Controversy).
Even so, there does remain a significant distinction between profit, which relates to assets
employed in the production process, and economic rents. For this reason, Marx also distinguished
between these two categories of income and spent a great deal of space in volume 3 of Capital
analyzing the various forms of surplus value, including different types of rent.
Hudson goes on to stress that the taxation imposed in the late 1800s and first half of the
1900s was highly progressive. Initially only the top 1 percent of income earners were required
to submit tax returns. The purpose of this was to keep taxes on wages and profit low to promote
price competitiveness against lower wage countries.
This can be contrasted with neo-liberal policies of today which seem to be designed almost
with the opposite intent: to tax wage and profit income (and also consumption) but provide loopholes
or tax breaks for the recipients of economic rents.
Above all, Hudson distinguishes between what the classical economists meant by the term
"free market" and what that term has come to mean in the neo-liberal period.
Hudson emphasizes that, for the classical economists, "free market" meant a market unencumbered
by rent-based claims on income that would draw economic activity away from income production and
toward speculation.
The aim of the classical economists was to incentivize production. This is a very different
notion than the neo-liberal one of labor-market "deregulation" (meaning regulation in favor of
employers over employees), which is really just code for union smashing and an attack on real
wages, or the neo-liberal deregulation of financial markets, which is a euphemism for enabling
financial parasitism.
Hudson makes another observation in passing. The observation is not central to his argument
in the interview, but is relevant to current debates over deficits and public debt, and consistent
with MMT.
He notes that immediately prior to the commencement of the only extended period of high
capitalist growth (WWII until the late 1960s), the US population was not in debt, and in fact
had pent up savings from the war that it was waiting to spend.
By little or no debt, Hudson clarifies that he means little or no private debt. There was,
of course, a large public debt – larger as a percentage of GDP than the current US government
"debt".
This public debt did not matter, in spite of the familiar opposition to deficits and public
debt, the echoes of which can be heard today, simply because the budget deficit shrinks endogenously
once private-sector activity and income growth resume. This is precisely what happened in the
immediate postwar period.
Today, with the US government the monopoly issuer of its own flexible exchange-rate fiat currency,
public "debt" is – or rather should be – even less of an issue. Unlike in the immediate postwar
period, the government is not subject to the constraints of Bretton Woods or a similar commodity-backed
money system. It is free to utilize its fiscal capacity to the extent necessary to restore full
employment.
Government "debt" is nothing other than the accumulated net financial wealth of the non-government.
Once the non-government is ready to spend, income growth will deliver stronger revenues,
reducing the deficit. But the private sector needs to have its debt under control before it will
resume spending at levels sufficient to sustain strong economic growth.
In addition to the absence of significant private debt at the end of WWII, there were other
factors that contributed to the strong growth of the immediate postwar period, including Keynesian
demand-management policies, a progressive tax system, and significant financial regulation.
All these beneficial features of the economy were gradually undermined, and then exposed to
outright attack from the 1970s onwards.
Hudson discusses how, over time, much of the progressivity in the tax system was removed,
paving the way for the construction of the inequitable and anti-productive monster of today.
Keynesian demand-management policies were also largely eschewed throughout the neo-liberal
era on the basis of an opportunistic misinterpretation of the stagflation of the 1970s. All this
took place alongside deregulation of the financial sector and an aggressive dismantling of worker
employment protections.
The result of this neo-liberal policy mix was an increasing financialization and "rentification"
of the economy, widening income inequality, and an adherence to fiscal austerity that directly
corresponded, as a matter of accounting, to an unsustainable build up in the only US debt that
matters – private debt – and culminated in the Global Financial Crisis and Great Recession.
If the aim is to restore sustainable growth under capitalism (which is not my preferred social
system, but presumably the one commanding the allegience of policymakers), the insights obtained
from the classical economists in conjunction with the lessons of the postwar period would seem
to suggest some combination of the following policy responses: tighter regulations of speculative
activities; a more steeply progressive tax system targeted at the confiscation of economic rents
and the incentivization of production and consumption; stronger worker protections; and the abandonment
of the faulty construct of a 'government budget constraint' and a return to deficit expenditure
sufficient to underpin non-government net saving and full employment.
But the actual policy response has instead been to manipulate financial markets to engineer
a massive transfer of wealth to the rentiers and exacerbate income and wealth inequality; to continue
with the approach of taxing wage and profit income along with consumption rather than economic
rents; and possibly even to revert foolishly to austerity while the private sector remains deeply
indebted.
That's good thank you. I am thinking along the same lines:
In some way unregulated finance acts as cancer cells in human body (while this analogy is definitely
superficial it might be stimulating for thinking about neoliberalism):
Uncontrollable growth detached from real economics ("casino capitalism" with its proliferation
of hedge funds, private equity firms, derivatives, credit default swaps and similar instruments).
Suppression of immune system so that this uncontrollable growth should not be checked (aka
deregulation, capture of economics departments, an army of neoliberal think tanks)
Like cancel creates a blood network to stimulate its own growth, finance also diverts lion
share of resource in the economy for its own consumption -- casino consumption.
Very difficult to fight and can reoccur if treatment was insufficient or ineffective.
1. Study reports results which reinforce the dominant,
politically correct, narrative.
2. Study is widely cited in other academic work, lionized in the
popular press, and used to advance real world agendas.
3. Study fails to replicate, but no one (except a few careful and
independent thinkers) notices.
#1 is spot-on for economics. Woe be to she who bucks the dominant
narrative. In economics, something else happens. Following the study,
there are 20 piggy-back papers which test for the same results on
other data. The original authors typically get to referee these
papers, so if you're a young researcher looking for a publication,
look no further. You've just guaranteed yourself the rarest of gifts
-- a friendly referee who will likely go to bat for you. Just make
sure your results are similar to theirs. If not, you might want to
shelve your project, or else try 100 other specifications until you
get something that "works". One trick I learned: You can bury a
robustness check which overturns the main results deep in the paper,
and your referee who is emotionally invested in the benchmark result
for sure won't read that far. ...
Most researchers in Economics go their entire careers without
criticizing anyone else in their field, except as an anonymous
referee, where they tend to let out their pent-up aggression. Journals
shy away from publishing comment papers, as I
found out first-hand
. In fact, much if not a majority of the
papers published in top economics journals are probably wrong, and yet
the field soldiers on like a drunken sailor. Often, many people "in
the know" realize that many big papers have fatal flaws, but have
every incentive not to point this out and create enemies, or to waste
their time writing up something which journals don't really want to
publish (the editor doesn't want to piss a colleague off either). As a
result, many of these false results end up getting taught to
generations of students. Indeed, I was taught a number of these flawed
papers as both an undergraduate and a grad student.
Intertrial priming allows an accumulation of effects from
iterations of trials. ceu
If we see fed governors
repeatedly drop rates when dollar becomes 22% stronger, we
could soon assume that rates and dollar strength are
indirectly related. Are new import taxes about to increase
the $ strength by 22%? will this retard FG hawks? What will
the shake out be for investments? For treasuries vs. common
stock?
But it would
seem that fields that don't rely heavily on controlled
experiments, as in the "hard" sciences, might be more
vulnerable to this kind of issue. But only marginally so,
because bad controlled experimental data does also exist.
Either way, it's a bit of a comic irony that the field of
economics hasn't found good ways to address this. Isn't
identifying in clear-eyed terms and addressing market
failures kind of your thing, Econ?
Actually, the seminal paper on this issue is Ioannidis (2005)
"Why most published research findings are false," PloS
Medicine, vol 2, issue 8, e124, is about biomedical research.
However, Andrew Gelman has lots to say on the topic regarding
social sciences.
"In fact, much if not a majority of the papers published in
top economics journals are probably wrong, and yet the field
soldiers on like a drunken sailor."
It's possible I have a
new hero. Unless writing from Moscow he's a Putin plant.
"1. Study reports results which reinforce the
dominant, politically correct, narrative.
2. Study is widely cited in other academic work, lionized in
the popular press, and used to advance real world agendas.
3. Study fails to replicate, but no one (except a few careful
and independent thinkers) notices."
Leave it to Cato to write "Do Budget Deficits Raise
Long-Term Interest Rates?" which is a great example of (2).
That's right – Evans got this intellectual garbage
published in the American Economic Review in 1985 over the
objections of many sensible economists. But Barro-Ricardian
equivalence was the politically correct view among the
anti-Keynesian New Classical types who ruled back then. Evans
wanted us to believe that the Reagan fiscal stimulus would
not raise real interest rates as the rich people who got
those massive tax cuts would not consume their new after-tax
income. Of course, consumption as a share of national income
soared as they did spend their tax cuts. So what was Evans
evidence? Interest rates did not rise as the deficit soared?
Wait real interest rates did rise from around 2% to 6%. Evans
measured the wrong interest rate (nominal) and he overstated
fiscal stimulus by using the actual deficit during a period
of overall weak aggregate demand. But the AER published this
intellectual garbage anyway. At least people have noticed
that this stupid paper was not replicated (#3).
If it is not replicable it is religion, not science.
People have deep need for a belief system. The right has
an invisible being in the sky. The left has math models that
cannot be verified, aka social science and economic.
If there is not a double blind clinical trial or similarly
replicable result, don't bet your career or legacy on it.
It might be interesting to look at history of neoclassical
economics from this perspective.
Hyman Minsky critique of
neoclassical economics remains relevant -- it is a junk
science. There no place of any math equations connecting of
supply and demand without taking into account the existence
of financial system and its dominant influence on markets. In
this sense book-bust cycle under capitalism is an immanent
feature due to positive feedback loop introduced by financial
system.
another important issue to reconsider is the role of
banks. If it is difficult to make private banks profitable if
they operate under strict regulation it might be no place for
private banks at all.
Current "private banks" are actually corrupt and criminal
private-public partnerships acting on the principle
"privatize profits -- shift to public all the debts".
"... Keynesianism offered important tools for overcoming the economic crisis, but its application by Obama's government was too half-hearted and misdirected (going to banks rather than households) to effectively reduce the recession. Clinton paid the price. ..."
"... We need to work towards a post-capitalist system that aims at promoting equality, enhances instead of destroys the environment, is based on cooperation, and is engaged in planning to achieve short term, medium term, and long-term goals. ..."
"... "The Labour and time of the poor is in civilised countries sacrificed to the maintaining of the rich in ease and luxury. The Landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his extractions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money." ..."
"... "But the rate of profit does not, like rent and wages, rise with the prosperity and fall with the declension of the society. On the contrary, it is naturally low in rich and high in poor countries, and it is always highest in the countries which are going fastest to ruin." ..."
Keynesianism offered important tools for overcoming the economic crisis,
but its application by Obama's government was too half-hearted and misdirected
(going to banks rather than households) to effectively reduce the recession.
Clinton paid the price.
This interview with Walden Bello is based on the article "Keynesianism in
the Great Recession:
Right Diagnosis, Wrong Cure," available here from the Trans National Institute.
Q: What were the main ways in which neoliberalism created the Great
Recession?
A: Neoliberalism sought to remove the regulatory constraints that the state
was forced to impose on capitalist profitability owing to the pressure of the
working class movement.
But it had to legitimize this ideologically. Thus it came out with two very
influential theories, the so-called efficient market hypothesis (EMH) and
rational expectations hypothesis (REH). EMH held that without
government-induced distortions, financial markets are efficient because they
reflect all the available information available to all market participants at
any given time. In essence, EMH said, it is best to leave financial markets
alone since they are self-regulating. REH provided the theoretical basis for
EMH with its assumption that individuals operate on the basis of rational
assessments of economic trends.
These theories provided the ideological cover for the deregulation or "light
touch" regulation of the financial sector that took place in the 1980s and
1990s. Due to a common neoliberal education and close interaction, bankers and
regulators shared the assumptions of this ideology. This resulted in the
loosening of regulation of the banks and the absence of any regulation and very
limited monitoring of the so-called "shadow banking" sector where all sorts of
financial instruments were created and traded among parties.
With so little regulation, there was nothing to check the creation and
trading of questionable securities like subprime mortgage-based securities. And
with no effective monitoring, there were no constraints on banks' build-up of
unsustainable balance sheets with a high debt to equity ratios.
Without adult supervision, as it were, a financial sector that was already
inherently unstable went wild. When the subprime assets were found to be toxic
since they were based on mortgages on which borrowers had defaulted, highly
indebted or leveraged banks that had bought these now valueless securities had
little equity to repay their creditors or depositors who now came after them.
This quickly led to their bankruptcy, as in the case of Lehman Brothers, or to
their being bailed out by government, as was the case with most of the biggest
banks. The finance sector froze up, resulting in a recession-a big one-in the
real economy.
Q: So how did these banks get to be so big and powerful? What drove the
"financialization boom" that triggered the recession?
A: Financialization or an increasing preference for speculative activity
instead of production as a source of profit was driven by four developments.
The first was the abolition, during the Clinton Administration, of the
Glass-Steagall Act that had served as a Chinese Wall between commercial or
retail banking and investment banking, as a result of tremendous pressure from
the big banks felt left out of the boom in trading. The second was the
expansive monetary policy promoted by the Federal Reserve to counter the
downturn following the piercing of the dot.com bubble in the first years of the
new century. Third was the government and business' move to shore up effective
demand by substituting household indebtedness for real wage increases. Fourth
was the lifting of capital controls on the international flow of finance
capital, following the era of financial repression during the post-war period.
These developments acted in synergy, first to produce a speculative boom in the
housing and stock markets, then feeding on one another to accelerate an
economic nose-dive during the bust.
Q: What was the worst impact of the crisis, and upon whom?
A: With unemployment hitting 10 per cent in 2010, working people suffered
the most. Although the unemployment rate is now down to five per cent, that
fall has been driven less by improved labor market conditions than a falling
rate of participation, as discouraged workers withdrew from the labor force.
More than 4 million homes were foreclosed. Lower income households, the main
victims of aggressive loan sharks, suffered most.
As far as growth was concerned, the recovery was tepid, with average GDP
growth barely 2 per cent per annum between 2011 and 2013, less than half the
pace of the typical post-World War II expansion. In terms of inequality, the
statistics were clear: 95% of income gains from 2009 to 2012 went to the top
1%; median income was $4,000 lower in 2014 than in 2000; concentration of
financial assets increased after 2009, with the four largest banks owning
assets that came to nearly 50% of GDP.
An Economic Policy Institute study summed up the trends: "[T]he gains of the
top 1 percent have vastly outpaced the gains for the bottom 99 percent as the
economy has recovered."
At the individual and household level, the economic consequences of being laid
off were devastating; with one study finding that workers laid off during
recessions "lose on average three full years of lifetime income potential." One
estimate showed that the income of the United States would have been $2
trillion higher had there been no crisis, or $17,000 per household.
Q: What did Keynesianism offer as a way of responding to the crisis?
A: Keynesianism offered two major weapons for overcoming the crisis. The
first and most important was a fiscal stimulus, or deficit spending by
government. The second was monetary expansion. Essentially, these were forms of
government intervention designed to revive the economy after a collapse of
investment on the part of the private sector. They are called "countercyclical"
since they are designed to counter the recessionary pressures brought about by
the crisis of the private sector.
Q: How were Keynesian policies and strategies applied in the wake of the
onset of the recession?
A: The Keynesian interventions were in the right direction. Unfortunately,
they were applied half-heartedly by the Obama administration. For instance, the
size of the fiscal stimulus $787 billion might have been enough to prevent the
recession from getting worse, but it was not enough to trigger an early
recovery, which would have demanded at least $1.8 trillion, according to
Cristina Romer, the head of Obama's Council of Economic Advisers.
Expansive monetary policy was always a second best solution and was not as
effective as a fiscal stimulus. Yes, cutting interests to zero and quantitative
easing-or providing banks with infusions of money-did have some impact, but
this was rather small since, for the most part, individuals and corporations
did not want to go further into debt but wanted to focus on lessening their
debt.
Q: What three things could have been done, "truer" to the spirit of
Keynesianism, that would have reduced the recession?
A: First of all, there should have been a much bigger stimulus, one along
the lines of Cristina Romer's proposal of $1.8 trillion. Second, instead of
focusing on saving the banks, the government should have devoted resources to
assisting the millions of troubled homeowners, a move which would have raised
effective demand. Third, the insolvent banks should have been taken over or
nationalized and the billions spent on recapitalizing them or guaranteeing
their borrowing should have been devoted to creating jobs to absorb the
unemployed.
Q: Is financialization still a threat?
A: Yes, even conservative analysts say that the so-called Dodd-Frank reform
encourages moral hazard or reckless behavior by banks owing to their belief
that when they get into trouble, the government will bail them out.
Derivatives-which Warren Buffet called "weapons of mass destruction"-are
still virtually unregulated. And so is the shadow banking sector. The
non-transparent derivatives market is now estimated to total US$707 trillion,
or significantly higher than the US$548 billion in 2008.
As one analyst puts it, "The market has grown so unfathomably vast, the
global economy is at risk of massive damage should even a small percentage of
contracts go sour. Its size and potential influence are difficult just to
comprehend, let alone assess." Former U.S. Securities and Exchange Commission
Chairman Arthur Levitt, the former chairman of the SEC, says that none of the
post-2008 reforms has "significantly diminished the likelihood of financial
crises."
Q: What has been the legacy of the crisis on U.S. politics?
A: One can say that the Obama administration's failure to reinvigorate the
economy after eight years and to reform the banks was the central factor that
lost the elections for Hillary Clinton. If there's one certainty that emerged
in the 2016 elections, it was that Clinton's unexpected defeat stemmed from her
loss of four so-called "Rust Belt" states: Wisconsin, Michigan, and
Pennsylvania, which had previously been Democratic strongholds, and Ohio, a
swing state that had twice supported Barack Obama.
The 64 Electoral College votes of those states, most of which hadn't even
been considered battlegrounds, put Donald Trump over the top. Trump's numbers,
it is now clear, were produced by a combination of an enthusiastic turnout of
the Republican base, his picking up significant numbers of traditionally
Democratic voters, and large numbers of Democrats staying home.
But this wasn't a defeat by default. On the economic issues that motivate many
of these voters, Trump had a message: The economic recovery was a mirage,
people were hurt by the Democrats' policies, and they had more pain to look
forward to should the Democrats retain control of the White House.
The problem for Clinton was that the opportunistic message of this demagogue
rang true to the middle class and working class voters in these states, even if
the messenger himself was quite flawed. These four states reflected, on the
ground, the worst consequences of the interlocking problems of high
unemployment and deindustrialization that had stalked the whole country for
over two decades owing to the flight of industrial corporations to Asia and
elsewhere. Combined with the financial collapse of 2007-2008 and the widespread
foreclosure of the homes of millions of middle class and poor people who'd been
enticed by the banks to go into massive indebtedness, the region was becoming a
powder keg of resentment.
True, these working class voters going over to Trump or boycotting the polls
were mainly white. But then these were the same people that placed their faith
in Obama in 2008, when they favored him by large margin over John McCain. And
they stuck with him in 2012, though his margins of victory were for the most
part narrower. By 2016, however, they'd had enough, and they would no longer
buy the Democrats' blaming George W. Bush for the continuing stagnation of the
economy.
Clinton bore the brunt of their backlash, since she made the strategic mistake
of running on Obama's legacy-which, to the voters, was one of failing to
deliver the economic relief and return to prosperity that he had promised eight
years earlier.
Q: In what ways do we need to go beyond Keynesianism to address current
economic and ecological problems?
A: I think Keynesianism has valuable insights into how a capitalist economy
operates and can be steadied so its inherent instability and contradictions can
be mitigated. But, as Minsky says, these solutions do not address the inherent
instability of the system. A new equilibrium contains the seeds of
disequilibrium. With its focus on growth propelled by effective demand,
Keynesianism also has problems addressing the problem of ecological
disequilibrium brought about by growth.
The real issue is capitalism's incessant search for profit that severely
destabilizes both society and the environment. I think there is no longer any
illusion, even among its defenders, that capitalism is prone to crises, and
these days, these are crises that not only stem from the dynamics of production
but from the dynamics of finance.
We need to work towards a post-capitalist system that aims at promoting
equality, enhances instead of destroys the environment, is based on
cooperation, and is engaged in planning to achieve short term, medium term, and
long-term goals. In this scheme, finance would function to link savings to
investment and savers to investors, instead of becoming an autonomous force
whose dynamics destabilizes the real economy. A post-capitalist society does
not mean the elimination of the market. But it does mean making use of the
market to achieve democratically decided social goals rather than having the
market drive society in an anarchic fashion.
But Yobs! EMH is more than just a hypothesis. It's really, really true
stuff. Say Paris Hilton or even some squillionaire heir dude decides to spend a
little pocket change on a brand new pair of self driving, artificial
intelligence, rocket powered yoga pants.
An enterprising Silicon Valley startup will emerge and, with the help of IPO
financing, supply the product 'cause there is demand. It's that simple!
But can they patent their invention, monopolize the market, and defend
their obscene profits with an army of New York and D.C. lawyers circling
around the money machine? If so, count me in!
We need to work towards a post-capitalist system that aims at promoting
equality, enhances instead of destroys the environment, is based on
cooperation, and is engaged in planning to achieve short term, medium term, and
long-term goals.
Not going to happen because there is no long-term goal. That pile of
derivative crap will keep growing forestalling the day the nothing cancer it's
based on metastasis and brings it down, quantitative easing is a placebo.
That's the medium term. In the short term there's Silicon Valley's
monopolization model, run by selfish man-boy innovators stroking the egos of
old greedy politicians who look down on indebted, seduced spend happy
deplorables. The latest video of insecure man-boy Travis Kalanick arguing with
and dismissing the views of one of his drivers "Some people don't like to take
responsibility for their own shit." shows the attitude of the ruling classes
toward the 90% deplorable suckers they're working to con with new
"Innovations".
https://www.youtube.com/watch?v=gTEDYCkNqns
The long-term our elites have given up on, smart people they are and as
Chris Hedges has said "know what's coming" as today's news brings warnings of
permafrost gas release. What are our elites solutions? Do as Peter Thiel and
buy citizenship to an island nation, or like those smart people who purchased a
condo in some mid-western abandoned missile silo? Why they have a doctor and
dentist on the condo board has me confused, what no butcher, baker,
candle-stick maker? And then what? After Bannon's apocalyptic melt down come
back home and take an Uber ride to your AirBnB where the doctor's serve up a
delicious gourmet feast?
The Best and Brightest, the ruling class. Time is running out, as the planet
burns.
When you have a finance dominated economy, the uber ceo is the standard
for what the "best and brightest" will become. That youtube video captures
the immaturity, selfishness, and arrogance of this child masquerading as a
man.
If you want things biased in your favour, bias the economics that
everything runs on.
The Classical Economists looked out on a world of small state, basic
capitalism in the 18th and 19th Centuries and observed it. It is nothing like
our expectations today because they are just made up.
Adam Smith in the 18th century:
"The Labour and time of the poor is in civilised countries sacrificed to
the maintaining of the rich in ease and luxury. The Landlord is maintained in
idleness and luxury by the labour of his tenants. The moneyed man is supported
by his extractions from the industrious merchant and the needy who are obliged
to support him in ease by a return for the use of his money."
We still have a UK aristocracy that is maintained in luxury and leisure and
can see associates of the Royal Family that are maintained in luxury and
leisure by trust funds. As these people are doing nothing productive, nothing
can be trickling down, the system is trickling up to maintain them.
Adam Smith in the 18th century:
"But the rate of profit does not, like rent and wages, rise with the
prosperity and fall with the declension of the society. On the contrary, it is
naturally low in rich and high in poor countries, and it is always highest in
the countries which are going fastest to ruin."
Exactly the opposite of today's thinking, what does he mean?
When rates of profit are high, capitalism is cannibalising itself by:
1) Not engaging in long term investment for the future
2) Paying insufficient wages to maintain demand for its products and services
Today's problems with growth and demand.
Amazon re-invested its profits and didn't suck them out as dividends and
look how big it's grown. Ignoring today's economics can work wonders.
The Classical Economists direct observations come to some very unpleasant
conclusions for the ruling class; they are parasites on the economic system
using their land and capital to collect rent and interest to maintain
themselves in luxury and ease (Adam Smith above).
What can these vested interests do to maintain their life of privilege that
stretches back centuries?
Promote a bottom-up economics that has carefully crafted assumptions that hide
their parasitic nature. It's called neoclassical economics and it's what we use
today.
The distinction between "earned" and "unearned" income disappears and the
once separate areas of "capital" and "land" are conflated. The landowners,
landlords and usurers are now just productive members of society and not
parasites riding on the back of other people's hard work.
Unearned income is so easy, it's the UK favourite today.
Most of the UK now dreams of giving up work and living off the "unearned"
income from a BTL portfolio, extracting the "earned" income of generation rent.
The UK dream is to be like the idle rich, rentier, living off "unearned"
income and doing nothing productive.
Powerful vested interests come up with neoclassical economics so that it works
in their favour and only bottom-up economics can be easily corrupted. Top-down
economics is based on real world observation.
Their neoclassical economics blows up in 1929 due to its own internal flaws
but the powerful vested interests still love it as they designed it to work in
their favour.
Keynes comes up with new ideas that herald the New Deal and a way out of the
Great Depression.
The powerful vested interests don't want to lose their beloved neoclassical
economics and fuse it with Keynes ideas to roll out after the war. This gives
them the opportunity to get rid of some of Keynes's more unpleasant
conclusions, generally tone it down and remove all the really obvious conflicts
with their neoclassical economics. The only real Keynesian economics was in the
New Deal.
When the Keynesian synthesis fails in the 1970s, they seize the opportunity
to bring back their really biased neoclassical economics.
It still doesn't work of course.
It's reliance on debt based consumption and debt based speculation, tend to
end in debt deflation, e.g. the Great Depression, today's secular stagnation.
Today's secular stagnation is only being achieved by the Central Banker's
pumping in their trillions to stave off debt deflation and there are plenty of
asset bubbles still to burst.
Supply side economics – when inflation is too high and demand
exceeds supply
Demand side economics – when inflation is too low and supply exceeds demand
Today's economics was a solution to what went before it, as Keynesian
capitalism had ended in the stagflation of the 1970s, but it was far too
extreme.
Looking back with two assumptions:
1) Money at the top is mainly investment capital as those at the top can
already meet every need, want or whim. It is supply side capital.
2) Money at bottom is mainly consumption capital and it will be spent on goods
and services. It is demand side capital.
Pre-1930s – Supply side economics leading to:
Too much investment capital leading to rampant speculation and a Wall Street
crash
Too little consumption capital and demand is maintained with debt.
Leads to Great Depression and the debt deflation of an economy mired in debt
Post-1930s – Demand side economics leading to:
Too little investment capital compared to demand, supply constrained.
Too much consumption capital, leading to very high inflation.
Imbalance causes stagflation.
Post-1980s – Supply side economics leads to:
Too much investment capital leading to rampant speculation and a Wall Street
crash, asset bubbles all over the place.
Too little consumption capital and demand is maintained with debt. Global
aggregate demand is suffering and with such subdued demand there are few places
for real investment leading to more speculation.
Leads to the secular stagnation of the new normal, the assert bubbles have
yet to burst.
Maybe it's just the balance between supply and demand necessary to
achieve that happy medium.
Pre-1930s – Supply side economics – Runs into the debt deflation
of the Great Depression.
Post-1930s – Demand side economics – Runs into stagflation.
Post-1980s – Supply side economics – Runs into the new normal of
secular stagnation as the Central Bankers manage to stave off the
under-lying debt deflation.
Separate money and credit. We have a ridiculous system that requires
credit creation in order to create money, eventually too much credit is
created, but instead of that just being a banking crisis it's also a
monetary and economic crisis. Free your mind a little. Just separate the
two.
German Capitalism was State-sponsored. Siemens & Halske were based in Berlin
and lived off State contracts for railways, telegraphs. French Capitalism was
State-sponsored. English Capitalism was sponsored by Discrimination against
Congregationalists, Quakers, Unitarians, Baptists who were outside the Church
of England and could not therefore go to University or enter Professions under
Test & Corporation Acts 1665. They had to enter Trade. Hence Cadbury, Rowntree,
James Barclay, Samuel Lloyd were Quakers – the latter two forming banks.
Siemens created Deutsche Bank. As for Finance in Germany, Bleichroeder was
Bismarck's banker – the Bauer Family of Frankfurt became Rothschild. The
Finance in London was largely German immigrants – Kleinwort Benson, Sassoons,
Cassel etc.
Britain ultimately lacked investment opportunities because of Free Trade
letting competitors export goods into the UK market but tariffs preventing UK
exports to USA, Germany, Russia, France etc. Hence Capital was exported
building huge foreign investment portfolio through The City – liquidated in 1st
World War
'When the subprime assets were found to be toxic since they were based on
mortgages on which borrowers had defaulted, highly indebted or leveraged banks
that had bought these now valueless securities had little equity to repay their
creditors or depositors who now came after them.'
Interesting interpretation. Unfortunately it bears little relationship to
what actually happened. The financial crisis was a repo crisis. Most
collateralized mortgage obligations had plenty of equity to cover default
losses. Unfortunately, they were by nature opaque and hard to analyze quickly,
and like a murmuration of birds, everyone zigged at the same time, so there
were no buyers. The repo aspect of the crisis was what really counted. Suddenly
repo lenders refused to lend. Investment banks once had longer term financing
in place, but this eroded over the several years prior to the crisis. See Cohan
'House of Cards.' Also Ed Conard's 'Unintended Consequences.'
Anonymous, you are forgetting the role of the massive sub-prime mortgage
fraud that the banks initiated and then the banks foreclosed on those who
had bought the offered mortgages rather than re-negotiate new mortgages.
Forget repo; remember the fraud: forget opaque and hope for transparency
which was in short supply during the crisis. It's all about
the fraud
, you know.
Hmmmm ..let's see if I understand you correctly. It appears that when
everyone thought they were buying lunch, they were buying sh*t sandwiches.
So the problem wasn't that they were being sold sh*t under another name, the
problem was that they weren't willing to buy that sh*t? So if they'd have
been willing to eat sh*t instead of what they thought they were going to
get, everything would have been hunky dory? Ah ..lunch, sh*t, but it's all
the same, huh? Anything for a buck?
This is not correct. I wrote about this in sordid detail in ECONNED, with
the details of the structures, the amounts, and who was exposed.
Subprime CDOs (more accurately, asset backed CDOs, which at the time
happened to consist heavily of BBB- RMBS exposures) were a significant
portion of repo collateral. They went almost without exception to zero.
Those exposures wound up disproportionately at heavily leveraged,
systemically important, and tightly coupled financial institutions. The
Eurobanks loaded up on ABS CDOs because their trader bonus formulas highly
incentivized it (see discussion of "negative basis trade"). AIG and the
monolines were as we know heavily exposed. US investment banks were heavily
exposed by virtue of either being stupidly heavily involved in subprime CDOs
at the worst moment (Citi and Merrill, I explain why/how), Lehman and Bear
by simply being weakly capitalized second tier investment banks that tried
getting to be first tier by going way overweight in total risk terms in RMBS
and doing a bad job of risk management (Bear by extending too much in its
warehouse lines to originators like IndyMac and New Century as well as being
a large CDS player; Lehman by taking on too much risk everywhere, witness
its obvious balance sheet problems in 2008). Morgan Stanley also had a weak
balance sheet and big CDO/RMBS exposures, see AIG trial for details; Goldman
was heavily exposed to ABS CDOs by having too cleverly trying to pick up
extra margin by brokering them to Middle Eastern investors, leaving them
exposed when their AIG hedge was gonna fail.
Yes. repo was the proximate cause, but contrary to your claim, a lot of
the collateral was no good and that was why the repos were not rolled.
People who advocate reindustrialization and manufacturing are out of their
minds. Manufacturing margins are shrinking everywhere. China and Germany are
going to be in deep trouble. Bruce Greenwald, of Columbia Business School, says
that in fifty years most of the things that you buy will be made within fifty
miles of your home. Actually, they may be made in your garage, by you, and you
may not 'buy' them, per se, so much as buy the raw materials and make them.
What's that likely to do for manufacturing jobs?
That 50 mile radius is not only true; it's obvious. Fifty years from
now, all of our roadways and bridges will have crumbled, and so the
transport of finished goods beyond 50 miles of their manufacture will be
nigh on impossible.
Of course the transport of raw materials from their origins to their
points of refinement will also be similarly limited, which means that
most of what most of us use will be made out of sticks.
I'm sitting in my kitchen looking at all the things that are
manufactured, from my fridge, to my clothes, to my car, to my floors, to the
farm equipment I can see outside my window, etc. And heaven knows none of
these things last as long as they used to, so yes, I am going to have to
replace all this some day as is the farmer ..
So yes, there will be manufacturing jobs in the future, and not just within
a 50 mile radius. Perhaps when the actual economy gets better for people in
the lower 90%, they will be more willing to spend money on manufactured
products. But in order for their economy to get better, they are going to
have to be the ones doing the manufacturing, aren't they?
Derivatives are the biggest threat to the financial system.
James Rickards in Currency Wars gives some figures for the loss
magnification of complex financial instruments/derivatives in 2008.
Losses from sub-prime – less than $300 billion
With derivative amplification – over $6 trillion
It was the derivatives that really did the damage; derivatives were the
mechanism that allowed a housing bust in one nation to infect the global
economy.
Derivatives were used as leverage to increase bonuses on the way up and
losses on the way down.
The derivatives market is now bigger than ever, no sensible regulations have
been put in place since 2008.
Where does the real danger come from with derivatives?
Jim Rickards was at the top of LTCM when it collapsed in 1998 and saw how the
collapse in a link of the derivative chains turns losses, from nett to gross
within the system.
Everyone panicked as it was impossible to gauge the size of the losses.
When Lehman Brothers collapsed in 2008, everyone panicked as it was
impossible to gauge the size of the losses.
The same problem ten years later and the same problem will happen next time
as no regulations are in place. Everyone still believes the risk with
derivatives only comes from their nett value as they have learnt nothing from
experience.
Credit Default Swaps are an unregulated insurance product that bought down
AIG in 2008, the largest insurance company in the world. They took the
insurance premiums and didn't put anything aside in case these insurance
policies had to pay out as they weren't regulated.
CDSs are the most dangerous of the derivative products, they bought down AIG
and it all happened in a division in Curzon Street, Mayfair in the UK.
They are zero sum bets, so why do bankers love them?
Both sides think they are taking the right side of the bet and both sides can
post profits until that future bet is realised. They are great for bonuses.
They don't incur any costs up front and allow for enormous leverage, they
are great for bonuses.
Derivatives are the transmission mechanism for crises in one part of the
world to infect the whole global economy.
They interconnect the major banks in a way that has devastating consequences
should one of them fail, this has already been demonstrated by LTCM in 1998 and
Lehman Brothers in 2008.
The nett losses turn to gross losses within the derivatives chains and the
losses are incalculable as these chains are opaque and hard to trace.
We know the biggest threat to the financial system; will anyone do
anything about it?
First of all, there should have been a much bigger stimulus, one along
the lines of Cristina Romer's proposal of $1.8 trillion.
I was just reading accounts of the events leading up to the stimulus
package, and it seems Ms. Tomer was told time and time again that her stimulus
proposals were politically impossible. Is there actual evidence that Obama ever
saw that 1.8 trillion figure? According to Scheiber's book, Summers kept
brushing off Romer's numbers.
If so, the important economic advisors never wanted to fight for what was
necessary at a time when a majority of the US public would have gone along with
anything. They really are just a bunch of careerists.
I have a hard time taking anything said by Christina Romer seriously.
After all, she was one of the authors of the infamous ARRA justification
report that predicted a 10% peak unemployment rate without the stimulus and
a 8% peak unemployment rate with it. That prediction assumed $800 billion in
spending and tax cuts, and
we got
that $800 billion. The
unemployment rate shot past 10% anyway. [Additionally, the return to a 6%
unemployment rate took twice as long as predicted and only reached that
level because of a plummeting labor force participation rate.] The failure
of the predictions in the ARRA justification report were truly
epic
.
Competence matters. The economists working for the White House (Romer
among them) didn't have it.
This is part of why Trump won. The ARRA justification report promised a
glorious V-shaped recovery with 300k to 500k jobs per month. We didn't even
average 200k per month. The ACA promised cheaper health insurance by $2000
per year. Premium rose sharply instead. When you implement grand new plans,
those plans need to ACTUALLY WORK!!
It sounds like Ms. Romer wrote a report which matched the exact amount
that her bosses were going to get from Congress. So she was giving cover
for something that was already decided.
And the ACA is a pile of crap that anyone being involved with should
be ashamed of. Unfortunately since the Federal government is completely
captured by the renter's there is zero chance of reform without a
complete political revolution.
Summers agreed that Romer's analysis was correct, and Summers is the
last person to say that sort of thing. It's in Ron Suskind's book
Confidence Men. He nixed it for political reasons, not economic ones.
Is it not hard to imagine that Romer was pressured to create a model
to sell the deal? Why would her second model be so different from her
earlier one otherwise? That happens all the time in the private sector.
If you haven't seen it, you haven't been looking.
People keep forgetting that a large portion of that $781 billion was in the
form of tax credits weighted towards the usual suspects.
And since the MOTU never let an emergency go to waste, the scrum at the
trough resulted in the actual stimulus being even more anemic than it is
portrayed.
Here in Illinois, which received the second or third highest amount of
stimulus dollars, most of the money was spent on bridge and road repairs.
Yes, those repairs provided some construction jobs, but, otherwise hardly
served to promote the economy for ordinary people. The only really large
project to receive stimulus money here was the destruction of a massive,
abandoned Outboard Marine plant sitting right on the shores of Lake
Michigan. The building was dangerous–and an eyesore–and occupied prime real
estate. Unfortunately, what remains on the site is a low level of rubble.
Apparently, there isn't enough money, or interest, in developing the land to
provide jobs, recreational space, new living accommodations–anything that
might improve people's lives. In other words, the stimulus was used to
repair the old and crumbling, but not to generate new opportunities.
Here's a conundrum which baffles me: Bello writes (as have many before):
"These developments acted in synergy, first to produce a speculative boom in
the housing and stock markets, then feeding on one another to accelerate an
economic nose-dive during the bust."
So we did have our bust in the real estate market, here in California. My
own property, purchased in 2005, dropped about 30% in value in 2008 from its
market high in 2007.
It's nine years later - and my property value is now back up to its 2007
value. So is Los Angeles (and other cities no doubt) back in a "boom" that is
inevitably headed again for a "bust"? It seems to me the economy is worse now
than it was in 2007, and if these prices were an unsupportable boom then, why
wouldn't they be now? And yet we are (so I'm told) in a period of rising
interest rates and tight credit, two things absent the last "boom." I'm
befuddled.
I think Picketty Capitalism has been going on so long that the GFC was
caused by the labor classes being deprived too long, then the banksters
realized it and tried to resuscitate them but it was too late and because
the stimulus was too small even the cure got caught in the implosion
All of the desirable neighborhoods in LA are now well above their 2007
valuations. It seems like pure madness. The way-out exurbs of the Antelope
Valley and the Inland Empire are still lower but almost everything in LA
city limits is considerably higher now than in 2007. Median income for
normal Americans is still lower than in the year 2000, but yet no one seems
to think the market is in another bubble? I share your befuddlement. I
live/rent in LA and I am sitting on a good chunk of cash I would like to put
towards purchasing a home, but I can't bring myself to pay $600k for a 2
bedroom, 1 bath, 1200 square foot, 1950's shit box that some jerk is trying
to flip for a $200,000 profit. I'm still hoping for another housing crash.
The fundamentals of this market are rotten and prices need to come down
before I consider tethering myself to a large, long period mortgage.
Housing is not just about fulfilling our basic human need for security
and warmth, but also our innate powerful tendencies toward aspiration and
speculation.
Sure it is our house, our home, our security etc but for most of us mere
mortals it is our biggest financial outlay and has increasingly come to be
seen in investment terms.
Thus over time property has gradually displaced gold as the major store
of wealth, and this fixation has clearly been exploited accordingly.
Crucially it is also one of the biggest and most effective means for the
debt creation, through mortgages and their numerous spin offs, that
underwrites and drives most modern economies.
So apart from its obvious practical uses, property fulfils many other
functions within economies, many of which used to be filled by gold ie asset
backed promises to pay, but without its numerous obvious limitations. We
can't keep finding or creating more gold to keep up with debt/credit
expansion, but we can keep building more houses, or creating or exploiting
more desirable environments for them for example.
Equally as important, and unlike gold, government can regulate supply.
This ensures that demand ideally outstrips supply to pump the sometimes
apparently illogical price inflation that keeps people chasing the horizon
and thus keep feeding debt/money into the system.
Seems like there should be the discussion that there are two competing
theories running simultaneously here in the US and much of the EU. My
understanding of JMK's theory is that after the expansion of debt and other
financial stimulus to get us out of a recession, that after the recovery Keynes
called for paying off debt through generating surplus that we retire debt in
the form of higher taxes until we reach equilibrium. But that never happened.
You overlay the Neoliberial macro ideology and voila we get tax cuts to the
wealthy instituted by Reagan and Bush43 and austerity for everybody else,
exactly the wrong medicine. Compound the growth of debt by trillions of dollars
spent on never ending wars. The partial embrace of supply-side policy for 35
years accelerated growing government debt, thus causing subsequent economic
crisis.
It is as if our economic policy leaders are bipolar or schizophrenic.
Between this mishmash of conflicting policy and accelerating the uncoupling of
labor from capital and wealth creation, inequality has become endemic and
without change will become much, much worse. Just wait till the BLS U-6
participation number drops to 40% as millions of jobs cease to exist in the
next 20 years while 80% of the wealth will be held by a handful of people. In
this "free market" casino capitalist system with its insider trading, zero sum
wars, and disregard for collateral damage, survival will only happen for a few.
It will be ugly for those trapped in the Kansas silo. Little did George Miller
realize in the late 70's that his Mad Max movie would be a documentary.
Let's see – A gambling addict makes reckless bets using credit and loses
big. His Uncle Sam bails him out and admonishes him to never do it again but
does nothing else to deter future bad behavior.
The casino is still open for business, offering unlimited chips on credit.
Is Walden Bello an Argentinian by any chance? He sounds like my ancient
boyfriend Ezekiel who was the smartest, funniest guy I ever. And he always made
fun of me, my idiocy, and the USA for thinking we were the only answer for
humanity. I loved him, but I was a dummy and I loved him too late. As for this
delightful article, it's better than butter dumplings, I loved it too. I won't
elaborate all the points. It was great. I'm pondering how wise it seems to
demand a post capitalist society which uses the market to achieve democracy and
environmental justice – but I definitely do think it's time has come and we are
ready to go forward with this idea. Thank you for posting this. (versus both
financial and industrial capitalism which both fail to address the shitstorm we
are facing).
Another excellent, very succinct and up to the point expose of Keynesianism,
a condemned by corporate economists, out of fashion economic theory with plenty
of experimental foundations. Mostly the so-called " direct government
investments into the mainstream economy as a methods of increasing an aggregate
economic demand was hypocritically criticized as detrimental to free markets
and free trade, while the same investment in Wall Street financial instruments
was welcomed.
Here is another interesting unique, take what is or may be so-called demand
side economics in the context of Keynesianism which only deals with a fraction
of the issues of the economy in a deflationary spiral.
IS THE END GAME FOR THE SSE RADICALISM NEAR? MAY BE.
"The Supply Side Economics (SSE) did us all. Yes. Under this benign name the
SSE represent an extreme radical and dangerous ideology based on the unfounded
(or rather borrowed) believe that "If we build, they will come" supply side
fantasy that implicitly assumes that the real demand (nominal demand minus
weighted debt incurred while producing the demand) does not need not be of any
concern to the economic, financial and political decision makers, spelling the
decades of doom to the people who work for living and created a paradise for
the parasitic rent seekers, financial oligarchs and their government cronies.
The SSE (Supply Side Economic) was presented in the early seventies as an
alternative to the Keynesian Theory that supposedly was concerned about the
Demand Side Economics (DSE) but in fact it was not [only tangentially]. It
cared mostly about the so-called aggregate demand stimulation initiated
generally through the government investment policies leaving the task of "real
demand" creation on the shoulders of the working people through the organized
labor actions and leftist political movements lobbying the government and
imparting on the government fiscal policies in a way beneficial to the labor
and restricting the power of economic elites.
For the true demand side economic we would need a set of fiscal and economic
and trade policies that would build up the institutional support for completely
different, non financial, assets classes such as: the labor asset class (LAC)
and the natural environment assets class (NRAC) [and more]. The economic,
fiscal and monetary policies of the government in the DSE are [suppose to be]
dedicated to maintain the fair value and stable growth of the above asset
classes while leaving the other financial assets classes exposed to the global
free markets. The true DSE guaranties demand and adjust the supply to fit the
real demand hence no deflationary death spiral is ever possible, and if
value-based [not debt based] monetary system is imposed, no inflationary
pressures may ever develop."
"The non-transparent derivatives market is now estimated to total US$707
trillion, or significantly higher than the US$548 billion in 2008."
Wow! Is this figure real? Not that 548 billion is small sum but I thought
the derivative market in pre-crash '08 was in the neighborhood of 8 trillion?
It's now 707 trillion? That's nearly a hundred-fold increase in 9 years.
Anyone knowledgeable enough on the world derivative market to comment?
$548 trillion – the billion is likely a transcription mistake.
Note the fatuous accuracy, down to the trillion where in the next
paragraph is this.
>As one analyst puts it, "The market has grown so unfathomably vast, the
global economy is at risk of massive damage should even a small percentage
of contracts go sour. Its size and potential influence are
difficult
just to comprehend, let alone assess
."
Basically, no one knows. It could be over a quadrillion (1000 X 1
trillion) or a 1 followed by 15 zeros.
To give these figures a faint wisp of reality, I like using Nimitz class
aircraft carriers as coins of the realm.
$707 trillion would buy 153,420 of them at their original cost of $4.6
billion each, and were they placed end to end would stretch 31,707 miles.
Bernie Sanders: The business of Wall Street is fraud and greed.
What an ironic fate for the ever elegant Czar of style and the chief chair
of the blue blooded aristocracy of Bloomsbury Lord Keynes to be first turned
into 'keynesianism' and then as if it is not enough, to be 'discussed' by low
caste nincompoops in crude English. Alas. The author should not call Trump
opportunistic, pray tell me which capitalistic harlot is not one? He is
constitutionally elected please.
Edward Dodson
10
months ago
The first presenter (Professor Skidensky?) has
described very clearly my own experience as a
student and subsequently as a teacher. Decades ago
when I began my work on a master's degree I
initially chose economics but soon became very
disillusioned by the reliance on mathematics and the
absence of investigation into historical experience
and societal norms. Nor was there any serious
investigation into the validity of propositions put
forward as economic theory. At once time in class I
engaged my economics professor in a long exchange
over the impact of land hoarding and land
speculation in the U.S. economy. After about twenty
minutes he simply ended our exchanged exasperated
because he could not counter the observations made
by evidence offered by real world observations.
Fortunately, my university offered an
interdisciplinary alternative, a Master of Liberal
Arts degree and I switched programs. My course of
study permitted me to read and study the great
political economists, who were all historians and
all moral philosophers. They examined markets,
market forces, and government as a primary
externality, and they reached moral judgments based
on the principles of justice they embraced. Along
the way, I was introduced to the writings of the
great French school of political economists, the
Physiocrats, and to the American Henry George.
George's theory of the business cycle, based on the
classical three factor model of how economies and
societies function, provided to be quite useful in
my later work as a market analyst in the real estate
sector. When I retired from my professional work in
the mid-2000s I gave some thought to entering a
doctorate program in order to acquire the
credentials for college instruction. The very low
probablility of ever securing a full-time teaching
position pushed me in a different direction.
Instead, I developed two courses to teach to senior
adults in a non-credit environment. One is titled
"Understanding our Political Economy." The other is
"The History of Economic Thought." Although I do
introduce basic economic concepts, such as factor of
production and wealth distribution in these two
courses, my students are not required to know or use
mathematics in order to understand such concepts. I
found an introductory economics textbook written by
Professor Harry Gunnison Brown used to teach basic
economics without even one equation in the book.
Each course is two semesters in length is discussion
oriented. My view is that the more I am required to
lecture, the less the students are learning. I am
more than happy to share this course material with
any teacher who is attracted to the
interdisciplinary approach offered by the study of
political economy and by reliance on the classical
three factor model of wealth production and
distribution. I can be reached by email at
[email protected].
Over the weekend, Brigitte Nerlich published a piece on
the origin of the 'deficit model'.
My post from the weekend on trying to find the origins of the
'deficit model' in #scicomm
https://t.co/fhZk8bXUg2
- Brigitte Nerlich (@BNerlich) February 27, 2017The 'deficit
model' is the idea that if the public understood scientific
concepts they would accept the judgements of scientists. Or,
if scientists shout loud enough eventually people will agree
with them. Or, people don't like GMOs/fracking/climate change
science because they are dumb.
This is a hot-topic in the aftermath of the US Presidential
Election and theUK's EU Referendum, when 'experts' were
widely ignored and her contribution has been well received.
@BNerlich Very good.
1/ I think there are some roots in the "health belief model"
which dates to the 1950s -->
https://t.co/cPOdz0EcOd
- Roger Pielke Jr. (@RogerPielkeJr) February 27, 2017My
reaction to Brigitte's tweet was "Spinoza of course", but
there was no reference of the seventeenth century Dutch
philosopher in her piece.
My interest is as part of my remit as the RCUK Academic
Fellow for Financial Mathematics between 2006 and 2011 was
the 'publicunderstanding of Financial Mathematics', or at
least the 'public engagement with Financial Mathematics'.
This introduced me to the issue of the 'deficit model' over a
period in time dominated by the 'Great Financial Crisis,
which started 10 years ago yesterday.
For almost ten years I have been trying to figure out what
is the relationship between finance, mathematics and ethics.
To me, a significant contributor to the GFC was the belief
that 'science' had some how tamed financial risk. Therefore
to understand the GFC it was necessary to understand where
the faith in scientific determinism originated, and I think
the source (in European science at any rate) is in Spinoza.
The argument is presented in the book I am finishing off for
Palgrave
You can catch #Palgrave author Timothy Johnson speaking about
morality out of money at the @EdSciFest on 9 April
https://t.co/bQ2GzCOLRB
- Palgrave Finance (@PalgraveFinance) February 21, 2017and I
have extracted two relevant sections, separated by some
27,000 words and 125 years.
Baruch Spinoza would produce the most influential development
of Descartes' philosophy that incorporated ideas from de
Groot and Hobbes during the 'Dutch Golden Age'...
[Lengthy description along the framework of Western
philosophy that you must go to the link and read to get your
honest reaction to this explanation.]
...I suspect students of Spinoza and Hegel will object to
my caricature, but I think the essential point that "
Spinoza's contribution to western philosophy was in
suggesting that humans were capable of attaining a complete
picture of the universe that provided certain knowledge." is
important in understanding why 'science' believes in the
'deficit model'.
*
[I have a shorter version: Only crazy people will work
that hard to convince everyone else that they are really the
sane ones. If you were to study the private lives of
philosophers, none more than Nietzsche and Machiavelli, then
this MIGHT be apparent or maybe not. We also must overcome
our learned ignorance which imposes upon us the distinction
between private lives and public lives which disciplines us
to accept immoral behavior as respectable as long as the
wicked are deftly rational.]
Neoliberal take on Machiavelli... This crazy idea that the ruler is "political entrepreneur"
is definitely 100% neoliberal. Other then example of the neoliberal thinking this peace is junk.
Notable quotes:
"... Moreover, the ruler is a political entrepreneur: his job is no different from a job of a tailor, carpenter, teacher. He is after selfish objectives which are attained under constraints. The constraints for the ruler are of two kinds: he must somehow acquire the power and he must be able to keep it despite attempts of many people to prevent him from coming to power or trying to overthrow him. ..."
I was recently rereading The Discourses (as I periodically enjoy doing) and on Sunday I
read a
review of an interesting new book on Machiavelli -an inexhaustible topic indeed. So I thought
of writing down why I, and I would presume many economists, admire Machiavelli (and thus adding to
this inexhaustible topic yet another piece).
There is a clear affinity between economists and political scientists in the Machiavelli tradition.
For Machiavelli, the objective of a ruler or a politician is maximization of power in two dimensions,
at any point in time and over time. This is exactly the same as maximization of income or utility
over time. The ruler is a rational homo politicus in the same way that people, according to
economists, are rational homo economicuses .
Moreover, the ruler is a political entrepreneur: his job is no different from a job of a tailor,
carpenter, teacher. He is after selfish objectives which are attained under constraints. The constraints
for the ruler are of two kinds: he must somehow acquire the power and he must be able to keep it
despite attempts of many people to prevent him from coming to power or trying to overthrow him.
The ruler therefore must have the famous virtù which is indeed one of the rarest combination
of talents. He must fight off domestic foes, foreign enemies or adversaries, and must combine the
use of deception, violence and genuine concern for his subjects in the right proportions to be able
to stay in power. Machiavelli's politician is like a businessman. There are cases when the businessman
will gain more by lying and others when he would gain more by telling the truth. Similarly, the ruler
would sometimes gain more through violence, guile and ruse, and at other times through honesty and
improvements of his subjects' welfare. The attractiveness of Machiavelli to economists comes also
from the fact his ruler always remains a self-interested individual who might do well for his subjects
not because he cares about them but because he believes that doing well for them would be ultimately
good for himself. In that he is like Adam Smith's baker: he is selling us bread not because he is
concerned about our hunger but because he is concerned about his self-interest.
Throughout centuries Machiavelli has, of course, been accused of condoning many evils. Yet his
type of the politician is much more benign and better for the mankind that the types that have normally
ruled us. This is because the rulers who actually come to believe they are trying to accomplish good
things are most likely to create endless bloodsheds. Most of the killings in history have been motivated
by "goodness" and desire to be virtuous. Surely, all religious wars have been such. In recent past,
all communist exactions (most notably, the collectivization in the Soviet Union and the Great Leap
Forward in China) were motivated by the desire to lift people from their millennial poverty. George
W. Bush's invasion and occupation of Iraq cannot be explained otherwise since no economic or any
other rational objective was ever achieved or was even given serious consideration in the decision
to wage the war.
The most potentially destructive forces today are hidden under the banner of "goodness".
Whether this is done hypocritically or because the rulers believe in such professions of "goodness"
is immaterial; the latter is even worse. The terms under which such "goodness" is projected to the
heathens-"the American exceptionalism,", "the Third Rome", "Hindutva", "the new (old) Caliphate"-are
nothing but a self-license to impose own values and beliefs on those who dare disagree with them.
Such rulers are the most bloodthirsty because belief in own moral superiority renders them unconcerned
with reality.
Machiavelli's ruler will for sure also engage in deception and cruelty, but his objective will
never be to impose one form of government or religion, or more generally a set of beliefs as such,
on others. He might decide to impose a new government if he believes that this would increase his
dominion. This would be a rational objective, grounded in self-interest. Ideological puritans who
want to bring happiness to others would engage in such operations more frequently and fully. Disengaging
from them implies for the ideological zealots a destruction of their own intimate world of beliefs;
never so with Machiavelli's ruler who would give up the operation once its costs outweigh the benefits.
The world ruled by politicians who follow own interest like Adam Smith's baker, and leave the
rest of the world in peace, may be the best world we can hope for.
Looks like Donald Trump did not win because he is great politician,
but because of previous 30 years of dominance of neoliberalism.
Blame Margaret Thatcher.
A utopian ideology that failed to deliver on its promise
"in a long run" (it can very long run like Flat Earth theory)
is unsustainable.
People who now do not consider Milton Friedman to be a sad
joke are very rare. "Free market" ideology is devalued considerably
from late 60th. Probably more then dollar.
Neoliberal Jesuits (aka academic economists who still adhere
to neoliberal ideology) still are trying to stem or reverse the
slide. Much like the previous generation of Jesuits tried to
defend flat Earth hypothesis. We see their efforts in this blog
too.
IMHO modern neoliberal Jesuits nave even less chances to persuade
the audience now. At least 17 years of neoliberal bubbles and
neoliberal excesses like outsourcing and offshoring speak for
themselves. And lemmings no longer want to march to the cliff
under the banners of this failed religion.
After let's say of 30 years of complete dominance they also lost
control of the language (with at the peak was comparable with
the Bolshevism dominance in language in the USSR). With all those
pseudo-religious terms like NAIRU, GDP, U3, core inflation and
such.
Look at fiasco of neoliberal MSM during recent Presidential
elections. The fact the sitting president openly calls neoliberal
MSM "fake news" tells that neoliberalism is in trouble.
And all those very emotional laments against Trump (Trump this,
Trump that) is just the result of failure to understand
the problems, that the US society faces due to collapse of neoliberalism
and its promises.
Desperation of defenders of ideology (like Jesuits fight with
heretics ) is just another sign that the time for neoliberal
dominance is probably over.
And that it was neoliberal politicians like Bill Clinton and
Obama who hatched Trump. Much like Roman republic hatched its
own transition to Julius Caesar. So instead or along with indignation,
we should ask yourself a simple question: how neoliberalism created
Trumpism.
BTW Neoliberalism has very little to do with classic liberalism
(being, in reality, a flavor of corporatism) much like Neoconservatism
has almost nothing to do with Conservatism (being a flavor of
Trotskyism).
Bolshevism proved that a discredited utopian ideology can
exist in a zombie state for a couple of decades; so we might
have 10-20 years or so in which some new ideology will emerge
that will replace neoliberalism. I hope that it will not be neofascism.
Trump was not an accident (in the sense of confluence-of-random-events
freak accident).
I wouldn't blame Ms. Thatcher for it either.
Her ascendancy was likewise an expression of (the same) social
dynamics. Her perhaps-counterpart was Reagan, but the situation
and the general dynamics in the US were different at the time,
so it (he) didn't lead to the same outcomes.
With the US still "the" technology leader (perhaps not in
*all* aspects academically but in most, and certainly commercially
and thus dominating academia) - and also probably because of
"less (or more favorable?) regulation" and more easily available
VC money in the US (USD hegemony?), the new technology industries
took off in the US predominantly.
This has (in part) carried the US economy for about 2-3 decades,
but a reversion to mean is plausible even if I don't really see
it yet.
The US is still a formidable, capable, and yes, meritorious
entity, if it doesn't "collectively" (or rather by elite misjudgment?)
undermines itself.
"Debs was arrested and sentenced to ten years in Atlanta Penitentiary.
He was still in prison when as the presidential candidate of
the Socialist Party, he received 919,799 votes in 1920. His program
included proposals for improved labour conditions, housing and
welfare legislation and an increase in the number of people who
could vote in elections. President Warren G. Harding pardoned
Debs in December, 1921."
"With all those pseudo-religious terms like NAIRU, GDP, U3, core
inflation and such. "
Of those terms only NAIRU could in any
way be called "pseudo-religious". All the others are empirical
measures (however flawed) with clear definitions. An empirical
measure by itself can do no harm. People giving too much weight
to a single measure can do harm, but that is something completely
different.
Chris Edwards
says
the privatizations started by Thatcher "transformed the
British economy" and boosted productivity. This raises an
under-appreciated paradox.
The thing is that privatization
isn't the only thing to have happened since the 1980s which
should have raised productivity, according to (what I'll loosely
call) neoliberal ideology. Trades unions have weakened, which
should have reduced "restrictive practices". Managers have
become better paid, which should have attracted more skilful
ones, and better incentivized them to increase productivity. And
the workforce has more human capital: since the mid-80s, the
proportion of workers with a degree has quadrupled from 8% to
one-third.
Neoliberal ideology, then,
predicts that productivity growth should have accelerated. But
it
hasn't
.
In fact, Bank of England
data
show that productivity growth, averaged over 20 years,
has trended down since the 1970s.
Why?
It could be that neoliberal
reforms did give a short-lived boost to productivity. I'm not
sure. As Dietz Vollrath
says
, economies are usually slow to respond to a rise in
potential output. If there had been a big rise in potential
output, therefore, it should show up in the data on 20-year
growth. It hasn't.
Another possibility is that the
productivity-enhancing effects of neoliberalism have been
outweighed by the forces of secular stagnation – the dearth of
innovations and profitable investment projects.
But there's another possibility –
that neoliberalism has in fact contributed to the productivity
slowdown.
I'm thinking of three different
ways in which this is possible.
One works through macroeconomic
policy. In tight labour markets of the sort we had in the
post-war years, employers had an incentive to raise productivity
because they couldn't so easily reply upon suppressing wages to
raise profits. Also, confidence that aggregate demand would
remain high encouraged firms to invest and so raise capital-labour
ratios. In the post-social democracy years, these spurs to
productivity have been weaker.
Another mechanism is that
inequality can
reduce
productivity. For example, it
generates (pdf
)
distrust
which
depresses
growth by
worsening
the quality of policy; exacerbating "markets for
lemons" problems; and by diverting resources towards
low-productivity
guard
labour.
A third mechanism is that
neoliberal management itself can reduce productivity. There are
several pathways here:
- Good management can be bad for
investment and innovation. William Nordhaus has shown that the
profits from innovation are
small
. And Charles Lee and Salman Arif have shown that
capital spending is often motivated by
sentiment
rather than by cold-minded appraisal with the
result that it often leads to falling profits. We can interpret
the slowdowns in innovation and investment as evidence that
bosses have
wised
up to these facts. Also, an emphasis upon
cost-effectiveness, routine and best practice can
deny
employees the space and time to experiment and
innovate. Either way, Joseph Schumpeter's point seems valid:
capitalist growth requires a buccaneering spirit which is killed
off by rational bureaucracy.
- As Jeffrey Nielsen has
argued
, "rank-based" organizations can demotivate more
junior staff, who expect to be told what to do rather than use
their initiative.
- The high-powered incentives
offered to bosses can
backfire
. They can incentivize rent-seeking, office politics
and jockeying for the top job rather than getting on with one's
work. They can
crowd
out intrinsic
motivations
such as professional pride. And they can
divert (pdf)
managers towards doing tasks that are easily
monitored rather than ones which are important to an
organization but harder to measure: for example, cost-cutting
can be monitored and incentivized but maintaining a healthy
corporate culture is less easily measured and so can be
neglected by crude incentive schemes.
- Empowering management can
increase opposition to change. As McAfee and Brynjolfsson have
shown
, reaping the benefits of technical change often
requires
organizational change. But well-paid bosses have
little reason to want to rock the boat by undertaking such
change. The upshot is that we are stuck in what van Ark
calls (pdf)
the "installation phase" of the digital economy
rather
than the deployment phase. As Joel Mokyr has
said
, the forces of conservatism eventually suppress
technical creativity.
All this is consistent with the
Big Fact – that aggregate productivity growth has been lower in
the neoliberal era than it was in the 1945-73 heyday of social
democracy.
I'll concede that this is only
suggestive and that there might be another possibility – that
the strong growth in productivity in the post-war period was an
aberration caused by firms catching up and taking advantage of
pre-war innovations. This, though, still leaves us with the
possibility that slow growth is a feature of normal capitalism.
Most such 200 year graphs, you can see historical events like
WWII and Thatcher. This is clearly not random noise, but doesn't
seem to tie obviously into the historical narrative either.
Maybe it is more to do with globalism; the first peak at 1870 is
the start of 'new imperialism'. Imperial lands were for the
first time things you could invest in as a regular capitalist
(as opposed to a 'venture state' like the East India company).
And 1970 is the date when the end of the war in Vietnam made the
same true of much of the third world.
That's how I've been thinking about productivity.
Tight labor marktets and social democratic macro. Unfortunately
economists are trained not to think in these terms.
Also since the Reagan/Thatcher revolution, productivity
increase have coincided with financial bubbles like the Dot.com
tech stock and epic housing bubbles. Massive leveraged ponzi
schemes are "increasing productivity" or profits.
There is another explanation. The proportion of service
industries in the economy has grown rapidly and accelerated with
globalisation. It is difficult to squeeze productivity gains out
of hairdressers and care workers.
The slowing technical change
hypothesis has been proposed many times in the past, e.g. James
Galbraith and seems to make more sense than just trying to blame
it on capitalism. If it was just neo-liberalism I would expect
to see weaker effects in countries with different models. I
think that there is too much ideology in your arguments.
Do
you link any of the productivity slowdown with the 'orthodox'
Marxist analysis of the Tendential Fall in the Rate of Profit?
The fall begins at the end of the period of productivity growth
and has not recovered as the rate of profit hasn't either
(depending on which analysis you use).
One of the most plausible explanations for the continued fall
even with the moderating factors of neoliberalism is the
increase in the moral depreciation of capital. This has arguably
accelerated with the information technology revolution. More and
more firms seeking to gain advantage by replacing hard and
software at greater and greater rates but with no actual
increase in productivity (or profitability). This suggests even
more technology in an installation phase (possibly an endless
one). (On a similar vein David Harvey cites Brian Arthur's
analysis that the evolution of technology is often largely
driven by trying to solve problems the technology itself has
created: better touchscreen phones, more than how we use the
existing technology for productive gain.)
Thus, the surplus capital absorption problem is addressed by:
rent seeking in property; increasing investment into fictitious
capital (novel financial instruments); investment in new
technology with little productivity gain, other than by
increasing the productivity in the technology sector itself. All
of which results in little genuine investment.
I am not sure the economic policy response to this (if you
accept the analysis, but don't believe in the imminent socialist
revolution)? Two policy elements being to deliberately target
higher inflation (as a means of deleveraging debt) and taxing
non-productive wealth holding (such as a land tax))?
I
found the opening paragraphs hilarious. These days, those
arguments can only be parody -- nicely refuted by the rest of
the article.
I have noticed a general misunderstanding of
"productivity". One way to increase "productivity" is to lay off
workers while keeping production unchanged. Overall, that tends
to backfire because the workers buy fewer things, but it
benefits the firms that do it. (It's "the Prisoner's Dilemma",
"the tragedy of the commons", "the race to the bottom", etc.)
If you've introduced a self-checkout system that eliminates
ten jobs and replaces them with one job, you've greatly improved
productivity.
For reasons like this, I think that "productivity" and
"economic growth" should be decoupled.
I won't dispute the accolades (and not only because it's in bad taste),
especially the long-standing consensus that he was "a very good guy."
All the same, I'm inclined to believe that Arrow's undoubtedly clever if
not brilliant "impossibility theorem" (Amartya Sen describes it as a 'result
of breathtaking brilliance and power') had, and speaking generally, a
pernicious effect on the discipline of economics, captured in part by
Deirdre (né Donald) McCloskey's comment that it, along with other
qualitative general theorems in the discipline, "do not, strictly speaking,
relate to anything an economist would actually want to know," in other
words, "axiomatizing economics" (which Arrow alone cannot be held
responsible for) was a turn for the worse, no doubt motivated by a desire to
bring (natural) scientific respectability and putative "rigor" (of the sort
believed to characterize physics) to a field not amenable to same (to put it
bluntly if not mildly).
For a different sort of critique of his work in this regard in economics
and the "social choice" literature, see Hausman and McPherson's Economic
Analysis, Moral Philosophy, and Public Policy (Cambridge University Press,
2nd ed., 2006).
There is also a vigorous critique of the use of this theorem by
professional economists and political scientists in S.M. Amadae's
Rationalizing Capitalist Democracy: The Cold War Origins of Rational Choice
Liberalism (University of Chicago Press, 2003).
Sen has a decidedly more favorable assessment of the "impossibility
theorem" in his book, Neoliberal_rationality/ and Freedom (Belknap Press of Harvard
University Press, 2002).
Alas, it was mischievous interpretations and application of his famous
"impossibility theorem" that unequivocally did enormous harm to the
discipline of political science, particularly with regard to democratic
theory (and by implication, praxis as well): see Gerry Mackie's Democracy
Defended (Cambridge University Press, 2003).
Donald A. Coffin
02.22.17 at 4:16 pm
(
5
)
"Information" has different definitions in different disciplines. One of
Arrow's last lectures explains his use of the word, and also his view of the
current state of many other things. Only 9 pages, no math:
Tyler Cowen: There are a few reasons, but the internet may be the biggest. It is easier to
have fun while unemployed. That's a social problem for some people.
Noah Smith: If that's true -- if we're seeing a greater preference for leisure -- why are we
not seeing wages go up as a result? Is that market also broken?
Cowen: Maybe employers just aren't that keen to hire those males who prefer to live at home,
watch porn and not get married. Is that more of a personal failure on the part of the worker than
a market failure?
Our situation with neoliberalism reminds me lines from the "Hotel California " ;-)
http://www.azlyrics.com/lyrics/eagles/hotelcalifornia.html
== quote ==
Last thing I remember, I was
Running for the door
I had to find the passage back
To the place I was before
"Relax, " said the night man,
"We are programmed to receive.
You can check-out any time you like,
But you can never leave! "
"... Yet, a return to protectionism is not likely to solve the problems of those who have lost ground due to globalisation without appropriate compensation of its 'losers', and is bound to harm growth especially in emerging economies. The world rather needs a more inclusive model of globalisation. ..."
"... From an energy point of view globalisation is a disaster. The insane level of fossil fuels that this current world requires for transportation of necessities (food and clothing) is making this world an unstable world. Ipso Facto. ..."
"... Those who believe that globalisation is bringing value to the world should reconsider their views. The current globalisation has created both monopolies on a geopolitical ground, ie TV make or shipbuilding in Asia. ..."
"... Do you seriously believe that these new geographical and corporate monopolies does not create the kind bad outcomes that traditional – country-centric ones – monopolies have in the past? ..."
"... Then there is the practical issue of workers having next to no bargaining power under globalization. Do people really suppose that Mexican workers would be willing to strike so that their US counterparts, already making ficew times as much money, would get a raise? ..."
"... Basically our elite sold us a bill of goods is why we lost manufacturing. Greed. Nothing else. ..."
"... So proof is required to rollback globalization, but no proof was required to launch it or continue dishing it out? It's good to be the King, eh? ..."
"... America hasn't just gotten rid of the low level jobs. It has also gotten rid of supervisors and factory managers. Those are skills you can't get back overnight. For US plants in Mexico, you might have US managers there or be able to get special visas to let those managers come to the US. But US companies have shifted a ton, and I meant a ton, to foreign subcontractors. Some would put operations in the US to preserve access to US customers, but their managers won't speak English. How do you make this work? ..."
"... The real issue is commitment. Very little manufacturing will be re-shored unless companies are convinced that it is in their longterm interest to do so. ..."
"... There is also what I've heard referred to as the "next bench" phenomenon, in which products arise because someone designs a new product/process to solve a manufacturing problem. Unless one has great foresight, the designer of the new product must be aware there is a problem to solve. ..."
"... When a country is involved in manufacturing, the citizens employed will have exposure to production problems and issues. ..."
"... After his speech he took questions. I asked "Would Toyota ever separate design from manufacturing?" as HP had done, shipping all manufacturing to Asia. "No" was his answer. ..."
"... In my experience, it is way too useful to have the line be able to easily call the designer in question and have him come take a look at what his design is doing. HP tried to get around that by sending part of the design team to Asia to watch the startup. Didn't work as well. And when problems emerged later, it was always difficult to debug by remote control. ..."
"... How about mass imports of cheap workers into western countries in the guise of emigrants to push down worker's pay and gut things like unions. That factor played a decisive factor in both the Brexit referendum and the US 2016 elections. Or the subsidized exportation of western countries industrial equipment to third world countries, leaving local workers swinging in the wind. ..."
"... The data sets do not capture some of the most important factors in what they are saying. It is like putting together a paper on how and why white men voted in the 2016 US elections as they did – and forgetting to mention the effect of the rest of the voters involved. ..."
"... I had a similar reaction. This research was reinforcing info about everyone's resentment over really bad distribution of wealth, as far as it went, but it was so unsatisfying ..."
"... "Right to work" is nothing other than a way to undercut quality of work for "run-to-the-bottom competitive pay." ..."
"... I've noticed that the only people in favor of globalization are those whose jobs are not under threat from it. ..."
"... First off, economic nationalism is not necessarily right wing. I would certainly classify Bernie Sanders as an economic nationalist (against open borders and against "free" trade). Syriza and Podemos could arguably be called rather ineffective economic nationalist parties. I would say the whole ideology of social democracy is based on the Swedish nationalist concept of a "folkhem", where the nation is the home and the citizens are the folk. ..."
"... So China is Turmpism on steroids. Israel obviously is as well. Why do some nations get to be blatantly Trumpist while for others these policies are strictly forbidden? ..."
"... One way to look at Globalization is as an updated version of the post WW1 Versailles Treaty which imposed reparations on a defeated Germany for all the harm they caused during the Great War. The Globalized Versailles Treaty is aimed at the American and European working classes for the crimes of colonialism, racism, slavery and any other bad things the 1st world has done to the 3rd in the past. ..."
"... And yes, this applies to Bernie Sanders as well. During that iconic interview where Sanders denounced open borders and pushed economic nationalism, the Neoliberal interviewer immediately played the global guilt card in response. ..."
"... During colonialism the 3rd world had a form of open borders imposed on it by the colonial powers, where the 3rd world lost control of who what crossed their borders while the 1st world themselves maintained a closed border mercantilist regime of strict filters. So the anti-colonialist movement was a form of Trumpist economic nationalism where the evil foreigners were given the boot and the nascent nations applied filters to their borders. ..."
"... Nationalism (my opinion) can do this – economic nationalism. And of course other people think oh gawd, not that again – it's so inefficient for my investments- I can't get fast returns that way but that's just the point. ..."
"... China was not a significant exporter until the 2001 inclusion in WTO: it cannot possibly have caused populist uprisings in Italy and Belgium in the 1990s. It was probably too early even for Pim Fortuyn in the Netherlands, who was killed in 2002, Le Pen's electoral success in the same year, Austria's FPOE in 1999, and so on. ..."
"... In the 1930s Keynes realized, income was just as important as profit as this produced a sustainable system that does not rely on debt to maintain demand. ..."
"... "Although commercial banks create money through lending, they cannot do so freely without limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system." ..."
"... The Romans are the basis. Patricians, Equites and Plebs. Most of us here are clearly plebeian. Time to go place some bets, watch the chariot races and gladiatorial fights, and get my bread subsidy. Ciao. ..."
"... 80-90% of Bonds and Equities ( at least in USA) are owned by top 10 %. 0.7% own 45% of global wealth. 8 billionaires own more than 50% of wealth than that of bottom 50% in our Country! ..."
"... Globalisation has caused a surge in support for nationalist and radical right political platforms. ..."
"... Trump's withdrawal from the Trans-Pacific Partnership seems to be a move in that direction. ..."
"... Yet, a return to protectionism is not likely to solve the problems of those who have lost ground due to globalisation without appropriate compensation of its 'losers' ..."
"... and is bound to harm growth especially in emerging economies. ..."
"... The world rather needs a more inclusive model of globalisation. ..."
Definitely a pleasant read but IMHO wrong conclusion: Yet, a return to protectionism is
not likely to solve the problems of those who have lost ground due to globalisation without appropriate
compensation of its 'losers', and is bound to harm growth especially in emerging economies. The
world rather needs a more inclusive model of globalisation.
From an energy point of view globalisation is a disaster. The insane level of fossil fuels
that this current world requires for transportation of necessities (food and clothing) is making
this world an unstable world. Ipso Facto.
We need a world where goods move little as possible (yep!) when smart ideas and technology
(medical, science, industry, yep that's essential) move as much as possible. Internet makes this
possible. This is no dream but a XXIth century reality.
Work – the big one – is required and done where and when it occurs. That is on all continents
if not in every country. Not in an insanely remote suburbs of Asia.
Those who believe that globalisation is bringing value to the world should reconsider their
views. The current globalisation has created both monopolies on a geopolitical ground, ie TV make
or shipbuilding in Asia.
Do you seriously believe that these new geographical and corporate monopolies does not
create the kind bad outcomes that traditional – country-centric ones – monopolies have in the
past?
Yves Smith can have nasty words when it comes to discussing massive trade surplus and policies
that supports them. That's my single most important motivation for reading this challenging blog,
by the way.
Another thing is that reliance on complex supply chains is risky. The book 1177 B.C.: The Year
Civilization Collapsed describes how the ancient Mediterranian civilization collapsed when the
supply chains stopped working.
Then there is the practical issue of workers having next to no bargaining power under globalization.
Do people really suppose that Mexican workers would be willing to strike so that their US counterparts,
already making ficew times as much money, would get a raise?
Is Finland somehow supposed to force the US and China to adopt similar worker rights and environmental
protections? No, globalization, no matter how you slice it,is a race to the bottom.
I do not agree with the article's conclusion either.
Reshoring would have 1 of 2 outcomes:
Lots of manufacturing jobs and a solid middle class. We may be looking at more than 20
percent total employment in manufacturing and more than 30 percent of our GDP in manufacturing.
If the robots take over, we still have a lot of manufacturing jobs. Japan for example has
the most robots per capita, yet they still maintain very large amounts of manufacturing employment.
It does not mean the end of manufacturing at all, having worked in manufacturing before.
Basically our elite sold us a bill of goods is why we lost manufacturing. Greed. Nothing
else.
The conclusion is the least important thing. Conclusions are just interpretations, afterthoughts,
divagations (which btw are often just sneaky ways to get your work published by TPTB, surreptitiously
inserting radical stuff under the noses of the guardians of orthodoxy).
The value of these reports is in providing hardcore statistical evidence and quantification
for something for which so many people have a gut feeling but just cann't prove it (although many
seem to think that just having a strong opinion is sufficient).
Yes, correct. Intuition is great for coming up with hypotheses, but it is important to test
them. And while a correlation isn't causation, it at least says the hypothesis isn't nuts on its
face.
In addition, studies like this are helpful in challenging the oft-made claim, particularly
in the US, that people who vote for nationalist policies are bigots of some stripe.
You are missing the transition costs, which will take ten years, maybe a generation.
America hasn't just gotten rid of the low level jobs. It has also gotten rid of supervisors
and factory managers. Those are skills you can't get back overnight. For US plants in Mexico,
you might have US managers there or be able to get special visas to let those managers come to
the US. But US companies have shifted a ton, and I meant a ton, to foreign subcontractors. Some
would put operations in the US to preserve access to US customers, but their managers won't speak
English. How do you make this work?
The only culture with demonstrated success in working with supposedly hopeless US workers is
the Japanese, who proved that with the NUMMI joint venture with GM in one of its very worst factories
(in terms of the alleged caliber of the workforce, as in many would show up for work drunk). Toyota
got the plant to function at better than average (as in lower) defect levels and comparable productivity
to its plants in Japan, which was light years better than Big Three norms.
I'm not sure any other foreign managers are as sensitive to detail and the fine points of working
conditions as the Japanese (having worked with them extensively, the Japanese hear frequencies
of power dynamics that are lost on Westerners. And the Chinese do not even begin to have that
capability, as much as they have other valuable cultural attributes).
That is really interesting about the Japanese sensitivity to detail and power dynamics. If
anyone has managed to describe this in any detail, I would love to read more, though I suppose
if their ability is alien to most Westerners the task of describing it might also be too much
to handle.
I lean more to ten years than a generation. And in the grand scheme of things, 10 years is
nothing.
The real issue is commitment. Very little manufacturing will be re-shored unless companies
are convinced that it is in their longterm interest to do so. Which means having a sense
that the US government is serious, and will continue to be serious, about penalizing off-shoring.
Regardless of Trump's bluster, which has so far only resulted in a handful of companies halting
future offshoring decisions (all to the good), we are nowhere close to that yet.
There is also what I've heard referred to as the "next bench" phenomenon, in which products
arise because someone designs a new product/process to solve a manufacturing problem. Unless one
has great foresight, the designer of the new product must be aware there is a problem to solve.
When a country is involved in manufacturing, the citizens employed will have exposure to
production problems and issues.
Sometimes the solution to these problems can lead to new products outside of one's main
business, for example the USA's Kingsford Charcoal arose from a scrap wood disposal problem that
Henry Ford had.
If one googles for "patent applications by countries" one gets these numbers, which could be
an indirect indication of some of the manufacturing shift from the USA to Asia.
Patent applications for the top 10 offices, 2014
1. China 928,177
2. US 578,802
3. Japan 325,989
4. South Korea 210,292
What is not captured in these numbers are manufacturing processes known as "trade secrets"
that are not disclosed in a patent. The idea that the USA can move move much of its manufacturing
overseas without long term harming its workforce and economy seems implausible to me.
While a design EE at HP, they brought in an author who had written about Toyota's lean design
method, which was currently the management hot button du jour. After his speech he took questions.
I asked "Would Toyota ever separate design from manufacturing?" as HP had done, shipping all manufacturing
to Asia. "No" was his answer.
In my experience, it is way too useful to have the line be able to easily call the designer
in question and have him come take a look at what his design is doing. HP tried to get around
that by sending part of the design team to Asia to watch the startup. Didn't work as well. And
when problems emerged later, it was always difficult to debug by remote control.
And BTW, after manufacturing went overseas, management told us for costing to assume "Labor
is free". Some level playing field.
Oh gawd! The man talks about the effects of globalization and says that the solution is a "a
more inclusive model of globalization"? Seriously? Furthermore he singles out Chinese imports
as the cause of people being pushed to the right. Yeah, right.
How about mass imports of cheap workers into western countries in the guise of emigrants
to push down worker's pay and gut things like unions. That factor played a decisive factor in
both the Brexit referendum and the US 2016 elections. Or the subsidized exportation of western
countries industrial equipment to third world countries, leaving local workers swinging in the
wind.
This study is so incomplete it is almost useless. The only thing that comes to mind to say
about this study is the phrase "Apart from that Mrs. Lincoln, how was the play?" And what form
of appropriate compensation of its 'losers' would they suggest? Training for non-existent jobs?
Free moving fees to the east or west coast for Americans in flyover country? Subsidized emigration
fees to third world countries where life is cheaper for workers with no future where they are?
Nice try fellas but time to redo your work again until it is fit for a passing grade.
Aw jeez, mate – you've just hurt my feelings here. Take a look at the actual article again.
The data sets do not capture some of the most important factors in what they are saying. It
is like putting together a paper on how and why white men voted in the 2016 US elections as they
did – and forgetting to mention the effect of the rest of the voters involved.
Hey, here is an interesting thought experiment for you. How about we apply the scientific method
to the past 40 years of economic theory since models with actual data strike your fancy. If we
find that the empirical data does not support a theory such as the theory of economic neoliberalism,
we can junk it then and replace it with something that actually works then. So far as I know,
modern economics seems to be immune to scientific rigour in their methods unlike the real sciences.
Not all relevant factors need to be included for a statistical analysis to be valid, as long
as relevant ignored factors are randomized amongst the sampling units, but you know that of course.
Thanks for you kind words about the real sciences, we work hard to keep it real, but once again,
in all fairness, between you and me mate, is not all rigour, it is a lot more Feyerabend than
Popper.
What you say is entirely true. The trouble has always been to make sure that that statistical
analysis actually reflects the real world enough to make it valid. An example of where it all
falls apart can be seen in the political world when the pundits, media and all the pollsters assured
America that Clinton had it in the bag. It was only after the dust had settled that it was revealed
how bodgy the methodology used had been.
By the way, Karl Popper and Paul Feyerabend sound very interesting so thanks for the heads
up. Have you heard of some of the material of another bloke called Mark Blyth at all? He has some
interesting observations to make on modern economic practices.
I had a similar reaction. This research was reinforcing info about everyone's resentment
over really bad distribution of wealth, as far as it went, but it was so unsatisfying and
I immediately thought of Blyth who laments the whole phylogeny of economics as more or less serving
the rich.
The one solution he offered up a while ago was (paraphrasing) 'don't sweat the deficit spending
because it is all 6s in the end' which is true if distribution doesn't stagnate. So as it stands
now, offshoring arms, legs and firstborns is like 'nothing to see here, please move on'. The suggestion
that we need a more inclusive form of global trade kind of begs the question. Made me uneasy too.
"Gut things like unions." How so? In my recent interaction with my apartment agency's preferred
contractors, random contractors not unionized, I experienced a 6 month-long disaster.
These construction workers bragged that in 2 weeks they would have the complete job done -
a reconstructed deck and sunroom. Verbatim quote: "Union workers complete the job and tear it
down to keep everyone paying." Ha Ha! What a laugh!
Only to have these same dudes keep saying "next week", "next week", "next week", "next week".
The work began in August and only was finished (not completely!) in late January. Sloppy crap!
Even the apartment agency head maintenance guy who I finally bitched at said "I guess good work
is hard to come by these days."
Of the non-union guys he hired.
My state just elected a republican governor who promised "right to work." This was just signed
into law.
Immigrants and Mexicans had nothing to do with it. They're not an impact in my city. "Right
to work" is nothing other than a way to undercut quality of work for "run-to-the-bottom competitive
pay."
Now I await whether my rent goes up to pay for this nonsense.
They look at the labor cost, assume someone can do it cheaper. They don't think it's that difficult.
Maybe it's not. The hard part of any and all construction work is getting it finished. Getting
started is easy. Getting it finished on time? Nah, you can't afford that.
I've noticed that the only people in favor of globalization are those whose jobs are not
under threat from it. Beyond that, I think the flood of cheap Chinese goods is actually helping
suppress populist anger by allowing workers whose wages are dropping in real value terms to maintain
the illusion of prosperity. To me, a more "inclusive" form of globalization would include replacing
every economist with a Chinese immigrant earning minimum wage. That way they'd get to "experience"
how awesome it is and the value of future economic analysis would be just as good.
I'm going to question a few of the author's assumptions.
First off, economic nationalism is not necessarily right wing. I would certainly classify
Bernie Sanders as an economic nationalist (against open borders and against "free" trade). Syriza
and Podemos could arguably be called rather ineffective economic nationalist parties. I would
say the whole ideology of social democracy is based on the Swedish nationalist concept of a "folkhem",
where the nation is the home and the citizens are the folk.
Secondly, when discussing the concept of economic nationalism and the nation of China, it would
be interesting to discuss how these two things go together. China has more billionaires than refugees
accepted in the past 20 years. Also it is practically impossible for a non Han Chinese person
to become a naturalized Chinese citizen. And when China buys Boeing aircraft, they wisely insist
on the production being done in China. A close look at Japan would yield similar results.
So China is Turmpism on steroids. Israel obviously is as well. Why do some nations get
to be blatantly Trumpist while for others these policies are strictly forbidden?
One way to look at Globalization is as an updated version of the post WW1 Versailles Treaty
which imposed reparations on a defeated Germany for all the harm they caused during the Great
War. The Globalized Versailles Treaty is aimed at the American and European working classes for
the crimes of colonialism, racism, slavery and any other bad things the 1st world has done to
the 3rd in the past.
Of course during colonialism the costs were socialized within colonizing states and so it was
the people of the colonial power who paid those costs that weren't borne by the colonial subjects
themselves, who of course paid dearly, and it was the oligarchic class that privatized the colonial
profits. But the 1st world oligarchs and their urban bourgeoisie are in strong agreement that
the deplorable working classes are to blame for systems that hurt working classes but powerfully
enriched the wealthy!
And so with the recent rebellions against Globalization, the 1st and 3rd world oligarchs are
convinced these are nothing more than the 1st world working classes attempting to shirk their
historic guilt debt by refusing to pay the rightful reparations in terms of standard of living
that workers deserve to pay for the crimes committed in the past by their wealthy co-nationals.
And yes, this applies to Bernie Sanders as well. During that iconic interview where Sanders
denounced open borders and pushed economic nationalism, the Neoliberal interviewer immediately
played the global guilt card in response.
Interesting. Another way to look at it is from the point of view of entropy and closed vs open
systems. Before globalisation the 1st world working classes enjoyed a high standard of living
which was possible because their system was relatively closed to the rest of the world. It was
a high entropy, strongly structured socio-economic arrangement, with a large difference in standard
of living between 1st world and 3rd world working classes. Once their system became more open
by virtue (or vice) of globalisation, entropy increased as commanded by the 2nd Law of Thermodynamics
so the 1st world and 3rd world working classes became more equalised. The socio-economic arrangements
became less structured. This means for the Trumpening kind of politicians it is a steep uphill
battle, to increase entropy again.
Yes, I agree, but if we step back in history a bit we can see the colonial period as a sort
of reverse globalization which perhaps portends a bit of optimism for the Trumpening.
I use the term open and closed borders but these are not precise. What I am really saying is
that open borders does not allow a country to filter out negative flows across their border. Closed
borders does allow a nation to impose a filter. So currently the US has more open borders (filters
are frowned upon) and China has closed borders (they can filter out what they don't want) despite
the fact that obviously China has plenty of things crossing its border.
During colonialism the 3rd world had a form of open borders imposed on it by the colonial
powers, where the 3rd world lost control of who what crossed their borders while the 1st world
themselves maintained a closed border mercantilist regime of strict filters. So the anti-colonialist
movement was a form of Trumpist economic nationalism where the evil foreigners were given the
boot and the nascent nations applied filters to their borders.
So the 3rd world to some extent (certainly in China at least) was able to overcome entropy
and regain control of their borders. You are correct in that it will be an uphill struggle for
the 1st world to repeat this trick. In the ideal world both forms of globalization (colonialism
and the current form) would be sidelined and all nations would be allowed to use the border filters
they think would best protect the prosperity of their citizens.
Another good option would be a version of the current globalization but where the losers are
the wealthy oligarchs themselves and the winners are the working classes. It's hard to imagine
it's easy if you try!
What's interesting about the concept of entropy is that it stands in contradiction to the concept
of perpetual progress. I'm sure there is some sort of thesis, antithesis, synthesis solution to
these conflicting concepts.
To overcome an entropy current requires superb skill commanding a large magnitude of work applied
densely on a small substratum (think of the evolution of the DNA, the internal combustion engine).
I believe the Trumpening laudable effort and persuasion would have a chance of success in a country
the size of The Netherlands, or even France, but the USA, the largest State machinery in the world,
hardly. When the entropy current flooded the Soviet system the solution came firstly in the form
of shrinkage.
We need to think more about it, a lot more, in order to succeed in this 1st world uphill struggle
to repeat the trick. I am pretty sure that as Pierre de Fermat famously claimed about his alleged
proof, the solution "is too large to fit in the margins of this book".
My little entropy epiphany goes like this: it's like boxes – containers, if you will, of energy
or money, or trade goods, the flow of which is best slowed down so everybody can grab some. Break
it all down, decentralize it and force it into containers which slow the pace and share the wealth.
Nationalism (my opinion) can do this – economic nationalism. And of course other
people think oh gawd, not that again – it's so inefficient for my investments- I can't get fast
returns that way but that's just the point.
Don't you mean "It was a LOWER entropy (as in "more ordered"), strongly structured socio-economic
arrangement, with a large difference in standard of living between 1st world"?
The entropy increased as a consequence of human guided globalization.
Of course, from a thermodynamic standpoint, the earth is not a closed system as it is continually
flooded with new energy in the form of solar radiation.
The Globalized Versailles Treaty -- Permit me a short laughter . The terms of the crippling
treaty were dictated by the victors largely on insecurities of France.
The crimes of the 1st against the 3rd go on even now- the only difference is that some of the
South like China and India are major nuclear powers now.
The racist crimes in the US are even more flagrant- the Blacks whose labour as slaves allowed
for cotton revolution enabling US capitalists to ride the industrial horse are yet to be rehabilitated
, Obama or no Obama. It is a matter of profound shame.
The benefits of Globalization have gone only to the cartel of 1st and 3rd World Capitalists.
And they are very happy as the lower classes keep fighting. Very happy indeed.
The gorgon cry of the past is all over the present , including in " unsuspecting" paying folks
of today! Blacks being brought to US as slave agricultural labour was Globalisation. Their energy
vibrated the machinery of Economics subsequently. What Nationalism and where is it hiding pray?
Bogus analysis here , yes.
The reigning social democratic parties in Europe today are not the Swedish traditional parties
of yesteryear they have morphed into neoliberal austerians committed to globalization and export
driven economic models at any cost (CETA vote recently) and most responsible for the economic
collapse in the EU
I wonder they chose Chinese imports as the cause of the right-wing shift, when they themselves
admit that the shift started in the 1990s. At that time, there were few Chinese imports and China
was not even part of the WHO.
If they are thinking of movements like the Lega Nord and Vlaams Blok, the reasons are clearly
not to be found in imports, but in immigration, the welfare state and lack of national homogeneity,
perceived or not.
And the beginnings of the precariat.
So it is not really the globalization of commerce that did it, but the loss of relevance of
national and local identities.
Correlation does not imply causation, but lack of correlation definitely excludes it.
The Lega was formed in the 1980s, Vlaams Blok at the end of the '70s. They both had their best
days in the 1990s. Chinese imports at the time were insignificant.
I cannot find the breakdown of Chinese imports per EU country, but here are the total Chinese
exports since 1983:
China was not a significant exporter until the 2001 inclusion in WTO: it cannot possibly
have caused populist uprisings in Italy and Belgium in the 1990s. It was probably too early even
for Pim Fortuyn in the Netherlands, who was killed in 2002, Le Pen's electoral success in the
same year, Austria's FPOE in 1999, and so on.
The timescales just do not match. Whatever was causing "populism", it was not Chinese imports,
and I can think of half a dozen other, more likely causes.
Furthermore, the 1980s and 1990s were something of an industrial renaissance for Lombardy and
Flanders: hardly the time to worry about Chinese imports.
And if you look at the map. the country least affected by the import shock (France) is the
one with the strongest populist movement (Le Pen).
People try to conflate Trump_vs_deep_state and Brexit with each other, then try to conflate this "anglo-saxon"
populism with previous populisms in Europe, and try to deduce something from the whole exercise.
That "something" is just not there and the exercise is pointless. IMHO at least.
European regionalism is often the result of the rise of the EU as a new, alternative national
government in the eyes of the disgruntled regions. Typically there are three levels of government,
local, regional (states) and national. With the rise of the EU we have a fourth level, supra-national.
But to the Flemish, Scottish, Catalans, etc, they see the EU as a potential replacement for the
National-level governments they currently are unhappy being under the authority of.
Capitalism should be evolving but it went backwards. Keynesian capitalism evolved from the
free market capitalism that preceded it. The absolute faith in markets had been laid low by 1929
and the Great Depression.
After the Keynesian era we went back to the old free market capitalism of neoclassical economics.
Instead of evolving, capitalism went backwards. We had another Wall Street Crash that has laid
low the once vibrant global economy and we have entered into the new normal of secular stagnation.
In the 1930s, Irving Fisher studied the debt deflation caused by debt saturated economies. Today
only a few economists outside the mainstream realise this is the problem today.
In the 1930s, Keynes realized only fiscal stimulus would pull the US out of the Great Depression,
eventually the US implemented the New Deal and it started to recover. Today we use monetary policy
that keeps asset prices up but cannot overcome the drag of all that debt in the system and its
associated repayments.
In the 1920s, they relied on debt based consumption, not realizing how consumers will eventually
become saturated with debt and demand will fail. Today we rely on debt based consumption again,
Greece consumed on debt. until it maxed out on debt and collapsed.
In the 1930s Keynes realized, income was just as important as profit as this produced a
sustainable system that does not rely on debt to maintain demand. Keynes was involved with
the Bretton-Woods agreement after the Second World War and recycled the US surplus to Europe to
restore trade when Europe lay in ruins. Europe could rebuild itself and consume US products, everyone
benefitted.
Today there are no direct fiscal transfers within the Euro-zone and it is polarizing. No one
can see the benefits of rebuilding Greece, to allow it to carry on consuming the goods from surplus
nations and it just sinks further and further into the mire. There is a lot to be said for capitalism
going forwards rather than backwards and making the same old mistakes a second time.
The ECB didn't listen and killed Greece with austerity and is laying low the Club-Med nations.
Someone who knows what they are doing, after studying the Great Depression and Japan after 1989.
Let's keep him out of the limelight; he has no place on the ship of fools running the show.
DEBT on Debt with QEs+ ZRP ( borrowing from future) was the 'solution' by Bernanke to mask
the 2008 crisis and NOT address the underlying structural reforms in the Banking and the Financial
industry. He was part of the problem for housing problem and occurred under his watch! He just
kicked the can with explosive credit growth ( but no corresponding growth in the productive Economy!)and
easy money!
We have a 'Mother of all bubbles' at our door step. Just matter of time when it will BLOW and
NOT if! There is record levels of DEBT ( both sovereign, public and private) in the history of
mankind, all over the World.
DEBT has been used as a panacea for all the financial problems by CBers including Bernanke!
Fed's balance sheet was than less 1 Trillion in 2008 ( for all the years of existence of our Country!)
but now over 3.5 Trillions and climbing!
Kicking the can down the road is like passing the buck to some one (future generations!). And
you call that solution by Mr. Bernanke? Wow!
Will they say again " No one saw this coming'? when next one descends?
The independent Central Banks that don't know what they are doing as can be seen from their
track record.
The FED presided over the dot.com bust and 2008, unaware that they were happening and of their
consequences. Alan Greenspan spots irrational exuberance in the markets in 1996 and passes comment.
As the subsequent dot.com boom and housing booms run away with themselves he says nothing.
The money supply is flat in the recession of the early 1990s.
Then it really starts to take off as the dot.com boom gets going which rapidly morphs into
the US housing boom, courtesy of Alan Greenspan's loose monetary policy.
When M3 gets closer to the vertical, the black swan is coming and you have an out of control
credit bubble on your hands (money = debt).
We can only presume the FED wasn't looking at the US money supply, what on earth were they
doing?
The BoE is aware of how money is created from debt and destroyed by repayments of that debt.
"Although commercial banks create money through lending, they cannot do so freely without
limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive
banking system."
The BoE's statement was true, but is not true now as banks can securitize bad loans and get
them off their books. Before 2008, banks were securitising all the garbage sub-prime mortgages,
e.g. NINJA mortgages, and getting them off their books. Money is being created freely and without
limit, M3 is going exponential before 2008.
Bad debt is entering the system and no one is taking any responsibility for it. The credit
bubble is reflected in the money supply that should be obvious to anyone that cares to look.
Ben Bernanke studied the Great Depression and doesn't appear to have learnt very much.
Irving Fisher studied the Great Depression in the 1930s and comes up with a theory of debt
deflation. A debt inflated asset bubble collapses and the debt saturated economy sinks into debt
deflation. 2008 is the same as 1929 except a different asset class is involved.
1929 – Margin lending into US stocks
2008 – Mortgage lending into US housing
Hyman Minsky carried on with his work and came up with the "Financial Instability Hypothesis"
in 1974.
Steve Keen carried on with their work and spotted 2008 coming in 2005. We can see what Steve
Keen saw in 2005 in the US money supply graph above.
The independent Central Banks that don't know what they are doing as can be seen from their
track record.
Good to see studies confirming what was already known.
This apparently surprised:
On the contrary, as globalisation threatens the success and survival of entire industrial
districts, the affected communities seem to have voted in a homogeneous way, regardless of
each voter's personal situation.
It is only surprising for people not part of communities, those who are part of communities
see how it affects people around them and solidarity with the so called 'losers' is then shown.
Seems like radical right is the preferred term, it does make it more difficult to sympathize
with someone branded as radical right . The difference seems to be between the radical liberals
vs the conservative. The radical liberals are too cowardly to propose the laws they want, they
prefer to selectively apply the laws as they see fit. Either enforce the laws or change the laws,
anything else is plain wrong.
Socialism for the upper classes, capitalism for the lower classes? That will turn out well.
Debt slaves and wage slaves will revolt. That is all the analysis the OP requires. The upper class
will respond with suppression, not policy reversal every time. Socialism = making everyone equally
poor (obviously not for the upper classes who benefit from the arrangement).
Regrettably today we have socialism for the wealthy, with all the benefits of gov regulations,
sympathetic courts and legislatures etc. etc.
Workers are supposed to take care for themselves and the devil take the hind most. How many
workers get fired vs the 1%, when there is a failure in the company plan?
The Romans are the basis. Patricians, Equites and Plebs. Most of us here are clearly plebeian.
Time to go place some bets, watch the chariot races and gladiatorial fights, and get my bread
subsidy. Ciao.
Globalization created winners and losers throughout the world. The winners liked it, the losers
didn't. Democracy is based on the support of the majority.
The majority in the East were winners. The majority in the West were losers.
The Left has maintained its support of neoliberal globalisation in the West. The Right has
moved on. There has been a shift to the Right. Democracy is all about winners and losers and whether
the majority are winning or losing. It hasn't changed.
Globalization( along with communication -internet and transportation) made the Labor wage arbitration,
easy in favor of capital ( Multi-Nationals). Most of the jobs gone overseas will NEVER come back.
Robotic revolution will render the remaining jobs, less and less!
The 'new' Economy by passed the majority of lower 80-90% and favored the top 10%. The Losers
and the Winners!
80-90% of Bonds and Equities ( at least in USA) are owned by top 10 %. 0.7% own 45% of
global wealth. 8 billionaires own more than 50% of wealth than that of bottom 50% in our Country!
The Rich became richer!
The tension between Have and Have -Nots has just begun, as Marx predicted!
I think it's about time that we stopped referring to opposition to globalization as a product
or policy of the "extreme right". It would be truer to say that globalization represents a temporary,
and now fading, triumph of certain ideas about trade and movement of people and capital which
have always existed, but were not dominant in the past. Fifty years ago, most mainstream political
parties were "protectionist" in the sense the word is used today. Thirty years ago, protectionism
was often seen as a left)wing idea, to preserve standards of living and conditions of employment
(Wynne Godley and co). Today, all establishment political parties in the West have swallowed neoliberal
dogma, so the voters turn elsewhere, to parties outside the mainstream. Often, it's convenient
politically to label them "extreme right", although in Europe some left-wing parties take basically
the same position. If you ignore peoples' interests, they won't vote for you. Quelle surprise!
as Yves would say.
Yes, there are many reasons to be skeptical of too much globalization such as energy considerations.
I think another interesting one is exchange rates.
One of the important concepts of MMT is the importance of having a flexible exchange rate to
have full power over your currency. This is fine as far as it goes but tends to put hard currencies
against soft currencies where a hard currency can be defined as one that has international authority/acceptance.
Having flexible exchange rates also opens up massive amounts of financial speculation relative
to fluctuations of these currencies against each other and trying to protect against these fluctuations.
""Keynes' proposal of the bancor was to put a barrier between national currencies, that is
to have a currency of account at the global level. Keynes warned that free trade, flexible exchange
rates and free movement of capital globally were incompatible with maintaining full employment
at the local level""
""Sufficiency provisioning also means that trade would be discouraged rather than encouraged.""
Local currencies can work very well locally to promote employment but can have trouble when
they reach out to get resources outside of their currency space especially if they have a soft
currency. Global sustainability programs need to take a closer look at how to overcome this sort
of social injustice. (Debt or Democracy)
As has already been pointed out so eloquently here in the comments section, economic nationalism
is not necessarily the preserve of the right, nor is it necessarily the same thing as nationalism.
In the UK the original, most vociferous objectors to EEC membership in the 70s (now the EU)
were traditionally the Left, on the basis that it would gradually erode labour rights and devalue
the cost of labour in the longer term. Got that completely wrong obviously .
In the same way that global trade has become synonymous with globalisation, the immigration
debate has been hijacked and cynically conflated with free movement of (mainly low cost, unskilled)
labour and race when they are all VERY different divisive issues.
The other point alluded to in the comments above is the nature of free trade generally. The
accepted (neoliberal) wisdom being that 'collateral damage' is unfortunate but inevitable, but
it is pretty much an unstoppable or uncontrollable force for the greater global good, and the
false dichotomy persists that you either embrace it fully or pull up all the drawbridges with
nothing in between.
One of the primary reasons that some competing sectors of some Western economies have done
so badly out of globalisation is that they have adhered to 'free market principles' whilst other
countries, particularly China, clearly have not with currency controls, domestic barriers to trade,
massive state subsidies, wage suppression etc
The China aspect is also fascinating when developed nations look at the uncomfortable 'morality
of global wealth distribution' often cited by proponents of globalisation as one of their wider
philanthropic goals. Bless 'em. What is clear is that highly populated China and most of its people,
from the bottom to the top, has been the primary beneficiaries of this global wealth redistribution,
but the rest of the developing world's poor clearly not quite so much.
The map on it's own, in terms of the English one time industrial Midlands & North West being
shown as an almost black hole, is in itself a kind of " Nuff Said ".
It is also apart from London, where the vast bulk of immigrants have settled.
The upcoming bye-election in Stoke, which could lead to U-Kip taking a once traditionally always
strong Labour seat, is right in the middle of that dark cloud.
The problem from the UK 's position, I suggest, is that autarky is not a viable proposition
so economic nationalism becomes a two-edged sword. Yes, of course, the UK can place restrictions
on imports and immigration but there will inevitably be retaliation and they will enter a game
of beggar my neighbour. The current government talks of becoming a beacon for free trade. If we
are heading to a more protectionist world, that can only end badly IMHO.
Unless we get some meaningful change in thinking on a global scale, I think we are heading
somewhere very dark whatever the relative tinkering with an essentially broken system.
The horse is long gone, leaving a huge pile of shit in it's stable.
As for what might happen, I do not know, but I have the impression that we are at the end of
a cycle.
This is quite interesting, but only part of the story. Interestingly the districts/provinces
suffering the most from the chinese import shock are usually densely populated industrial regions
of Europe. The electoral systems in Europe (I think all, but I did not check) usually do not weight
equally each district, favouring those less populated, more rural (which by the way tend to be
very conservative but not so nationalistic). These differences in vote weigthing may have somehow
masked the effect seen in this study if radical nationalistic rigth wing votes concentrate in
areas with lower weigthed value of votes. For instance, in Spain, the province of Soria is mostly
rural and certainly less impacted by chinese imports compared with, for instance, Madrid. But
1 vote in Soria weigths the same as 4 votes in Madrid in number of representatives in the congress.
This migth, in part, explain why in Spain, the radical rigth does not have the same power as in
Austria or the Netherlands. It intuitively fits the hypothesis of this study.
Nevertheless, similar processes can occur in rural areas. For instance, when Spain entered
the EU, french rural areas turned nationalistic against what they thougth could be a wave of agricultural
imports from Spain. Ok, agricultural globalization may have less impact in terms of vote numbers
in a given country but it still can be politically very influential. In fact spanish entry more
that 30 years ago could still be one of the forces behind Le Penism.
All this statistical math and yada yada to explain a rise in vote for radical right from 3%
in 1985 to 5% now on average? And only a 0.7% marginal boost if your the place really getting
hammmered by imports from China? If I'm reading it right, that is, while focusing on Figure 2.
The real "shock" no pun intended, is the vote totals arent a lot higher everywhere.
Then the Post concludes with reference to a "surge in support" - 3% to 5% or so over 30 years
is a surge? The line looks like a pretty steady rise over 3 decades.
Maybe I'm missing sommething here.
Also what is this thing they're callling an "Open World" of the past 30 years? And why is that
in danger from more balanced trade? It makes no sense. Even back in the 60s and 70s people could
go alll over the world for vacations. Or at least most places they coould go. If theh spent their
money they'd make friends. Greece even used to be a goood place people went and had fun on a beach.
I think this one is a situation of math runing amuck. Math running like a thousand horses over
a hill trampling every blade of grass into mud.
I bet the China factor is just a referent for an entire constellatio of forces that probably
don't lend themselves (no pun intended) partiicularly well to social science and principal component
analysis - as interesting as that is for those who are interested in that kind of thing (which
I am acctually).
Also, I wouldn't call this "free trade". Not that the authors do either, but trade means reciprocity
not having your livelihood smashed the like a pinata at Christmas with all your candy eaten by
your "fellow countrymen". I wouldn't call that "trade". It's something else.
Regarding your first point, it is a small effect but it is all due to the China imports impact,
you have to add the growth of these parties due to other reasons such as immigration to get the
full picture of their growth. Also I think the recent USA election was decided by smaller percentage
advantages in three States?
Globalisation is nothing but free trade extended to the entire world. Free trade is a tool
used to prevent competition. By flooding countries with our cheaper exports, they do not develop
the capacity to compete with us by making their own widgets. So, why are we shocked when those
other countries return the favor and when they get the upper hand, we respond in a protectionist
way? It looks to me that those countries who are now competing with us in electronics, automobiles,
etc. only got to develop those industries in their countries because of protectionism.
Refugees in great numbers are a symptom of globalization, especially economic refugees but
also political and environmental ones. This has strained the social order in many countries that
have accepted them in and it's one of the central issues that the so-called "right" is highlighting.
It is no surprise there has been an uproar over immigration policy in the US which is an issue
of class as much as foreign policy because of the disenfranchisement of large numbers of workers
on both sides of the equation - those who lost their jobs to outsourcing and those who emigrated
due to the lack of decent employment opportunities in their own countries.
We're seeing the tip of the iceberg. What will happen when the coming multiple environmental
calamities cause mass starvation and dislocation of coastal populations? Walls and military forces
can't deter hungry, desperate, and angry people.
The total reliance and gorging on fossil energy by western countries, especially the US, has
mandated military aggression to force compliance in many areas of the world. This has brought
a backlash of perpetual terrorism. We are living under a dysfunctional system ruled by sociopaths
whose extreme greed is leading to world war and environmental collapse.
Who created the REFUGEE PROBLEMS in the ME – WEST including USA,UK++
Obama's DRONE program kept BOMBING in SEVEN Countries killing innocents – children and women!
All in the name of fighting Terrorism. Billions of arms to sale Saudi Arabia! Wow!
Where were the Democrats and the Resistance and Women's march? Hypocrites!
Globalisation has caused a surge in support for nationalist and radical right political
platforms.
Just a reminder that nationalism doesn't have to be associated with the radical right. The left
is not required to reject it, especially when it can be understood as basically patriotism, expressed
as solidarity with all of your fellow citizens.
Trump's withdrawal from the Trans-Pacific Partnership seems to be a move in that direction.
Well, that may be true as far as Trump's motivations are concerned, but a major component (the
most important?) of the TPP was strong restraint of trade, a protectionist measure, by intellectual
property owners.
Yet, a return to protectionism is not likely to solve the problems of those who have lost
ground due to globalisation without appropriate compensation of its 'losers'
Japan has long been 'smart' protectionist, and this has helped prevent the 'loser' problem, in
part because Japan, being nationalist, makes it a very high priority to create/maintain a society
in which almost all Japanese are more or less middle class. So, it is a fact that protectionism
has been and can be associated with more egalitarian societies, in which there are few 'losers'
like we see in the West. But the U.S. and most Western countries have a long way to go if they
decide to make the effort to be more egalitarian. And, of course, protectionism alone is not enough
to make most of the losers into winners again. You'll need smart skills training, better education
all around, fewer low-skill immigrants, time, and, most of all strong and long-term commitment
to making full employment at good wages national priority number one.
and is bound to harm growth especially in emerging economies.
Growth has been week since the 2008, even though markets are as free as they've ever been. Growth
requires a lot more consumers with willingness and cash to spend on expensive, high-value-added
goods. So, besides the world finally escaping the effects of the 2008 financial crisis, exporting
countries need prosperous consumers either at home or abroad, and greater economic security. And
if a little bit of protectionism generates more consumer prosperity and economic stability, exporting
countries might benefit overall.
The world rather needs a more inclusive model of globalisation.
Well, yes, the world needs more inclusivity, but globalization doesn't need to be part of the
picture. Keep your eyes on the prize: inclusivity/equality, whether latched onto nationally, regionally,
'internationally' or globally, any which way is fine! But prioritization of globalization over
those two is likely a victory for more inequality, for more shoveling of our wealth up to the
ruling top 1%.
"Larry sees the coming of globalization as bringing with it a
sharp reduction in the market power of American blue-collar
workers in mass-production industries, and thus as exerting
significant downward pressure on middle class wages and
upward pressure on inequality. The live question, he thinks,
is how large and significant these pressures have been."
As
if this was natural and ordained by God. Can't argue with
economics.
It looks like there should strict external "moral"
constrains on economic activity, like they were most of human
history. For some activities which are now legal you can
spend life in jail even in rather relaxed 30th ( for example,
credit cards interest rates are usury rates, no question
about it)
All this mathiness junk and operating with unreliable and
politically fudged (as in employment numbers and GDP)
statistics (as in "There are three kinds of lies: lies,
damned lies, and statistics."
We already saw to what economic outcomes neoliberals have
led us. While neoliberal were eating the carcass of New Deal
things were not that bad.
Now it's over and they are in deep trouble. Election of
Trump is just the fist sign of troubles ahead. One swallow
does not a summer make.
The problem is that financial oligarchy does not want to
part with their illicit gains.
In the past this dilemma, especially in case Jewish
bankers, was resolved by killing some part and exiling
another part. It would be nice for our Masters of the
Universe to remember this historical fact.
"... Privilege: still exorbitant. Here's a nice analysis of the international role of the dollar. This is the same argument I tried to make in my Roosevelt Institute piece on trade policy last summer. The Economist* says it better: ..."
"... "Unlike other aspects of American hegemony, the dollar has grown more important as the world has globalised, not less. As economies opened their capital markets in the 1980s and 1990s, global capital flows surged. Yet most governments sought exchange-rate stability amid the sloshing tides of money. They managed their exchange rates using massive piles of foreign-exchange reserves Global reserves have grown from under $1trn in the 1980s to more than $10trn today. ..."
"... Dollar-denominated assets account for much of those reserves. Governments worry more about big swings in the dollar than in other currencies; trade is often conducted in dollar terms; and firms and governments owe roughly $10trn in dollar-denominated debt. the dollar is, on some measures, more central to the global system now than it was immediately after the second world war. ..."
"... America wields enormous financial power as a result. It can wreak havoc by withholding supplies of dollars in a crisis. When the Federal Reserve tweaks monetary policy, the effects ripple across the global economy. Hélène Rey of the London Business School argues that, despite their reserve holdings, many economies have lost full control over their domestic monetary policy, because of the effect of Fed policy on global appetite for risk. ..."
"... America's return on its foreign assets is markedly higher than the return foreign investors earn on their American assets That flow of investment income allows America to run persistent current-account deficits -- to buy more than it produces year after year, decade after decade." ..."
Privilege: still exorbitant. Here's a nice analysis of the international role of the dollar.
This is the same argument I tried to make in my Roosevelt Institute piece on trade policy last
summer. The Economist* says it better:
"Unlike other aspects of American hegemony, the dollar has grown more important as the
world has globalised, not less. As economies opened their capital markets in the 1980s and 1990s,
global capital flows surged. Yet most governments sought exchange-rate stability amid the sloshing
tides of money. They managed their exchange rates using massive piles of foreign-exchange reserves
Global reserves have grown from under $1trn in the 1980s to more than $10trn today.
Dollar-denominated assets account for much of those reserves. Governments worry more about
big swings in the dollar than in other currencies; trade is often conducted in dollar terms; and
firms and governments owe roughly $10trn in dollar-denominated debt. the dollar is, on some
measures, more central to the global system now than it was immediately after the second world
war.
America wields enormous financial power as a result. It can wreak havoc by withholding
supplies of dollars in a crisis. When the Federal Reserve tweaks monetary policy, the effects
ripple across the global economy. Hélène Rey of the London Business School argues that, despite
their reserve holdings, many economies have lost full control over their domestic monetary policy,
because of the effect of Fed policy on global appetite for risk.
During the heyday of Bretton Woods, Valéry Giscard d'Estaing, a French finance minister (later
president), complained about the "exorbitant privilege" enjoyed by the issuer of the world's reserve
currency. America's return on its foreign assets is markedly higher than the return foreign
investors earn on their American assets That flow of investment income allows America to run
persistent current-account deficits -- to buy more than it produces year after year, decade after
decade."
Exactly right. You can have free capital mobility, or you can have a balanced trade for the
US. But you can't have both, as long as the world depends on dollar reserves."
"... As we discussed long form in ECONNED, orthodox economics rests on the assumption that economies have a natural propensity to equilibrium, and that equilibrium is full employment. ..."
"... their mathematical exposition enables them to dismiss lay critics. ..."
I hate to come off like a nay-sayer, because I have no doubt that the underlying methodology
is useful. But this sounds an awful lot like a new improved version of system dynamics, which the
economics profession successfully beat back in the 1970s.
As we discussed long form in ECONNED, orthodox economics rests on the assumption that
economies have a natural propensity to equilibrium, and that equilibrium is full employment.
As Paul Samuelson stressed, that assumption is necessary for economics to be science, as in
mathed up, and the dominance that economists have achieved is due to their scientific appearances
and the fact that their mathematical exposition enables them to dismiss lay critics.
"... They focused on Dennis Carlton , a professor at the University of Chicago's Booth School of Business, and a senior managing director at the consulting firm Compass Lexecon . According to Eisinger and Elliott, Carlton has been paid more than $100 million from consulting activities during his career. ..."
"... Mergers can hurt consumers by giving companies increased market power. The less competitive an industry is, the more the big companies can raise prices, which not only makes life more painful for consumers, but limits the size of the market itself, reducing economic productivity. ..."
"... Obviously, if consultants like Carlton are being paid by the companies that want to merge, they have an incentive to use economics to predict a rosy outcome instead of a bad one. But how easy is that? In an ideal world, it would be very difficult to get away with using economic models to make slanted forecasts. If a certain type of model repeatedly got things wrong in biology or electrical engineering, professors would toss it out, and it would probably no longer be used in most court cases. ..."
"... Does this mean that the theoretical models used by merger consultants like Carlton are wrong? Not necessarily. It just means that it's very hard to know either way. As Eisinger and Elliott demonstrate, however, the models have been known to make some pretty big mistakes. One example they cite is the merger of appliance makers Maytag Corp. and Whirlpool Corp. in 2005. Carlton, hired by those companies, wrote that international competition would prevent the new super-company from raising prices. But he was wrong, and prices went up. ..."
"... The threat of excessive industrial concentration is worth paying more attention to. Economists increasingly are focusing on the harms that monopoly power might be causing. In addition to the well-known effect of higher prices, industrial concentration might exacerbate inequality and decrease labor's share of national income. It might also be reducing business dynamism, which has taken a dive since 2000. ..."
Amid the blizzard of election news last November, two writers at the nonprofit news organization
ProPublica came out with a startling
investigative report . Jesse Eisinger and Justin Elliott wrote about a small but very wealthy
group of American economists who make millions of dollars helping companies deal with the federal
government on antitrust cases.
They focused on
Dennis
Carlton , a professor at the University of Chicago's Booth School of Business, and a senior managing
director at the consulting firm Compass
Lexecon . According to Eisinger and Elliott, Carlton has been paid more than $100 million from
consulting activities during his career.
That's an astounding sum, and it demonstrates how lucrative the economics profession can be for
those who reach the top echelons. But the ProPublica reporters suggest that much of this fortune
may have been made at the public's expense. Carlton and economists like him are mostly hired by companies
that want to do big mergers and acquisitions. This basically involves convincing the government --
which reviews all large corporate acquisitions -- that the merger won't hurt consumers.
Mergers can hurt consumers by giving companies increased market power. The less competitive an
industry is, the more the big companies can raise prices, which not only makes life more painful
for consumers, but limits the size of the market itself, reducing economic productivity. Any time
two companies want to merge, there's the possibility that the result could be a more efficient company,
which would lead to lower prices as production costs decline. But there's also the possibility of
a less efficient market, where prices rise because of increased monopoly power. You need economics
to predict which of these will happen.
Obviously, if consultants like Carlton are being paid by the companies that want to merge, they
have an incentive to use economics to predict a rosy outcome instead of a bad one. But how easy is
that? In an ideal world, it would be very difficult to get away with using economic models to make
slanted forecasts. If a certain type of model repeatedly got things wrong in biology or electrical
engineering, professors would toss it out, and it would probably no longer be used in most court
cases.
Econ is different. Despite a recent turn away from pure theory and toward empirical work, the
profession doesn't always insist on the most rigorous standards of evidence. Economists Joshua Angrist
and Jörn-Steffen Pischke have criticized the field of industrial organization, which deals with competition
and monopoly power. They say that
it still relies on obsolete theoretical models laden with questionable assumptions.
Does this mean that the theoretical models used by merger consultants like Carlton are wrong?
Not necessarily. It just means that it's very hard to know either way. As Eisinger and Elliott demonstrate,
however, the models have been known to make some pretty big mistakes. One example they cite is the
merger of appliance makers Maytag Corp. and Whirlpool Corp. in 2005. Carlton, hired by those companies,
wrote that international competition would prevent the new super-company from raising prices. But
he was wrong, and prices went up.
This sort of result seems to be the norm in recent years. Northwestern University economist John
Kwoka has written
an entire book in which he documents how lax U.S. antitrust policy has resulted in less competition
and higher prices -- the kind of thing the high-flying consultants are paid to say won't happen.
The threat of excessive industrial concentration is worth paying more attention to. Economists
increasingly are focusing on the harms that monopoly power might be causing. In addition to the well-known
effect of higher prices, industrial concentration might exacerbate inequality and decrease
labor's share of national income. It might also be reducing business dynamism, which has
taken a dive since 2000.
So it probably makes sense to take a harder look at antitrust policy in general and merger consultants
more specifically. The U.S. system may simply be too lenient. It may rely too much on the testimony
of well-paid experts, who are able to use their models to reach the desired conclusion. One solution
might be for the government to review the predictions of expert consultants, and see whether they
end up being right or wrong -- something that Eisinger and Elliott say isn't done now. The results
of these follow-up studies could be made public, so courts and regulators know the track record of
a given model or consultant.
That's just one possibility. Any solution to this problem, though, should follow the principle
of greater empiricism. The more weight is given to evidence, and the less to theoretical assumptions,
the better it will be for the American consumer. Economics is becoming more empirical, and the lucrative
world of legal consulting should follow suit.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and
its owners.
To contact the author of this story:
Noah Smith at [email protected]
"These Professors Make More Than a Thousand Bucks an Hour
Peddling Mega-Mergers - The economists are leveraging their
academic prestige with secret reports justifying corporate
concentration. Their predictions are often wrong and
consumers pay the price."
That is just the headline. Way down in the discussion
comes the most damning statement:
"These complex mathematical formulations carry weight with
the government because they purport to be objective. But a
ProPublica examination of several marquee deals found that
economists sometimes salt away inconvenient data in footnotes
and suppress negative findings, stretching the standards of
intellectual honesty to promote their clients' interests."
Of course the government is supposed to hire its own world
class economists to review the evidence as well. The problem,
however, is that these government agencies are often
underfunded. It is hard to compete with the mega-firms who
pay $1000 an hour for a consultant when the entire budget for
the government review agency is only $100,000. Penny wise,
pound foolish.
"... John Kenneth Galbraith laid out the problem of companies with too much market/political power back in the 1950s and 60s. I never read Galbraith in an economics course, only on my own. Economists were not interested...not enough mathematics and marginal this equals marginal that. ..."
John Kenneth Galbraith laid out the problem of companies with
too much market/political power back in the 1950s and 60s. I
never read Galbraith in an economics course, only on my own.
Economists were not interested...not enough mathematics and
marginal this equals marginal that.
Nothing like
overlooking the elephant is the room...something that
economists are better at doing than trying to do their jobs.
by Yoram Bauman [1]
University of Washington, Seattle, Washington
The cornerstone of Harvard professor N. Gregory Mankiw's introductory economics textbook, Principles
of Economics, is a synthesis of economic thought into Ten Principles of Economics (listed in the
first table below). A quick perusal of these will likely affirm the reader's suspicions that
synthesizing economic thought into Ten Principles is no easy task, and may even lead the reader to
suspect that the subtlety and concision required are not to be found in the pen of N. Gregory Mankiw.
I have taken it upon myself to remedy this unfortunate situation. The second table below summarizes
my attempt to translate Mankiw's Ten Principles into plain English, and in doing so to provide the
uninitiated with an invaluable glimpse of the economic mind at work. Explanations and details can be
found in the pages that follow, but the average reader is advised to simply cut out the table below
and carry it around for assistance in the (hereafter unlikely) event of confusion about the basic
Principles of Economics.
#1. People face tradeoffs.
#2. The cost of something is what you give up to get it.
#3. Rational people think at the margin.
#4. People respond to incentives.
#5. Trade can make everyone better off.
#6. Markets are usually a good way to organize economic activity.
#7. Governments can sometimes improve market outcomes.
#8. A country's standard of living depends on its ability to produce goods and services.
#9. Prices rise when the government prints too much money.
#10. Society faces a short-run tradeoff between inflation and unemployment.
#1. Choices are bad.
#2. Choices are really bad.
#3. People are stupid.
#4. People aren't that stupid.
#5. Trade can make everyone worse off.
#6. Governments are stupid.
#7. Governments aren't that stupid.
#8. Blah blah blah.
#9. Blah blah blah.
#10. Blah blah blah.
At first glance, the reader cannot but be impressed by the translation's simplicity and clarity.
Accessibility, however, should not be mistaken for shallowness: further study will reveal hidden
depths and subtleties that will richly reward the attentive student. Indeed, a moment's reflection
will identify any number of puzzles and mysteries. Chief among them is probably this: Why do
Principles #8, #9, and #10 have identical translations?
The immediately obvious explanation is that these are macro-economic principles, and that I, as a
micro-economist, am ill equipped to understand them, let alone translate them.[2] As is often the
case in this complex world we live in, this immediately obvious explanation is also wrong. The true
reason I have provided identical translations of "Blah blah blah" for Principles #8, #9, and #10 is
that these principles say exactly the same thing, namely, "Blah blah blah." Sometime when you've got
a few hours to spare, go and ask an economist -- preferably a macro-economist -- what he or she
really means by "standard of living" or "goods and services" or "inflation" or "unemployment" or
"short-run" or even "too much." You will soon realize that there is a vast difference between, say,
what Principle #10 says -- "Society faces a short-run tradeoff between inflation and unemployment"
-- and what Principle #10 means: "Society faces blah between blah and blah." My translations are
simply concise renderings of these underlying meanings.
Having cleared up that issue, let us go back to Mankiw's
PRINCIPLE #1
People face tradeoffs.
TRANSLATION: Choices are bad.
The reasoning behind this translation is obvious. For example, imagine that somebody comes up to you
and offers you a choice between a Snickers bar and some M&Ms. You now have a tradeoff, meaning that
you have to choose one or the other. And having to trade one thing off against another is bad;
President Truman supposedly asked for a one-armed economics advisor because his two-armed economics
advisors were always saying, "On the one hand...but on the other hand..."
People who have not received any economics education might be tempted to think that choices are
good. They aren't. The (mistaken) idea that choices are good perhaps stems from the (equally
mistaken) idea that lack of choices is bad. This is simply not true, as Mancur Olson points out in
his book, The Logic of Collective Action: "To say a situation is 'lost' or hopeless is in one sense
equivalent to saying it is perfect, for in both cases efforts at improvement can bring no positive
results."
Hence my translation of Mankiw's first principle of economics: Choices are bad. This concept can be
a little difficult to grasp -- nobody ever said economics was easy -- but the troubled reader will
undoubtedly gain clarity from Mankiw's
PRINCIPLE #2
The cost of something is what you give up to get it.
TRANSLATION: Choices are really bad.
Beyond transforming Mankiw's semantic deathtrap into simplicity itself, this translation has the
advantage of establishing a connection between Principle #1 (Choices are bad) and Principle #2
(Choices are really bad).
To continue to deepen the reader's understanding of why choices are bad -- really bad -- let's
return to our previous example, in which somebody offers you a choice between a Snickers bar and a
package of M&Ms. Suppose, for the sake of argument, that you take the M&Ms. According to Mankiw, the
cost of those M&Ms is the Snickers bar that you had to give up to get the M&Ms. Your gain from this
situation -- what economists call "economic profit" -- is therefore the difference between the value
you gain from getting the M&Ms (say, $.75) and the value you lose from giving up the Snickers bar
(say, $.40). In other words, your economic profit is only $.35. Although you value the M&Ms at $.75,
having the choice of the Snickers bar reduces your gain by $.40. Hence Principle #2: Choices are
really bad.
Indeed, the more choices you have, the worse off you are. The worst situation of all would be
somebody coming up to you and offering you a choice between two identical packages of M&Ms. Since
choosing one package (which you value at $.75) means giving up the other package (which you also
value at $.75), your economic profit is exactly zero! So being offered a choice between two
identical packages of M&Ms is in fact equivalent to being offered nothing.
Now, a lay person might be forgiven for thinking that being offered a choice between two identical
packages of M&Ms is in fact equivalent to being offered a single package of M&Ms. But economists
know better. Being offered a single package of M&M effectively means having to choose between a
package of M&Ms (which you value at $.75) and nothing (which you value at $0). Choosing the M&Ms
gives you an economic profit of $.75, which is $.75 more than your economic profit when you are
offered a choice between two identical packages of M&Ms.
At this point it is worth acknowledging that (1) there may be readers who have failed to grasp the
above subtleties in their entirety, and (2) such readers may well be beginning to wonder whether
they are, in a word, stupid. Any lingering doubts should be eliminated by the Mankiw's
PRINCIPLE #3
Rational people think at the margin.
TRANSLATION: People are stupid.
One point that is immediately obvious to the most casual observer with the meanest intelligence is
that most people do not think at the margin. For example, most people who buy oranges at the grocery
store think like this: "Hmmm, oranges are $.25 each. I think I'll buy half a dozen." They do not
think like this: "Hmmm, oranges are $.25 each. I'm going to buy one, because my marginal value
exceeds the market price. Now I'm going to buy a second one, because my marginal value still exceeds
the market price..." We know most people don't think like this because most people don't fill their
shopping baskets one orange at a time!
But we are now led inexorably toward a most unhappy conclusion. If -- as Mankiw says -- rational
people think at the margin, and if -- as we all know -- most people do not think at the margin, then
most people are not rational. Most people, in other words, are stupid. Hence my translation of the
third principle of economics: People are stupid.
Before sinking into despair for the fate of the human race, however, the reader would be wise to
consider Mankiw's
PRINCIPLE #4
People respond to incentives.
TRANSLATION: People aren't that stupid.
The dictionary says that incentive, n., is 1. Something that influences to action; stimulus;
encouragement. SYN. see motive.
So what Mankiw is saying here is that people are motivated by motives, or that people are influenced
to action by things that influence to action. Now, this may seem to be a bit like saying that
tautologies are tautological -- the reader may be thinking that people would have to be pretty
stupid to be unmotivated by motives, or to be inactive in response to something that influences to
action. But remember Principle #3: People are stupid. Hence the need for Principle #4, to clarify
that people aren't that stupid.
Only truly stupid people can fail to understand my translation of Mankiw's
PRINCIPLE #5
Trade can make everyone better off.
TRANSLATION: Trade can make everyone worse off.
But, the reader may well be asking, isn't the translation of the fifth principle the exact opposite
of the principle itself? Of course not.
To see why, first note that "trade can make everyone better off" is patently obviously: if I have a
Snickers bar and want M&Ms and you have M&Ms and want a Snickers bar, we can trade and we will both
be better off. Surely Mankiw is getting at something deeper than this? Indeed, I believe he is. To
see what it is, compare the following phrases:
A: Trade can make everyone better off.
B: Trade will make everyone better off.
Now, Statement B is clearly superior to Statement A. Why, then, does Mankiw use Statement A? It can
only be because Statement B is false. By saying that trade can make everyone better off, Mankiw is
conveying one of the subtleties of economics: trade can also not make everyone better off. It is a
short hop from here to my translation, "Trade can make everybody worse off." (A numerical example
can be found in Note #3, below.)
The subtlety evident in Principle #5 is even more clearly visible in the next two principles.
PRINCIPLE #6
Markets are usually a good way to organize economic activity.
TRANSLATION: Governments are stupid.
and
PRINCIPLE #7
Governments can sometimes improve market outcomes.
TRANSLATION: Governments aren't that stupid.
To see the key role that Principle #5 plays in both of these statements, note that the original
phrasing of Principle #5 ("Trade can make everyone better off") leads to Principle #6 ("Governments
are stupid"). After all, if trade can make everyone better off, what do we need government for? But
the translation of Principle #5 ("Trade can make everyone worse off") leads to Principle #7
("Governments aren't that stupid"). After all, if trade can make everyone worse off, we better have
a government around to stop people from trading!
Like the first five principles, Principles #6 and #7 demonstrate the fine distinctions inherent in
the economic way of thinking. People are stupid, but not that stupid; trade can make everyone better
off, but it can also make everyone worse off; governments are stupid, but not that stupid.
Exploring, refining, and delineating these distinctions is the subject matter of upper-level
economics classes, doctoral dissertations in economics, and the vast majority of papers in the
American Economic Review and other scholarly journals. Should the reader decide to follow this path,
the fundamental principles described on the first page of this article will provide invaluable
guidance.
Acknowledgement
Thank you to Ivars Skuja for assistance in taking and preparing the photographs[4] that accompany
this article.
Notes
1. My own microeconomics text, Quantum Microeconomics, can be found online at <http://www.smallparty.org/quantum>.
2. The exact meanings of the terms "micro" and "macro" may be lost on the reader -- or, more likely,
may never have been found in the first place. This should not be cause for concern: absence of these
terms from Mankiw's Ten Principles indicates that they are not of fundamental economic importance.
3. Many non-economists (and some economists) are intimidated by numerical examples. To make it
easier for those people to recognize that the following is a numerical example, it is formatted in
very small type.
Consider a small town with three families. It just so happens that Family #1 needs a snowblower,
Family #2 needs a leafblower, and Family #3 needs a lawnmower; each family values their particular
need at $200. Fortune appears to be smiling on this town, because it also just so happens that
Family #1 owns a leafblower, Family #2 owns a lawnmower, and Family #3 owns a snowblower. These sit
unused in their respective garages; each family has no use for its current piece of equipment, and
therefore values it at $0.
The situation appears ripe for gains from trade: Family #1 could buy a snowblower from Family #3 for
$100, Family #2 could buy a leafblower from Family #1 for $100, and Family #3 could buy a lawnmower
from Family #2 for $100. Each family would be $200 better off.
Unfortunately, life in this small town is not so simple; the town is located in a valley that is
susceptible to severe air pollution problems. Blowers and mowers emit large quantities of air
pollutants, and in fact each blower or mower that is used will make air pollution so bad that
hospital bills (for asthma, etc.) will increase by $80 for each family. Three additional blowers and
mowers will therefore increase each family's bills by $240.
Two results follow. First, the trades will still take place. For example, Family #1 and Family #3
will both be better off by $100 - $80 = $20 if Family #3 sells Family #1 its snowblower for $100.
Second, the three trades together make everyone worse off: each family gains $200 from buying and
selling, but loses $240 in hospital bills, for a net loss of $40.
4. To accommodate schools that teach micro and macro separately, Mankiw's Principles of Economics is
also published in separate pieces; the accompanying photographs are of the micro piece, Principles
of Microeconomics. Note that the same Ten Principles of Economics (some micro, some macro) appear in
all versions of the book.
"... Yes economists are diverse as a group, but the opinions of the majority of that group might be described as having moved to the right since 1970. ..."
Economists are enormously diverse as a group. Any piece that
explicitly or implicitly describes them as being homogeneous
is being reductionist at best.
But Noah makes good points.
Though it's probably worth emphasizing that if there exists a
problem of communication between professionals and the
public, there is probably mutual blame to be assigned.
Economists should talk better to the general public, but as
citizens we don't serve ourselves well when we expect the
world to cater to our lack of knowledge and interest in
complex but important issues.
I have to disagree. It is the professionals who need to do a
better job of educating the public. It is ridiculous to
assume that the general public has the time or resources to
discover this for themselves.
Yes economists are diverse as a group, but the opinions
of the majority of that group might be described as having
moved to the right since 1970.
And often certain types
of economists are described as fringe and there is a
reluctance to discuss their ideas. That is somewhat
understandable because any one economist has only so much
time, but it seems to go deeper than that very often. Trade
has been one of those areas, and I am happy to see many
economists doing some re-evaluation of the free trade mantra,
among other things. I would include Paul Krugman in that
group.
As far as being a knowledge lacking citizen- well we
all are. Ain't no economist got it all completely figured out
as far as I know. That's how I read Noah Smith's article, as
a call to re-examine some previously sacred ideas with maybe
a goal of keeping in mind their effects on different segments
of society. And economists or anyone else who wants to impact
public policy in a democracy certainly should expect to cater
somewhat to those who are less knowledgeable about their
theories.
I have come around to the idea to the idea that the people
and the left have been ill-served by economists. Whether on
trade or on other issues, they are used for their supposed
expertise to argue against "populist" solutions. "Populist"
solutions aren't efficient. Most center-left economists
attacked Sanders for being unserious.
People no longer
trust them after being played.
Krugman and others want it just to be about the blue time
versus the red team, Keynesianism versus neoclassical. That's
the acceptable frame of debate.
But as the election of Trump has shown, it's more
complicated than that.
The left needs better economists. It's nice to see Piketty
join the campaign of France's Bernie Sanders, who just beat
their center-left Hillary in the Socialist primary. He knows
things need to change.
If he had joined Bernie Sanders campaign he would have
been attacked by the center-left economists as "unserious"
and "populist."
Economists mostly argue from authority and people no
longer trust their authority. Smith is suggesting they can
fall back on empirics and science to boost their legitimacy
only if their science backs the truth. Unfortunately
economics is too political.
Really? Offhand, I can
think of Dr Krugman and Joe Stiglitz having won Nobel prizes.
How many right wing economists have won a nobel in, say the
last 25 years?
Peter K is absolutely correct here in his criticism. Krugman
made the transition in the 90s with the Clinton/Rubin
economic regime. Their day is over. Obama embraced the same
and we are all paying the price. By shooting down Bernie,
they killed their chances in the election. We need a change.
and yes, I agree with Noah. Economists should hold their head
in shame. Not for not predicting the crisis. But for doing
little afterwards than boosting asset prices.
Repeat after me - High stock prices do NOT cure cancer.
pgl's usual denial: "Care to provide a link to where Krugman
declared no one would be hurt by a movement to free trade?"
pgl intentionally ignores the link I posed many times wherein
Krugman stated that labor would benefit from China's
accession to WTO...3 million jobs lost later, Krugman finally
started to rethink his full throated embrace of 'free' trade,
but not pgl!
All too often, economists posing as leftists, like PK,
champion investor friendly policies, claiming that they will
help labor. And then, when people finally start to catch onto
the bait and switch, they wonder why people don't trust
economists!
Tom has no idea how much of the loss of blue collar labor
demand in recent decades was due to trade policy vs
non-policy related trade trends vs technology shifts.
Further, he has no interest in even beginning to attempt to
assess the issue.
So I don't think he has any room to talk about who was
"wrong" about the impact of trade on workers.
To the extent that he actually was wrong (he did minimize
distributional effects in much of his earlier work), he has
admitted it and changed his ways.
"...How many right wing economists have won a nobel in, say
the last 25 years?"
[Economists don't designate
conservative or liberal when they hand up their shingle, so
one must use supply side, Austrian School, and neoclassical
orientations as a proxy for conservative ideology. New
Keynesian is a little on the fence, say centrist.]
Ronald Coase - 1991
Gary Becker - 1992
Robert Fogel (jointly with Douglass North, but North can
only be definitively classified as eclectic with a whiff of
neoclassical general equilibrium) -1993
John Harsanyi, John Nash, and Reinhard Selten won jointly
in 1994. They were the game theory guys, which along with
their theory of non-cooperative games made considerable
contributions to utilitarian ethics, which do no always lead
to happy endings for broadly shared social welfare. They were
NOT conservatives themselves by any stretch of the
imagination, but they were not notably liberals either. Crazy
people in search of impossible perfection but willing to cut
off a few limbs to get there is my impression.
Robert Lucas - 1995 ('nuff said)
Praise the lord, holy Jesus in 1996 William Vickrey and
James Mirrlees who ARE actual liberals were award the Nobel
"for their fundamental contributions to the economic theory
of incentives under asymmetric information," a topic of great
interest to conservatives.
Robert Merton (a social scientist) and Myron Sholes (a
financial economist) won in 1997 "for a new method to
determine the value of derivatives."
I almost had a heart attack when I got to this one.
Amartya Sen won in 1998 "for his contributions to welfare
economics." Of course he is from India.
Robert Mundell won in 1999 "for his analysis of monetary
and fiscal policy under different exchange rate regimes and
his analysis of optimum currency areas." Yep, this is the
supply sider that gave the world the EU crisis.
James Heckman "for his development of theory and methods
for analyzing selective samples" and Daniel McFadden "for his
development of theory and methods for analyzing discrete
choice" won jointly in 2000, another case of two liberals
getting awarded for research that was of interest to
conservatives while being almost entirely unrelated to their
own major contributions.
Similarly in 2001, George Akerlof, Michael Spence, and
Joseph Stiglitz won jointly "for their analyses of markets
with asymmetric information." This one actually had liberal
application, but my guess is they got it because
conservatives were scratching their heads about where they
went wrong with the dot-com bubble.
OK, I got other stuff to do now, but you can take the link
and figure it out for yourself. Clearly winning a Nobel still
does not make an economists a champion of the liberal
political cause. Still to go is Ed Prescott in 2004 if you
get my drift.
There is actually a book that discusses this in far greater
detail that I only discovered well into my own analysis with
Google and Wikipedia, but where I looked the experts that
wrote the book had the same judgements and misgivings as I
did.
I agree with Peter K.
...........
The "Nobel prize" was established as 'The Swedish National
Bank's Prize in Economic Sciences in Memory of Alfred Nobel".
Some critics argue that the prestige of the Prize in
Economics derives in part from its association with the Nobel
Prizes, an association that has often been a source of
controversy.
Among them is the Swedish human rights lawyer Peter Nobel,
a great-grandson of Ludvig Nobel.[27] Nobel criticizes the
awarding institution of misusing his family's name, and
states that no member of the Nobel family has ever had the
intention of establishing a prize in economics.[28]
According to Samuel Brittan of the Financial Times, both
of the former Swedish ministers of finance, Kjell-Olof Feldt
and Gunnar Myrdal, wanted the prize abolished, saying,
"Myrdal rather less graciously wanted the prize abolished
because it had been given to such reactionaries as Hayek (and
afterwards Milton Friedman)."[25]
Avner Offer's and Gabriel Söderberg's The Nobel factor:
the prize in economics, social democracy, and the market turn
(Princeton University Press 2016) argues that there has been
a dramatic shift in the dominant macroeconomic theories among
the academia, and that the creation of the Nobel in 1969 was
the cause of this, as it enhanced the prestige of free market
ideology and conferred upon it the status of science.
Governments today in both Europe and the United States have succeeded in casting government spending
as reckless wastefulness that has made the economy worse. In contrast, they have advanced a policy
of draconian budget cuts--austerity--to solve the financial crisis. We are told that we have all
lived beyond our means and now need to tighten our belts. This view conveniently forgets where all
that debt came from. Not from an orgy of government spending, but as the direct result of bailing
out, recapitalizing, and adding liquidity to the broken banking system. Through these actions private
debt was rechristened as government debt while those responsible for generating it walked away scot
free, placing the blame on the state, and the burden on the taxpayer.
That burden now takes the form of a global turn to austerity, the policy of reducing domestic
wages and prices to restore competitiveness and balance the budget. The problem, according to political
economist Mark Blyth, is that austerity is a very dangerous idea. First of all, it doesn't work.
As the past four years and countless historical examples from the last 100 years show, while it makes
sense for any one state to try and cut its way to growth, it simply cannot work when all states try
it simultaneously: all we do is shrink the economy. In the worst case, austerity policies worsened
the Great Depression and created the conditions for seizures of power by the forces responsible for
the Second World War: the Nazis and the Japanese military establishment. As Blyth amply demonstrates,
the arguments for austerity are tenuous and the evidence thin. Rather than expanding growth and opportunity,
the repeated revival of this dead economic idea has almost always led to low growth along with increases
in wealth and income inequality. Austerity demolishes the conventional wisdom, marshaling
an army of facts to demand that we austerity for what it is, and what it costs us.
An interesting Keynesian view of the current EU austerity programs
" I found this to be a very interesting and thought provoking book. The author makes his viewpoint
very clear with the book's subtitle "The History of a Dangerous Idea". The essence of the author's
argument is that austerity is unfair because it makes workers pay for the mistakes of banks, and
even more importantly, dangerous because it does not lead to prosperity, but only to decreased
economic growth and increased unemployment. This thesis is backed up by an analysis of the banking
crisis of 2008, how it spread from the US to the EU, why the single currency Euro has made the
problem worse for the EU and why using austerity to solve the problems will not work. It also
discusses the history of the idea of austerity, both in terms of the economic theory that promotes
it and the economic history that does not. Conservatives, who find Keynesian economics to be not
only wrong, but also the road to economic ruin, will likely be turned off by the book's subtitle
and many of the arguments that Professor Blyth utilizes. However, there is a lot of data in this
book that they should look at, if only to criticize it. I found this book very enlightening and
while I do not agree with all of Professor Blyth's ideas (particularly those of the last chapter),
I learned a lot, so for me it was 5-stars.
What is in the book?
The book is divided into 7 chapters, which cover the following:
Chapter 1 - A Primer on Austerity. This is a short chapter that summarizes the main thesis of
the book (mentioned above), and sets the stage for the more detailed discussions in subsequent
chapters.
Chapter 2 - America: To Big to Fail? This is an excellent chapter that summarizes the origins
and unfolding of the 2008-banking crisis in the US. This is a very complicated story, which Professor
Blyth tells in a clear manner. The story revolves around repurchase agreements (Repos), mortgage
backed securities (MBS), collateralized debt obligations (CDO), credit default swaps (CDS), and
how all these interacted in a climate of deregulation to produce the crisis. Professor Blyth does
a good job of explaining these terms and how the interaction worked.
Chapter 3 - Europe: Too Big to Bail? This is another very illuminating chapter. It shows how Europe,
which first believed it was not going to be affected by the US banking crisis, became a major
casualty of it and their own internal banking problems. All these factors were compounded by the
single currency Euro, which has removed devaluation as a solution to the crisis, instead fostering
the idea that governmental austerity was the only way to correct a problem produced by the private
banking sector.
Chapter 4 - Intellectual History of a Dangerous Idea 1692-1942. This chapter goes back to the
writings of John Locke, David Hume and Adam Smith to see how the idea of austerity developed.
It also covers the idea in the early 20th century and the development of anti-austerity Keynesian
economic theory. It is a nice primer on classical economic ideas.
Chapter 5 - Intellectual History of a Dangerous Idea 1942-2012. This chapter carries the story
of the idea of austerity into the present time. It shows how the idea of austerity, discredited
by the Great Depression and the success of the Keynesian solution (although conservatives would
argue these successes were illusory and set the stage for future economic problems), has been
resurrected by economists writing in the latter part of the 20th century and early 21st.
Chapter 6. Austerity's Natural History 1914-2012. Blyth presents a lot of data that shows that,
contrary to the theories presented in the previous chapter, austerity has not worked in practice.
Much of the chapter is spent it refuting the writings of several economists that say that the
recent historical data does support the idea. Blyth contends that in general it does not and if
is does in a few cases it either does not when all the data is considered, or worked only marginally
under a very limited set of conditions.
Chapter 7 - The End of Banking, New Tales and a Taxing Time Ahead. This is a very short eleven-page
chapter, but perhaps the most controversial on in the book. Blyth, initially a supporter of bank
bailouts as absolutely necessary to prevent a complete collapse of the banking system and with
it the whole capitalist economic system and with it democratic society as a whole, now questions
whether in might not have been better to let the banks fail. He cites the case of Iceland where
the banks were allowed to fail and society has recovered. This was done by making the bank's creditors
bear the cost of failure, instead of all of Iceland's citizens. He notes that most of this loss
was borne by foreign creditors of a very small country, whose banking system was an immense part
of the country's economy, but was small compared to the economies of the US or the EU. Unfortunately,
he fails to say how a banking collapse in the US or EU could be handled when the systems are huge
compared to Iceland's and where the creditors are largely internal. He does not explain how the
failure of these huge banking systems, with their internal creditors, would not result in the
scenario he originally envisioned. I found this analysis to be poor and not in keeping with the
thoroughness of the rest of the book. Blyth also floats the idea of huge tax increases, either
through a one-time tax on assets or a very large increase in higher bracket tax rates. Conservatives,
and many not quite so conservative, will likely blanch at these ideas. There is no discussion
of the political difficulties of doing this or very much development of the idea, which is contained
in only the last four pages of the book.
David
Lindsay on September 25, 2016 Format: Paperback Verified Purchase
Brilliant Overview
" Mark Blyth is a professor at Brown University and he explains why austerity doesn't work.
He points out that whenever austerity has been tried in the past it has usually proven to be disastrous.
What its supporters often seem to forget is that one person's spending is another's income and
demand in the economy would collapse if everyone stopped spending. The book is a sobering read
because Blyth is not optimistic about the future. However, the book is well written and is often
funny.
Blyth shows that the case for austerity does not add up. The US did not pursue austerity during
the recession and its economy has been growing. US GDP is 10% higher than it was in 2007. The
EU has pursued austerity with vigor, but GDP in the euro zone is still lower than it was in 2007.
Blyth shows that countries that cut the most have had lower rates of growth. Blyth claims that
all the countries that cut public spending in response to the financial crises had significantly
more debt in 2012 than when they started. For example, Ireland's debt to GDP ratio more than quadrupled,
from 24.8% in 2007 to 106.4% in 2012. The other problem is that austerity increased unemployment.
Throughout southern Europe, unemployment has been at levels not seen since the Great Depression.
It is still over 20% in Spain and Greece. As a result of cutting public expenditure Greece's GDP
dropped by 30% in four years. There is no evidence that austerity improves growth.
Blyth spends a lot of time trashing the pro-austerity thinking that took place in Europe. Germany
is driving economic policy for the euro zone and they have never believed in Keynesian economics.
Keynes advised that austerity was a bad idea during a recession. German politicians seem to believe
that all nations could have trade surpluses if only they tried hard enough, despite the fact that
it is impossible for all countries to have a surplus. Only one European country can be Germany.
The Germans have often advocated the sort of solutions that failed in the 1930s. They argue that
budget deficits and government debt have to be kept under strict control. The Maastricht Treaty,
which established the EU, required that national debt should not exceed 60% of GDP and the deficit
should not exceed 3.0%. Entry to the euro also requires a budget deficit of 3.0%.
Blyth points out that when you have a deficit, you can either raise taxes or cut spending to fill
the gap. The British government of David Cameron favored the latter in 2010. The British deficit
had reached 10% in 2010. However, UK government debt went up, not down, despite the cuts, from
52.3% of GDP in 2009 to 90.7% in 2013. The same pattern was repeated throughout the euro zone.
Cutting public expenditure shrank the underlying economy.
The German argument is that running large deficits increases the risk of high inflation. Blyth
points out that the Germans have selective amnesia about their past. It was the Wall Street Crash
in 1929 not hyper-inflation in 1924 that led to Hitler. Before the crash, 1.25 million people
were unemployed in Germany. Hitler was an accidental Keynesian and by 1937 German unemployment
had fallen from six million to one million. Unfortunately, much of his spending involved preparing
for war. Blyth argues that Germany's continuing insistence on austerity is the biggest threat
to the euro zone.
According to Blyth, the current version of the austerity argument was created by a group of Italian
economists, originating from Bocconi University, in Milan. He explains why their arguments are
deeply flawed. Blyth argues that, apart from Greece, public sector debt in the euro zone countries
was not out of control before the financial crises. Blyth rubbishes the theory of "expansionary
austerity," that cutting spending will lead to higher economic growth. The "austerians" believed
that large spending cuts would be followed by expansion rather than contraction. The reason, they
suggested, was that decisive fiscal austerity created confidence in the private sector. Keynesians
agreed that insufficient private spending was the cause of the problem, but only governments could
stimulate demand on the scale needed. Austerity failed to stimulate demand in Europe. Blyth also
argues that everybody cannot cut their way to growth at the same time. The IMF once went along
with austerity but it has recently concluded that austerity has had major adverse economic effects.
Blyth is worried that inequality could become a serious problem in the US. The 400 richest Americans
own more assets than the poorest 150 million. He argues that both major parties have written off
the bottom 30% of society. He claims that the American working class has not had a pay rise since
1979, and globalization has failed them. He believes this explains the anger behind the Trump
phenomenon. Blyth points out that rich Americans and the country's biggest companies are reluctant
to pay tax, so government borrowing has had to go up. Blyth claims that he pays more tax than
GE.
Blyth is critical of Republicans who advocated austerity. Republicans in the US also favored balancing
the budget and cutting taxes. Keynesians, like Paul Krugman, argued that this is what Herbert
Hoover tried to do in the early 1930s and the result was a 25% unemployment rate. Obama inherited
an 11.4% budget deficit in 2009. The Republicans wanted to cut government expenditure but Blyth
argues the reason the US has recovered faster than Europe is because it cut less. He makes it
clear that it is poorer people who usually rely on government services to make ends meet that
are the hardest hit when public expenditure is cut. He believes that the rich and corporate America
need to start paying more tax. He also argues that the US government should probably have let
its banks go bankrupt – as the Icelandic government did – rather than bail them out.
Blyth reminds us that 2008 was a private sector crisis. The debts of the banks landed on the balance
sheet of the public sector through bank bailouts and quantitative easing. In other words, taxpayers
bailed out the bankers. He calls this the "greatest bait-and-switch in modern history." The EU
is imposing austerity on southern Europe and dismantling the welfare state in Greece in order
to protect German banks that made stupid decisions.
Blyth in recent interviews has argued that the EU may have a sinister agenda and it really wants
to drag wages in Western Europe down to East European levels so that it can better compete with
China. I assumed this must be an exaggeration but it might not be. The Guardian mapped labor costs
across the euro zone from 1999 to 2013. What they found is that German workers have barely seen
wages rise for that 14-year stretch, despite Germany having massive trade surpluses. We could
be in for real trouble.
Fangon September 27, 2016 Format: Paperback Verified Purchase
The Richness of Austerity
" Mark Blyth tries to convey a simple message: austerity simply does not work. Defining austerity
as "voluntary deflation in which the economy adjusts through the reduction of wages, prices and
public spending to restore competitiveness .best achieved by cutting the state's budget, debts
and deficits" (p.2), Blyth argued that austerity's fallacies lies in the impossibility of having
everybody to be thrift at the same time and the cyclical nature of debt (pp.7 and 12).
Blyth also suggests that austerity efforts unevenly hurt the lower strata of societies (p.8),
and conflates debt and financialization problems in private sector (primarily referring to bank
and financial institutions) into state (sovereign) issues (p.6 and p.23). In the first three chapters,
Blyth strives to demonstrate that the financial and economic turmoil since 2008 is largely a crisis
of financialization, lack of regulation, slow growth and imbalance between monetary policy and
final creditor of printing press (in the case of Europe), not that of austerity (save the marginal
case of Greece). Blyth argues that it is a mentality of treating these crises as endogenous and
private actors as "rational" that underlay the bad policy choices in America and Europe (pp.91-93).
In chapters 4 through 6, Blyth provides an intellectual and practical history of austerity.
It is suggested that a spirit of thrift and aversion towards state and state spending runs through
the vein of economic liberalism, ranging from classical liberalism to neoclassical economics and
to the Austrian school. In more contemporary era, it is public choice theory, neoliberalism and
Milton Friedman's monetarism that carries this tradition forward to construct a pro-market and
private-sector-favoring package that turns public spending into a corporate calculation of costs
and benefits. Blyth goes on to illustrate the history of austerity in practice, arguing that it
is usually the Keynesian expansionary policies that couple austerity that reinvigorated economy
amid crises; austerity, carried out on its own, constitutes massive redistribution consequences.
Blyth obviously attempts to engage as wide an audience as possible in the public intellectual
realm. As much as he is successful in his empirical chapters, Blyth appears to fight a deflationary
economic policy with his own inflationary writing strategy. From chapters 4 to 5, he constantly
conflates the moral teaching of thrift and financial prudence from Adam Smith to avoidance of
debt, the Ordoliberalism's quest for order and proper state function to aversion of democratic
politics, the methodological insights of public choice to a general fear of bureaucracy and government,
and so on. These inflations, while sometimes credited, are bound to subject to scrutiny and questions.
Moreover, by glossing over the details of this rich intellectual history, Blyth dodges
some key questions that his empirical chapters also fail to articulate: what is the distinction
between private and public debt, and personal thrift and public austerity, when we talk about
austerity, and how significant is it? How does this distinction play out in more classical economic
philosophy?
And amid crisis, who should be considered the "ultimate creditor" or "final guarantor" of debt
(and money)? There questions certainly exceeds the scope and intention of Blyth's book, but they
should be instrumental in deepening our understanding of austerity.
I originally tried to post this comment
on Mainly Macro. It is in reply to some critical comments I received when I posted a comment suggesting
economists themselves were largely responsible for the unpleasant political consequences typified
by Trump and Brexit. I argued there has been a failure to properly communicate the serious distributional
implications of trade and globalization. This has led people to become disillusioned with stagnant
living standards and growing inequality. For some reason, my reply was disallowed, making it appear
as though I had no answer to my critics. As my reply addresses issues of concern here I am hoping
it will be published .
Thankyou for your replies to my comment.
Stéphane, I did not say trade gain arises from price convergence; neither do trade gains arise
from differences in opportunity costs (I think that is what you meant). Trade gain can arise from
several sources, these include relative differences in productive efficiency (Ricardian comparative
advantage), differences in relative factor abundance (HO theory), from tradeable goods where production
exhibits increasing returns to scale and from monopolistic competition (Krugman).
When trade gain is exhausted it is possible to derive further gains from factor mobility. For
example, shifting capital from a capital abundant region to a capital poor region will typically
result in further gains. An example of this process is off-shoring, where a firm shifts production
to another country where wages are lower and rent (the return on capital invested) is higher.
So why are potential gains from globalization a problem? The challenge is the sheer size of the
population industrializing from a very low capital base. Economically big regions with abundant labour
and scarce capital mean low wages and high rents extending into the long term. For a developed economy,
adopting a policy of free trade without capital controls with these regions will have two significant
consequences:
1. There is a trade induced shift to more capital intensive production driven by the factor advantage
of having a relative abundance of capital. This lowers the domestic labour share of GDP.
2. Capital abundance implies a capital drain as domestic saving is increasingly used to finance
foreign investment in productive capacity, driven by the higher foreign return. This correspondingly
lowers domestic investment which also slows growth. Labour now has less capital applied to it, reducing
labour productivity and also wages.
What are called "magnification effects" virtually guarantee wage earners are big losers in these
scenarios, whereas, capital owners are big winners; hence the rise in inequality.
The theoretical support for this view is very robust. I became interested in the debate when such
effects showed up strongly in the numerical trade models I develop. Economists, generally, have not
supported this basic theoretical perspective, preferring a grab bag of miscellaneous empirically
based models. Rapid technological change, too little technological change, skills biased technological
change, union demise, banks unwilling to lend, demographics, austerity, labour hoarding, financialization,
shift in consumer preference to services and on and on. Personally, I prefer basic economic theory
and regard all of these thought bubbles as garbage.
In answer to Anonymous, it is true; many economists assert automation is the principle cause of
our economic woes. This is theoretically baseless. I cannot describe a model of how technological
improvement is supposed to give rise to the above effects, because no such model exists. Improved
technology means we get more goods and services from the same resources of capital and labour, boosting
growth and wages and rents.
Why voting for Article 50 * may ruin an MP's career
The last time I did something like this was to urge Labour party members to vote for Smith
rather than Corbyn, knowing full well that Corbyn was almost certain to win. Being proved right
on that occasion is no consolation, because I would rather have been wrong. This is even more
futile, but now as then I feel a decision is about to be made that is both disastrous and irreversible.
I also want to say something about the longer term interests of MPs that I have not seen said
elsewhere.
There are so many principled reasons for MPs to vote against triggering Article 50. Let
me summarise what I see as the main ones here, but this is far from comprehensive....
Article 50 of the Treaty on European Union is a part of European Union law that sets out
the process by which member states may withdraw from the European Union.
1. Neoliberal economists are stooges of financial oligarchy
(much like Soviet economists were stooges of Communist Party)
and if they do not promote Washington consensus on trade and
globalization they would be ostracized and replaced by other
no less talented puppets. They all are replaceable and they understand
that perfectly well and behave accordingly. Being puppets they
have no degrees of freedom to express the discontent with neoliberalism.
2. The author himself is still in completely under the spell
of neoclassical economic framework. that's why his critique is
so superficial. As in "There is a trade induced shift to more
capital intensive production driven by the factor advantage of
having a relative abundance of capital. This lowers the domestic
labour share of GDP. " What a "neoliberal speak." Reminds me
1984 Newspeak. That was a political decision to shift capital
to developing countries in order to destroy union power and decimate
"trade unionism" as political force opposing to neoliberalism.
As simple as that.
"... More than any other economist of his century, Marx tied together the three major kinds of crisis that were occurring. His Theories of Surplus Value explained the two main forms of crises his classical predecessors had pointed to, and which the bourgeois revolutions of 1848 were fought over. These crises were the result of survivals from Europe's feudal epoch of landed aristocracy and banking fortunes. ..."
"... Financially, Marx pointed to the tendency of debts to grow exponentially, independently of the economy's ability to pay, and indeed faster than the economy itself. The rise in debt and accrual of interest was autonomous from the industrial capital and wage labor dynamics on which Volume I of Capital focused. Debts are self-expanding by purely mathematical rules – the "magic of compound interest." ..."
"... Industrial companies profit from labor not only by employing it, but by lending to customers. General Motors made most of its profits for many years by its credit arm, GMAC (General Motors Acceptance Corp.), as did General Electric through its financial arm. Profits made by Macy's and other retailers on their credit card lending sometimes accounted for their entire earnings. ..."
"... This privatization of rents and their transformation into a flow of interest payments (shifting the tax burden onto wage income and corporate profits) represents a failure of industrial capitalism to free society from the legacies of feudalism. ..."
"... Marx expected economies to act in their long-term interest to increase the means of production and avoid unproductive rentier income, underconsumption and debt deflation. Believing that every mode of production was shaped by the technological, political and social needs of economies to advance, he expected banking and finance to become subordinate to these dynamics. ..."
"... It seemed that the banking system's role as allocator of credit would pave the way for a socialist organization of economies. Marx endorsed free trade on the ground that industrial capitalism would transform and modernize the world's backward countries. Instead, it has brought Western rentier finance and privatization of the land and natural resources, and even brought the right to use these country's currencies and financial systems as casinos. And in the advanced creditor nations, failure of the U.S. and European economies to recover from their 2008 financial crisis stems from leaving in place the reckless "junk mortgage" debts, whose carrying charges are absorbing income. Banks were saved instead of industrial economies, whose debts were left in place. ..."
"... No observer of Marx's epoch was so pessimistic as to expect finance capital to overpower industrial capitalism, engulfing economies as the world is seeing today. Discussing the 1857 financial crisis, Marx showed how unthinkable anything like the 2008-09 Bush-Obama bailout of financial speculators seemed to be in his day. "The entire artificial system of forced expansion of the reproduction process cannot, of course, be remedied by having some bank, like the Bank of England, give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values." [6] ..."
"... Marx wrote this reductio ad absurdum not dreaming that it would become the Federal Reserve's policy in autumn 2008. The U.S. Treasury paid off all of A.I.G.'s gambles and other counterparty "casino capitalist" losses at taxpayer expense, followed by the Federal Reserve buying junk mortgage packages at par. ..."
"... The failure to socialize banking (or even to complete its industrialization) has become the most glaring economic tragedy of Western industrial capitalism. It became the tragedy of post-Soviet Russia after 1991, letting its natural resources and industrial economy be financialized while failing to tax land and natural resource rent. The commanding heights were sold to domestic oligarchs and Western investors buying on credit with their own banks or in association with Western banks. This bank credit was simply created on computer keyboards. Such credit creation should be a public utility, but it has broken free from public regulation in the West. That credit is now reaching out to China and the post-Soviet economies as a means of appropriating their resources. ..."
"... Note: Marx described productive capital investment by the formula M–C–M´, signifying money (M) invested to produce commodities (C) that sell for yet more money (M´). But the growth of "usury capital" – government bond financing for war deficits, and consumer lending (mortgages, personal loans and credit card debt) – consist of the disembodied M–M´, making money simply from money in a sterile operation. ..."
The Paradox of Financialized Industrialization
By Michael Friday, October 16, 2015
These remarks were made at the World Congress on Marxism, 2015, at the School of Marxism, Peking
University, October 10, 2015. The presentation was part of a debate with Bertell Ollman (NYU).
I was honored to be made a permanent Guest Professor at China's most prestigious university.
When I lectured here at the Marxist School six years ago, someone asked me whether Marx was
right or wrong. I didn't know how to answer this question at the time, because the answer is so
complex. But at least today I can focus on his view of crises.
More than any other economist of his century, Marx tied together the three major kinds
of crisis that were occurring. His Theories of Surplus Value explained the two main forms of crises
his classical predecessors had pointed to, and which the bourgeois revolutions of 1848 were fought
over. These crises were the result of survivals from Europe's feudal epoch of landed aristocracy
and banking fortunes.
Financially, Marx pointed to the tendency of debts to grow exponentially, independently
of the economy's ability to pay, and indeed faster than the economy itself. The rise in debt and
accrual of interest was autonomous from the industrial capital and wage labor dynamics on which
Volume I of Capital focused. Debts are self-expanding by purely mathematical rules – the "magic
of compound interest."
We can see in America and Europe how interest charges, stock buybacks, debt leveraging and
other financial maneuverings eat into profits, deterring investment in plant and equipment by
diverting revenue to economically empty financial operations. Marx called finance capital "imaginary"
or "fictitious" to the extent that it does not stem from within the industrial economy, and because
– in the end – its demands for payment cannot be met. Calling this financial accrual a "void form
of capital."
[1] It was fictitious because it consisted of bonds, mortgages, bank loans and other rentier
claims on the means of production and the flow of wages, profit and tangible capital investment.
The second factor leading to economic crisis was more long-term: Ricardian land rent. Landlords
and monopolists levied an "ownership tax" on the economy by extracting rent as a result of privileges
that (like interest) were independent of the mode of production. Land rent would rise as economies
became larger and more prosperous. More and more of the economic surplus (profits and surplus
value) would be diverted to owners of land, natural resources and monopolies. These forms of economic
rent were the result of privileges that had no intrinsic value or cost of production. Ultimately,
they would push up wage levels and leave no room for profit. Marx described this as Ricardo's
Armageddon.
These two contributing forces to crisis, Marx pointed out, were legacies of Europe's feudal
origins: landlords conquering the land and appropriating natural resources and infrastructure;
and banks, which remained largely usurious and predatory, making war loans to governments and
exploiting consumers in petty usury. Rent and interest were in large part the products of wars.
As such, they were external to the means of production and its direct cost (that is, the value
of products).
Most of all, of course, Marx pointed to the form of exploitation of wage labor by its employers.
That did indeed stem from the capitalist production process. Bertell Ollman has just explained
that dynamic so well that I need not repeat it here.
Today's economic crisis in the West: financial and rent extraction, leading to debt deflation
Bertell Ollman has described how Marx analyzed economic crisis stemming from the inability of
wage labor to buy what it produces. That is the inner contradiction specific to industrial capitalism.
As described in Volume I of Capital, employers seek to maximize profits by paying workers as little
as possible. This leads to excessive exploitation of wage labor, causing underconsumption and
a market glut.
I will focus here on the extent to which today's financial crisis is largely independent of
the industrial mode of production. As Marx noted in Volumes II and III of Capital and Theories
of Surplus Value, banking and rent extraction are in many ways adverse to industrial capitalism.
Our debate is over how to analyze the crisis the Western economies are in today. To me, it
is first and foremost a financial crisis. The banking crisis and indebtedness stems mainly from
real estate mortgage loans – and also from the kind of massive fraud that Marx found characteristic
of the high finance of his day, especially in canal and railroad financing.
So to answer the question that I was asked about whether Marx was right or wrong, Marx certainly
provided the tools needed to analyze the crises that the industrial capitalist economies have
been suffering for the past two hundred years.
But history has not worked out the way Marx expected. He expected every class to act in its
own class interest. That is the only way to reasonably project the future. The historical task
and destiny of industrial capitalism, Marx wrote in the Communist Manifesto, was to free society
from the "excrescences" of interest and rent (mainly land and natural resource rent, along with
monopoly rent) that industrial capitalism had inherited from medieval and even ancient society.
These useless rentier charges on production are faux frais, costs that slow the accumulation of
industrial capital. They do not stem from the production process, but are a legacy of the feudal
warlords who conquered England and other European realms to found hereditary landed aristocracies.
Financial overhead in the form of usury-capital is, to Marx, a legacy of the banking families
that built up fortunes by war lending and usury.
Marx's concept of national income differs radically from today's National Income and Product
Accounts (NIPA). Every Western economy measures "output" as Gross National Product (GNP). This
accounting format includes the Finance, Insurance and Real Estate (FIRE) sector as part of the
economy's output. It does this because it treats rent and interest as "earnings," on the same
plane as wages and industrial profits – as if privatized finance, insurance and real estate are
part of the production process. Marx treated them as external to it. Their income was not "earned,"
but was "unearned." This concept was shared by the Physiocrats, Adam Smith, John Stuart Mill and
other major classical economists. Marx was simply pressing classical economics to its logical
conclusion.
The interest of the rising class of industrial capitalists was to free economies from this
legacy of feudalism, from the unnecessary faux frais of production – prices in excess of real
cost-value. The destiny of industrial capitalism, Marx believed, was to rationalize economies
by getting rid of the idle landlord and banking class – by socializing land, nationalizing natural
resources and basic infrastructure, and industrializing the banking system – to fund industrial
expansion instead of unproductive usury.
If capitalism had achieved this destiny, it would have been left primarily with the crisis
between industrial employers and workers discussed in Volume I of Capital: exploiting wage labor
to a point where labor could not buy its products. But at the same time, industrial capitalism
would be preparing the way for socialism, because industrialists needed to conquer the political
stranglehold of the landed aristocracy and the financial power of banking. It needed to promote
democratic political reform to overcome the vested interests in control of Parliaments and hence
the tax system. Labor's organization and voting power would press its own self-interest and turn
capitalism into socialism.
China has indeed exemplified this path. But it has not occurred in the West.
All three kinds of crisis that Marx described are occurring. But the West is now in a chronic
depression – what has been called Debt Deflation. Instead of banking being industrialized as Marx
expected, industry is being financialized. Instead of democracy freeing economies from land rent,
natural resource rent and monopoly rent, the rentiers have fought back and taken control of Western
governments, legal systems and tax policy. The result is that we are seeing a lapse back to the
pre-capitalist problems that Marx described in Volumes II and III of Capital and Theories of Surplus
Value.
This is where the debate between Bertell Ollman and myself centers. My focus is on finance
and rent overwhelming industrial capitalism to impose a depression stemming from debt deflation.
This over-indebtedness is making the labor/capital problem worse, by weakening labor's political
and economic position. To make matters worse, labor parties in the West no longer are fighting
over economic issues, as they were prior to World War I.
My differences with Ollman and Roemer: I focus on non-production costs
Bertell follows Marx in focusing on the production sector: hiring labor to produce products, but
trying to get as much markup as possible – while underselling rivals. This is Marx's great contribution
to the analysis of capitalism and its mode of production – employing wage labor at a profit. I
agree with this analysis.
However, my focus is on the causes of today's crisis that are independent and autonomous from
production: rentier claims for economic rent, for income without work – "empty" pricing without
value. This focus on rent and interest is where I differ from that of Ollman, and also of course
from that of Roemer. Any model of the crisis must tie together finance, real estate (and other
rent-seeking) as well as industry and employment.
The rising debt overhead can be traced mathematically, as can the symbiosis of the Finance,
Insurance and Real Estate (FIRE) sector. But the interactions are too complex to be made into
a single economic "model." I am especially worried that Roemer's model might be followed here
in China, because it overlooks the most dangerous tendencies threatening China today: Western
financial practice and its pro-rentier tax policy.
China has spent the last half-century solving Marx's "Volume I" problem: the relations between
labor and its employers, recycling the economic surplus into new means of production to provide
more output, higher living standards, and most obviously, more infrastructure (roads, railways,
airlines) and housing.
But right now, it is experiencing financial problems from credit creation going into the stock
market instead of into tangible capital formation and rising consumption standards. And of course,
China has experienced a large real estate boom. Land prices are rising in China, much as they
are in the West.
What would Marx have said about this? I think that he would have warned China not to relapse
into the pre-capitalist problems of finance funding real estate – turning the rising land rent
into interest – and into permitting housing prices to rise without taxing them away.
Soviet planning failed to take the rent-of-location into account when planning where to build
housing and factories. But at least the Soviet era did not force labor or industry to pay interest
or for rising housing prices. Government banks simply created credit where it was needed to expand
the means of production, to build factories, machinery and equipment, homes and office buildings.
What worries me about the political consequences of Roemer's model is that it focuses only
on what Marx said about the production sector and employer-labor relations. It does not ask how
"endowments" come into being – or how China has changed so radically in the past generation. It
therefore neglects the danger of industrial capitalism lapsing back into a rent-and-interest economy.
And by the same token, it underplays the threat to China and other socialist economies of adopting
the West's surviving pre-feudal practices of predatory Bubble Finance (debt leveraging to raise
prices) and wealth in the form of land-rent charges.
These two dynamics – interest and rent – represent a privatization of banking and land that
rightly are public utilities. Marx expected industrial capitalism to achieve this transition.
Certainly socialist economies must achieve it!
China has no need of foreign bank credit – except to cover the cost of imports and the foreign-exchange
cost of investment in other countries. But China's foreign exchange reserves already are large
enough to be basically independent of the U.S. dollar and euro. Meanwhile, the American and European
economies are suffering from chronic debt deflation and depression that will reduce their ability
to serve as markets – for their own producers as well as for China.
Today's debt-wracked economies throw into question just what kind of crisis the capitalist
countries are experiencing. Marx's analysis provides the tools to analyze its financial, banking
and rent-extraction problems. However, most Marxists still view the 2008 financial and junk mortgage
crash as resulting ultimately from industrial employers squeezing wage labor. Finance capital
is viewed as a derivative of this exploitation, not as the autonomous dynamic Marx described.
The costs of carrying the rising debt burden (interest, amortization and penalties) deflate
the market for commodities by absorbing a growing wedge of disposable business and personal income.
This leaves less to be spent on goods and services, causing gluts that lead to crises in which
businesses scramble for money. Banks fail as bankruptcy spreads. By depleting markets, finance
capital is antithetical to the expansion of profits and tangible physical capital investment.
Despite this sterility, finance capital has achieved dominance over industrial capital. Transfers
of property from debtors to creditors – even privatizations of public assets and enterprises –
are inevitable as the growth of financial claims surpasses the ability of productive power and
earnings to keep pace. Foreclosures follow in the wake of crashes, enabling finance to take over
industrial companies and even governments.
China has largely solved the "Volume I" problem – that of expanding its internal market for
labor, investing the economic surplus in capital formation and rising living standards. It is
confronted by Western economies that have failed to solve this problem, and also have failed to
solve the "Volumes II and III" problem: finance and land rent. Yet few Western Marxists have applied
his theories to the present downturn and its rentier problem. Following Marx, they view the task
of solving this problem to be solved by industrial capitalism, starting with the bourgeois revolutions
of 1848.
Already in 1847, Marx's Poverty of Philosophy described the hatred that capitalists felt for
landlords, whose hereditary rents siphoned off income to an idle class. Upon being sent copies
of Henry George's Progress and Poverty a generation later, in 1881, he wrote to John Swinton that
taxing land rent was "a last attempt to save the capitalist regime." He dismissed the book as
falling under his 1847 critique of Proudhon: "We understand such economists as Mill, Cherbuliez,
Hilditch and others demanding that rent should be handed over to the state to serve in place of
taxes. That is a frank expression of the hatred the industrial capitalist bears towards the landed
proprietor, who seems to him a useless thing, an excrescence upon the general body of bourgeois
production."
[2]
As the program of industrial capital, the land tax movement stopped short of advocating labor's
rights and living standards. Marx criticized Proudhon and other critics of landlords by saying
that once you get rid of rent (and usurious interest by banks), you will still have the problem
of industrialists exploiting wage labor and trying to minimize their wages, drying up the market
for the goods they produce. This is to be the "final" economic problem to be solved – presumably
long after industrial capitalism has solved the rent and interest problems.
Industrial capitalism has failed to free economies from rentier interest and rent extraction
In retrospect, Marx was too optimistic about the future of industrial capitalism. As noted above,
he viewed its historical mission as being to free society from rent and usurious interest. Today's
financial system has generated an overgrowth of credit, while high rents are pricing American
labor out of world markets. Wages are stagnating, while the One Percent have monopolized the growth
in wealth and income since 1980 – and are not investing in new means of production. So we still
have the Volume II and III problems, not just a Volume I problem.
We are dealing with multiple organ failure.
Instead of funding new industrial capital formation, the stock and bond markets to transfer
ownership of companies, real estate and infrastructure already in place. About 80 percent of bank
credit is lent to buyers of real estate, inflating a mortgage bubble. Instead of taxing away the
land's rising rental and site value that John Stuart Mill described as what landlords make "in
their sleep," today's economies leave rental income "free" to be pledged to banks. The result
is that banks now play the role that landlords did in Marx's day: obtaining for themselves the
land's rising rental value. This reverses the central thrust of classical political economy by
keeping such rent away from government, along with natural resource and monopoly rents.
Industrial economies are being stifled by financial and other rentier dynamics. Rising mortgage
debt, student loans, credit card debt, automobile debt and payday loans have made workers afraid
to go on strike or even to protest working conditions. To the extent that wages do rise, they
must be paid increasingly to creditors (and now to privatized health insurance and drug monopolies),
not to buy the consumer goods they produce. Labor's debt dependency thus aggravates the "Volume
I" problem of labor's inability to purchase the products it produces. To top matters, when workers
seek to join the middle class "homeowner society" by purchasing their homes on mortgage instead
of paying rent, the price entails locking themselves into debt serfdom.
Industrial companies profit from labor not only by employing it, but by lending to customers.
General Motors made most of its profits for many years by its credit arm, GMAC (General Motors
Acceptance Corp.), as did General Electric through its financial arm. Profits made by Macy's and
other retailers on their credit card lending sometimes accounted for their entire earnings.
This privatization of rents and their transformation into a flow of interest payments (shifting
the tax burden onto wage income and corporate profits) represents a failure of industrial capitalism
to free society from the legacies of feudalism.
Marx expected industrial capitalism to act in its own self-interest by industrializing banking,
as Germany was doing along the lines that the French reformer Saint-Simon had urged. However,
industrial capitalism has failed to break free of pre-industrial usurious banking practice. And
in the sphere of tax policy, it has not shifted taxes away from land and natural resource rent.
It has inverted the classical reformers' idea of "free markets" as being free from economic rent
and predatory moneylending. The slogan now means economies free for the rentier class to extract
interest and rent.
Mode of production or mode of parasitism?
Instead of serving industrial capitalism, today's financial sector is bleeding it to death.
Instead of seeking profits by employing labor to produce goods at a markup, it doesn't even want
to hire labor or engage in the process of production and develop new markets. The epitome of this
postindustrial economics is Enron: its' managers wanted no capital at all – no employment, only
traders at a desk (and crooked accountants).
Today's characteristic mode of accumulating wealth is more by financial than industrial means:
riding the wave of debt-financed asset-price inflation to reap "capital" gains. This seemed unlikely
in Marx's era of the gold standard. Yet today, most academic Marxists still concentrate on his
"Volume I" crisis, neglecting finance capitalism's failure to free economies from the rentier
dynamics surviving from European feudalism and the colonial lands conquered by Europe.
Marxists who went into Wall Street have learned their lessons from Volumes II and III. But
academic Marxism has not focused on the FIRE sector – Finance, Insurance and Real Estate. It is
as if interest and rent extraction are secondary problems to the dynamics of wage labor.
The great question today is whether post-feudal rentier capitalism will stifle industrial capitalism
instead of serving it. The aim of finance is not merely to exploit labor, but to conquer and appropriate
industry, real estate and government. The result is a financial oligarchy, neither industrial
capitalism nor a tendency to evolve into socialism.
Marx's optimism that industrial capital would subordinate finance to serve its own needs
Having provided a compendium of historical citations describing how parasitic "usury capital"
multiplied at compound interest, Marx announced in an optimistic Darwinian tone that the destiny
of industrial capitalism was to mobilize finance capital to fund its economic expansion, rendering
usury an obsolete vestige of the "ancient" mode of production. It is as if "in the course of its
evolution, industrial capital must therefore subjugate these forms and transform them into derived
or special functions of itself." Finance capital would be subordinated to the dynamics of industrial
capital rather than growing to dominate it. "Where capitalist production has developed all its
manifold forms and has become the dominant mode of production," Marx concluded his draft notes
for Theories of Surplus Value, "interest-bearing capital is dominated by industrial capital, and
commercial capital becomes merely a form of industrial capital, derived from the circulation process."
[3]
Marx expected economies to act in their long-term interest to increase the means of production
and avoid unproductive rentier income, underconsumption and debt deflation. Believing that every
mode of production was shaped by the technological, political and social needs of economies to
advance, he expected banking and finance to become subordinate to these dynamics. "There is no
doubt," he wrote, "that the credit system will serve as a powerful lever during the transition
from the capitalist mode of production to the production by means of associated labor; but only
as one element in connection with other great organic revolutions of the mode of production itself."
[4]
The financial problem would take care of itself as industrial capitalism mobilized savings
productively, subordinating finance capital to serve its needs. This already was happening in
Germany and France.
It seemed that the banking system's role as allocator of credit would pave the way for a socialist
organization of economies. Marx endorsed free trade on the ground that industrial capitalism would
transform and modernize the world's backward countries. Instead, it has brought Western rentier
finance and privatization of the land and natural resources, and even brought the right to use
these country's currencies and financial systems as casinos. And in the advanced creditor nations,
failure of the U.S. and European economies to recover from their 2008 financial crisis stems from
leaving in place the reckless "junk mortgage" debts, whose carrying charges are absorbing income.
Banks were saved instead of industrial economies, whose debts were left in place.
Irving Fisher coined the term debt deflation in 1933. He described it as occurring when debt
service (interest and amortization) to pay banks and bondholders diverts income from being spent
on consumer goods and new business investment.
[5] Governments use their tax revenues to pay bondholders, cutting back public spending and
infrastructure investment, education, health and other social welfare.
No observer of Marx's epoch was so pessimistic as to expect finance capital to overpower industrial
capitalism, engulfing economies as the world is seeing today. Discussing the 1857 financial crisis,
Marx showed how unthinkable anything like the 2008-09 Bush-Obama bailout of financial speculators
seemed to be in his day. "The entire artificial system of forced expansion of the reproduction
process cannot, of course, be remedied by having some bank, like the Bank of England, give to
all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated
commodities at their old nominal values."
[6]
Marx wrote this reductio ad absurdum not dreaming that it would become the Federal
Reserve's policy in autumn 2008. The U.S. Treasury paid off all of A.I.G.'s gambles and other
counterparty "casino capitalist" losses at taxpayer expense, followed by the Federal Reserve buying
junk mortgage packages at par.
Socialist policy regarding financial and tax reform
Marx described the historical destiny of industrial capitalism as being to free economies from
unproductive and predatory finance – from speculation, fraud and a diversion of income to pay
interest without funding new means of production. On this logic, it should be the destiny of socialist
economies to treat bank credit creation as a public function, to be used for public purposes –
to increase prosperity and the means of production to give populations a better life. Socialist
nations have freed their economies from the internal contradictions of industrial capitalism that
stifle wage labor.
China has solved the "Volume I" problem. But it still must deal with the West's unsolved "Volume
II and III" problem of privatized finance, land rent and natural resource rent. Western economies
seek to extend these neoliberal practices to use finance as a lever to pry away the economic surplus,
to finance the transfer of property at interest, and to turn profits, rent, wages and other income
into interest.
The failure to socialize banking (or even to complete its industrialization) has become
the most glaring economic tragedy of Western industrial capitalism. It became the tragedy of post-Soviet
Russia after 1991, letting its natural resources and industrial economy be financialized while
failing to tax land and natural resource rent. The commanding heights were sold to domestic oligarchs
and Western investors buying on credit with their own banks or in association with Western banks.
This bank credit was simply created on computer keyboards. Such credit creation should be a public
utility, but it has broken free from public regulation in the West. That credit is now reaching
out to China and the post-Soviet economies as a means of appropriating their resources.
The eurozone seems incapable of saving itself from debt deflation, and the United States and
Britain likewise are limping along as they de-industrialize. That is what leads them to hope that
perhaps socialist China can save them – as long as it remains free of the financial disease. asset
stripping and debt deflation. Western neoliberal economists claim that this financialization of
erstwhile industrial capitalism is "progress," and even the end of history. Yet having watched
China grow while their economies have remained stagnant since 2008 (except for the One Percent),
their hope is that socialist China's market can save their financialized economies driven too
deeply into debt to recover on their own.
Note: Marx described productive capital investment by the formula M–C–M´, signifying money
(M) invested to produce commodities (C) that sell for yet more money (M´). But the growth of "usury
capital" – government bond financing for war deficits, and consumer lending (mortgages, personal
loans and credit card debt) – consist of the disembodied M–M´, making money simply from money
in a sterile operation.
Footnotes
[1] In Volume III of Capital (ch. xxx; Chicago 1909: p. 461) and Volume III of Theories of
Surplus Value.
[2] Karl Marx, The Poverty of Philosophy [1847] (Moscow, Progress Publishers, n.d.): 155.
[3] Karl Marx, Theories of Surplus Value III: 468
[4] Capital III (Chicago, 1905), p. 713.
[5] See Irving Fisher, "The Debt-Deflation Theory of the Great Depression," Econometrica (1933),
p. 342. Online at http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf. He used the term to
refer to bankruptcies wiped out bank credit and spending power, and hence the ability of economies
to invest and hire new workers. I provide a technical discussion in Killing the Host (ISLET 2015),
chapter 11, and "Saving, Asset-Price Inflation and Debt Deflation," in The Bubble and Beyond,
ch. 11 (ISLET 2012), pp. 297-319.
[6] Capital III (Moscow: Foreign Languages Publishing House, 1958), p. 479.
"... The 1970s stagflation hit these companies particularly hard, with the result that the whole was worth less than the sum of the parts. This made for an easy formula for takeover artists: buy a conglomerate with as much debt as possible, break it up and sell off the pieces. ..."
"... But CEOs recognized how the newly-installed leaders of LBO acquisitions got rich through stock awards or option-type compensation. They wanted a piece of the action. ..."
"... It produces short-termism, underinvestment, and a preoccupation with image management . We wrote in 2005 for the Conference Board Review about how the preoccupation with quarterly earnings led companies to underinvest on a widespread basis . Richard Davies and Andrew Haldane of the Bank of England demonstrated that companies were using unduly high discount rates, which punished long-term investment. Pearlstein provides more confirmation: ..."
"... Obliquity gives rise to the profit-seeking paradox: the most profitable companies are not the most profit-oriented. ICI and Boeing illustrate how a greater focus on shareholder returns was self-defeating in its own narrow terms. Comparisons of the same companies over time are mirrored in contrasts between different companies in the same industries. In their 2002 book, Built to Last: Successful Habits of Visionary Companies, Jim Collins and Jerry Porras compared outstanding companies with adequate but less remarkable companies with similar operations. ..."
"... It is our social capital that is now badly depleted. This erosion manifests in the weakened norms of behavior that once restrained the most selfish impulses of economic actors and provided an ethical basis for modern capitalism. ..."
"... A capitalism in which Wall Street bankers and traders think peddling dangerous loans or worthless securities to unsuspecting customers is just "part of the game," a capitalism in which top executives believe it is economically necessary that they earn 350 times what their front-line workers do, a ..."
"... I think that you seriously underestimate Trump. Napoleon excelled in an environment where military success was primary; Trump excels in a mediated environment where PR and imagery are primary. IMVHO, there are some eerie parallels between the two men; whether you like them or not, both men could be characterized by: ambition, vision, vindictiveness, and a willingness obliterate traditional social and political boundaries. ..."
"... Many elite professionals are deeply upset with Trump's win. Yet the ideology that he represents is very much in line with the logic of corporate raiders, many of whom, like him, went to Wharton Business School. And many elite professionals, in particular lawyers and consultants, profited handsomely from the adoption of the buccaneer capitalist view of the world and actively enabled much of its questionable thinking and conduct. ..."
"... That Wharton Business School model is oblivious to the human needs for: fairness, reciprocity, culture, and the need to penalize duplicity. (I would argue that the Wharton model exalts duplicity, if only to pass it off as some kind of exceptional superpower wielded only by Business Elites.) When you corrode trust, you damage economies. ..."
"... Trump is the apotheosis of neoliberal economics + junk-bond fueled casino empires in a media environment that worships 'shareholder value' and has lost sight of what genuinely creates sustainable value over the long term. ..."
"... did Friedman capture the growing political aggressiveness of capital, as capital gradually overcame the Great Fear of the 30s and prepared to mount, as Streeck has argued, a counteroffensive against the constraints of welfare capitalism? Likely all of the above, but in what proportions? ..."
"... It is that acme of Liberalism, Warren Buffett that created this fad. At a time when corporate dividends were taxed as ordinary income, whereas a stock price bump would be tax deferred - and ultimately taxed at long term capital gains rates - the scheme was merely tax avoidance. Warren Buffett's entire empire is based on this and other tax avoidence schemes. ..."
"... The maximize shareholder value ideology in practice looks like maximize CEO compensation and to heck with the company's long term prospects. imo. ..."
"... Considering relationship between share's liquidity and short-termism , any measure which reduces share's liquidity, for example a high tax on short term capital gain, will greatly reduce both short-termism and corporate governance issues as share holders will be forced to assume the risk they were supposed to bear in exchange of supermacy of their interest. ..."
"... While it has damaged corporate social responsibilities and banks' and corporations' long-term financial stability, actions taken pursuant to the Shareholder Value optimization model have served well many individuals on Wall Street, at private equity firms, CEOs of large publicly traded corporations, hedge funds, networked board members, their academic and professional servicers, and the political elite ..."
"... Reflecting back on developments like the dotcom bubble of 1999-2000; the underlying causes of the financial collapse of 2007-09; massive debt-leveraged corporate stock buybacks; socially damaging private equity LBOs; the current volumes of opaque OTC derivatives at large financial institutions; repeated episodes of environmental damage caused by firms in extractive industries seeking short-term financial returns; and the license it provides to exert power over legislation and regulation by those who own and control these corporations in a Citizens United legal framework; etc., it is difficult to see much in the way of redeeming social value in this corporate governance model. ..."
"... Is it simple greed, stupidity, cynicism, groupthink, false consciousness, sociopathy, the 'attractions' of a certain lifestyle, daddy-didn't-love-them-enough or what that leads certain types to behave the ways they do and seek to justify it? ..."
From the early days of this website, we've written from time to time about why the "shareholder
value" theory of corporate governance was made up by economists and has no legal foundation. It has
also proven to be destructive in practice, save for CEO and compensation consultants who have gotten
rich from it.
Further confirmation comes from a must-read article in American Prospect by Steven Pearlstein,
When Shareholder Capitalism Came to Town. It recounts how until the early 1990s, corporations
had a much broader set of concerns, most importantly, taking care of customers, as well as having
a sense of responsibility for their employees and the communities in which they operated. Equity
is a residual economic claim. As we wrote in 2013:
Directors and officers, broadly speaking, have a duty of care and duty of loyalty to the corporation.
From that flow more specific obligations under Federal and state law. But notice: those responsibilities
are to the corporation , not to shareholders in particular ..Equity holders are at the
bottom of the obligation chain. Directors do not have a legal foundation for given them preference
over other parties that legitimately have stronger economic interests in the company than shareholders
do.
And even in the early 1980s, common shares were regarded as a speculative instrument. And rightly
so, since shares are a weak and ambiguous legal promise: "You have a vote that we the company can
dilute whenever we feel like it. And we might pay you dividends if we make enough money and are in
the mood."
However, 1900s raiders who got rich by targeting companies that had gotten fat, defended their
storming of the corporate barricades by arguing that their success rested on giving CEOs incentives
to operate in a more entrepreneurial manner. In reality, most of the 1980s deals depended on financial
engineering rather than operating improvements. Ironically, it was a form of arbitrage that reversed
an earlier arb play in the 1960s. Diversified corporations had become popular in the 1960s as a borderline
stock market scam. Companies like Teledyne and ITT, that looked like high-fliers and commanded lofty
PE multiples, would buy sleepy unrelated businesses with their highly-valued stock. Bizzarely, the
stock market would value the earnings of the companies they acquired at the same elevated PE multiples.
You can see how easy it would be to build an empire that way.
The 1970s stagflation hit these companies particularly hard, with the result that the whole
was worth less than the sum of the parts. This made for an easy formula for takeover artists: buy
a conglomerate with as much debt as possible, break it up and sell off the pieces.
But CEOs recognized how the newly-installed leaders of LBO acquisitions got rich through stock
awards or option-type compensation. They wanted a piece of the action.
One of their big props to this campaign was the claim that companies existed to promote shareholder
value. This had been a minority view in the academic literature in the 1940s and 1950s. Milton Friedman
took it up an
intellectually incoherent New York Times op-ed in 1970 . Michael Jensen of Harvard Business School
and William Meckling of the University of Rochester argued in 1976 that corporate managers needed
to have their incentives better aligned with those of shareholders, and the way to do that was to
have most of their pay be equity-linked. In the late 1980s, Jensen in a seminal Harvard Business
Review article, claimed that executives needed to be paid like entrepreneurs. Jensen has since renounced
that view.
Why The Shareholder Value Theory Has No Legal Foundation
Why do so many corporate boards treat the shareholder value theory as gospel? Aside from the power
of ideology and constant repetition in the business press, Pearlstein, drawing on the research of
Cornell law professor Lynn Stout, describes how a key decision has been widely misapplied:
Let's start with the history. The earliest corporations, in fact, were generally chartered
not for private but for public purposes, such as building canals or transit systems. Well into
the 1960s, corporations were broadly viewed as owing something in return to the community that
provided them with special legal protections and the economic ecosystem in which they could grow
and thrive.
Legally, no statutes require that companies be run to maximize profits or share prices. In
most states, corporations can be formed for any lawful purpose. Lynn Stout, a Cornell law professor,
has been looking for years for a corporate charter that even mentions maximizing profits or share
price. So far, she hasn't found one. Companies that put shareholders at the top of their hierarchy
do so by choice, Stout writes, not by law
For many years, much of the jurisprudence coming out of the Delaware courts-where most big
corporations have their legal home-was based around the "business judgment" rule, which held that
corporate directors have wide discretion in determining a firm's goals and strategies, even if
their decisions reduce profits or share prices. But in 1986, the Delaware Court of Chancery ruled
that directors of the cosmetics company Revlon had to put the interests of shareholders first
and accept the highest price offered for the company. As Lynn Stout has written, and the Delaware
courts subsequently confirmed, the decision was a narrowly drawn exception to the business–judgment
rule that only applies once a company has decided to put itself up for sale. But it has been widely-and
mistakenly-used ever since as a legal rationale for the primacy of shareholder interests and the
legitimacy of share-price maximization.
How the Shareholder Value Theory Has Been Destructive
The shareholder value theory has proven to be a bust in practice. Here are some of the reasons:
It produces short-termism, underinvestment, and a preoccupation with image management . We
wrote in 2005 for the Conference Board Review about
how the preoccupation with quarterly earnings led companies to underinvest on a widespread basis
. Richard Davies and Andrew Haldane of the Bank of England demonstrated that companies were using
unduly high discount rates, which punished long-term investment. Pearlstein provides more confirmation:
A recent study by McKinsey & Company, the blue-chip consulting firm, and Canada's public pension
board found alarming levels of short-termism in the corporate executive suite. According to the
study, nearly 80 percent of top executives and directors reported feeling the most pressure to
demonstrate a strong financial performance over a period of two years or less, with only 7 percent
feeling considerable pressure to deliver strong performance over a period of five years or more.
It also found that 55 percent of chief financial officers would forgo an attractive investment
project today if it would cause the company to even marginally miss its quarterly-earnings target.
As we've stated before, we've been hearing this sort of thing from McKinsey contacts for more
than a decade. And the "55 percent" figure likely understates the amount of short-termism. First,
even in a presumably anonymous survey, some CFOs might be loath to admit that. Second, for any project
big enough to impact quarterly earnings, the CFO is almost certain not to have the final say. So
even if his team approves it, it could be nixed by the CEO out of concern for earnings impact.
It empirically produces worse results . We've written from time to time about the concept of obliquity,
that in a complex system that is affected by interactions with it, it is impossible to map out a
simple path to a goal. As a result, other approaches are typically more successful. From
a 2007 Financial Times article by John Kay , who later wrote a book about the concept:
Obliquity gives rise to the profit-seeking paradox: the most profitable companies are not
the most profit-oriented. ICI and Boeing illustrate how a greater focus on shareholder returns
was self-defeating in its own narrow terms. Comparisons of the same companies over time are mirrored
in contrasts between different companies in the same industries. In their 2002 book, Built to
Last: Successful Habits of Visionary Companies, Jim Collins and Jerry Porras compared outstanding
companies with adequate but less remarkable companies with similar operations.
Merck and Pfizer was one such comparison. Collins and Porras compared the philosophy of George
Merck ("We try never to forget that medicine is for the people. It is not for the profits. The
profits follow, and if we have remembered that, they have never failed to appear. The better we
have remembered it, the larger they have been") with that of John McKeen of Pfizer ("So far as
humanly possible, we aim to get profit out of everything we do").
Collins and Porras also paired Hewlett Packard with Texas Instruments, Procter & Gamble with
Colgate, Marriott with Howard Johnson, and found the same result in each case: the company that
put more emphasis on profit in its declaration of objectives was the less profitable in its financial
statements.
Some more commonly-cited reasons for why a focus on shareholder value hurts performance is that
it dampens innovation. Pearlstein describes another, how it demotivates workers:
Perhaps the most ridiculous aspect of shareholder–über-alles is how at odds it is with every
modern theory about managing people. David Langstaff, then–chief executive of TASC, a Virginia–based
government-contracting firm, put it this way in a recent speech at a conference hosted by the
Aspen Institute and the business school at Northwestern University: "If you are the sole proprietor
of a business, do you think that you can motivate your employees for maximum performance by encouraging
them simply to make more money for you?" Langstaff asked rhetorically. "That is effectively what
an enterprise is saying when it states that its purpose is to maximize profit for its investors."
And on a societal level, it erodes social capital and trust, which are the foundations for commerce:
It is our social capital that is now badly depleted. This erosion manifests in the weakened
norms of behavior that once restrained the most selfish impulses of economic actors and provided
an ethical basis for modern capitalism.
A capitalism in which Wall Street bankers and traders think peddling dangerous loans
or worthless securities to unsuspecting customers is just "part of the game," a capitalism in
which top executives believe it is economically necessary that they earn 350 times what their
front-line workers do, a capitalism that thinks of employees as expendable inputs, a capitalism
in which corporations perceive it as both their fiduciary duty to evade taxes and their constitutional
right to use unlimited amounts of corporate funds to purchase control of the political system-that
is a capitalism whose trust deficit is every bit as corrosive as budget and trade deficits.
As economist Luigi Zingales of the University of Chicago concludes in his recent book, A Capitalism
for the People, American capitalism has become a victim of its own success. In the years after
the demise of communism, "the intellectual hegemony of capitalism, however, led to complacency
and extremism: complacency through the degeneration of the system, extremism in the application
of its ideological premises," he writes. "'Greed is good' became the norm rather than the frowned-upon
exception. Capitalism lost its moral higher ground."
Many elite professionals are deeply upset with Trump's win. Yet the ideology that he represents
is very much in line with the logic of corporate raiders, many of whom, like him, went to Wharton
Business School. And many elite professionals, in particular lawyers and consultants, profited handsomely
from the adoption of the buccaneer capitalist view of the world and actively enabled much of its
questionable thinking and conduct. As CEO pay rose, so to did the pay of top advisers. They couldn't
be all that good, after all, if they were in a wildy different income strata.
So as Lambert has warned, unless we hear a different economic and social vision from The Resistance,
which looks troubling to have more failed Democratic party influence behind it than either of us
like, the best we are likely to get is a restoration. And if you remember the French Revolution,
strongman Napoleon was succeeded by the Bourbon Restoration, which then led to the Second Empire
under his nephew. So if we want better outcomes, status quo ante is not good enough.
I beg to differ. First, you ignore the fact that equity is a residual claim. Everyone else comes
first. Every party that holds more senior instruments than equity, along with other parties that
have enforceable claims, like the IRS and those with solid contracts that would give them the rights
to damages in certain circumstances, have rights that are more enforceable under the law. You can't
overturn that via exchange rules.
Second, Amar Bhide explained in the Harvard Business Review in 1994 why public companies will
always have deficient governance. My recap of his main points:
Disenfranchised shareholders are an inherent feature of liquid stock markets. In 1994, Amar
Bhide argued in a Harvard Business Review article that efficient equity markets inevitably led
inevitably to deficient corporate governance. Bhide explained that an ambiguous promise like equity
is not suitable to be traded on an arm's length basis. Historically, equity investors typically
acted like venture capitalists: they knew the owners personally and were involved in the company's
affairs. The securities laws of 1933 and 1934 tried to make it safe for distant, transient shareholders
to invest by providing for timely, audited financial statements, disclosure of information about
top executives and board members, and prohibiting insider trading and other forms of market manipulation.
But that turns out to be inadequate. No outsider can be told enough to make an informed judement
about a company's prospects; critical information, like acquisition and plans for new products,
must be kept secret until well advanced because they are competitively sensitive. Boards are protected
from liability by directors' and officers' insurance (plus hardly anyone even bothers pursuing
board members. For instance, have any Lehman board members been sued?). Moreover, only a comparatively
small cohort of people are deemed public-company-board worthy. Their incentives are to make nice
in their community and not rock the boat, which means not making life difficult for the CEOs,
since a nominating committee (of the current board) is responsible for nominating directors, which
means the entire process is incestuous.
This system has been fairly impervious to outside challenge. Once in a while, a company is
so abysmally run that an activist investor will take up a proxy fight. But that dog seldom catches
the car; instead, they might get a bad CEO to exit or force a restructuring. The stock trades
up and the rabble-rousers take their winnings and depart. More polite efforts, even by large,
powerful shareholders, are much less effective. For instance, some major institutional investors
met with Goldman to object to the idea that the firm would pay lavish bonuses for 2009. The session
appears to have had no impact.
Main categories of complain about "Maximize Shareholder Value":
Category 1 – Other things should get more weight alongside shareholder value – e.g. societal
responsibility – this is valid, but not our current topic/issue.
Category 2- Current practices aren't leading to the election of smart, capable BOD members
acting primarily for shareholder value in their decision-making including hiring/fire of executives
and voting on their proposals. This shown by, among other things, the very high levels of executive
compensation relative to profit, the lack of correlation between executive compensation and profit,
and the huge severance packages for released executives. This is my topic – what would improve
that.
Your points don't seem to fall in those categories. Seniority of debtto equity is a respected
feature of the common business landscape, not normally thought of as a problem. Lack of complete
information when voting on corporate actions is also a feature of the corporate setup – representational
government. It doesn't stand in the way of the possibility of smart, conscientious executives.
Other issues like cronyism, bad BODs, etc. are in the way, poor rules, poor communication, lack
of interest by short term stakeholders, etc. are viewed as much more problematic.
You are omitting a key point in the post, which is that seeking to maximize shareholder value
results in lower returns for shareholders. It is empirically a bad idea.
There are many views as to why this is so, but the biggest are likely the short-termism and
obliquity. Electing more outspoken board members won't solve that.
My narrower point was addressing why this notion had never been enshrined in any corporate
charter: it would be seen as created undue conflicts regarding directors making sure clearly senior
obligations are met. Again, under very well settled law, directors and officers have duties of
loyalty and care to the corporation, and those take precedence to serving shareholders. Go read
any law firm guide to director duties.
One picky point: the analogy to Bonaparte really doesn't hold up. We haven't had our French
Revolution yet. And I'm rusty on my nineteenth century French history, but I don't think there's
much of a valid comparison between him and Trump anyway. "Strong man" is way too vague. Whatever
is going on with Trump, he's not a brilliant military tactician and strategist moving into a power
vacuum from inside the existing government.
Agree about the "Resistance." But I don't see how the corporate Democrats return to power at
this point - I mean real, governing power. Whatever comes next, it won't be that.
I don't know yet whether to hope for oaths on tennis courts or not. That's a really, really
last resort, obviously. These people running around punching alt-right Teen Beat cover boys and
breaking windows are either fools or something worse.
Also, it's nice to have data to go with my loathing of this "theory." I feel like we need a
different word for this stuff, though. All these intersecting economic beliefs that are not based
in facts and are easily repudiated by facts can't really be called theories, can they? They're
more like belief systems. They were never really about figuring out something about reality. They
were always about manipulating behavior through assertion to get desired outcomes, weren't they?
I think that you seriously underestimate Trump. Napoleon excelled in an environment where military success was primary; Trump excels in a mediated
environment where PR and imagery are primary. IMVHO, there are some eerie parallels between the
two men; whether you like them or not, both men could be characterized by: ambition, vision, vindictiveness,
and a willingness obliterate traditional social and political boundaries.
I thought this was particularly brilliant:
Many elite professionals are deeply upset with Trump's win. Yet the ideology that he
represents is very much in line with the logic of corporate raiders, many of whom, like him,
went to Wharton Business School. And many elite professionals, in particular lawyers and consultants,
profited handsomely from the adoption of the buccaneer capitalist view of the world and actively
enabled much of its questionable thinking and conduct.
That Wharton Business School model is oblivious to the human needs for: fairness, reciprocity,
culture, and the need to penalize duplicity. (I would argue that the Wharton model exalts duplicity,
if only to pass it off as some kind of exceptional superpower wielded only by Business Elites.)
When you corrode trust, you damage economies.
Trump is the apotheosis of neoliberal economics + junk-bond fueled casino empires in a media
environment that worships 'shareholder value' and has lost sight of what genuinely creates sustainable
value over the long term.
Isn't this just a side effect of optimization for one variable? And which variable to optimize
is a question of governance? Since the invention of quantifiable economy, and the move from haggling
to fixed price, particularly since the invention of monetary valuation in place of barter the
mathematics becomes relentless to get the last drop of blood out of whatever turnip you are
squeezing. And the invention of spreadsheets makes it that much easier to lean toward the quantitative,
over the qualitative. We saw a similar process in "value engineering" in automotive engineering
in that case to get the last ounce of weight out of the car, in order to optimize mileage, regardless
of less quantifiable values.
Awesome article. Great explanation of how wall street orchestrated casino capitalism controls
today's economy, and in a manner that is detrimental to everyone but the casino operators. Milton
Friedman's perverse views on "free markets", have turned the economy into a casino, first by destroying
the controls on the money supply, and then by destroying corporate governance and responsibility.
And we all know who makes all the money in any casino operation.
Agree, awesome article. And interesting Clearpoint addition that the Street has every incentive
to orchestrate volatility, to the detriment of many firms' greatest stakeholders, the neglected
employees.
This question is of central importance, I only wish you'd find reason to bring it up more often.
It raises another important question, although one that cannot be addressed so neatly: why has
the capitalist project tended to turn away from long term commitments to profit-seeking through
the production of (material) commodities?
Was Friedman's short-termist view simply foolish, a
mistake that has had very damaging impact but which can be reversed?
Or, was it an idea that somehow
picked up on declining opportunities for profit via sales of commodities, as writers like Amin
and Harvey variously argue?
Or - and the article skips over this - did Friedman capture the growing
political aggressiveness of capital, as capital gradually overcame the Great Fear of the 30s and
prepared to mount, as Streeck has argued, a counteroffensive against the constraints of welfare
capitalism? Likely all of the above, but in what proportions?
A lot of corporate governance is controlled by legal decisions.
These legal decisions are rendered by judges.
Future judges are well-socialized into free market views long before they ever hear cases or render
judgments. We are seeing this trend continue with the current SCOTUS nomination in the hands of
a GOP controlled Congress.
Some of these people truly believe that 'free markets' can somehow 'improve and perfect' Human
Nature. (See also: Ayn Rand, 'John Galt', Alan Greenspan) In other words, it's has more than a
whiff of Nietzsche's 'Uber-man' ideology in the mix. It's an ideal system for equating human worth
with net worth, and justifying vast inequalities in money and power.
Thus does the snake swallow its tail.
These judges fail to notice there is a large bump somewhere in the snake's body; at some point,
it ate the Golden Goose, and is slowly digesting.
This does not directly mention the "increase shareholder value" action of a company buying
its own stock.
That should be viewed as a red-flag admission from the senior executives that the company doing
a share buyback does not see a way to grow its markets, does not see suitable investments for
R&D. sees no pressing need to improve corporate infrastructure, sees no reason to train their
workers, and can't find suitable acquisitions that would enhance their business.
Effectively, the management team has scoured the globe searching for the best use of their
spare cash, and, surprisingly, determined that one financial security, THEIR own company's stock,
was the best use of the corporation's cash.
A share buyback plan could be viewed as a warning shot indicating that management lacks ideas
and is poorly managing the corporation.
Instead it falls under a "increase shareholder value" tactic.
+1. Used as an attempt to ward off a hostile takeover stock buybacks might be justifiable.
Mostly, however, this usually looks like a simple attempt to prop up prices.
It is that acme of Liberalism, Warren Buffett that created this fad. At a time when corporate dividends were taxed as ordinary income, whereas a stock price bump
would be tax deferred - and ultimately taxed at long term capital gains rates - the scheme was
merely tax avoidance. Warren Buffett's entire empire is based on this and other tax avoidence schemes.
Then, coupled with stock options for corporate management, the path was set.
Common criticisms of "Maximize Shareholder Value: 1) Should give more weight to something else
– e.g. societal concerns. 2) Execs – prioritize other things; 3) BOD's prioritize other things,
including their personal relationship to execs. Improving corporate governance can, in theory,
setup procedures and rules to fix 2) and 3) by making sure BOD's in publicly listed corporations
really have the legal power, and by making elections more open, including the selection of the
initial selection of BOD candidates. However, this still requires interest from a majority of
voting shareholders – it would be better to ask people not interested to not vote at all. (I tried
to thread this comment as a reply above but it repeatedly disappeared).
For a UK example of a company choosing not to maximise shareholder value, the disastrous acquisition
of HBOS by Lloyds is instructive. Management claimed to be looking through the (ridiculously underestimated)
short-term issues to the resulting long-term competitive advantages which the government assured
them (falsely) wouldn't subsequently be challenged.
Of the c95% acceptances supporting this lunatic
deal, some proportion of the institutional shareholders must have been idiots, a few must have
feared for the stability of the banking system were the deal rejected, and a great many must also
have been HBOS bondholders
"But CEOs recognized how the newly-installed leaders of LBO acquisitions got rich through stock
awards or option-type compensation. They wanted a piece of the action. "
The maximize shareholder value ideology in practice looks like maximize CEO compensation and
to heck with the company's long term prospects. imo.
I doubt that any of the CEOs which have said that they are being pressurized to short-termism
are actually willing this stupid concept to be removed considering they are the prime benefactor
of this.
I believe that supermacy of shareholders interest was originally adopted because they were bearing
risk. Shares being an illiquid asset were supposed to be a source of income not capital gain.
Due to this shareholders were forced to ensure that short-termism is avoided and corporate governance
is adequate. Things started to reverse slowly as liquidity of shares increased gradually.
Presently,
when shares can be sold in seconds of owning them, risk a share-holder bear is greatly lower
than they beared a century ago. Also , shares are bought for capital gain not income.
Considering
relationship between share's liquidity and short-termism , any measure which reduces share's liquidity,
for example a high tax on short term capital gain, will greatly reduce both short-termism and
corporate governance issues as share holders will be forced to assume the risk they were supposed
to bear in exchange of supermacy of their interest.
1. Profit – Objective: to achieve sufficient profit to finance our company growth and to provide
the resources we need to achieve our other objectives
2. Customers- Objective: To provide products and services of the greatest possible value to
our customers, thereby gaining and holding their respect and loyalty.
3. Fields of Interest- Objective: To enter new fields only when the ideas we have, together
with our technical, manufacturing and marketing skills, assure that we can make a needed and profitable
contribution to the field.
4. Growth – Objective: To let our growth be limited only by our profits and our ability to
develop and produce technical products that satisfy real customer needs.
5. Our people: Objective: To help HP people share in the company's success, which they make
possible; to provide job security based on their performance; to recognize their individual achievements;
and to insure the personal satisfaction that comes from a sense of accomplishment in their work
6. Management- Objective: To foster initiative and creativity by allowing the individual great
freedom of action in attaining well-defined objectives,
7. Citizenship – Objective: To honor our obligations to society by being an economic, intellectual
and social asset to each nation and each community in which we operate.
*****
Note, Hewett and Packard, themselves, may have owned 40-50% of the company stock at this time,
so they had great control of the company's direction at this time.
No corporate objective about shareholder value even though they were very large shareholders.
Yes, but. I remember someone from UMichigan business school (Gary Hamel, I think) speaking
to a group of top 2% Ford Motor Co. execs in the late 1980s. He asked, "Come on, guys how many
of you were thinking about shareholder value in the shower this morning?" The room laughed, but
one pudgy hand in the back went up. It belonged to Edsel Ford.
This takes us back, HP was so honest it almost sounds quaint. And 1974 was just before Reagan's
supply side economics stuff in the aftermath of the awful stagflation that hit us after Vietnam.
According to Paul Craig Roberts, supply side was embraced because it was thought to prevent inflation
(wage price spiral) and still provide sufficient jobs and products.
He goes on to say that supply-side/trickle-down
was a reasonable idea but it was hijacked by Wall Street who took it to heart and then used it
to justify offshoring jobs to enhance corporate profits, and eventually shareholder value. Because,
as PCR puts it, Wall Street forced companies to get lean and competitive and if they didn't nobody
invested in them: aka no shareholders if no timely shareholder value. So it was almost an extortion
racket. This was accompanied by all the corporate raiders and the real prosperity of the country
was quickly retarded and siphoned off. Great post, thanks Yves.
I have a rather naive question which I should have asked long ago in my one and only finance
class at college. Why does it matter if a share price drops all other things being equal? A company
sells shares, effectively handing out "residual claims" against cold, hard cash. If the cash is
invested in a business – and assuming the business is at least "break-even" plus the risk-free
rate of return- other than investor panic and CEO's getting "refreshed" stock options, why would
this matter?
Some reasons are frequently given for preferring a high stock price.
1. A low share price encourages others to acquire the company
2. A high price is good when stock is used as currency to buy other companies.
3. Executive compensation schemes are sometimes tied to stock price.
But if a company is not selling stock to fund current operations, then the stock price could
go to zero with no operational effect. The employees who own stock would not be pleased. However,
an apparent artificially low price could help with hiring new employees who may be granted low
priced options.
Occasionally I see someone claiming a company is being killed by short sellers driving the
stock price down. I don't see how this could damage the ongoing operations or cash flow EXCEPT
if the company is selling stock to fund operations or is trying to make a truly worthwhile acquisition
with their stock.
If a company is doing well and cash flow positive and short sellers drive the stock price down
too low, the company should use their cash to buy their shares and squeeze the shorts.
In the case of Hewlett-Packard there was no official stock price set by the investment community
for years, as the company waited a few years before doing an IPO.
The company was founded in 1939 and IPO'ed eighteen years later in 1957.
Imagine, operating for 18 years without Wall Street supervision.
Agreed with your point and John Wright's explanation. The idea that a stock price must be high
is dogma that is never questioned. The big reason is for concern re a low stock price is it is
seen as the market voting against management and an invitation for raiders to take the company
over.
But otherwise, if a company can raise enough money to fund expansion through its own cash flow
(which is the biggest source of investment fund) and debt (the next biggest source), there is
no reason to issue more stock (save your point re employee/executive stock options) and hence
no reason to care regarding the price.
Equity is a form of HPM these days, for C-corps, which can be used as a tool of pleasure [c-suite
bonuses et al] or a weapon of destruction [excuse for diminishing labour and the enviroment].
disheveled . the religion of free markets has become the dominate meme in society and those
that benefit the most from it . wellie see history .
I'm struggling with the short termism argument. The cash flows from equity don't have a maturity.
Bonds due. If a company sought to maximize bond holder value, they would minimize risk (and R&D)
to make sure sufficient funds were available to pay the bond holders. Equity maximization should
be longer term focused than the maximization of limited life securities.
While it has damaged corporate social responsibilities and banks' and corporations' long-term
financial stability, actions taken pursuant to the Shareholder Value optimization model have served
well many individuals on Wall Street, at private equity firms, CEOs of large publicly traded corporations,
hedge funds, networked board members, their academic and professional servicers, and the political
elite
Reflecting back on developments like the dotcom bubble of 1999-2000; the underlying causes
of the financial collapse of 2007-09; massive debt-leveraged corporate stock buybacks; socially
damaging private equity LBOs; the current volumes of opaque OTC derivatives at large financial
institutions; repeated episodes of environmental damage caused by firms in extractive industries
seeking short-term financial returns; and the license it provides to exert power over legislation
and regulation by those who own and control these corporations in a Citizens United legal
framework; etc., it is difficult to see much in the way of redeeming social value in this corporate
governance model.
Topical article highlighting a way to subvert corporate governance: Corrupt US govt. supports
secret oil company payments/bribes to corrupt foreign govts., whose autocratic leaders may be
major shareholders in the oil company too.
Not by usury maybe, but wealth came to Renaissance Italy through use of interest , hitherto
prohibited. And advances in book keeping. This wealth financed the great artists mentioned by
Pound.
Thanks for this post. I always found the notion of "maximizing shareholder value" to be very
strange, and counter to common sense. The concept of "stakeholders" always made more sense. For
a company to be managed with a focus on the wellbeing of workers, customers, and community, in
addition to owners, struck me as being obviously the way it should work. (And sometimes does.)
The idea that parties who happen to own a share of the company should have their interests
served above all is counter intuitive, as employees will almost always have a greater stake in
the company than any individual owner, if shares are widely distributed.
If you think of an sole proprietor who ventures forth to do business who has made clear to
all that his interests are paramount in any transaction, I do not envision customers flocking
to such an individual.
The apparent lack of basic decency in corporate/management decisions that we see so often is
just hard to reconcile with how most of us intuitively feel about how we see ourselves in the
context of our community: most people have a significant level of self interest, but we are always
aware of the need to consider the interests of others when we act. Even for something as basic
as waiting in line for something.
Somehow people at the elite levels of, finance for example, feel quite OK about heavily prioritizing
their own interest above all.
As someone not privy to this social realm, I am just mystified about the social dynamics that,
if not encourage this, at least consider it a fine way to do business.
In a small example, from my personal experience, I am a professional user of audio software
from Avid. Avid has been losing money year after year. Over the past five years the company as
taken actions that have outraged the user base, far more than any other software company I know
of. Their forum is over run with vitriolic ranting, from longtime customers. (In fairness, this
has abated a bit, as the company has finally been making moves that are sensible, and that meet
the needs of the users.)
There have been several rounds of significant layoffs, and the frontline workers bear the brunt
of the customers wrath. Morale has been low.
In conversation, a previous employee told me he considered management to be white collar criminals,
who were looting the company.
This type of product has a unique feature of having very strong platform lock-in effects. In
few other product categories would you see such angry customers continue to buy the products.
Yet the board has been approving generous compensation increases for C level management, and
for themselves for the past few years.
I'm fascinated from an everyday, social point of view, how the board and management make these
decisions. Do they really think they are doing a good job? From the outside, it appears to me
that they do it simply because they can, and have little concern for the long term well being
of any of the other stakeholdes.
Does anyone here have insight about the social dynamics that enable this behavior?
This is something I'd welcome some insights on too as I find certain behaviours and attitudes
impossible to understand.
Is it simple greed, stupidity, cynicism, groupthink, false consciousness, sociopathy, the
'attractions' of a certain lifestyle, daddy-didn't-love-them-enough or what that leads certain
types to behave the ways they do and seek to justify it? If they acted with a degree
of shame or embarrassment, or even full on chutzpah , I'd understand them more, but it's
the ordinary types, those who outwardly seem to be of the same species as oneself and otherwise
appear to be perfectly normal people that I just don't understand. I can believe almost anything
of them, except for the possibility that they actually, genuinely, believe that they are on the
right side of things.
I have similar brain fade when it comes to much of what politicians of the Right have to say
on most things. So often, and try as I might, I just can't understand how supposedly sentient
beings can honestly believe the drivel they come out with, still less have the brass-neck to stand
up in public and display just how effing stupid and cynical they are. Feel much the same about
all shades of politician but it's far worse on the Right.
It's been the prevailing economic philosophy of the Republican Party since Ronald Reagan was elected
president in 1980.
Supply-side economics held that reducing marginal tax rates would spur economic growth, create
jobs and even generate tax revenue for the government.
Reuters A statue of former U.S. President Ronald Reagan near the American Embassy in Budapest, Hungary.
And it makes sense in theory: If people keep more of what they make, they would logically work
harder, spend more and hire more people, right?
When you listen to supply-siders like Arthur Laffer, Stephen Moore and Larry Kudlow, they always
extol the Kennedy-Johnson tax cut of the 1960s and especially President Reagan's tax cuts of the
1980s.
But they rarely mention the 1990s or the 2000s.
Maybe that's because those two decades were almost a perfect controlled experiment that shattered
their pet theories: President Bill Clinton raised marginal tax rates and the economy boomed and jobs
were plentiful. President George W. Bush cut them and we got only modest job growth.
In fact, there's more and more evidence suggesting that lowering marginal tax rates doesn't create
many jobs at all.
For years I've tried to find any economist - left, right, or center - who could estimate the number
of jobs created by the Bush tax cuts, but without success.
So, I'm taking a crack at it myself.
Tax hikes vs. tax cuts
Using data from the Bureau of Labor Statistics CES survey, I compared the number of jobs created
in the years following the balanced budget bill signed by President Clinton in August 1993 and after
the second round of Bush tax cuts, which went into effect in May 2003. (Supply-siders think that
was the real deal, not the earlier 2001 cuts.)
Nearly 20 million private sector jobs were created from the August 1993 tax increase until the
end of the Clinton administration in December 2000. The number following the Bush tax cuts, in a
shorter time period (May 2003 to December 2007, when the Great Recession began), was above seven
million.
But when I actually counted the jobs created in various industries and eliminated those that clearly
had nothing to do with lower marginal tax rates, I was left with a much smaller number: two million
at most, a dreadful performance by any measurement.
This isn't an academic exercise. A 20% cut in marginal tax rates, including reducing the top tax
rate to 28% from 35%, is a key plank of Republican presidential candidate Mitt Romney's economic
growth plan (along with cuts in business taxes and reduced regulation, which I won't cover in this
column).
One of former Gov. Romney's top economic advisers, Glenn Hubbard, the dean of the Columbia Business
School, wasn't available for an interview, nor could the Romney campaign provide another adviser
by deadline. Top Bush economist Lawrence Lindsey also wasn't available.
Yet Hubbard, along with former Sen. Phil Gramm (Mr. Banking Deregulation of the late 1990s), penned
an op-ed Thursday in the Wall Street Journal comparing the current recession with "the superior job
creation and income growth" of - wait for it - the 1980s.
Again, no mention of the Clinton 1990s or the Bush tax cuts, of which Hubbard was a prime architect
as chairman of the president's Council of Economic Advisers.
Isn't it curious how so many smart people have such complete amnesia about the last 20 years?
The Clinton delivery
Yet there's a growing consensus that cuts in marginal income-tax rates don't deliver the goods:
Robert Moffitt and Mark Wilhelm found "no evidence" that high-income U.S. taxpayers increased
their work hours in response to the 1986 Reagan tax cuts. This undercuts a central premise of supply-side
economics, that cutting taxes gives people incentives to work more.
A 2010 report by the nonpartisan Congressional Budget Office found that cutting income taxes produced
the least bang for the buck among 11 proposed policy options aimed at boosting employment. David
and Christina Romer, economists at the University of California-Berkeley (she was President Obama's
CEA chairman), found that changes in marginal tax rates had little effect on U.S. economic growth
in the 1920s and 1930s, either.
But the most striking evidence is the glaring contrast between the 1990s and 2000s.
A 2008 study by the liberal Center for American Progress and Economic Policy Institute showed
that private investment, GDP, wages, household income, employment and federal revenue all grew faster
- sometimes much faster - during the high-tax Clinton years than they did during the low-tax Reagan
and Bush eras.
In August 1993, President Clinton signed a law that boosted the top personal income tax rate dramatically,
to 39.6% from 31%.
But rather than die out, the nascent economic recovery picked up speed and never looked back.
By the time this giant boom ended, the U.S. economy had added nearly 20 million private-sector jobs
in every sector from manufacturing to retail trade to finance to information technology.
Marginalizing marginal tax rates
Of course, higher taxes didn't cause this boom. That's the whole point: other economic forces
were so powerful that marginal tax rates didn't matter.
And they didn't matter a decade later when President Bush signed the second of two tax cuts in
May 2003, accelerating the 2001 act's provisions, reducing the top rate to 35%, and cutting capital
gains and dividend tax rates.
But something else was brewing: In July 2003, the Federal Reserve cut the federal funds rate to
1% and kept it there for a year.
By doing so, the Fed pumped hot air into a speculative real estate bubble, with far-flung effects.
As Martin N. Baily, Susan Lund and Charles Atkins wrote in a 2010 paper for the McKinsey Global Institute:
"From 2003 through the third quarter of 2008, U.S. households extracted $2.3 trillion of equity
from their homes in the form of home-equity loans and cash-out refinancings. Nearly 40% of this -
$897 billion, an amount bigger than the 2008 U.S. government stimulus package - went directly to
finance home improvement or personal consumption." (Italics added.)
The two Bush tax cuts caused an estimated $1 trillion loss of federal tax revenues - and each
year the revenue shortfall is an additional $100 billion. It's the gift that keeps on giving.
So, here's how I'm calculating the jobs created by these cuts.
First, to the 7.33 million net new private-sector jobs, I'm adding back a million jobs lost in
manufacturing and technology, for about 8.3 million new jobs created.
Job growth under Bill Clinton and George W. Bush
After Clinton tax hike Aug. 1993-Dec. 2000
After Bush tax cut May 2003-Dec. 2007
Total private employment (thousands)
19,586
7,333
Manufacturing
437
(812)
Information
1,031
(169)
Retail Trade
2,321.4
674
Wholesale Trade
812.9
422.1
Leisure & Hospitality
2,201
1,458
Transportation
887.9
372.1
Finance (incl. real estate finance)
1,008
236
Professional & Business Services
5,300
2,131
Construction
1,986
784
Residential Construction
214.4
295.3
Health & Education Services
2,925
1,971
(Selected categories, may not add up)
Source: Bureau of Labor Statistics, CES
Then I'd subtract the two million new jobs in health and education, which grew steadily in both
the Clinton and Bush years with no impact from tax policy.
I'd also remove the 400,000 jobs added in residential real estate and home building, obviously
a result of lower interest rates and the housing bubble.
Then, I'd subtract two million new jobs in professional and business services, also the result
of a structural move to a service economy. Five million of those jobs were added under President
Clinton.
That leaves us with four million jobs added in cyclical industries like retail and wholesale trade,
leisure and hospitality, transportation and securities, as well as nonresidential construction.
My best guess is that half of those jobs were the result of the housing bubble, cash-out refinancing
and rock-bottom interest rates while the rest may have come from the additional animal spirits and
cash in consumers' pockets as a result of the Bush tax cuts.
My unscientific estimate, then, is that the Bush tax cuts were responsible for maybe two million
jobs at most. Pathetic is an understatement.
I welcome your input and would be glad to revise this number in a future column if you provide
a better estimate.
Supply-side economics is not the only economic philosophy that has come up short in the Great
Recession. As I wrote here last year, Keynesian stimulus and Friedmanesque monetary policy both haven't
done the job.
Surely supply-side economics worked better when the top tax rate was slashed from 70% to 28% under
President Reagan. It might be more justified at the state level, where crippling tax burdens have
made some states uncompetitive. And raising taxes too high would likely hurt growth, so it may work
better in reverse.
But clearly this is a theory with diminishing returns that has outlived its usefulness.
Because after the last two decades, believing that cuts in marginal personal tax rates will create
jobs and revive our economy is like still believing the sun orbits the earth.
Howard R. Gold is a columnist at MarketWatch and editor at large for MoneyShow.com. Follow him
on Twitter @howardrgold and read his commentary on politics and economics at www.independentagenda.com.
"... "I worked with Ronald Reagan to develop supply-side economics in the late '70s, along with Jack Kemp and Art Laffer and Jude Wanniski and others," Gingrich declared at a recent town hall event. "We ended up passing it into law in '81. At the time it was very bold. People called it 'voodoo economics.' It had one great virtue: it worked." ..."
"... Their second key advantage was that nobody could say for sure what the results of the "supply-side" experiment would be. There was little empirical data to assess how radical tax cuts would play out in the modern economy. One could make common-sense judgments, as George H.W. Bush had done with his "voodoo" remark, but you couldn't see the future. ..."
"... Now, however, with three decades of experience with the experiment, the fallacies of "supply-side" economics are no longer a mystery. For instance, a major obstacle to today's economic recovery has been the absence of "demand-side" consumers, not the availability of money to build more productive capacity. ..."
"... And the reasons for this dilemma are now well-known: first, when companies have expanded in recent years, the modern factories have relied on robotics with few humans required; second, the companies put many manufacturing sites offshore so they can exploit cheap labor; and third, the shrinking middle class has meant fewer customers, leaving corporations little motivation to build more factories. ..."
"... Blessed with a talented pitch man named Ronald Reagan, "supply-side" became the new product to sell. After taking office, Reagan pressed for a sharp reduction in the marginal tax rates, slashing the top rates for the wealthy from around 70 percent to 28 percent. Along with the tax cuts, Reagan also initiated an aggressive military buildup. ..."
"... After George W. Bush claimed the White House in 2001, "supply-side" dogma was back in vogue. Bush pushed through more tax cuts mostly for the rich, reducing the top marginal rate to 35 percent and creating an even bigger tax break for investors, cutting the capital gains rate to 15 percent. Combined with Bush's two wars and other policies, the surplus soon disappeared and was replaced by another yawning deficit. ..."
"... The Right also has worked diligently to create false narratives to convince many Americans that their hatred of a strong federal government links them to the Founders. Many Tea Partiers have bought into the historical lie that the Founders wrote the Constitution to limit the power of the federal government and to promote "states' rights" the near opposite of what the framers actually were doing. ..."
Exclusive: Any rational assessment of America's economic troubles would identify Ronald
Reagan's reckless "supply-side" economics as a chief culprit, but that hasn't stopped Republican
presidential hopefuls, led by Newt Gingrich, from selling this discredited theory to a gullible GOP
base, reports Robert Parry.
Despite Newt Gingrich's claim that "supply-side" economic theories have "worked," the truth is
that America's three-decade experiment with low tax rates on the rich, lax regulation of corporations
and "free trade" has been a catastrophic failure, creating massive federal debt, devastating the
middle class and off-shoring millions of American jobs.
It has "worked" almost exclusively for the very rich, yet the former House speaker and the three
other Republican presidential hopefuls are urging the country to double-down on this losing gamble,
often to the cheers of their audiences - like one Florida woman who said she had lost her job and
medical insurance but still applauded the idea of more "free-market" solutions.
Former House Speaker Newt Gingrich posing with his third wife, Callista
Gingrich even boasts of his role in pioneering these theories of massive tax cuts favoring the
rich, combined with sharp reductions in the role of government. That approach, once famously mocked
by George H.W. Bush as "voodoo economics," was supposed to spur businesses to expand production (the
"supply side"), thus creating jobs and boosting revenues from all the commercial activity.
"I worked with Ronald Reagan to develop supply-side economics in the late '70s, along with
Jack Kemp and Art Laffer and Jude Wanniski and others," Gingrich declared at a recent town hall event.
"We ended up passing it into law in '81. At the time it was very bold. People called it 'voodoo economics.'
It had one great virtue: it worked."
But that is not what the historical record really shows.
In 1980, I was working as an Associated Press correspondent covering budget and economic issues
on Capitol Hill and at the time, the "supply-siders" had two key arguments in their favor: first,
the economy had stagnated in the 1970s largely due to oil price shocks, inflation and an aging industrial
base.
Their second key advantage was that nobody could say for sure what the results of the "supply-side"
experiment would be. There was little empirical data to assess how radical tax cuts would play out
in the modern economy. One could make common-sense judgments, as George H.W. Bush had done with his
"voodoo" remark, but you couldn't see the future.
No More Mystery
Now, however, with three decades of experience with the experiment, the fallacies of "supply-side"
economics are no longer a mystery. For instance, a major obstacle to today's economic recovery has
been the absence of "demand-side" consumers, not the availability of money to build more productive
capacity.
And the reason that there are fewer consumers is that the Great American Middle Class, which
the federal government helped build and nourish from the New Deal through the GI Bill to investments
in infrastructure and technology in the Sixties and Seventies, has been savaged over the past three
decades.
Though many Americans were able to cover up for their declining economic prospects with excessive
borrowing for a while, the Wall Street crash of 2008 exposed the hollowing out of the middle class.
So today, businesses are sitting on vast sums of cash some estimates put the amount at about $2 trillion.
And the reasons for this dilemma are now well-known: first, when companies have expanded in
recent years, the modern factories have relied on robotics with few humans required; second, the
companies put many manufacturing sites offshore so they can exploit cheap labor; and third, the shrinking
middle class has meant fewer customers, leaving corporations little motivation to build more factories.
For Americans, this has represented a downward spiral with no end in sight. American workers,
whether blue- or white-collar, know that computers and other technological advancements have made
many of their old jobs obsolete. And modern communications have allowed even expert service jobs,
like computer tech advice, to go to places like India.
While painful to millions of Americans who find their talents treated as surplus, these developments
do not by themselves have to be negative. After all, humans have dreamed for centuries about technology
freeing them from the grind of tedious work and freeing up society to invest in a higher quality
of life, for today's citizens and for posterity.
The problem is that the only practical way for a democratic society to achieve that goal is to
have a vibrant government using the tax structure to divert a significant amount of the super-profits
from the rich into the public coffers for investments in everything from infrastructure to education
to arts and sciences, including research and development for future generations, even possibly Gingrich's
"big idea" of a colony on the moon.
In fact, that kind of virtuous cycle was the experience of the United States from the 1930s through
the 1970s, with the federal government taxing the top tranches of wealth at up to 90 percent and
using those funds to build major electrification projects like the Hoover Dam and the Tennessee Valley
Authority, to educate World War II veterans through the GI Bill, to connect the nation through the
Interstate Highway system, to launch the Space Program, and to create today's Internet.
Out of those efforts emerged robust economic growth as private corporations took advantage of
the nation's modern infrastructure and the technological advancements. Millions of good-paying jobs
were created for the world's best-trained work force, giving rise to the Great American Middle Class.
The obvious answer was to keep this up, with the government investing in new productive areas, like
renewable energy.
Demonizing 'Guv-mint'
Instead, facing economic headwinds in the 1970s, caused in part by rising energy costs, Americans
grew anxious about their futures, making them ripe for a new right-wing propaganda campaign demonizing
"guv-mint" and telling white men, in particular, that the "free market" was their friend.
Blessed with a talented pitch man named Ronald Reagan, "supply-side" became the new product
to sell. After taking office, Reagan pressed for a sharp reduction in the marginal tax rates, slashing
the top rates for the wealthy from around 70 percent to 28 percent. Along with the tax cuts, Reagan
also initiated an aggressive military buildup.
The results were devastating to the U.S. fiscal position. The federal debt soared, quadrupling
during the 12 years of Reagan and Bush Sr. As a percentage of the gross domestic product, federal
debt was actually declining in the 1970s, dropping to 26 percent of GDP, before exploding under Reagan,
rising to 41 percent by the end of the 1980s. The shared wealth of the country also diverged, with
the rich claiming a bigger and bigger piece of the national economic pie.
The nation's debt crisis only began to subside after tax increases were enacted under President
George H.W. Bush and President Bill Clinton, with Clinton's tax hike pushing the top marginal rate
back up to 39.6 percent. At the time, Gingrich warned that the Clinton tax hike would lead to an
economic catastrophe.
The actual result was a booming economy, spurred strongly by the federal government's new "information
super-highway," the Internet. The Clinton years also saw low unemployment and a balanced budget by
the late 1990s. The debt-to-GDP measure declined from about 43 percent to 33 percent and was on course
toward zero within a decade.
Ironically Gingrich also claims credit for that because as House speaker he worked with Clinton
on some cost-cutting measures, but Clinton credits the 1993 tax increase, which passed without a
single Republican vote, as the key factor in the budget turnaround.
After George W. Bush claimed the White House in 2001, "supply-side" dogma was back in vogue.
Bush pushed through more tax cuts mostly for the rich, reducing the top marginal rate to 35 percent
and creating an even bigger tax break for investors, cutting the capital gains rate to 15 percent.
Combined with Bush's two wars and other policies, the surplus soon disappeared and was replaced by
another yawning deficit.
Even as most Americans struggled to hold a job and pay their bills, America's super-rich lived
a life of unparalleled luxury. With this concentration of money also had come a concentration of
power, as right-wing operatives were hired to build a sophisticated media apparatus and think tanks
to push often with populist rhetoric the policies that were dividing the country along the lines
of a pampered one percent and a pressured 99 percent.
Many Americans, especially white men, heard their personal grievances echoed in the angry voices
of Rush Limbaugh, Sean Hannity, Michael Savage and Glenn Beck all well-compensated propagandists
for "the one percent."
Lesson Unlearned
Now, looking back over the economic and fiscal history of the past three decades, you might think
that few Americans would be fooled again by this sucker bet on "supply-side." But the Tea Partiers
and many rank-and-file Republicans seem ready to put what's left of their money back down on the
gambling table.
All four remaining Republican hopefuls Mitt Romney, Rick Santorum, Ron Paul and Gingrich have
proposed lower tax rates especially on the rich with the same enduring but fanciful faith in "supply-side"
economics.
Gingrich has gone so far as to advocate eliminating the capital gains tax entirely. It's already
down to 15 percent, meaning that many super-rich, from financier Warren Buffett to Mitt Romney, can
live off their investments and pay a lower tax rate than what many middle-class Americans pay on
their wages and salaries. In a recent Florida debate, Romney noted he would pay virtually no federal
income tax under Gingrich's plan.
The Republicans seem to be counting on the parallel propaganda campaign of demonizing "guv-mint."
They're pinning their hopes on an ill-informed electorate (especially white men) siding with "the
one percent" over their own working- and middle-class interests.
The GOP hopes also may hinge significantly on how determined some whites are to get the country's
first black president out of the White House. Historically, demagogic U.S. politicians have had great
success in exploiting racial resentments, although these days often with coded language like Gingrich
calling Barack Obama "the food-stamp president."
The Right also has worked diligently to create false narratives to convince many Americans
that their hatred of a strong federal government links them to the Founders. Many Tea Partiers have
bought into the historical lie that the Founders wrote the Constitution to limit the power of the
federal government and to promote "states' rights" the near opposite of what the framers actually
were doing.
Led by Virginians Gen. George Washington and James Madison, the Constitutional Convention in 1787
threw out the Articles of Confederation, which had made the states supreme and the federal government
a supplicant.
The Constitution reversed that situation, eliminating state "independence" and bestowing national
sovereignty onto the federal Republic representing "we the people of the United States." Contrary
to the Tea Party's false narrative, the Constitution represented the single biggest assertion of
federal power in U.S. history.
When the Tea Partiers dress up in Revolutionary War costumes, they apparently don't know that
their notion of a weak central government and state "sovereignty" was anathema to the key framers
of the Constitution, especially to Washington who had watched his soldiers suffer under the ineffectual
Articles of Confederation.
And, when the Tea Partiers wave their "Don't Tread on Me" flags of a coiled snake, they don't
seem to know that the warning was directed at the British Empire and that the banner aimed at fellow
Americans was Benjamin Franklin's image of a snake severed into various pieces representing the colonies/states
with the admonishment "Join, or Die."
Nevertheless, false narratives and false arguments can be as effective as real ones to a thoroughly
misinformed population. Thus, many middle- and working-class Americans still cheer when Newt Gingrich
references Ronald Reagan and his "supply-side" economics.
But the failure of Reagan's economic strategy should be obvious to anyone who is not fully deluded
by right-wing propaganda. Not only has the national debt skyrocketed over the past three decades,
but whatever economic benefits that have been produced have gone overwhelmingly to the wealthy while
the nation as a whole has suffered.
[For more on related topics, see Robert Parry's Lost History, Secrecy & Privilege and
Neck Deep , now available in a three-book set for the discount price of only $29. For details,
click
here .]
Robert Parry broke many of the Iran-Contra stories in the 1980s for the Associated Press
and Newsweek. His latest book, Neck Deep: The Disastrous Presidency of George W. Bush, was written
with two of his sons, Sam and Nat, and can be ordered at
neckdeepbook.com . His two previous books,
Secrecy & Privilege: The Rise of the Bush Dynasty from Watergate to Iraq and Lost History: Contras,
Cocaine, the Press & 'Project Truth' are also available there.
"... He [Bush] signaled the shift [in strategy] in a speech here [in Pittsburgh] last week when
he charged that Reagan had made 'a list of phony promises' on defense, energy and economic policy. And
he labeled Reagan's tax cut proposal 'voodoo economic policy' and 'economic madness.'" ..."
"... Let me just emphasize that the words "voodoo economic policy" are Bush's words. The source
is a reputable one that is easily available even at second-tier universities, so I think this counts
as pretty strong evidence to anyone with a reasonably open mind. I think even someone with a Ph.D. in
history from Harvard might concede that it is at least a scrap of evidence. ..."
Sam Houston State University historian, writing on the Forbes web site, has a very odd
blog post this morning. He criticizes MIT economist Simon Johnson for attributing the term "voodoo
economics" to George H.W. Bush. Domitrovic calls it a "myth" that the elder Bush ever uttered those
words. "You'd think there'd be a scrap of evidence dating from 1980 in support of this claim. In
fact there is none," he says.
Perhaps down in Texas they don't have access to the Los Angeles Times. If one goes to the April
14, 1980 issue and turns to page 20, one will find an articled by Times staff reporter Robert Shogan,
entitled, "Bush Ends His Waiting Game, Attacks Reagan." Following is the 4th paragraph from that
news report:
"He [Bush] signaled the shift [in strategy] in a speech here [in Pittsburgh] last week when
he charged that Reagan had made 'a list of phony promises' on defense, energy and economic policy.
And he labeled Reagan's tax cut proposal 'voodoo economic policy' and 'economic madness.'"
I've attached a PDF file of the Times article to this post for the benefit of the skeptical.
Let me just emphasize that the words "voodoo economic policy" are Bush's words. The source
is a reputable one that is easily available even at second-tier universities, so I think this counts
as pretty strong evidence to anyone with a reasonably open mind. I think even someone with a Ph.D.
in history from Harvard might concede that it is at least a scrap of evidence.
I suppose that is one wanted to be pedantic, one could continue to argue that Bush never said
the precise words "voodoo economics," that somehow or other "voodoo economic policy" is something
completely different. I will allow others to debate the point.
"... General equilibrium thinking is the enemy of understanding - it requires as the interview shows (and he seems unaware of) a cascade of absurd assumptions. He also seems unaware that a series of unreal assumptions can't cancel out - their effects multiply. ..."
"... One of my finds in economic efficiency is to not read articles by George Farmer. Unlike Greg Mankiw, whom I never read, it is not a hard fast prohibitive rule. I sometimes allow myself to get sucked into reading George Farmer by an enticing title but such actions always come with a pang of guilt. ..."
He shouldn't humor such complete nonsense with so much respect.
General equilibrium thinking is the enemy of understanding - it requires as the interview
shows (and he seems unaware of) a cascade of absurd assumptions. He also seems unaware that a
series of unreal assumptions can't cancel out - their effects multiply.
One of my finds in economic efficiency is to not read articles by George Farmer. Unlike Greg
Mankiw, whom I never read, it is not a hard fast prohibitive rule. I sometimes allow myself to
get sucked into reading George Farmer by an enticing title but such actions always come with a
pang of guilt.
One can argue that reading Mankiw or Farmer is useful just to see what others are saying, what
other people read, and preventing oneself from isolation in the bubble chamber, but I don't buy
that argument. I get enough open mindedness just from Dani Rodrik, Dean Baker, Jared Bernstein,
and Menzie Chinn. I used to read Krugman, but that is mostly in the past now with exceptions a
little less rare than Farmer. I also skip reading most of the comments once the day gets going.
I am planting my last 25 daffodil bulbs today. It's a bit late. I already have over a dozen
coming up from earlier planting. I get up every morning to fix my wife coffee and the just wait
around doing this until the sun rises. Practicing good economics is worth more to me now that
reading bad economics.
Ron, what about these consecutive sentences from Duy- "That said, the central bank tends to react
fairly nimbly to changing economic conditions. It has repeatedly delayed action in response to
deteriorating economic or financial conditions."
Which one is it? Act nimble, or fail to act? I know what Duy means but I find the sentences
contradictory in a humorous way.
What Peter K said, at least in the terms that Duy would consider realistic. One can also posit
that the Fed failed to do enough or react soon enough in 2006-2007 or a host of other criticisms,
but all those criticisms would be out of bounds for central bank behavioral expectations in general
and Fed-watcher Tim Duy in specific. Market monetarists are less generous in that respect.
Economists are not noted for their sense of humor and I have a theory that exposure to economists
impairs the sense of humor in normal people. I am afraid mine has been badly damaged at this point.
Anyone here a lawyer? Maybe we can do a class action suit?
Jerry, you and Ron just made my day! My wife and are in lake Placid celebrating out 47th wedding
anniversary, and during our pre-dinner cocktail hour were depressing one another with excerpts
from today's news, and then I came across your Ron's comments. We nearly fell of our chairs laughing!
Thanks guys, we really needed this!
Darn it, you wont be able to join as a plaintiff if you keep that up Chris. Falling out of your
chair laughing does not demonstrate impaired humor- you will ruin my case! Perhaps you can maintain
that you were being very sarcastic? Sarcasm is the last bit of humor to be affected by economism
in my theory...
He neglected to bring illumination to his mention of cash replacing the maturing bond, and where
this cash comes from and what happens with the cash in light if the remittance requirements (where
excess cash is swept into the Treasury's accounts).
They cannot destroy the cash. The redeeming cash will come, in the case of a Treasury bond,
from Treasury who must borrow this amount to pay the Fed. If they are permitted to hokd the cash
on their books, and not remit, we still have borrowing by the public (and this sweeps excess off
of the books of buyers of this new debt) fir it to be placed somewhere if not remitted.
As I have said for quite some time it makes basic common sense to have a mature bond redeemed
via an accounting offset with Treasury as this avoids the need to borrow the money just to then
have it remitted back to Treasury. And why would the Fed and Treasury not do this??? I would like
someone to explain.
For example, why is the Fed doing this now when it could have been redeeming by offset during
the Obama administration (lowering the amount of public borrowing but financing the same nominal
spending).
This piece by Duy misses the absolutely most critical part of the redemption story.
Not what I meant. I have limited time and limited interest. Economics is secondary to politics
as it stands. I don't have sufficient means to become more politically involved yet though. So,
this is something rather than just nothing, but I cut my losses short. You are younger and apparently
more involved in this aspect of thought about the political economy. I am older and more intent
on positive action in my remaining time. There is not much new for me to think about that will
matter at all to me.
Well the other day Farmer said he rejects the Keynesian concept of Aggregate Demand and the consumption
function based on income. And provides no evidence except a recommendation to go and buy his book
to find out. That about does it for me.
No, no, no, no, I don't do it no more. Sometimes in the mornings waiting for the sun to rise then
I actually miss my work in SAS language programming. I was always a bigger fan of PROC FASTCLUS
than PROC REG, but definitely PROC FASTCLUS with PROC GPLOT presentation color coding the cluster
group number assignments in an overlay scatter plot. That is because I could estimate the expected
degree of change in activity from the expected change in natural business units or hardware or
software making historical data of use only for establishing a baseline, hopefully a clean baseline,
rather than for estimating the degree of change itself. I used PROC REG to generate 95% confidence
intervals around the linear regression means of predicted data points.
In my cases the heteroskedasticity was merely considered in the application of outliers from the
central cluster(s). Outliers that constituted some type of risk had to be considered discretely,
one by one, but only those that with predicted change would overshoot capacity limits. Undershooting
was just an isolated outage or collapse in demand and certainly not a capacity risk.
Outlier detection is a whole other kettle of fish. Once upon a time I spent most of my time finding
outliers in multivariate data and trying to figure out more effective methods for finding them.
(Turns out the world isn't multivariate-normal distributed. Who knew?)
For system performance data, which was my domain, an outlier could be an effect on the response
variable at the extreme range of the independent variable, or just an unordinary event. The heteroskedasticity
type outliers were things like increased CPU overhead at high utilizations, a feature of the MVS
IBM mainframe operating system, or elongated service times for Fiber channels and Ethernet or
elongated response times for a device having excessive utilization and queueing delays. Outliers
could also be bugs or system recovery events as well as work scheduled outside its normal window
of operation including systems programmers screwing around in production logical partitions. The
heteroskedasticity type outliers were actually my job to prevent and I did a good job of that.
My occasional undoing was almost always because of application changes that exceeded the developers
expected resource requirements. A couple of times my system programmer coworker that controlled
MVS performance misinterpreted a software constraint until it manifested itself in extreme ways
for long enough until I was consulted for analysis.
So what I am getting at is that all exceptions to normal expectations can be considered as
outliers, but then those that demonstrate only a difference in the reaction function of the response
variable accorded by the range of the independent variable can also be considered heteroskedasticity.
In any case, I am about at the end of my analysis of outliers on my daffodil bulb planting
now. I sure hope that I don't encounter any heteroskedasticity with the chain saw later this week.
The authors are using a study of heteroskedasticity to inform their forecasting ability. In such
a case outliers would be very different from heteroskedasticity in the response variable over
certain ranges of the independent variable. In other applications, such as large computer system
performance, heteroskedasticity exists as something to be avoided because elongation of response
variables follow a hyperbolic curve and we don't want to be kneed by the curve. Classic outliers
are to ignored for forecasting even if not solved by protective measures but heteroskedasticity
occurs as a response to demand in excess to expected and provisioned. Either resources per business
unit of work must be reduced or more resources must be provisioned. In the former case then the
historical baseline must be readjusted and in the later capacity limits must be increased.
International Trade Effects of Value-Added Taxation
By Martin Feldstein and Paul Krugman
There is a well-understood economists' case for a value-added tax (VAT). As a consumption tax,
a VAT would not impose the bias against saving that is inherent in income taxation and could therefore
help promote capital formation and economic growth. Against this advantage must be weighed possible
disadvantages resulting from higher administrative costs and greater difficulty in providing an
acceptable degree of progressivity to the overall tax-and-transfer structure as well as the possible
political costs (or benefits, depending on one's point of view) of a tax that is relatively invisible
and thus easy to raise.
Among many businessmen, however, the case for a VAT is often stated quite differently. They
view such a tax as an aid to international competitiveness since VATs are levied on imports but
rebated on exports. The case is often stated as follows: an income tax is paid by producers of
exports but not by foreign producers of the goods we import, while a VAT is paid on imports but
not on exports. Surely, say the proponents of this view, this means that countries that have a
VAT have an advantage in international competition over countries that rely on income taxation.
In fact, this argument is wrong. A VAT is not, contrary to popular belief, anything like a
tariff-cum-export subsidy. Indeed, a VAT is no more an inherently procompetitive trade policy
than a universal sales tax, to which an "idealized" VAT, levied equally on all consumption, is
in fact equivalent. The point that VATs do not inherently affect international trade flows has
been well recognized in the international tax literature. This point is also familiar to tax policy
practitioners; McLure (1987), to take a recent example, dismisses the competitive argument for
a VAT as evident nonsense. Yet the belief that VATs are important determinants of international
competitiveness persists among laymen.
In large part, the belief that VATs are trade-distorting policies reflects a failure on the
part of noneconomists to understand the basic economic arguments. There is also another factor,
however: in reality, VATs will not be neutral in their effect on trade, for at least two reasons.
First, VATs are a substitute for other taxes, especially income taxes, that do affect trade. Second,
in practice, a VAT will not be neutral; concern over distributional issues, as well as administrative
difficulties, inevitably leads to a tax whose rate varies substantially across industries.
To acknowledge that in practice a VAT will indeed affect trade flows is not the same as saying
that the lay view is right. In fact, the widespread view that a VAT enhances the international
competitiveness (in some sense) of the country that adopts it may well be the reverse of the truth.
To the extent that a VAT taxes traded goods more heavily than nontraded, which is normally the
case, a VAT in practice probably tends to reduce rather than increase the size of a country's
traded goods sector. Against this may be set the favorable effect on saving and hence on a country's
trade balance in the short run of substituting a consumption tax for taxes, like the income tax,
that distort intertemporal consumption choices.
The purpose of this paper is to lay out a simple analytical approach for thinking about the
effects of a VAT on international trade. The paper begins by laying out a simple three-good, two-period
model that has the minimal elements necessary to discuss the international trade effects of a
VAT. The first section describes the model and shows how equilibrium is determined in the absence
of taxation. The second section introduces a VAT and demonstrates in the context of our model
the well-known fundamental point that an idealized VAT that is levied on all production is nondistortionary,
in particular having no effect on the allocation of resources between tradable and nontradable
sectors. We can also show that such an idealized VAT would leave nominal factor prices measured
in foreign currency unchanged; this argues, in effect, that even in the short run under fixed
exchange rates a VAT should not be expected to have any effect on trade.
We show next that the absence of distortionary effects from a VAT depends on precisely the
feature that is often alleged to constitute an unfair trade advantage, namely, the rebate of value-added
taxes on exports. In the absence of an export rebate, a VAT would act like an export tax-which
in general equilibrium is equivalent to an import tariff. Thus, the export rebate is necessary
if a VAT is not to be protectionist.
The remainder of the paper is devoted to reasons why in practice the introduction of a VAT
may not be neutral in its trade effects. First, a VAT may substitute for an income tax; since
an income tax is not neutral in its effects, the substitution will have allocative effects, tending,
other things being equal, to improve the trade balance in the short run. Second, and offsetting
this effect in the short run and persisting in the long run, a VAT in practice will tend to be
levied more heavily on traded than on nontraded output and will therefore tend to shift resources
out of the traded goods sectors.
On balance, the substitution of value-added taxation for income taxation is likely to have
an uncertain short-run effect on a nation's net exports but is likely to reduce net exports in
the longer term. This does not constitute an argument either for or against introducing a VAT;
indeed, even if the effect on competitiveness were unambiguous, it is by no means clear what policy
moral ought to be drawn. The point of this analysis is more modest; we want to show that the common
belief that a VAT is a kind of disguised protectionist policy is based on a misunderstanding....
It drives me nuts to see opening premise statements that invoke this notion of savings and capital
formation as leading to something called investments, and this is the rationale for why we skew
policy toward encouraging more of everything in the sentence.
First off, the financial crisis clearly revealed that the financial community creates investment
monies via its privilege to create credit and lending accounts.
It is sophistry, in my view, to premise public policy discussions with this stupid, non-real
world ideology about why we need tax and other economic policies that favor capital formation
when this privilege exists in its unregulated mode (well, since the crisis more supervision has
come and common sense has come back to this privileged community, of course until the Admin signals
a laissez faire on this privilege again, leading to places I dont want to go, again).
So I said, first, above. So the second related point is about how economists seem to not understand
how the statistical program under NIPA is a looking backward program using definitions, like identities
(such as the defined one where Savings equals Investment) to bring cloture to the stat program,
and that is what it surely does - but its structure as a statistical program must be used with
great caution when you look forward and talk about how the economy actually works.
As for the VAT rationales, if they start with these premises they will clearly end with the
conclusion that is built in, that the taxing of the incidence of buying/selling, consumption,
is not just ok, but that it is better because the application of the tax is not on Savings or
on Investment. It places the burdens on consumption, do not believe this sophistry, it is a shift
in revenue raising system design away from wealth and high incomes, shifting the burdens on to
basic consumption where all of us live.
Krugman is helping to justify this shift. He should be wailing in opposition to such a shift
(especially in light of a clear memory about how tax grants of huge magnitude were already given
to the highly mobile people of wealth and high income).
I agree. Touting increasing savings as good thing as a means of increasing investment is the wrong
idea. Especially when economic recessions are mostly due to falling consumption demand caused
by a desire to increase savings. This is Keynes' paradox of thrift.
Neoliberals seem very concerned not to have a label. I posit this is because the founders of the
malign ideology didn't want their victims be able to reliably identify them. The deliberately and misleadingly
promote the view of the economy as an isolated scientific subject, like the interior of a test tube,
and treat politics and policy as a sort of exterior force, that can be isolated from the world of the
chemist and pushed off-to-one side. Neoclassic economists consistently and deliberately blinds itself
to politics and the dynamics of power, despite the deep entanglement of politics with everything economic.
"I look at politics and the economy and see one thing, not two things, and I am astonished at the extent
to which economists focus on the part they like to play with intellectually, while deliberately looking
away from what is probably the more important part. "
Notable quotes:
"... when left-wing people say that economists are defenders and supporters of the current order of things, they have a point: ignoring power relationships and their impact on the world supports the continued existence of those relationships. ..."
"... Neoliberalism may have been in part so successful because it appeals to (and tries to explain many things in terms of) a narrative of competition (and assignment of reward and acknowedlgement) by merit. ..."
"... Most people, esp. when young (still largely sheltered) or (still) successful, probably have an exaggerated assessment of their own merit (absolute and relative) - often actively instilled and encouraged by an "enabling" environment. ..."
"... It promises a lake Wobegon of sorts where everybody (even though not all!) are above average, and it is finally recognized. ..."
What Wren-Lewis misses, I think, is that something I've noticed in my roughly a decade of reading
economic blogs on the Internet. Economists have blinkers on. They want to view the economy as an
isolated scientific subject, like the interior of a test tube, and treat politics and policy as a
sort of exterior force, that can be isolated from the world of the chemist and pushed off-to-one
side. It seems fairly clear to me that the two elements--politics and the economy--are obviously
continuously co-mingled, and have all sorts of feedback loops running between them.
The discipline really consistently and deliberately blinds itself to politics and the dynamics
of power, despite the deep entanglement of politics with everything economic. Wren-Lewis admits that
macroeconomists "missed" the impacts of very high financial sector leverage, but finds that now that
economists have noticed it, and suggested remedies, that the power of bank lobby prevents those remedies
from being enacted. But shouldn't the political power of the finance lobby been a part of economic
analysis of the world along with the dangers of the financial sector's use of extreme leverage? Does
he think the two phenomena are unrelated?
Shouldn't economics pay more attention to the ongoing attempts of various groups to orient government
policy in their favor, just like they pay attention to the trade deficit and GDP numbers?
I look at politics and the economy and see one thing, not two things, and I am astonished at the
extent to which economists focus on the part they like to play with intellectually, while deliberately
looking away from what is probably the more important part. Its like economists obsessively focus
on the part that can be studied via numbers (money) and don't' want to think about the part that
is harder to look quantify (political policy). And there is a political issue there, which Mr. Wren-Lewis,
keeps ignoring in his defense of "mainstream economics."
The neoclassical economics tendency of not looking at power relationships makes power imbalances
and their great influence on economics seem like "givens" or "natural endowments", which is clearly
an intellectual sin of omission.
Many people, even within the halls of mainstream economics, note economists are "uncomfortable"
with distributional issues.
Whether they like the implication or not, economists need to acknowledge that this discomfort
has a profoundly conservative intellectual bias, in the sense that it make the status quo arrangement
of society seem "natural" and "normal", when it is obviously humanly constructed and not in any sense
"natural." So when left-wing people say that economists are defenders and supporters of the current
order of things, they have a point: ignoring power relationships and their impact on the world supports
the continued existence of those relationships.
Mr. Wren-Lewis seems like a nice guy, but he needs to take that simple home truth in. I'm not
sure why he seems to struggle so with acknowledging it.
Oh you mean the success of being able to raise asset prices without the growth in wages, make
education costly and unaffordable without student loans, not chargeable under bankruptcy, spruce
up employment figures by not counting the people who have stopped look for jobs because they cannot
find one, make people debt serfs, make savers miserable by keeping interest rates at zero and
making them take risks that they may not want to take though it is picking pennies in front of
a steamroller, keeping wages stagnant for decades and thus impoverishing people.
The list of successes is endless and you should be glad we are NOT talking about them. Because
if we do, the clan called economists might well be torched.
Neoliberalism may have been in part so successful because it appeals to (and tries to explain
many things in terms of) a narrative of competition (and assignment of reward and acknowedlgement)
by merit.
Most people, esp. when young (still largely sheltered) or (still) successful, probably
have an exaggerated assessment of their own merit (absolute and relative) - often actively instilled
and encouraged by an "enabling" environment.
A large part is probably the idea that "markets" are "objective" or at least "impartial" in
bringing out and rewarding merit - also technology and "data driven" technocratic management,
which are attributed "objectivity". All in the explicitly stated or implied service of impartially
recognizing merit and its lack.
It promises a lake Wobegon of sorts where everybody (even though not all!) are above average,
and it is finally recognized.
"Neoliberalism may have been in part so successful because it appeals to (and tries to explain
many things in terms of) a narrative of competition (and assignment of reward and acknowedlgement)
by merit."
"... Starting with three classic papers in the same 1982 issue of the Journal of Economic Theory, a large literature in economics has dealt with the implications for rational behavior of interacting with parties who, with small likelihood, may not be rational." ..."
"... It's why many non-experts believe academic economists' pretensions to science and accuracy is BS. ..."
"Similarly, in bargaining situations, "the sophisticated
negotiator may find it difficult to seem as obstinate as a
truly obstinate man." And when faced with a threat, it may be
profitable to be known to possess "genuine ignorance,
obstinacy or simple disbelief, since it may be more
convincing to the prospective threatener."
Starting with three classic papers in the same 1982 issue
of the Journal of Economic Theory, a large literature in
economics has dealt with the implications for rational
behavior of interacting with parties who, with small
likelihood, may not be rational."
It's why many non-experts believe academic economists'
pretensions to science and accuracy is BS.
Like Simon Wren-Lewis's blog-post the other day defending
mainstream economics.
It's like they come up with the political answer they want
and then rationalize it via math and rhetoric in a way that
would make Kellyanne Conway proud.
Simon Wren-Lewis does not understand (or more correctly does not want to understand) that
there is no economics, only political economy and that neoclassical economics are stooges and
propagandists of the Grand neoliberal Party, which pay them handsomely for role they are playing.
Hiding ideology under the smoke screen of economics is not new, but under neoliberalism it is became
status quo.
Notable quotes:
"... I have had a sense that during the 1970s conservative economists, "Chicago School" economists, become distinctly influential both in the field of economics and for policy makers. ] ..."
"... Economists have blinkers on. They want to view the economy as an isolated scientific subject, like the interior of a test tube, and treat politics and policy as a sort of exterior force, that can be isolated from the world of the chemist and pushed off-to-one side. ..."
"... It seems fairly clear to me that the two elements--politics and the economy--are obviously continuously co-mingled, and have all sorts of feedback loops running between them. The discipline really consistently and deliberately blinds itself to politics and the dynamics of power, despite the deep entanglement of politcs with everything economic. ..."
"... Wren-Lewis admits that macroeconomists "missed" the impacts of very high financial sector leverage, but finds that now that economists have noticed it, and suggested remedies, that the power of bank lobby prevents those remedies from being enacted. But shouldn't the political power of the finance lobby been a part of economic analysis of the world along with the dangers of the financial sector's use of extreme leverage? Does he think the two phenomena are unrelated? Shouldn't economics pay more attention to the ongoing attempts of various groups to orient government policy in their favor, just like they pay attention to the trade deficit and GDP numbers? ..."
"... I look at politics and the economy and see one thing, not two things, and I am astonished at the extent to which economists focus on the part they like to play with intellectually, while deliberately looking away from what is probably the more important part. Its like economists obsessively focus on the part that can be studied via numbers (money) and dont' want to think about the part that is harder to look quantify (political policy). And there is a political issue there, which Mr. Wren-Lewis, keeps ignoring in his defense of "mainstream economics." ..."
"... The neoclassical economics tendency of not looking at power relationships makes power imbalances and their great influence on economics seem like "givens" or "natural endowments", which is clearly an intellectual sin of omission. Many people, even within the halls of mainstream economics, note economists are "uncomfortable" with distributional issues. ..."
"... I don't see it as attacking economics as science tied to nature, as much as attacking economists who pick one "natural law" and apply it generally far outside the limits for which it applies, ignoring all the other laws that constrain it. ..."
"... "...but failing to ignore their successes,..." ..."
"... Oh you mean the success of being able to raise asset prices without the growth in wages, make education costly and unaffordable without student loans, not chargeable under bankruptcy, spruce up employment figures by not counting the people who have stopped look for jobs because they cannot find one, make people debt serfs, make savers miserable by keeping interest rates at zero and making them take risks that they may not want to take though it is picking pennies in front of a steamroller, keeping wages stagnant for decades and thus impoverishing people. The list of successes is endless and you should be glad we are NOT talking about them. Because if we do, the clan called economists might well be torched. ..."
7. So given all this, why do some continue to attack economists? On the left there are
heterodox economists who want nothing less than revolution, the
overthrow of mainstream economics. It is the same revolution that
their counterparts were saying was about to happen in the early 1970s
when I learnt my first economics. They want people to believe that the
bowdlerised version of economics used by neoliberals to support their
ideology is in fact mainstream economics.
8. The right on the other hand is uncomfortable when evidence
based economics conflicts with their politics. Their response is to
attack economists. This is not a new phenomenon, as I
showed
in connection with the famous letter from 364
economists. With austerity they cherry picked the minority of
economists who supported it, and then implemented a policy that even
some of them would have disagreed with. (Rogoff did not support the
cuts in public investment in 2010/11 which did most of the damage to
the UK economy.) The media did the rest of the job for them by hardly
ever talking about the majority of economists who did not support
austerity.
So given all this, why do some continue to attack economists?
On the left there are heterodox economists who want nothing
less than revolution, the overthrow of mainstream economics.
It is the same revolution that their counterparts were saying
was about to happen in the early 1970s when I learnt my first
economics. They want people to believe that the bowdlerised
version of economics used by neoliberals to support their
ideology is in fact mainstream economics.
-- Simon
Wren-Lewis
[ This is an important criticism that as such can surely
be further explained and analyzed at length.
The reference to the work of "heterodox economists" in the
1970s is completely unknown to me and I would be interested
in knowing more. After all, I have had a sense that during
the 1970s conservative economists, "Chicago School"
economists, become distinctly influential both in the field
of economics and for policy makers. ]
On the left there are heterodox economists who want nothing
less than revolution, the overthrow of mainstream
economics....
[ Since my understanding of heterodox
economics is that it ranges from cultural to ecological
perspectives to various degrees of institutional planning, I
do not understand what revolution Simon Wren-Lewis has in
mind. Also, again I do not understand what heterodox
economics was in the 1970s. ]
"heterodox economists" is sort of like "neoliberal". We are
talking what political types call a Big Tent. Alas the hyper
political types here cast this tent over everyone they might
disagree with. Which is sort of Simon's point.
What Wren-Lewis misses, I think, is that something I've
noticed in my roughly a decade of reading economic blogs on
the Internet. Economists have blinkers on. They want to view
the economy as an isolated scientific subject, like the
interior of a test tube, and treat politics and policy as a
sort of exterior force, that can be isolated from the world
of the chemist and pushed off-to-one side.
It seems fairly
clear to me that the two elements--politics and the
economy--are obviously continuously co-mingled, and have all
sorts of feedback loops running between them. The discipline
really consistently and deliberately blinds itself to
politics and the dynamics of power, despite the deep
entanglement of politcs with everything economic.
Wren-Lewis
admits that macroeconomists "missed" the impacts of very high
financial sector leverage, but finds that now that economists
have noticed it, and suggested remedies, that the power of
bank lobby prevents those remedies from being enacted. But
shouldn't the political power of the finance lobby been a
part of economic analysis of the world along with the dangers
of the financial sector's use of extreme leverage? Does he
think the two phenomena are unrelated? Shouldn't economics
pay more attention to the ongoing attempts of various groups
to orient government policy in their favor, just like they
pay attention to the trade deficit and GDP numbers?
I look at
politics and the economy and see one thing, not two things,
and I am astonished at the extent to which economists focus
on the part they like to play with intellectually, while
deliberately looking away from what is probably the more
important part. Its like economists obsessively focus on the
part that can be studied via numbers (money) and dont' want
to think about the part that is harder to look quantify
(political policy). And there is a political issue there,
which Mr. Wren-Lewis, keeps ignoring in his defense of
"mainstream economics."
The neoclassical economics tendency
of not looking at power relationships makes power imbalances
and their great influence on economics seem like "givens" or
"natural endowments", which is clearly an intellectual sin of
omission. Many people, even within the halls of mainstream
economics, note economists are "uncomfortable" with
distributional issues.
Whether they like the implication or
not, economists need to acknowledge that this discomfort has
a profoundly conservative intellectual bias, in the sense
that it make the status quo arrangement of society seem
"natural" and "normal", when it is obviously humanly
constructed and not in any sense "natural."
So when left-wing
people say that economists are defenders and supporters of
the current order of things, they have a point: ignoring
power relationships and their impact on the world supports
the contined existence of those relationships. Mr. Wren-Lewis
seems like a nice guy, but he needs to take that simple home
truth in. I'm not sure why he seems to struggle so with
acknowledging it.
The sense that the study of
economics is a political-economic study appears as a
rejection of what is supposed to be technocratic, supposed to
be the study of the mechanics of capitalism in a pure frame
as though capitalist mechanics were not continually defined.
The mechanics of pure capitalism dictates a technocratic
politics:
The point being we cannot ignore the politics? Simon gets the
politics but he still tries to get the analysis straight. I
find this to be a very important thing to do but then the
hyper political types call getting the analysis right lying.
Or something like that.
No, you pretty much seem to be missing my point completely.
It's not about getting the economics right and the politics
right as two separate exercises, it's about taking seriously
the interactions between the two. Who knows, maybe if someone
had modelled the positive feedback loops between lobbying
expenditures, industry-friendly public policy, and industry
profits for, say, the financial industry, someone might have
correctly predicted the financial crisis of 2008, and perhaps
even predicted that it would also be almost impossible for
the government to take the necessary action to correct the
problem politically, and that this would result in a sluggish
economy post-crisis. Whereas, keeping these issues separate
as we currently do makes it pretty much a sure bet that no
one will have a very good insight into how the real world
will unfold in the future.
Former Top British Official to Join BlackRock as an
Adviser
By CHAD BRAY
Other recent moves from Westminster, where Britain's
government is based, to the City, as the historical London
financial district is known, include:
William Hague, the former British foreign minister, who
this week announced that he was joining Citigroup as a senior
adviser.
Alistair Darling, a former member of Parliament and the
chancellor before Mr. Osborne, joined Morgan Stanley's board
of directors last year.
Gordon Brown, the former British prime minister, joined a
global advisory board at Pimco last year. The advisory
board's members include Ben Bernanke, the former Federal
Reserve chairman.
Tony Blair, the British prime minister before Mr. Brown,
joined JPMorgan Chase as a part-time senior adviser in 2008.
You think what's needed is a perfect plan. You are so wrong
because you lack life experience.
Tip for the neoliberal
pgl from the world of business, engineering, war and
politics.
A bad plan executed well beats a good plan executed badly.
You want to know why economists are being attacked.
The
Yellen Fed is rapidly digressing into a political entity.
The Fed is allegedly independent of politics, but Janet
Yellen's latest statements leave no doubt that she is more of
a political operative than an economist.
Three months ago, on October 14 2016, Yellen stated the
following:
Yellen Cites Benefits to Running Economy Hot for Some Time
Federal Reserve Chairwoman Janet Yellen offered an argument
for running the U.S. economy hot for a period to ensure
moribund growth doesn't become an entrenched feature of the
business landscape. That would mean letting unemployment fall
lower and spurring faster growth to boost consumer spending
and business investment.
Source: Wall Street Journal
Compare this language to Yellen's statement from last
week.
Federal Reserve Chair Janet Yellen backed a strategy for
gradually raising interest rates, arguing that the central
bank wasn't behind the curve in containing inflation
pressures but nevertheless can't afford to allow the economy
to run too hot. Still, she saw dangers in permitting the
economy to overheat and inflation expectations to get out of
control. "Allowing the economy to run markedly and
persistently 'hot' would be risky and unwise," she said.
Source: Bloomberg.
So three months ago, running the economy "hot" was a good
idea. But today, it's a massive risk that we cannot afford to
take.
What changed in those three months?
Core inflation rose 0.1%. And the US closed 2016 with a
sub-2% growth rate for the year. Neither of those would
qualify as remotely "hot."
The main change? The GOP took the House, Senate, and White
House.
Bear in mind, Yellen's statement came a mere 24 hours
after then President-elect Donald Trump commented that the US
Dollar was "too strong."
So we have a Fed chair performing a 180% on running a
"hot" economy within three months and openly defying the new
administration's views on the US Dollar at a time when the
data doesn't support any of her claims.
Yellen may be seeing something everyone else is not, but
it is difficult to see this as anything other than political
hackery.
Uh dude, CPI is running at 2.1% yry and will rise further
when the 2016 oil "mirage" is removed unless we can get
another price collapse. Inflation was firming right under
your noise.
The economy from a monetary pov is indeed running hot.
This is what you do not understand. The structural issues
deal with the plutocratic tyranny that began under Reagan and
the zionist Trump cabal want to take to another level. Jack
London called it the Iron Heel.
First of all, core CPI (which according to the Fed is a
better measure) has been above 2% level since Nov 2015. So
CPI inflation around 2% level is NOT NEW NEWS. If rates
should rise because of inflation, then why did she not raise
them a lot before? Answer - because Obama was in office. The
plan was to get HRC into office and run a high pressure
economy with low unemployment and high inflation. That all
changed when the GOP won. Those are the facts. Yellen is
nothing but a disgusting political operative.
Your handle
is offensive. But hey, this is a free country. Or was, till
the liberal left decided that the first amendment only
applies if you agree with them.
Yet again, bad economics are behind most Fed related policy
proclamations justifying and criticizing Fed policy.
Do
don't think even Milton Friedman would accept any of it,
unless he let politics blind him to what was clear to him in
the 50s and 60s.
In the 50s and 60s, he would be debating the cratering
velocity, it's causes, and remedies. He would not be blindly
calling for increasing or decreasing the growth in money
supply.
Scott summer is calling blindly for higher growth in money
supply by blindly advocating "NGDP targeting" while ignoring
the exporting of "capital" and importing of labor, and
ignoring the falling velocity of money.
The two are likely closely tied, in that money created
that flows out of the US as "capital" where is pays no
workers in the US, thus never adding to US GDP, means the Fed
can't boost NGDP.
The reality is the Fed can have no significant impact on
the economy by any normal policy moves. Changing the interest
rates by purchase and repo trades to US Treasuries at 4%
would not impact the economy because of the new market
interest rates, but the reaction of interest payers will
impact the economy. Everyone assumes higher interest payments
will mean less paid to workers, because the way to cut the
burden of interest payments is to cut revenue so interest
becomes a higher share of revenue. In reality, what is cut is
buying goods with future wages and working hard to repay
borrowed labor costs. Keynes notes that the individual self
interest reaction is both collectively and individually
harmful.
The high level of debt from consumption in a growing
economy is extremely harmful, yet Fed policy has been
promoting job killing debt funded consumption by doing less
of what Scott Summer advocates it should do to create jobs.
Fair enough. I think we are in agreement that monetary policy
should be based on the state of the economy and not politics
even if we have a genuine disagreement about the state of the
economy. But at least you and I are having a principled
discussion. Something others here should emulate.
Heterodox economics refers to methodologies or schools of
economic thought that are considered outside of "mainstream
economics", often represented by expositors as contrasting
with or going beyond neoclassical economics. "Heterodox
economics" is an umbrella term used to cover various
approaches, schools, or traditions. These include socialist,
Marxian, institutional, evolutionary, Georgist, Austrian,
feminist, social, post-Keynesian (not to be confused with New
Keynesian), and ecological economics among others.
Mainstream economics may be called orthodox or
conventional economics by its critics. Alternatively,
mainstream economics deals with the
"rationality–individualism–equilibrium nexus" and heterodox
economics is more "radical" in dealing with the
"institutions–history–social structure nexus". Many
mainstream economists dismiss heterodox economics as "fringe"
and "irrelevant", with little or no influence on the vast
majority of academic economists in the English-speaking
world.
It seems
mainstream to argue that a high tax rate and costly
regulations kill jobs, and that cutting taxes and regulations
will create jobs because rewarding higher profits from
reducing labor costs far below prices, and eliminating all
the labor costs to comply with regulations will create jobs,
because lower labor costs mean more workers being paid higher
wages.
But can someone explain the mainstream economic theory of
reducing labor costs resulting in more workers getting paid
more??? Looks like voodoo to me.
I don't see it
as attacking economics as science tied to nature, as much as
attacking economists who pick one "natural law" and apply it
generally far outside the limits for which it applies,
ignoring all the other laws that constrain it.
For example demand price theory and elasticity is sound
natural law. It's like Boyles Law of gases. Boyles law
applies over a range of pressures and temperature for which
the gas remains a gas. It has limits, the point the "gas"
becomes liquid or solid.
The idea that lower prices will create jobs applies only
for a limited range of prices and quantities, but once
outside those bound, lower prices MUST KILL JOBS.
The Laffer curve is an elasticity curve that covers the
entire range of tax rates. A carbon tax works by moving up
the curve to the point zero tax revenue is generated. The
higher the tax, the cheaper it is to pay workers to build
substitutes that do not burn fossil fuels, and instead of
paying taxes, you pay the cheaper payroll of more workers.
Likewise, a high tax rate on economic aka monopoly
profits, and on rents, the cheaper paying workers to build
tax dodging depreciating capital becomes, which in the long
run increases the capital stock, the product quantity, and
thus prices are driven to cost eliminating economic profit
and economic rents.
The point of high tax rates, tax rates of 50% and up, is
not to raise revenue but to cause paying workers for
substitutes.
On the other hand, government is a product, the general
welfare, so, to increase the quantity of general welfare, tax
rates need to be high enough to pay workers. The cost of
general welfare is certainly much less than 50% of the
economy in the long run, so tax rates are at all points in
the lower part of the Laffer curve so lowering rates will
reduce the quantity of general welfare that can be produced.
And the general welfare is always from paying workers.
So, economists across the board are pretty universally
wrong about tax rates and about prices levels, and the impact
of raising and lowering them.
At the micro level, the theory is clear. At the micro
level, the principle of zero sum is held as a natural law
constraint.
Moving to macro does not eliminate any of the natural laws
of micro, but instead moves economics from the micro theory
of the two body problem, two bodies of mass rotating about
each other, to macro theory of the n-body problem of sun,
planets, solar systems, galaxies all rotating around each
other. At this level, many natural laws come into play, like
general relativity in its many forms including imputing mass
to energy, going far beyond Newtonian physics, yet not
discarding it.
Macro economists have either blindly and wishfully
forgotten or ignored fundamental micro laws, or intentionally
eliminated them from the macro proclamations to deceive.
When Bernie Sanders argues a carbon tax can pay for vast
welfare state benefits, is he intentionally lying, or has he
been deceived by self deceiving economists who wishfully seek
a free lunch economic system where money comes from nothing?
When Milton Friedman argued in 1970 lower tax rates would
generate the same tax revenue and create more jobs and
output, was he intentionally lying, or self deceiving
himself?
Milton Friedman in arguing against high tax rates made a
point of all the jobs and wage income that resulted from the
high tax rates, jobs and income he considered wasteful
spending promoted by the tax policy. He even noted that the
high wage income increased demand for goods and services,
consumption he considered wasteful.
So, as the father of the macro economic policy of tax
(rate) cuts, how can it be a policy to boost gdp and jobs to
cut taxes as Friedman argued?
Trump seems to latch onto simplified macro economic half
baked policy ideas an run with them to the max. The
economists who crafted the policy statements he has extracted
his proclamations from are horrified by what he is doing with
their policy proclamations. Proclamations that are half baked
and thus violate natural law.
Take the economists at Econlog from which Trump gets a lot
of his economics. They are horrified. Yet their economic
"theory" clearly does not work. Trade theory in particular.
The micro theory of trade exchanges labor for labor, ie, your
labor makes goods traded for goods I make with my labor. But
trade today swaps labor for capital, so jobs are moved from
one nation to another in exchange for reducing the wealth of
the other.
Saudi Arabia is the simplest example. It sells it's
natural capital and then imports labor goods at prices lower
than Saudi workers can hope to produce them, thus killing
jobs in Saudi Arabia. The crisis in Saudi Arabia is a lack of
opportunity for the Saudi people who are multiplying as if it
were still an undeveloped nation with high mortality rate.
Since Reagan, the US has become more like Saudi Arabia,
selling off capital to buy cheap goods from less developed
economies where labor is relatively cheaper and sending back
capital, killing jobs in the process and eliminating economic
opportunity to Trump voters.
Milton Friedman argued that this was a good policy because
we as a nation were better off from China effectively gifting
us cheap goods and that on the whole, the US is better off
from jobs lost in the US. He hinted at using the consumer
surplus of cheap imports to pay welfare to those who lost
jobs, but those advocating job killing trade imbalance also
condemn welfare payments, blaming those who lost jobs as
being at fault.
So, Trump is going back to micro economics and promising
to make sure trade is going to create jobs in the US. But he
also grabs onto and clings to the cheap price concept that
requires killing jobs. Trump is going to ensure energy is
cheap, which means he will never ban oil imports or put a $50
a barrel tariff on oil imports.
What policy could Trump do to create jobs quickly? A $50 a
barrel tariff on imported oil, say phase it in over a year,
$20 starting April 1, $30 July 1, $40 Oct 1, $50 Jan 1 2018.
This time, ExxonMobil will not have high profits from $4
gasoline and heating oil because they will be paying 25,000
more direct workers to drill baby frack, plus ten times as
many supporting jobs, as they build assets they can rapidly
depreciate or expense to wipe out taxable profits. At the
same time, incumbents drillers will return to high gear. If
Trump rebates a tariff on exported refined oil products, it
would delay NAFTA sanctions as oil products consumed in
Mexico and Canada will be cheaper but exports will not be
reduced much. On the global market, the results will be
devastating with oil prices crashing. Putin would likely
target Trump for going to war on the Russian people and
economy.
Bernie would likely attack Trump for his policy hiking the
price of heating oil to the working poor of Vermont. But you
can't pay more American workers without higher energy prices.
Vermont's working poor will end up with better pay if energy
efficiency investments are made in Vermont because neither
Chinese nor Saudi workers can eliminate the need for oil to
keep housing warm in Vermont.
And the $50 a barrel tariff on imported oil will generate
no revenue for government to spend by 2020 if oil product
exports get tariff rebates.
The financial crisis in the UK was the result of losses by
banks on overseas assets, originating from the collapse in
the US subprime market. It was not a result of excessive
borrowing by UK consumers, firms or our government. As the
Bank's Ben Broadbent points out, "Thanks to the international
exposure of its banks the UK has been, in some sense, a "net
importer" of the financial crisis." This overseas lending
caused a crisis because banks were far too highly levered,
and so could not absorb these losses and had to be bailed out
by the government.
This is why UK macroeconomists failed to pick up the
impending crisis. They did routinely monitor personal,
corporate and government borrowing, but not the amount of
bank leverage. Macroeconomists generally acknowledge that
they were at fault in ignoring the crucial role that
financial sector leverage can play in influencing the
macroeconomy. There has been a huge increase in the amount of
research on these finance-macro linkages since the crisis.
But supposing economists had ensured that they knew about
the increase in bank leverage and had collectively warned of
the dangers of excessive risk taking that this represented.
Would it have made any difference? There are good reasons for
thinking it would not.
The main evidence for this is what has happened after the
crisis. Admati and Hellweg have written persuasively that we
need a huge increase in bank capital requirements to bring
the 'too big to fail' problem to an end and avoid a future
banking crisis, and the work of David Miles in the UK has a
similar message. I have not come across an academic economist
who seriously dissents from this analysis, but it has no
impact on policy at all. The power of the banking lobby is
just too strong....
Oh you mean
the success of being able to raise asset prices without the
growth in wages, make education costly and unaffordable
without student loans, not chargeable under bankruptcy,
spruce up employment figures by not counting the people who
have stopped look for jobs because they cannot find one, make
people debt serfs, make savers miserable by keeping interest
rates at zero and making them take risks that they may not
want to take though it is picking pennies in front of a
steamroller, keeping wages stagnant for decades and thus
impoverishing people. The list of successes is endless and
you should be glad we are NOT talking about them. Because if
we do, the clan called economists might well be torched.
On monetary economics - he is closer to Krugman than to Phil Gramm. But some people here hate
Friedman as much as they hate Krugman and they have decided "neoliberal" is the ultimate put down.
Even though they have no working definition of "neoliberal".
"... I seriously question the assumption of FOREX adjustments perfectly offsetting policy changes such that the balance of trade remains unchanged. It seems like an article of faith that things work this way, based on logic, intelligence, and economic analysis based on various models of how the world works. ..."
"... Do economists have solid models that accurately predict the movement of FOREX rates in the first place? I mean, all else being equal, and given no policy changes at all, can economists accurately forecast the exchange rates between, say, Canada and the US over the next 10 years? And, if so, why do these economists have to work for a living? Shouldn't they be enormously wealthy people by now if they possess this level of predictive capabilities? ..."
"... My personal thinking on the matter is to take a more humble approach. Given some solid reasons to believe the proposed border adjustment tax will increase the value of the dollar, but lacking a way to accurately predict FOREX, I would guess that exchange rates would adjust to cancel out only half the policy change. I'll assume trade flows adjust a bit and FOREX rates adjust a bit. And since it is just a guess, I'd be quite cautious in drawing any strong conclusions. ..."
"border adjustability. In the eurozone, where there is a fixed exchange rate of 1 between
the member countries, relying more heavily on a value-added tax-for which international rules
allow taxing imports while exempting exports from the tax-and less on other taxes, is understood
as a way to get the same effect as devaluing to an exchange rate that makes foreign goods more
expensive to people in a country and domestic goods cheaper to foreigners. But in a floating
exchange rate setup as the US has, most of the effects of border adjustment can be canceled
out by an explicit appreciation in the dollar that cancels out the implicit devaluation from
the tax shift. And indeed, such an appreciation of the dollar is exactly what one should expect."
The architect of this Destination Based Cash Flow Tax with "Border Adjustments" (is that
like sprinkles on top) is Alan Auerbach and even he admits this. Miles moves onto something
else I have been saying:
"A way to push down the value of the dollar and stimulate net exports for a much longer
time is to increase saving rates in the US As greater saving pushed down US rates of return,
some of that extra saving would wind up in foreign assets, putting extra US dollars in the
hands of folks abroad, so they would have US dollars to buy US goods. This effect can be enhanced
if the regulations for automatic enrollment are favorable to a substantial portion (say 30%)
of the default investment option being in foreign assets. Note that an increase in US saving
would tend to push down the natural interest rate, and so needs to be accompanied by the elimination
of the zero lower bound in order to avoid making it hard for monetary policy to respond to
recessions."
OK – it might not be so easy to lower the natural rate now but back in 1981, real interest
rates soared as the Reagan tax cuts lowered national savings. This led to a massive dollar appreciation
and a large drop in net exports.
I seriously question the assumption of FOREX adjustments perfectly offsetting policy changes
such that the balance of trade remains unchanged. It seems like an article of faith that things
work this way, based on logic, intelligence, and economic analysis based on various models of
how the world works.
But while this view seems to be held by intelligent people with far more economic education
that I will ever have, I am wondering if there is any empirical evidence that supports this reasoning?
I am sceptical.
Do economists have solid models that accurately predict the movement of FOREX rates in
the first place? I mean, all else being equal, and given no policy changes at all, can economists
accurately forecast the exchange rates between, say, Canada and the US over the next 10 years?
And, if so, why do these economists have to work for a living? Shouldn't they be enormously wealthy
people by now if they possess this level of predictive capabilities?
My personal thinking on the matter is to take a more humble approach. Given some solid
reasons to believe the proposed border adjustment tax will increase the value of the dollar, but
lacking a way to accurately predict FOREX, I would guess that exchange rates would adjust to cancel
out only half the policy change. I'll assume trade flows adjust a bit and FOREX rates adjust a
bit. And since it is just a guess, I'd be quite cautious in drawing any strong conclusions.
I welcome comments that would help educate me on this subject. Best wishes to all.
Before the opportunity-window slams shut, harvest your data from the market! You need to record
a baseline from the last moments of the O'Bummer World. Sure!
You will wish him back, but that is beside the point. We are scientists not wishers.
Hello. Thank you for this link. I found this comment by Peter Dornman to be interesting: "And
also, yes, any theory that implies a known relationship between macro variables and forex rates
is *very* counter-empirical."
If his comment is correct, it makes me wonder about the reliability of Miles Kimball's analysis.
There are certain types of problems we just can't reliably analyze, as they are too complicated,
or the underlying physics is subject to extreme sensitivity to accuracy of the inputs (chaos theory,
basically). For instance, our ability to make meaningful forecasts of the weather is limited to
a few days. Maybe FOREX predictions are like that? If so, we should be cautious about making any
strong statements about FOREX adjustments precisely offsetting policy changes.
I mean, doesn't it seem like hubris when you can't predict what a variable will do given no
changes to current conditions, but you decide that you can predict *precisely* what it will do
if we make changes to current conditions?
"Do economists have solid models that accurately predict the movement of FOREX rates in the first
place?"
Meese-Rogoff showed that exchange rates are disconnected from fundamentals. It's called the
'foreign exchange puzzle.'
Yet pgl keeps insisting on an 'if x then y' approach to most problems. His key variable is
interest rates, which are at the root of most every change in pglian universe.
I'm actually surprised that he departs from his rate-centric universe to suggest that Trump
might be responsible for something like the fall of the peso, though he stridently rejects the
idea that Trump's bully pulpit might shame American companies into keeping more jobs at home.
If there is Fake News, is there such
a thing as Fake Economics? I thought
about this as a result of two studies
that have received considerable
publicity in the press and broadcast
media over the last few weeks. Both,
needless to say, involve Brexit. The
first are two bits of analysis by
'Change Britain', saying Brexit would
generate
400,000
new jobs
and
"boost the UK
by £450 million a week". The second
is a more substantial piece of
work
by economists
at the Centre for Business Research (CBR)
in Cambridge, which was both very
critical of the Treasury's own
analysis of the long term costs of
Brexit and came up with much smaller
estimates of its own for these costs.
Defining exactly what Fake News is
can be
difficult
, although
we can point to examples which
undoubtedly are fake, in the sense of
reporting things to be true when it
is clear they are not. Fake News
often constitutes made up facts that
are designed for a political purpose.
You could define Fake economics in a
similar way: economic analysis or
research that is obviously flawed but
whose purpose is to support a
particular policy. (Cue left wing
heterodox economists to say the whole
of mainstream economics is fake
economics.) We can equally talk about
evidence based policy and its fake
version, policy based evidence.
Current U-6 Unemployment Rate is 9.1% (BLS) or 13.7% (Gallup)
Current U-6 Unemployment Rate:
Unemployment U6 vs U3 For December 2016 the official Current U-6 unemployment rate was 9.1%
up from last month's 9.0% but still below the recent low of 9.3% in April and September and October's
9.2%.
On the other hand the independently produced Gallup equivalent called the "Underemployment
Rate" was up to 13.7 in December from 13.0% in November nearing the 13.8% of April. The current
differential between Gallup and BLS on supposedly the same data is 4.6%!
"The labor market remains near its sustainable, full employment level."
This is a hope not a fact
There is plenty of slack if the underemployed move into jobs and we return the 20-50 yr olds to
pre-recession participation rates.
nope,nope,nope. you don't get how employment to population ratio is calculated. it can't rise
and should not rise unless the calculations are adjusted.
Let's see:
SUPPORTING the belief that we are "close" to full employment is the U-3 measure of unemployment,
a measure with an arbitrary cut-off that excludes from the official labor force as many people
as possible who are not employed but do want jobs -- by requiring (1) an "active" search effort
only within the last four weeks, based on (2) a definition of "active" that probably does not
fit rational behavior by the unemployed who now have access to comprehensive Internet jobs databases
that did not exist 20 years ago. (It is not terribly hard to surmise the institutional interests
that are served by keeping the size of the labor force for purposes of determining the official
unemployment rate as small as possible.)
NOT SUPPORTING the belief that we are close to full employment:
(1) the lowest employment-to-population ratio in almost half a century;
(2) negating the intellectually-lazy demographic excuse that invariably gets raised to point No.
1, the lowest employment-to-population ratio in 30 years in the prime working age group (25-54),
a group that is 99.99% unaffected by the phenomenon of voluntary retirement;
(3) a U-6 (that counts many more of the unemployed in the labor force) that is still three percentage
points higher than the low point reached in 2000 (three percentage points is a lot, representing
about 7.5 million people who want jobs but are not counted in the labor force for calculating
the U-3);
(4) an aggregate growth in full-time jobs of only 9% since the relative high point in 2000 even
though the working age population has grown by 20%;
(5) average weeks unemployed among those who are counted as part of the labor force (26 weeks)
that is still more than twice as high as it was in 2000 (under 13 weeks) and is still 10 weeks
higher than it was before the Great Recession;
(6) involuntary part-time employment still 75% higher than it was in 2000, 33% higher than before
the Great Recession;
(7) whereas in 2000, the U.S. was near the top in employment rate among the OECD countries, in
2017 it is close to the bottom; most OECD countries have recovered in their employment rates since
the depths of the Great Recession, and many have moved to new levels (even supposedly sick France
has a higher employment rate in the 25-54 prime working age group than te U.S.).
With this array of negative date to overcome, it takes a lot of wise monkeys who neither speak,
hear nor see any evil to expound a belief that we are close to full employment.
RW said... January 18, 2017 at 07:05 AM
Inflation for the 4th quarter of 2016 is zero -- no change Oct through Dec -- and real interest
rates remain near the zero boundary. Republican history WRT governing particularly as it pertains
to the economy is sufficiently poor that optimism appears entirely unwarranted. I hear a lot of
investors are adjusting their portfolio allocations to favor equities over bonds. Two years ago
that was a smart move; now, not so much.
mulp said...
"All else equal, tax cuts boost household and business income."
In 2001, I was rif'd from my 100K++ job and got a $20,000 tax cut.
That tax cut did not boost my household income.
That economists have been bamboozled into thinking this way is beyond my comprehension.
Economies are zero sum. For every action, there is a reaction. Tax cuts mean revenue cuts which
means spending cuts and spending cuts mean lower household income.
Very few sectors of the economy are subject to demand price elasticity that results in higher
revenue from price reduction due to the quantity increasing explosively from a small reduction
in price.
For example, cutting the profit tax by 30% on $100 oil so gasoline falls from $4.05 to $4.00
and thus doubles the quantity of gasoline sold to boost profit taxes is an impossibility.
And cutting the tax on economic profits from restricting oil production to drive up prices
and profits can only increase tax revenue if oil production is cut further by cutting jobs so
gasoline prices can be increased from $4 to $5 to $6 per gallon.
Since Reagan, economists seem to have self lobotomized so they spout totally illogical nonsense
like "All else equal, tax cuts boost household and business income."
Might as well say "if you believe, you can fly when tinker bell hits you with pixie dust."
I know I will completely offside with my view on this, but I
think the behavioural/rational expectations debate is rather
besides the point. The much bigger issues are uncertainty and
disequilibrium.
As I noted the other day, and Johnnny Bakho refers to below,
the essence of this problem is that the thing being observed,
observes back and adapts.
The only kind of model that might
work in the long run, is a model that works even after
everybody becomes aware of it and adapts their behavior to
it.
As to the issue of uncertainty, if we assume that most
people operate with formal or informal budgets, anything that
causes them to think that their budget is about to increase
or decrease is going to change their consumption. And since
people *hate* to sustain and realise losses, the change is
going to be disproportionately intense if the uncertainty
include an possible increase to the downside.
No that isn't enough. Sure people might change their behavior
as their understanding changes. But other things are changing
as well as the behavior. In particular, technology and
available resources change.
As I said the system is
evolutionary (which means an adaptive system - which includes
behavior changes), and evolution is never easy to anticipate,
which implies uncertainty. And the existence of uncertainty
leads to persistent disequilibrium (as people adopt defensive
contingent strategies to cope with uncertainty). The big
errors in macro are all associated with the general
equilibrium paradigm and the assumptions that come with it.
Point taken re technology and resources, although behavioral
adaptation is a big part of why models fail.
I had a big
long response worked out re the biggest endemic problem with
"the assumptions that come with" macro's paradigm. Then my
iPad decided to randomly pop up a keyboard screen and when I
touched to get rid of it, deleted the entire comment!
The screaming at crapified Apple has passed now. I am zen
again.
P.S. Rational expectations IS an attempt to build in
behavioral adaptation. It is just that it turns out not very
useful (it is empirically a complete flop).
So there is 'uncertainty' and 'uncertainty.' Which kind of
uncertainty leads to a slower economy? Why wouldn't unknown
after-shocks from repealing Obamacare have current economic
repercussions?
Republicans used to claim that the roll-out
of Obamacare was causing economic uncertainty and hurting the
economy.
Seems to me that the whole foundation of 'economic
uncertainty' is rather shaky, particularly if the promised,
disruptive actions of Trump don't cause economic
repercussions.
Uncertainty (as for instance PK pointed out) can work in
different ways in the short and long terms. In the short term
it can result in hedging behavior which might actually
promote some investment. In the longer term it will push up
risk margins which will probably push growth rates down.
Humans evolved as social animals.
If rational expectations focuses on the individual and
ignores that humans act as members of groups, not
individuals, then it will not accurately predict human
behavior or outcomes.
Perhaps your comment is similar to supposing that perhaps
"equilibrium" is a not always useful concept when the modeled
surface may have multiple local maxima, minima and saddles.
Nope. I think we are trying to model a system converging to
an equilibrium that is changing faster than the system can
possibly adapt. We should forget all about equilibrium in
macro-economics. It only misdirects.
I once tried to explain this with an analogy to flying a
plane - the plane is always sinking and rising and net path
the outcome of the sum of different (constantly varying)
forces. This is quite distinct for instance, from the way
that a boat floats on the ocean (which is much closer to how
we are trying to model things today). The stochastic shocks
in economic models are like waves on the sea - where the net
effect in the end is that the average position remains the
same. I don't think the economy is like that.
The idea of equilibrium is a neoclassical fallacy. financial
sector introduced in the system systemic instability, the
positive feedback loop.
Cassidy called it "Utopian economics".
As you wrote in 2015
reason :
The problem in thinking here is the equilibrium paradigm.
Equilibrium NEVER exists. If there is a glut the price falls
below the marginal cost/revenue point, if the seller is
desperate enough it falls to zero!
Ignoring disequilibrium dynamics means this obvious (it
should be obvious) point is simply ignored. The assumption of
general equilibrium leads to the assumption of marginal
productivity driving wages. You are not worth what you
produce, you are worth precisely what somewhat else would
accept to do your job.
All those notions like "full employment" (when employment
metrics are completely screwed) are very questionable indeed.
And role of federal reserve in enforcing neoliberal policies
is often underestimated. Greenspan was a neoliberal stooge. A
servant of Wall Street.
What Does Crowding Out Even Mean?
by J.W. Mason
Posted on January 16, 2017
Paul Krugman is taking some guff for this column where he
argues that the US economy is now at potential, or full
employment, so any shift in the federal budget toward deficit
will just crowd out private demand.
...
...In the more sophisticated textbooks, this becomes a
central bank reaction function - the central bank's actions
change from being policy choices, to a fundamental law of the
economic universe. The master parable for this story is the
1990s, when the Clinton administration came in with big plans
for stimulus, only to be slapped down by Alan Greenspan, who
warned that any increase in public spending would be offset
by a contractionary shift by the federal reserve. But once
Clinton made the walk to Canossa and embraced deficit
reduction, Greenspan's fed rewarded him with low rates,
substituting private investment in equal measure for the
foregone public spending. In the current contest, this means:
Any increase in federal borrowing will be offset one for one
by a fall in private investment - because the Fed will raise
rates enough to make it happen."
"... But the application is broader. There are two types of economics: positive economics vs. normative economics. Basically, " here is what people do" vs. "here is what people *should* do." The better economics gets at explaining what people actually do, the more people can adapt their behavior based on the accuracy of economics. ..."
"... "War is regarded as nothing but the continuation of state policy with other means." ..."
The Stumbling and Mumbling article raises a fundamental point
about economics: forecasting *must* inevitably be generally
wrong.
The reason is that you are predicting human
behavior, but the humans under observation also get to
observe back! They can and will adapt their behavior based on
your forecasts. For example, let's say that everyone knows
that I am a 100% accurate economic prognosticator. I forecast
that while the economy is doing well now, one year from now
there will be a recession.
What do you as a producer or consumer do? Since you know I
am 100% accurate, you alter your behavior because you know a
recession is coming in one year. Result: the recession comes
now! Because you curtailed production or consumption in
anticipation of the recession you knew was coming.
But the application is broader. There are two types of
economics: positive economics vs. normative economics.
Basically, " here is what people do" vs. "here is what people
*should* do." The better economics gets at explaining what
people actually do, the more people can adapt their behavior
based on the accuracy of economics.
Result: the better
positive and normative economics get, the more positive and
to some extent* normative economics must fail!
(*I think there are some normative concepts that would be
correct even if everyone knew about them and acted on them,
e.g., efficiently allocating time.)
P.S.: As an aside and a real-world example, I am just
finishing a dense 800 page tome on Napoleon. It has been a
godsend since the election! As a young general, Napoleon was
brilliant, adopting and using the newest and novel tactics
and formations advocated by military scholars against his
geriatric and monarchically-connected opponents.
But over time his adversaries, especially Tsar Alexander,
learned. They appointed more military generals and
strategists on merit, adopted Napoleon's reforms, and in a
strategy that the Chinese and Japanese (and Karl Rove) would
have approved, actually used his strengths against him.
Humans are remarkably cunning chimpanzees. When enough of
them learn a strategy, it loses its effectiveness.
'Napoleon: A Life,' by Andrew Roberts
By DUNCAN KELLY
On July 22, 1789, a week after the storming of the
Bastille in Paris, Napoleon Bonaparte wrote to his older
brother, Joseph, that there was nothing much to worry about.
"Calm will return. In a month." His timing was off, but
perhaps he took the misjudgment to heart because he spent the
rest of his life trying to bring glory and order to France by
building a new sort of empire. By the time he was crowned
emperor on Dec. 2, 1804, he could say, "I am the Revolution."
It was, according to the historian Andrew Roberts's epically
scaled new biography, "Napoleon: A Life," both the ultimate
triumph of the self-made man, an outsider from Corsica who
rose to the apex of French political life, and simultaneously
a "defining moment of the Enlightenment," fixing the "best"
of the French Revolution through his legal, educational and
administrative reforms. Such broad contours get at what
Napoleon meant by saying to his literary hero Goethe at a
meeting in Erfurt, "Politics is fate."
Napoleon didn't mean fatalism by this, rather that
political action is unavoidable if you want personal and
national glory. It requires a mastery of fortune, and a
willingness to be ruthless when necessary. If this sounds
Machiavellian, that's because it is - Machiavelli's arguments
about politics informed Napoleon's self-consciousness,
whether in appraising fortune as a woman or a river to be
tamed and harnessed, or assuming that in politics it is
better to be feared than loved. Such views went hand in hand
with the grand visions of politics outlined in the ancient
histories and biographies Napoleon revered as a young man.
"Bloodletting is among the ingredients of political medicine"
was Napoleon's cool if brutal reminder of an ever-present
item on his exhausting schedule.
His strategy always included dashing off thousands of
letters and plans, in a personal regime calling for little
sleep, much haste and a penchant for being read to while
taking baths so as not to waste even a minute. He
compartmentalized ruthlessly, changing tack between lobbying
for more shoes and brandy for the army at one minute, to
directing the personal lives of his siblings or writing love
letters to the notorious Josephine at another; here ensuring
extravagant financial "contributions" from those whom he had
vanquished, there discussing the booty to send back to Paris,
particularly from the extraordinary expedition in Egypt where
his "savants had missed nothing." The personal and the
political ran alongside each other in his mind.
Yet when his longtime collaborator but fair-weather
political friend, the diplomat Charles-Maurice de Talleyrand,
suggested that Napoleon try to make those he conquered learn
to love France, Napoleon replied that this was an
irrelevance. "Aimer: I don't really know what this means when
applied to politics," he said. Still, if grand strategy and
national interest lay behind foreign affairs, there were
nevertheless personal rules of conduct to uphold. Talleyrand
was a party to Napoleon's strategy since supporting his coup
d'état against the French Directory in 1799. That was O.K.
And by short-selling securities he made millions for himself.
But he was called out by Napoleon and dismissed as vice grand
elector when found facing both ways politically at a crucial
moment.
Napoleon understood those temptations because he was also
flexible enough to tilt toward the winning side, regularly
supporting any form of local religion that could help him
militarily. Nonetheless, Roberts's Napoleon is a soldier,
statesman and "bona fide intellectual," who rode his luck for
longer than most intellectuals in politics ever do....
Duncan Kelly teaches political thought at the University of
Cambridge.
"... What is full employment is also debatable issue. For example, if workers or a good portion of workers are not earning a living wage, is that full employment? ..."
"... If production is reduced because people cannot afford the products, when in fact we have the capacity and people have the appetites and time to get utility out of the consumption is that full employment? ..."
"... Central bankers today irresistibly bring to mind the Wizard of Oz. It's the characters' missing virtues that grab me: a heart, a brain, and courage. Central bankers today lack all three. ..."
"... The Fed took risks to save the banking system, but is already telling us we are close to full employment and professing to be alarmed about "inflation," when anyone can see that banks, insurers, and pension funds are clamoring for rate rises, just as in the 1930s. Both institutions need to start thinking about someone besides the financial community. If they don't, I do not doubt that we will not have seen the last of the anger that Donald Trump and Senator Bernie Sanders mobilized in such disparate ways in the United States..." ..."
Really what SWL is saying he and Krugman
are against fiscal expansion because the Fed will negate it with higher interest rates.
"Paul Krugman
and I say no, using the following logic. The Fed thinks we are close to full employment, if we use
the term to denote the level of employment that keeps inflation constant. Generalised tax cuts (rather
than just tax cuts to the very rich) will tend to raise aggregate demand, which will lead inflation
to increase. The Fed will therefore raise interest raise rates further to offset this increase in
demand before it happens. As a result, the tax cuts will have no impact on demand, but simply make
funding investment more expense."
Maybe Trump will then fire Yellen? Did the clever little progressive neoliberals ever consider
that?
(Probably not since Obama never mad filling open slots on the FOMC a priority.)
Or he'll swamp her with reflationary nominations to the FOMC.
djb -> Peter
K....
What is full employment is also
debatable issue. For example, if workers or a good portion of workers are not earning a living
wage, is that full employment?
If production is reduced because people cannot afford the products, when in fact we have
the capacity and people have the appetites and time to get utility out of the consumption is that full employment?
So full employment definition is a whole field in itself
Thomas Ferguson: "Central bankers today irresistibly bring to
mind the Wizard of Oz. It's the characters' missing virtues
that grab me: a heart, a brain, and courage. Central bankers
today lack all three.
First, the brain. Two generations
ago, almost every economist knew what a catastrophe a
deficiency of effective demand could create. And in a real
crunch, they knew what to do about that. They realized you
couldn't push on a string, so somebody - the government - had
to borrow and spend when private markets would not. From the
1980s on, though, the fundamental Keynesian point - the
Principle of effective Demand -disappeared in a cloud of
statistical double-talk that, when you deconstruct it, turns
out to imply estimating potential output as a lagged function
of whatever foolish policy is being pursued.
Central bankers didn't take this giant step backwards to
pre-Keynesian economics by themselves. In that sense, it's
unfair to say they have only themselves to blame. But they
swallowed it whole, helped subsidize it, and cheered it on.
Now that they have rediscovered that monetary policy can't
levitate a broken economy, except by beggaring the neighbors,
it's time they admitted their errors and stopped acting like
they could control everything...
Next, courage. In the good old days, central bankers were
given to heady talk about "taking away the punch bowl" before
the party really got going. That may have been mostly
rhetoric, but it at least paid lip service to some value
bigger than banking...
The Fed took risks to save the banking system, but is
already telling us we are close to full employment and
professing to be alarmed about "inflation," when anyone can
see that banks, insurers, and pension funds are clamoring for
rate rises, just as in the 1930s. Both institutions need to
start thinking about someone besides the financial community.
If they don't, I do not doubt that we will not have seen the
last of the anger that Donald Trump and Senator Bernie
Sanders mobilized in such disparate ways in the United
States..."
Meanwhile 'liberal' worshippers of unsubstantiated
'crowding out' theories are eager to stifle fiscal stimulus
by having the Fed take away the punch bowl before the party
starts.
"... For him, the Soviet Union was once a stable, entrenched, conservative state and the majority of Russian people -- actually myself included -- thought it would last forever. But the way people employ language and read ideologies can change. That change can be undetectable at first, and then unstoppable. ..."
" In America there was once a popular but simplistic image of the Soviet Russia as the Evil
Empire destined to fall, precisely because it was unfree and therefore evil. Ronald Reagan who
advocated it also once said that the Russian people do not have a word for "freedom". Not so fast
-- says Alexei Yurchak. He was born in the Soviet Union and became a cultural anthropologist in
California. He employs linguistic structural analysis in very interesting ways. For him, the
Soviet Union was once a stable, entrenched, conservative state and the majority of Russian people
-- actually myself included -- thought it would last forever. But the way people employ language
and read ideologies can change. That change can be undetectable at first, and then unstoppable.
Yurchak's Master-idea is that the Soviet system was an example of how a state can prepare its
own demise in an invisible way. It happened in Russia through unraveling of authoritative discourse
by Gorbachev's naive but well-meaning shillyshallying undermining the Soviet system and the master
signifiers with which the Soviet society was "quilted" and held together. According to Yurchak
"In its first three or four years, perestroika was not much more than a deconstruction of Soviet
authoritative discourse". This could a cautionary tale for America as well because the Soviet
Union shared more features with American modernity than the Americans themselves are willing to
admit.
The demise of the Soviet Union was not caused by anti-modernity or backwardness of Russian
people. The Soviet experiment was a cousin of Western modernity and shared many features with
the Western democracies, in particular its roots in the Enlightenment project. The Soviet Union
wasn't "evil" in late stages 1950-1980s. The most people were decent. The Soviet system, despite
its flaws, offered a set of collective values. There were many moral and ethical aspects to Soviet
socialism, and even though those values have been betrayed by the state, they were still very
important to people themselves in their lives. These values were: solidarity, community, altruism,
education, creativity, friendship and safety. Perhaps they were incommensurable with the "Western
values" such as the rule of law and freedom, but for Russians they were the most important. For
many "socialism" was a system of human values and everyday realities which wasn't necessarily
equivalent of the official interpretation provided by the state rhetoric.
Yurchak starts with a general paradox within the ideology of modernity: the split between ideological
enunciation, which reflects the theoretical ideals of the Enlightenment, and ideological rule,
which are the practical concerns of the modern state's political authority. In Soviet Union the
paradox was "solved" by means of dogmatic political closure and elevation of Master signifier
[Lenin, Stalin, Party] but it doesn't mean the Western democracies are immune to totalitarian
temptation to which the Soviet Union had succumbed. The vast governmental bureaucracy and Quango-state
are waiting in the shadows here as well, may be ready to appropriate discourse.
It is hard to agree with everything in his book. But it is an interesting perspective. I wish
Alexei Yurchak would explore more implications of Roman Jacobson's "poetic function of language"
and its connection to Russian experiment in communism. It seems to me, as a Russian native speaker,
that Russians put stress on form, sound, and poetics. The English-language tradition prioritizes
content and meaning. Can we speak of "Hermeneutics" of the West versus "Poetics" of Russia? Perhaps
the tragedy of Russia was under-development of Hermeneutics? How does one explain the feeble attempts
to throw a light of reason into the loopy texts and theories of Marks, Lenin, Trotsky and Stalin?
Perhaps the Russians read it as a kind of magical text, a poetry, a bad poetry -- not Pasternak
or Blok -- but kind of poetry nevertheless?
Just loved this -- a brilliant study of how everyday citizens (as opposed to active supporters
or dissidents) cope with living in a decadent dictatorship, through strategies of ignoring the
powerful, focusing on hyperlocal socialities, treating ritualized support for the regime as little
more than an annoying chore, and withdrawal into subcultures. Yurchak demolishes the view that
the only choices available to late Soviet citizens were either blind support (though his accounts
of those figures who chose this path are deeply chilling) or active resistance, while at the same
time showing how many of the purported values of Soviet socialism (equality, education, friendship,
community, etc) were in fact deeply held by many in the population. While his entire account is
a tacit meditation on the manifold unpleasantnesses of living under the Soviet system, Yurchak
also makes clear that it was not all unpleasantness and that indeed for some people (such as theoretical
physicists) life under Soviet socialism was in some ways freer than for their peers in the West.
All of which makes the book function (sotto voce) as an explanation for the nostalgia that many
in Russia today feel for Soviet times - something inexplicable to those who claim that Communism
was simply and nothing but an evil.
The theoretical vehicle for Yurchak's investigation is the divergence between the performative
rather than the constative dimensions of the "authoritative discourse" of the late Soviet regime.
One might say that his basic thesis is that, for most Soviet people, the attitude toward the authorities
was "They pretend to make statements that corresponded to reality, and we pretend to believe them."
Yurchak rightly observes that one can neither interpret the decision to vote in favor of an official
resolution or to display a pro-government slogan at a rally as being an unambiguous statement
of regime support, nor assume that these actions were directly coerced. People were expected to
perform these rituals, but they developed "a complexly differentiating relationship to the ideological
meanings, norms, and values" of the Soviet state. "Depending on the context, they might reject
a certain meaning, norm or value, be apathetic about another, continue actively subscribing to
a third, creatively reinterpret a fourth, and so on." (28-29)
The result was that, as the discourse of the late Soviet period ossified into completely formalist
incantations (a process that Yurchak demonstrates was increasingly routinized from the 1950s onwards),
Soviet citizens participated in these more for ritualistic reasons than because of fervent belief,
which in turn allowed citizens to fill their lives with other sources of identity and meaning.
Soviet citizens would go to cafes and talk about music and literature, join a rock band or art
collective, take silly jobs that required little effort and thus left room for them to pursue
their "interests." The very drabness of the standardizations of Soviet life therefore created
new sorts of (admittedly constrained) spaces within which people could define themselves and their
(inter)subjective meanings. All of which is to say that the book consists of a dramatic refutation
of the "totalitarianism" thesis, demonstrating that despite the totalitarian ambitions of the
regime, citizens were continually able to carve out zones of autonomy and identification that
transcended the ambitions of the Authoritative discourse.
"... Normalisation is what has historically happened in the wake of financial crises. During the booms that precede busts, low interest rates encourage people to make investments with borrowed money. However, even after all of the prudent investment opportunities have been taken, people continue borrowing to invest in projects and ideas that are unlikely to ever generate profits. ..."
"... Eventually, the precariousness of some of these later investments becomes apparent. Those that arrive at this realization early sell up, settle their debts and pocket profits, but their selling often triggers a rush for the exits that bankrupts companies and individuals and, in many cases, the banks which lent to them. ..."
"... By contrast, the responses of policy-makers to 2008's financial crisis suggest the psychology of hypernormalisation. Quantitative easing (also known as money printing) and interest rate suppression (to zero percent and, in Europe, negative interest rates) are not working and will never result in sustained increases in productivity, income and employment. However, as our leaders are unable to consider alternative policy solutions, they have to pretend that they are working. ..."
"... Statistical chicanery has helped understate unemployment and inflation while global cooperation has served to obscure the currency depreciation and loss of confidence in paper money (as opposed to 'hard money' such as gold and silver) that are to be expected from rampant money printing. ..."
"... The recent fuss over 'fake news' seems intended to remove alternative news and information sources from a population that, alarmingly for those in charge, is both ever-more aware that the system is not working and less and less willing to pretend that it is . Just this month U.S. President Barack Obama signed the Countering Disinformation and Propaganda Act into law. United States, meet your Ministry of Truth. ..."
"... Great article. I think it does describe the USSA at the present time. Everything works until it doesn't. ..."
"... The funny thing is I had almost identical thoughts just a few days ago. But I was thinking in comparison more of East Germany's last 20 years before they imploded - peacefully, because not a single non-leading-rank person believed any of the official facts anymore (and therefore they even simply ignored orders from high command to crush the Leipzig Monday demonstrations.) ..."
"... I'm ok with a world led by Trump and Putin. ..."
"... I recall the joke from the old Soviet Union: "They pretend to pay us, we pretend to work." In the USSA these last few years, Barry pretends to tell the truth. Libtards pretend to believe him. ..."
"... Wrong. They believe him. Look at the gaggle of libtard/shiteaters at Soetero's Friday night bash at the White House. ..."
"... Reagan used to quip that in the Soviet Union, the people pretend to work and the government pretends to pay them. We're not the Soviet Union, but we have become a farce. Next stop - the fall. Followed by chaos, then onto something new. The new elites will just be the old elites, well, the ones that escape the noose. ..."
"... The real ugly problem with the Soviet Union is that whatever they broke it into isn't working well either. ..."
"... Russia's problem post collapse was the good ol' USSA and its capitalist, plunderer banking mavens. ..."
"... The only way to normalize banking in a contemporary banking paradigm of QE Infinity & Beyond is to start over again without the bankers & accountants that knowingly bet the ranch for a short term gain at the expense of long term profitability. In Japan an honourable businessman/CEO would suicide for bringing this kind of devastation to the company shareholders. ..."
"... In America they don't give a shit because it is always someone else other than the CEO that takes the fall. ..."
"... This, after I'd point out his evasion and deflection every time I addressed his bias and belief in the MSM propaganda mantras of racism, misogyny, xenophobia - all the usual labeling bullshit up to insinuating Russia hacked the election ..."
"... I've been using the term Hypernormalisation to describe aspects of western society for the last 15 years, before Adam Curtis's brilliant BBC documentary Hypernormalisation , afflicting western society and particularly politics. There are lies and gross distortions everywhere in western society and it straddles/effects all races, colours, social classes and the disease is most acute in our politics. ..."
"... We all know the hypernoprmalisation in politics, as we witness stories everyday on Zerohedge of the disconnect from reality ..."
"... It is called COGNITIVE DISSONANCE .. ..."
"... "When they are presented with evidence that works against that belief, the new evidence cannot be accepted. It would create a feeling that is extremely uncomfortable, called cognitive dissonance. And because it is so important to protect the core belief, they will rationalize, ignore and even deny anything that doesn't fit with the core belief." ..."
"... During their final days as a world power, the Soviet Union allowed cognitive dissonance to rule its better judgment as so many Americans are doing in 2012. The handwriting on the wall was pretty clear for Gorbachev. The Soviet economy was failing. They did none of the necessary things to save their economy. In 2012, the handwriting on the wall is pretty clear for the American people. The economy is failing. The people and the Congress do none of the necessary things to save their economy. Why? Go re-read the definition of cognitive dissonance. That's why. We have a classic fight going on between those who want government to take care of them who will pay the price of lost freedom to get that care, and those who value freedom above all else. ..."
"... to me the PTB are "Japanifying" the u.s. (decades of no growth, near total demoralization of a generation of worker bees (as in, 'things will never get any better, be glad for what little you've got' etc... look what they've done to u.s. millenials just since '08... fooled (crushed) them TWICE already) ..."
"... But the PTB Plan B is to emulate the USSR with a crackup, replete with fire sale to oligarchs of public assets. ..."
The term comes from Alexei Yurchak's 2006 book Everything was Forever, Until it was No More: The
Last Soviet Generation. The book argues that over the last 20 years of the Soviet Union, everyone
knew the system wasn't working, but as no one could imagine any alternative, politicians and citizens
were resigned to pretending that it was. Eventually this pretending was accepted as normal and the
fake reality thus created was accepted as real, an effect which Yurchak termed "hypernormalisation."
Looking at events over the past few years, one wonders if our own society is experiencing the
same phenomenon. A contrast with what economic policy-makers term "normalisation" is instructive.
Normalisation is what has historically happened in the wake of financial crises. During the
booms that precede busts, low interest rates encourage people to make investments with borrowed money.
However, even after all of the prudent investment opportunities have been taken, people continue
borrowing to invest in projects and ideas that are unlikely to ever generate profits.
Eventually, the precariousness of some of these later investments becomes apparent. Those
that arrive at this realization early sell up, settle their debts and pocket profits, but their selling
often triggers a rush for the exits that bankrupts companies and individuals and, in many cases,
the banks which lent to them.
In the normalisation which follows (usually held during 'special' bank holidays) auditors and
accountants go through financial records and decide which companies and individuals are insolvent
(and should therefore go bankrupt) and which are merely illiquid (and therefore eligible for additional
loans, pledged against good collateral). In a similar fashion, central bank officials decide which
banks are to close and which are to remain open. Lenders made freshly aware of bankruptcy risk raise
(or normalise) interest rates and in so doing complete the process of clearing bad debt out of the
system. Overall, reality replaces wishful thinking.
While this process is by no means pleasant for the people involved, from a societal standpoint
bankruptcy and higher interest rates are necessary to keep businesses focused on profitable investment,
banks focused on prudent lending and overall debt levels manageable.
By contrast, the responses of policy-makers to 2008's financial crisis suggest the psychology
of hypernormalisation. Quantitative easing (also known as money printing) and interest rate suppression
(to zero percent and, in Europe, negative interest rates) are not working and will never result in
sustained increases in productivity, income and employment. However, as our leaders are unable to
consider alternative policy solutions, they have to pretend that they are working.
To understand why our leaders are unable to consider alternative policy solutions such as interest
rate normalization and banking reform one only needs to understand that while such policies would
lay the groundwork for a sustained recovery, they would also expose many of the world's biggest banks
as insolvent. As the financial sector is a powerful constituency (and a generous donor to political
campaigns) the banks get the free money they need, even if such policies harm society as a whole.
As we live in a democratic society, it is necessary for our leaders to convince us that there
are no other solutions and that the monetary policy fixes of the past 8 years have been effective
and have done no harm.
Statistical chicanery has helped understate unemployment and inflation while global cooperation
has served to obscure the currency depreciation and loss of confidence in paper money (as opposed
to 'hard money' such as gold and silver) that are to be expected from rampant money printing.
Looking at unemployment figures first, while the unemployment rate is currently very low, the
number of Americans of working age not in the labour force is currently at an all-time high of over
95 million people. Discouraged workers who stop looking for work are no longer classified as unemployed
but instead become economically inactive, but clearly many of these people really should be counted
as unemployed. Similarly, while government statistical agencies record inflation rates of between
one and two percent, measures that use methodologies used in the past (such as John Williams' Shadowstats
measures) show consumer prices rising at annual rates of 6 to 8 percent. In addition, many people
have noticed what has been termed 'shrinkflation', where prices remain the same even as package sizes
shrink. A common example is bacon, which used to be sold by the pound but which is now commonly sold
in 12 ounce slabs.
Meanwhile central banks have coordinated their money printing to ensure that no major currency
(the dollar, the yen, the euro or the Chinese renminbi) depreciates noticeably against the others
for a sustained period of time. Further, since gold hit a peak of over $1900 per ounce in 2011, central
banks have worked hard to keep the gold price suppressed through the futures market. On more than
a few occasions, contracts for many months worth of global gold production have been sold in a matter
of a few minutes, with predictable consequences for the gold price. At all costs, people's confidence
in and acceptance of the paper (or, more commonly, electronic) money issued by central banks must
be maintained.
Despite these efforts people nonetheless sense that something is wrong. The Brexit vote and the
election of Donald Trump to the White House represent to a large degree a rejection of the fake reality
propagated by the policymaking elite. Increasingly, people recognize that a financial system dependent
upon zero percent interest rates is not sustainable and are responding by taking their money out
of the banks in favour of holding cash or other forms of wealth. In the face of such understanding
and resistance, governments are showing themselves willing to use coercion to enforce acceptance
of their fake reality.
The recent fuss over 'fake news' seems intended to remove alternative news and information
sources from a population that, alarmingly for those in charge, is both ever-more aware that the
system is not working and less and less willing to pretend that it is . Just this month U.S. President
Barack Obama signed the Countering Disinformation and Propaganda Act into law. United States, meet
your Ministry of Truth.
Meanwhile, in India last month, people were told that the highest denomination bills in common
circulation would be 'demonetized' or made worthless as of December 30th. People were allowed to
deposit or exchange a certain quantity of the demonetized bills in banks but many people who had
accumulated their savings in rupee notes (often the poor who did not have bank accounts) have been
ruined. Ostensibly, this demonetization policy was aimed at curbing corruption and terrorism, but
it is fairly obvious that its real objective was to force people into the banking system and electronic
money. Unsurprisingly, the demonetization drive was accompanied by limits on the quantity of gold
people are allowed to hold.
Despite such attempts to influence our thinking and our behaviour, we don't need to resign ourselves
to pretending that our system is working when it so clearly isn't. Looking at the eventual fate of
the Soviet Union, it should be clear that the sooner we abandon the drift towards hypernormalisation
and start on the path to normalisation the better off we will be.
Correct. I seen with sufficient level of comprehending consciousness the last 5 years of it
- copy-cat perfection with the current times in US(S)A, terrifying how similar the times are as
it is a clear indication of the times to come.
The funny thing is I had almost identical thoughts just a few days ago. But I was thinking
in comparison more of East Germany's last 20 years before they imploded - peacefully, because
not a single non-leading-rank person believed any of the official facts anymore (and therefore
they even simply ignored orders from high command to crush the Leipzig Monday demonstrations.)
I was just thinking that the whole economic world sees us in a sort of equilibrium at the moment.
There will be some adjustments under Trump, but nothing serious. We shall see ..
Repeat something often enough and it becomes hypernormalised. With that in mind the number
of eyes/minds/hits is all that matters. This has been known and exploited for hundreds of years.
That a handful of individuals can have a monopoly over the single most important aspect of
whether you live or die is the ultimate success of hypernormalisation. CENTRAL BANKING.
Mrs.M is of the last Soviet generation. Her .gov papers say so. There is never
a day when I don't hear something soviet. She still has a her red pioneer ribbon.
I have tried to encourage her to write about it on ZH so that we know. Do you think she
will? No. She's says that we can't understand what it was like no matter what she
says.
Mrs.M was born in 1981 so she has lived an interesting life. I married her in 2004 after
much paperwork and $15000. I wanted that female because we got along quite well. She
is who I needed with me this and I would do it all over again.
Needless to say, I do not support any aggression towards Russia. And to my fellow Americans,
I advise caution because the half you are broke ass fucks and are already ropes with me.
I recall the joke from the old Soviet Union: "They pretend to pay us, we pretend to work."
In the USSA these last few years, Barry pretends to tell the truth. Libtards pretend to believe
him.
Geezer, I'd change only one thing... I believe libtards bought Barry's bullshit hook, line
and sinker... it was the rest of us who not-so-subtly were saying WTF!!!
Reagan used to quip that in the Soviet Union, the people pretend to work and the government
pretends to pay them. We're not the Soviet Union, but we have become a farce. Next stop
- the fall. Followed by chaos, then onto something new. The new elites will just be the old elites,
well, the ones that escape the noose.
what noose? you think joe 6p is going to identify the culprits? i think not. "no one saw this
coming!!!" is still ringing in my ears from the last time.
I really don't know how people can keep on getting clicks with this tired crap. It didn't happen
in 2008 just get over it. The delusional people are the people that think the world is going to
end tomorrow.
Maybe the world has ended, for 95 million? I haven't paid a single Fed income tax dollar
in over 8 yrs., for a specific reason, I refuse to support the new normal circus, and quite frankly
I would have gotten out during the GWBush regime, but I couldn't afford to at the time.
The real ugly problem with the Soviet Union is that whatever they broke it into isn't working
well either. Same with the USSA. No one really knows what to do. Feudalism would probably
work, but it is not possible to go back to it. My bet is that we will end up with some form of
socialism, universal income and whatever else, just because there is no good alternative for dealing
with lots and lots of people who are not needed anymore.
Do you mean useless eaters or fuckers deserving the guillotine? Russia's problem post collapse
was the good ol' USSA and its capitalist, plunderer banking mavens.
The Soviet Union pushed its old culture to near destruction but failed to establish a new and
better culture to replace it, writes Angelo M. Codevilla in "The Rise of Political Correctness,"
and as a result the U.S.S.R fell, just as America's current "politically correct" and dysfunctional
"progressive utopia" will implode.
As such, Codevilla would agree that the US population " is both ever-more aware that the system
is not working and less and less willing to pretend that it is."
As for the U.S.S.R., "this step turned out instead to destroy the very basis of Soviet power,"
writes Codevilla. "[C]ontinued efforts to force people to celebrate the party's ersatz reality,
to affirm things that they know are not true and to deny others they know to be true – to live
by lies – requires breaking them , reducing them to a sense of fearful isolation, destroying their
self-esteem and their capacity to trust others. George Orwell's novel 1984 dramatized this culture
war's ends and means : nothing less than the substitution of the party's authority for the reality
conveyed by human senses and reason. Big Brother's agent, having berated the hapless Winston
for preferring his own views to society's dictates, finished breaking his spirit by holding up
four fingers and demanding that Winston acknowledge seeing five.
"Thus did the Soviet regime create dysfunctional, cynical, and resentful subjects. Because
Communism confused destruction of 'bourgeois culture' with cultural conquest, it won all the cultural
battles while losing its culture war long before it collapsed politically. As Communists identified
themselves in people's minds with falsehood and fraud, people came to identify truth with anything
other than the officials and their doctrines. Inevitably, they also identified them with corruption
and privation. A nd so it was that, whenever the authorities announced that the harvest had been
good, the people hoarded potatoes; and that more and more people who knew nothing of Christianity
except that the authorities had anathematized it, started wearing crosses."
And if you want to see the ruling class's culture war in action today in America, pick up the
latest issues of Vogue Magazine or O, The Oprah Magazine with their multitude of role reversals
between whites and minorities. Or check out the latest decisions by the U.S. Supreme Court forcing
people to acknowledge that America is not a Christian nation, or making it "more difficult for
men, women and children to exist as a family" or demanding via law "that their subjects join them
in celebrating the new order that reflects their identity."
As to just how far the ruling class has gone to serve the interests and proclivities of its
leaders and to reject the majority's demand for representation, Codevilla notes, "In 2012 no one
would have thought that defining marriage between one man and one woman, as enshrined in U.S.
law, would brand those who do so as motivated by a culpable psychopathology called 'homophobia,'
subject to fines and near-outlaw status. Not until 2015-16 did it occur to anyone that requiring
persons with male personal plumbing to use public bathrooms reserved for men was a sign of the
same pathology
"On the wholesale level, it is a war on civilization waged to indulge identity politics."
This article is so flawed! People[impoverished] aren't trying to jump over a wall patrolled
by guards into Mexico -YET. Tyler, why do you repost shit like this?
That's because the Yankees, fleeing high taxes, can move to the sunbelt states w/o freezing.
The USA went broke in 2008. Mexico got a head start by 22 years when oil prices collapsed in '86.
The only way to normalize banking in a contemporary banking paradigm of QE Infinity & Beyond
is to start over again without the bankers & accountants that knowingly bet the ranch for a short
term gain at the expense of long term profitability. In Japan an honourable businessman/CEO would
suicide for bringing this kind of devastation to the company shareholders.
In America they don't give a shit because it is always someone else other than the CEO
that takes the fall. 08 was proof that America is not equipped to participate in a Multinational
& Multipolar world of business & investment in business. America can't get along in business in
this world anymore. Greed has rendered America unemployable as a major market participant in a
Globally run network of businesses.
America is the odd man out these days even though the next POTUS promises better management
from a business perspective. Whilst the Mafia Cartel bosses trust TrumpO's business savvy the
rest of the planet Earth does not.
A liberal friend laid this movie on me to show me why he supported Hillary. A smart cookie,
a PHd teaching English in Japan. A Khazarnazi Jew, he even spent time in Kyiv, Ukraine pre-coup,
only mingling with "poets and writers". He went out of his way to tell me how bad the Russians
were, informed as he was prior to the rejection of the EU's usurious offer.
He even quite dramatically pulled out the Anti-Semite card. I had to throw Banderas in his
face and the US sponsored regime. I had respect for this guy and his knowledge but he just - could
- not - let - go the cult assumptions. I finally came to believe Liberal Arts educators are victims
of inbred conditioning. In retaliation, he wanted to somehow prove Putin a charlatan or villian
and Trump his proxie.
This, after I'd point out his evasion and deflection every time I addressed his bias and
belief in the MSM propaganda mantras of racism, misogyny, xenophobia - all the usual labeling
bullshit up to insinuating Russia hacked the election. Excerpts from a correspondence wherein
I go full asshole on the guy follow. Try and make sense of it if you watch this trash:
HyperNormalization 50:29 Not Ronald Rayguns, or Quadaffi plays along. Say what? They're, i.e.
Curtis, assuming what Q thought?
1:15 USSR collapses. No shit. Cronyism in a centralized organization grown too large is inevitable
it seems. So the premise has evolved to cultural/societal "management". Right. USSR collapses
but let's repeat the same mistakes 'cause "it's different this time". We got us a computer!
Then Fink the failed Squid (how do Squids climb the corporate ladder?) builds one and programs
historical data to,,,, forecast? I heard a' this. Let me guess. He couldn't avoid bias, making
his models fallacious. Whoops. Well, he does intend to manipulate society, or was that not the
goal? Come again? Some authority ran with it and ... captured an entire nation's media, conspired
with other like-minded sycophants and their mysterious masters to capture an election by ... I
may be getting ahead of myself.
Oh, boy, I have an inkling of where this is going. Perceptions modified by the word, advanced
by the herd, in order to capture a vulnerable society under duress, who then pick sides, fool
themselves in the process, miss the three hour tour never to live happily ever after on a deserted
isle because they eschew (pick a bias here from the list provided). The one you think the "others"
have, 'cause, shit, we're above it all, right? " Are we not entertained" is probably not the most
appropriate question here.
Point being, Curtis, the BBC documentarian, totally negates the reality of pathological Imperialism
as has been practiced by the West over the last half century, causing so many of the effects
he so casually eludes to in the Arab Spring, Libya, Syria, Russia, the US and elsewhere. Perhaps
the most blatant is this; Curtis asserts that Trump "defeated journalism" by rendering its fact-checking
abilities irrelevant. Wikipedia He Hypernormalizes the very audience that believes itself to be
enlightened. As for my erstwhile friend, the fucker never once admitted all the people *killed*
for the ideals he supported. I finally blew him off for good.
I've been using the term Hypernormalisation to describe aspects of western society for
the last 15 years, before Adam Curtis's brilliant BBC documentary Hypernormalisation , afflicting
western society and particularly politics. There are lies and gross distortions everywhere in
western society and it straddles/effects all races, colours, social classes and the disease is
most acute in our politics.
We all know the hypernoprmalisation in politics, as we witness stories everyday on Zerohedge
of the disconnect from reality...
Enter Operation Stillpoint: William Colby, William Casey and Leo Emil Wanta.
At the time it started, President Reagan wanted to get a better handle on ways to keep the
Soviets from expansionary tactics used to spread Vladimir Ilyich Ulyanov Lenin's philosophy of
communism around the world. He looked to his Special Task Force to provide a means of doing so.
One thing was certain: The economy of the Soviets had never been strong and corruption, always
present in government and always growing at least as fast as a government grows, made the USSR
vulnerable to outside interference just as the United States is today.
According to Gorbachev's Prime Minister, Nikolai Ryzhkov, the "moral [nravstennoe] state of
the society" in 1985 was its "most terrifying" feature: "[We] stole from ourselves, took and gave
bribes, lied in the reports, in newspapers, from high podiums, wallowed in our lies, hung medals
on one another. And all of this – from top to bottom and from bottom to top."
Again, it sounds like today's America, doesn't it?
Foreign Minister Eduard Shevardnadze made equally painful comments about the lawlessness and
corruption dominating the Soviet Union. During the winter months of 1984-85, he told Gorbachev
that "Everything is rotten. It has to be changed."
"Sometimes people hold a core belief that is very strong," Frantz Fanon said in his 1952 book
Black Skin, White Masks (originally published in French as Peau Noire, Masques Blancs). "When
they are presented with evidence that works against that belief, the new evidence cannot be accepted.
It would create a feeling that is extremely uncomfortable, called cognitive dissonance. And because
it is so important to protect the core belief, they will rationalize, ignore and even deny anything
that doesn't fit with the core belief."
COGNITIVE DISSONANCE
During their final days as a world power, the Soviet Union allowed cognitive dissonance
to rule its better judgment as so many Americans are doing in 2012. The handwriting on the wall
was pretty clear for Gorbachev. The Soviet economy was failing. They did none of the necessary
things to save their economy. In 2012, the handwriting on the wall is pretty clear for the American
people. The economy is failing. The people and the Congress do none of the necessary things to
save their economy. Why? Go re-read the definition of cognitive dissonance. That's why. We have
a classic fight going on between those who want government to take care of them who will pay the
price of lost freedom to get that care, and those who value freedom above all else.
On one day we have 50 state attorneys general suing Bank of America for making fraudulent mortgages,
and on the next we have M.F. Global losing billions upon billions of customer dollars because
they got mixed with the firm's funds – which is against the law – or we have J.P. Morgan Chase
losing $2 billion (or is it $5 billion?) in bad investments. As Eduard Shevardnadze said, "Everything
is rotten. It has to be changed." As I would say it, "There is no Rule of Law in America today.
There has been no real Rule of Law since George Herbert Walker Bush took office."
No one listened then; no one is listening in America now. The primary reason? Cognitive dissonance.
-- Chapter 2, "Wanta! Black Swan, White Hat" (2013)
Okay then, forget what was said in 1985, that was later reported in 2013 ..
Lee Wanta. I've heard of him before. He was screwed over for some bullshit charges. And the
CIA made a firm warning... How long did that dude spent in jail?
Just looked up his story as it was blurry. Cronyism at its finest. So now that I got my refreshing
course. Trump stole/adopted (however you want to look at that) his plan and the project the gov
(DOT) proposes sucks donkey balls compared to Wanta's.
So where are all the climate hoaxers now by the way? You'd figure they'd be all over this.
to me the PTB are "Japanifying" the u.s. (decades of no growth, near total demoralization
of a generation of worker bees (as in, 'things will never get any better, be glad for what little
you've got' etc... look what they've done to u.s. millenials just since '08... fooled (crushed)
them TWICE already)
But the PTB Plan B is to emulate the USSR with a crackup, replete with fire sale to oligarchs
of public assets. They will Japan as long as they can (so it will be difficult to forecast
any crackup anymore than six months beforehand). Hope they have a Gorbachev lined up, to limit
the bloodshed
Andy Haldane
, Chief Economist and Executive Director, Monetary Analysis &
Statistics, Bank of England
It would be easy to become very depressed at the
state of economics in the current environment. Many experts, including economics
experts, are simply being ignored. But the economic challenges facing us could not be
greater: slowing growth, slowing productivity, the retreat of trade, the retreat of
globalisation, high and rising levels of inequality. These are deep and diverse
problems facing our societies and we will need deep and diverse frameworks to help
understand them and to set policy in response to them. In the pre-crisis environment
when things were relatively stable and stationary, our existing frameworks in
macroeconomics did a pretty good job of making sense of things.
But the world these days is characterised by features such as discontinuities,
tipping points, multiple equilibria, and radical uncertainty. So if we are to make
economics interesting and the response to the challenges adequate, we need new
frameworks that can capture the complexities of modern societies.
We are seeing increased interest in using complexity theory to make sense of the
dynamics of economic and financial systems. For example, epidemiological models have
been used to understand and calibrate regulatory capital standards for the largest,
most interconnected banks, the so-called "super-spreaders". Less attention has been
placed on using complexity theory to understand the overall architecture of public
policy – how the various pieces of the policy jigsaw fit together as a whole in
relation to modern economic and financial systems. These systems can be characterised
as a complex, adaptive "
system
of systems
", a nested set of sub-systems, each one itself a complex web. The
architecture of a complex system of systems means that policies with varying degrees
of magnification are necessary to understand and to moderate fluctuations. It also
means that taking account of interactions between these layers is important when
gauging risk.
Although there is no generally-accepted definition of complexity, that proposed by
Herbert Simon in
The Architecture of Complexity
– "one made up of a
large number of parts that interact in a non-simple way" – captures well its everyday
essence. The whole behaves very differently than the sum of its parts. The properties
of complex systems typically give rise to irregular, and often highly non-normal,
statistical distributions for these systems over time. This manifests itself as much
fatter tails than a normal distribution would suggest. In other words, system-wide
interactions and feedbacks generate a much higher probability of catastrophic events
than Gaussian distributions would imply.
For evolutionary reasons of survival of the fittest, Simon posited that
"decomposable" networks were more resilient and hence more likely to proliferate. By
decomposable networks, he meant organisational structures which could be partitioned
such that the resilience of the system as a whole was not reliant on any one
sub-element. This may be a reasonable long-run description of some real-world complex
systems, but less suitable as a description of the evolution of socio-economic
systems. The efficiency of many of today's networks relies on their
hyper-connectivity. There are, in the language of economics, significantly increasing
returns to scale and scope in a network industry. Think of the benefits of global
supply chains and global interbank networks for trade and financial risk-sharing.
This provides a powerful secular incentive for non-decomposable socio-economic
systems.
Moreover, if these hyper-connected networks do face systemic threat, they are
often able to adapt in ways which avoid extinction. For example, the risk of social,
economic or financial disorder will typically lead to an adaptation of policies to
prevent systemic collapse. These adaptive policy responses may preserve
otherwise-fragile socio-economic topologies. They may even further encourage the
growth of connectivity and complexity of these networks. Policies to support
"super-spreader" banks in a crisis for instance may encourage them to become larger
and more complex. The combination of network economies and policy responses to
failure means socio-economic systems may be less Darwinian, and hence decomposable,
than natural and biological systems.
Andy Haldane addresses OECD New Approaches to Economic Challenges (NAEC)
Roundtable
What public policy implications follow from this complex system of systems
perspective? First, it underscores the importance of accurate data and timely mapping
of each layer in the system. This is especially important when these layers are
themselves complex. Granular data is needed to capture the interactions within and
between these complex sub-systems.
Second, modelling of each of these layers, and their interaction with other
layers, is likely to be important, both for understanding system risks and dynamics
and for calibrating potential policy responses to them.
Third, in controlling these risks, something akin to the Tinbergen Rule is likely
to apply: there is likely to be a need for at least as many policy instruments as
there are complex sub-components of a system of systems if risk is to be monitored
and managed effectively. Put differently, an under-identified complex system of
systems is likely to result in a loss of control, both system-wide and for each of
the layers.
In the meantime, there is a crisis in economics. For some, it is a threat. For
others it is an opportunity to make a great leap forward, as Keynes did in the 1930s.
But seizing this opportunity requires first a re-examination of the contours of
economics and an exploration of some new pathways. Second, it is important to look at
economic systems through a cross-disciplinary lens. Drawing on insights from a range
of disciplines, natural as well as social sciences, can provide a different
perspective on individual behaviour and system-wide dynamics.
The NAEC initiative does so, and the OECD's willingness to consider a complexity
approach puts the Organisation at the forefront of bringing economic analysis
policy-making into the 21
st
century.
The OECD organised a Workshop on Complexity and Policy, 29-30 September, OECD HQ,
Paris, along with the European Commission and INET. Watch the webcast:
29/09
morning
;
29/09
afternoon
;
30/09
morning
Re Wolfers: Having an opinion is not the same as being able to predict or infer accurately. (Nominally)
informed opinion hasn't performed particularly well with respect to either at the macro level
and many see no connection with their lives at the micro level. If people see "expert" opinion
as either wrong or irrelevant then they will ignore it. Nature abhors a vacuum so rather adopt
experts' stories they'll create their own narrative. Confidence of small business owners that
their lot will improve? That's what they'd like to believe and what evidence do they have that
it won't? (Stories matter more to most people than facts or models. We ignore that at our peril.)
Small business is optimistic based on current trends with demand improving and people having more
money to spend. Their optimism has nothing to do with Trump
Wall Street sees opportunity for profits. Big Tax cuts for the wealthy will inflate stock prices.
It reflects the opportunity for short term gains, not long term economic improvement
Economist influence on policy is overrated
Since when have our ruling elites followed advice?
Medical research can thrive in spite of a government of short earth creationists
A key battle is giving cities more control over spending
Local control can better direct infrastructure spending than state agencies concerned with freeways
It is a mistake to look to the Federal Government as savior. Urbanization is the future. Let the
cities invest in themselves and stop subsidizing the unsustainable suburban and exurban development.
Peter K. -> jonny bakho... , -1
"It is a mistake to look to the Federal Government as savior. Urbanization is the future. Let
the cities invest in themselves and stop subsidizing the unsustainable suburban and exurban development."
Why Most Economists Are So Worried About Trump http://nyti.ms/2ij9VRP via @UpshotNYT
NYT - Justin Wolfers - January 11
I feared that I might have been talking with an unrepresentative group until I stumbled upon
a recent survey of leading academic economists showing a similar pattern. Of the 31 respondents
to the University of Chicago's IGM Economic Experts Panel, 28 disagreed with the claim that the
"seven actions to protect American workers" in Mr. Trump's 100-day plan would improve the economic
prospects of middle-class Americans. The dissenters were two economists who were uncertain, and
one who had no opinion.
The pervasive pessimism among professional economists stands in stark contrast with the judgment
of financial markets, which rose strongly in the wake of Mr. Trump's election, and have remained
buoyant since.
It also puts economists at odds with the judgments of small-business owners. According to the
latest survey from the National Federation of Independent Businesses, the balance of members who
expect general business conditions to improve has moved drastically. In October, the pessimists
who saw business conditions as likely to worsen outnumbered the optimists by seven percentage
points; the latest survey from December shows that the optimists now outnumber the pessimists
by 50 percentage points. It's an extraordinary shift - one the association described as "stratospheric."
I'm not quite sure how to reconcile these conflicting signals. One possibility is that Mr.
Trump remains something of an unknown, and each group is filling in the blanks differently. Small
businesses, pleased to see a businessman in the White House, might be tempted to believe the best.
By contrast, there's a reason that economics is called the dismal science, and few economists
trust politicians - of either stripe - to get things right. Greater uncertainty gives economists
a broader canvas upon which to project their pessimism. ...
JW: ... 'According to the latest survey from the National Federation of Independent Businesses,
the balance of members who expect general business conditions to improve has moved drastically.'
...
"Expect Better Business Conditions" rises dramatically
Small business optimism rocketed to its highest level since 2004, with a stratospheric 38-point
jump in the number of owners who expect better business conditions, according to the monthly National
Federation of Independent Business (NFIB) Index of Small Business Optimism, released today.
"We haven't seen numbers like this in a long time," said NFIB President and CEO Juanita Duggan.
"Small business is ready for a breakout, and that can only mean very good things for the U.S.
economy."
The Index reached 105.8, an increase of 7.4 points. Leading the charge was "Expect Better Business
Conditions," which shot up from a net 12 percent in November to a net 50 percent last month. ...
"Confidence of small business owners that their lot will improve?
"
Could *small business confidence index* work same as *odd lot investor's confidence*? Odd lot
buying index? The little people registering their wrong opinions? A contrary indicator? Do you
see how small business confidence curve has begun to raise a red flag?
"... By Philip Pilkington, a macroeconomist working in asset management and author of the new book The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory . The views expressed in this interview are not those of his employer ..."
"... The Reformation in Economics ..."
"... Once the theory is assumed to be true it can then be applied everywhere and anywhere in an entirely uncritical manner. Anything can then be interpreted in terms of utility-maximisation. This is most obvious in popular publications like Freakonomics: A Rogue Economist Explores the Hidden Side of Everything ..."
"... To paraphrase from Yes Minister, real economists don't sully their elevated minds with anything as sordid as data. It's much easier to make a a bunch of unrealistic assumptions, for example "trade deals don't affect trade balance and employment", and just to build their model from there. The fact that these kind of missteps are not stamped out by the profession shows that fire is the only answer. ..."
"... I abandoned Econ. as a major when I was a senior in college (mid 70's) because what was being taught had little to no relationship to what I observed in the real world of human beings (as opposed to the "Homo Economicus" that econ. theory depended on). ..."
In my book
The Reformation in Economics
I take the position that modern
economics is more similar to phrenology than it is to, say, physics. This is
not at all surprising as it grew up in the same era and out of remarkably
similar ideas. But what is surprising is that this is not widely noticed today.
What is most tragic, however, is that there is much in economics that can and
should be salvaged. While these positive aspects of economics probably do not
deserve the title of 'science' they at least provide us with a rational toolkit
that can be used to improve political and economic governance in our societies.
The Ideology at the Heart of Modern Economics
The curious thing about modern economics is its almost complete insularity.
Its proponents appear to have very little notion of how it applies to the real
world. This is not the case in normal sciences. Take physics, for example. It
is extremely clear how, say, the inverse squares law applies to experienced
reality. In the case of gravitation, for example, the inverse squares law makes
experimentally testable predictions about the force exerted by, say, the
gravitational pull between the sun and the earth.
Modern economics – by which I mean neoclassical or marginalist economics
which relies on the notion of utility-maximisation as its central pillar –
completely lacks this capacity to map itself onto the real world.
As philosophers of science like Hans Albert have pointed out
, the theory of
utility-maximisation rules out such mapping
a priori
, thus rendering
the theory completely untestable. Since the theory is untestable it cannot be
falsified and this allows economists to simply
assume
that it is true.
Once the theory is assumed to be true it can then be applied everywhere and
anywhere in an entirely uncritical manner. Anything can then be interpreted in
terms of utility-maximisation. This is most obvious in popular publications
like
Freakonomics: A Rogue Economist Explores the Hidden Side of Everything
.
Such books read in an almost identical way to the fashionable books of 19
th
century phrenology. The economists address everything from parenting to crime
to the Ku Klux Klan by filtering it through the non-experimental theory of
utility-maximisation – a theory that has not and cannot be verified and so the
author and reader alike take it entirely on trust.
Such systems of ideas are ideological to the core. They are cooked up
independently of the evidence and are then imposed upon the material of
experienced reality. We are encouraged to 'read' the world through the
interpretive lens of economics – and when we ask for evidence that this lens
uncovers factually accurate information we are confounded with circular
arguments from the economists.
Large-scale public policy is also filtered through this lens. This is done
by constraining the study of macroeconomics – that is, GDP growth,
unemployment, inflation and so on – by tying it to the theories of
utility-maximisation. All macroeconomics today must be 'microfounded'. This
means that it must have microeconomic – read: 'utility-maximising' –
foundations. In reality, as I show in the book, these foundations are anything
by 'micro'. Rather, what is done is that the entire economy is seen to be
dominated by a single uber-utility-maximiser and all the conclusions flow from
there.
This may seem like odd stuff but it is built into the theory as a sort of
foundational delusion. The arbitrary, non-empirical theory of
utility-maximisation assumes primacy to all considerations of actual
statistical facts, intuitions about human motivations and even basic
assumptions about what should constitute a properly moral view of man. What we
end up with is not just a crushing, anti-inquiry ideology but also a lumbering
failure of a system of ideas that has no hope in extracting relevant
information about the real world.
What Is To Be Done?
Is economics then to be thought of as a failure? Must we scrap economics and
try to find other ways to describe and address our economic and political
problems? In this regard, my book claims to lay out a new path – albeit one
that has been intuitively followed by some economists, most notably those in
the heterodox camp. This new path is based on two key interrelated premises.
The first is that we have little insight into what actually motivates human
beings. For this reason theories that rest on assumptions about human
motivation – like utility-maximisation – must be thrown out and the study of
the economy must be undertaken by examining large economic aggregates. In
short, micro must be tossed off the throne and the crown must be handed to
macro. The second premise is that we must not be overly concerned with highly
precise 'models' of the economy. Instead we must take what I have come to call
a 'schematic' approach. A schematic approach involves building tools that can
be integrated into how we understand the world around us without assuming that
these tools provide us with an exact description of this world. This schematic
toolkit – which I begin to lay out in the later chapters of the book – can then
be used to approach the study of actual economies.
These may seem like rather simple rules. But when applied to economic theory
they generate rather radical results. At the same time they greatly constrain
the amount of wisdom that we can assume economists to have; given these
premises no book like
Freakonomics
should ever be taken seriously and
should probably even be written in the first place. In that sense, they may
appear to militate against Enlightenment optimism. This may well be so, but I
would argue that they are arrived at through rational Enlightenment-style
inquiry and so should be taken seriously even by proponents of Enlightenment
Progress. After all, phrenology eventually fell in the face of rationalistic
criticism.
In the book some of the issues around uncertainty and free will are also
explored. Implicit in some of the book's central criticisms is that societies
are not to be understood in a deterministic manner. Unlike billiard balls,
social forces are not subject to deterministic laws. In one sense this is
unfortunate as it means that our understandings of social and economic
processes must always be of a contingent and not-too-precise nature. But on the
other hand it is optimistic in the sense that it attributes an agency to human
beings to create the world around them that mainstream marginalist economics
stripped away by imposing the limited utility-maximiser framework on everyone
from Mother Theresa to Hitler.
This also creates an opening for a proper discussion of ethics and morality.
Although this is not dealt with directly in the book – it would surely require
another ten volumes – the framework does reopen awkward questions surrounding
morality and ethics. Some self-professed social scientists, nervous that these
questions have been passed to us from the world religions, would prefer to do
away with any moral and ethical questions. But this was always a fantasy – even
the most hardened anti-ethicist, unless they are serving life for
serial-killing, has a system by which they determine right from wrong.
All that I have said here is rather abstract. But a good portion of the book
is not and I do not want to give that impression. It contains chapters that
deal with inflation, profits, income distribution, income determination,
financial markets, interest rates, investment and employment. It is not simply
a book of methodology but rather one that tries to also provide the basic
building blocks of a theory that can be applied to understand really-existing
economies. In this sense, I hope that it is again more optimistic than many
mainstream economics books that leave the reader without any capacity to apply
the supposed ideas that they have absorbed by reading them beyond mere
chest-puffing at dinner parties and moral condemnations of the social safety
net.
We dont have Departments of Astrology. Just dump it call it business data
and stick it in business schools or departments. It is not science or social
science it is the worst ever pseudoscience with blood all over its hands see
previous post.
You could call it a branch of political "science" (also not a science).
At least it would be honest. Everything proposed or concluded in economics
classes will be known to simply be political preferences or ideas, not real
or valuable beyond that.
A holistic understanding of the natural world is needed, therefore I believe
the first rule of economics that should override all others is one that would
correct the false assumption that humans are separate from our environment and
superior to all other species. That separation and illusion of independence,
particularly endemic to the European mentality, has caused us to denigrate
nature as though we must dominate and subdue it to satisfy our needs and
desires, and the result now in full evidence is the wholesale destruction of
habitat and ecocide that inevitably lead to omnicide. We have allowed our
population to exceed the carrying capacity of the earth and have used
technology without regard for the consequences, thus contradicting the meaning
of homo sapiens and assuring our extinction.
Phillip's comments regarding the "Great Chain of Being" are apropo.
This is "Western" in a sense, "Christian" more particularly. It tells
the underclass they are special while at the same time justifying and
encouraging their subservience (i.e., the underclass is told they are
disconnected on the one hand, but totally "connected" (that is, have a
"place") on the other hand (which they should not try to rise above)).
The implication that other societies where greater "connection" is
somehow recognized are somehow immune to stratification and dominance
by a ruling elite, somehow more "wholesome" or "gentle" or "sane", has
very little evidence in its favor that I have ever seen. It's rather
faddish to criticize "the West" for all the ills of the world. And
"the West" certainly has left a trail of suffering and destruction
across the face of the planet. But other societies have their own
mechanisms for justifying and encouraging subservience. And a
religious "feeling" of the connectedness of all things is not a
substitute for the scientific insights of the discipline of ecology,
brought to us by a "Western" mode of thought and enquiry.
No matter what society we live in, the problem of just governance,
the aggrandizement of the elite and the suffering of the masses,
remains the same.
What passes for the science of economics has become politicized and
scientifically compromised to the point that the only thing that makes sense is
to burn it with fire. Data has stopped playing a role in development of
economic theory and selected snippets of it are occasionally dragged out only
if they support the latest concoction that comes to their mind.
To paraphrase from Yes Minister, real economists don't sully their elevated
minds with anything as sordid as data. It's much easier to make a a bunch of
unrealistic assumptions, for example "trade deals don't affect trade balance
and employment", and just to build their model from there. The fact that these
kind of missteps are not stamped out by the profession shows that fire is the
only answer.
Economics is to ecology as phrenology is to neuroscience?
Always thought the problem was that economics should be descriptive, not
prescriptive. Maybe a parallel in how science came out of "natural philosophy".
In the book some of the issues around uncertainty and free will are also
explored. Implicit in some of the book's central criticisms is that
societies are not to be understood in a deterministic manner. Unlike
billiard balls, social forces are not subject to deterministic laws.
This seems to me to be an over reaction to the specious nature of current
mainstream economics, compounded by a misunderstanding of the role of
determinism and uncertainty in physics. What most characterizes physics is not
the absence of uncertainty, but the specification of it. Just because the
current dominant economic dogma has it wrong is no reason to throw out
determinism.
The analogy to billiard balls is a poor analogy to social systems. The
physical forces that determine an earthquake, for example, may not allow us to
precisely predict the moment in time when the quake will trigger, but that
doesn't make earthquakes "non-deterministic". OK, the point is taken that
societies are not billiard balls. There is still plenty of room to hope that
social forces may be sufficiently specified to allow useful predictions.
Throwing out determinism is not a royal road to morality. The moral quandary of
the present day is how to reconcile determinism and morality, each of us as
individuals and all of us as a society, not to force a choice between them.
Because we are not billiard balls, we do not have to accept that the
morality of society is merely the sum of all the individual moralities of all
the individuals composing it ("market" morality). We can allow for the social
construction of a moral code and the imposition of that code on society's
constituent individuals. None of that necessarily takes us outside of
determinism. Because previous generations got some of the laws of physics wrong
does not mean the laws of physics did not exist at that time. Because current
economists make absurd assumptions does not mean no science of economy is
possible. But a "non-deterministic" 'science' is no science at all.
I abandoned Econ. as a major when I was a senior in college (mid 70's)
because what was being taught had little to no relationship to what I observed
in the real world of human beings (as opposed to the "Homo Economicus" that
econ. theory depended on).
My father made the money that paid for my tuition & books through sales. As
a sales manager for a major insurance co. he was always looking for recruits
who could "sell air conditioners to Eskimos". If, in fact, the "information
symmetry" that econ. theory depends on existed, then his job could not have
existed.
I was also influenced by an econ. prof. who told me that an econ. degree was
worthless unless I wanted to teach it or work for the gov't.
I think most NC readers will understand the "shorthand" phrase "First, assume a
can opener"
Elites always invent ideologies, which are like operating systems, in order
to maintain control over the minds of their subjects. Economics, great chains
of being, Mandate of Heaven. It's all the same.
Does he not understand Science and the Scientific method?
Hypothesis
Thesis
Experiment – Repeatable by independent parties, Experiments.
Proof.
That's Science, That's physics. Read Joule's biography to understand the
method.
Economics is NO science because there is no way to conduct an experiment, a
repeatable experiment.
In addition the mathematicians have discovered and codified Chaos or
Catastrophe Theory, and the attendant Black Swans, in the last 50 years, which
provides a solid foundation to understand economics, and its absolute
unpredictability.
Because us humans are driven by fear and greed, consequently:
Presume a rational actor
(economics 101) is invalid.
There is not ONE mention of chaos in this article, which is the governing
mathematics behind Economics in the world we inhabit, work, play, are born and
die.
There is an old expression:
Before putting pen to paper, please
engage mind.
In an even larger sense, we have substituted ideology for religion. Consider
capitalism, privatization, democracy, the profit motive, materialism, utility
maximisation, and, yes, even the scientific method. We worship these just as
ardently as we did the Grecian or Egyptian pantheon of gods in the years b.c.e.,
and the Christian, Jewish, and Islamic characterizations of god/Allah up to the
present era.
The unquestioning acceptance of these belief systems filters our perceptions
of reality and blinds us to the infinite number of possibilities that exist
outside of those frames of reference. In fact, those systems have indeed become
our religion and stepping outside of them frequently incurs the same stigma and
scorn formerly accorded to religious heretics who were often burned at the
stake. One doesn't need to spend more than a day reading a layperson's guide to
quantum mechanics to get an idea of what happens when you set your mind free of
those confining boxes.
I highly recommend Morris Berman's book,
Coming to Our Senses
, where he traces western history from the beginnings
of Christendom to the modern day in the context of heresy. (That's a simplistic
but reasonably accurate synopsis.) It's a dense read and when I first sat down
with it in the early 90s, I could only manage a few pages at a time and then
had to take two or three days to digest before coming back for more. I read it
again ten years later and it made even more of an impact the second time
around. Without exaggerating, I can honestly say that it profoundly shaped my
world view to the point that I now view all belief systems skeptically and try
to place them in a larger context.
Pilkington's description of economics as an unassailable belief system rings
true to me. Not unlike religion (the Crusades, the Inquisition, the
Conquistadors, right on up to ISIS), economics has wreaked and is wreaking
havoc across the globe. Who knows what wonders await us when we start thinking
out of that box.
A schematic approach involves building tools that can be integrated into
how we understand the world around us without assuming that these tools
provide us with an exact description of this world.
I am perhaps most interested in this. Will look for the book. I always get
something from reading Pilkington's posts.
"... reduced competition can also give employers power to dictate wages-so- called "monopsony" power in the labor market. ..."
"... While monopoly in product markets and monopsony in labor markets can be related and share some common causes, the latter has some distinct causes and policy implications. ..."
"... This issue brief explains how monopsony, or wage-setting power, in the labor market can reduce wages, employment, and overall welfare ..."
A growing literature has documented several
indicators of declining] competition in the United
States, and economists have begun to explore the
links between these trends and rising income
inequality (Furman and Orzag 2015). While recent
discussions have highlighted rising concentration
among producers and monopoly pricing in sellers
markets (The Economist 2016), reduced competition
can also give employers power to dictate wages-so-
called "monopsony" power in the labor market.
While monopoly in product markets and monopsony
in labor markets can be related and share some
common causes, the latter has some distinct causes
and policy implications.
This issue brief explains how monopsony, or wage-setting power, in the labor market can reduce wages,
employment, and overall welfare...
P8 Keynesian Complexity
................
"But no one appears to have understood the fundamental
insights of Keynesian complexity: the system as whole does
not act as a simple aggregate of the actions of the
individual agents within the system. Pre-Keynesian
macroeconomics was based centrally on the misunderstanding
that the macroeconomy can be understood by scaling up the
microeconomic behaviors of individual agents. While Keynes
forcefully rejected this thesis, and created a complex system
view of the macroeconomy, simple-minded followers failed to
understand complexity, and went back to the pre-Keynesian
views."
........................
https://weapedagogy.wordpress.com/2017/01/07/p8-keynesian-complexity/
RGC -> RGC...
, -1
Paul Samuelson on Keynes (same link):
Ironically, failure
to understand Keynes led to dismissal and contempt "Paul
Samuelson felt he could say that "it is remarkable that so
active a brain would have failed to make any contribution to
economic theory . .." (cited in John Foster 2006).
Because Samuelson could not understand the complexity of
Keynesian theory, he wrote that: "[The General Theory] is a
badly written book, poorly organized; any layman who,
beguiled by the author's previous reputation, bought the book
was cheated of his 5 shillings. It is not well suited for
classroom use. It is arrogant, bad-tempered, polemical, and
not overly generous in its acknowledgements. It abounds with
mares' nests and confusions: involuntary unemployment, wage
units, the equality of savings and investment, the timing of
the multiplier, interactions of marginal efficiency upon the
rate of interest, forced savings, own rates of interest, and
many others. In it the Keynesian system stands out
indistinctly, as if the author were hardly aware of its
existence or cognizant of its properties; and certainly he is
at his worst when expounding its relations to its
predecessors."
Samuelson's arrogance in believing that he understood the
Keynesian system better than Keynes created the biggest
barrier to understanding Keynes for 20th Century economists.
Because of his stature, he became the authorized interpreter
of Keynes, and very few went back to original writings to try
to understand them. Those who did also failed to come to
grips with complexity, and as a result, it is impossible to
count the variety of interpretations of Keynes - see for
example, Backhouse and Bateman. The Keynesian elephant has a
huge number of parts, it seems.
Brad DeLong * catches John Cochrane ** being remarkably
dense:
"Paul Krugman recommended, with refreshing clarity, that
the US government fake an alien invasion so we could spend
trillions of dollars building useless defenses. (I'm not
exactly sure why he does not call for real defense spending.
After all, if building aircraft carriers saved the economy in
1941, and defenses against imaginary aliens would save the
economy in 2013, it's not clear why real aircraft carriers
have the opposite effect. But I'm still working on the
nuances of new-Keynesianism, so I'll let him explain the
difference. I'm not a big fan of huge defense spending
anyway.)"
As I've explained before, *** the alien thing was a modern
riff on Keynes's coalmine thought experiment. **** It's worth
quoting that one in full:
"It is curious how common sense, wriggling for an escape
from absurd conclusions, has been apt to reach a preference
for wholly 'wasteful' forms of loan expenditure rather than
for partly wasteful forms, which, because they are not wholly
wasteful, tend to be judged on strict 'business' principles.
For example, unemployment relief financed by loans is more
readily accepted than the financing of improvements at a
charge below the current rate of interest; whilst the form of
digging holes in the ground known as gold-mining, which not
only adds nothing whatever to the real wealth of the world
but involves the disutility of labour, is the most acceptable
of all solutions.
"If the Treasury were to fill old bottles with banknotes,
bury them at suitable depths in disused coalmines which are
then filled up to the surface with town rubbish, and leave it
to private enterprise on well-tried principles of
laissez-faire to dig the notes up again (the right to do so
being obtained, of course, by tendering for leases of the
note-bearing territory), there need be no more unemployment
and, with the help of the repercussions, the real income of
the community, and its capital wealth also, would probably
become a good deal greater than it actually is. It would,
indeed, be more sensible to build houses and the like; but if
there are political and practical difficulties in the way of
this, the above would be better than nothing."
In a way, I'm amazed by economists who find this sort of
thing absurd on its face. Leave macroeconomics on one side:
what about the theory of the second best? This theory - which
is just basic micro - says that when some markets are
distorted, for whatever reason, social costs and benefits
across the economy don't correspond to private costs, so that
unprofitable, even seemingly wasteful activities can
sometimes be beneficial. And an economy in which millions of
willing workers can't find work is surely one with massive
distortions of some kind.
Oh, and let's always remember that Keyensians like me
don't believe that thing like the paradox of thrift and the
paradox of flexibility are the way the economy normally
works. They're very much exceptional, applying only when
interest rates are up against the zero lower bound.
Unfortunately, that happens to be the world we're currently
living in.
"... Credit creation and the financialization above the consumer level of this new-money creation is an unlimited privlege held by financial system actors, we saw this blatantly in 2000-2006, so IS is demonstrably not true, the amount of available Investment funds Is unlimited. There is no such thing as loanable funds at the macro level, the financial system can make financial positions then manages the cash liquidity (until ... .). ..."
"... Defining currency as a liability on a set of books for a thing called a central bank and talking about Quantity Theories of Money, are all demonstrably weak notions, at keast in huge economies. The approach by China ignores a lot of this theory in practice as they Spend to improve the economic potential of their people, a ka Keynes. They do care about closing the supply gaps in housing and transport, and clean power, sure, but they care more about helping more and more and more chinese to get a connection to a modernizing economy. Sure wish Krugman cared the same way rather than caring fir the cloture of the ISLM theory. He may have been kinder to Sanders and more challenging of Clinton too. ..."
"... Krugman is willing to explain that the US can borrow at low rates to build public goods and other assets and get it paid for by returns, but somehow direct Spending, even using phoney debt processes to push the financing outward as the chinese do (which is simply helicopter money) cant do the same. ..."
Krugman believes deeply in the ISLM model and cant seem to admit that there are stunning implications
to the following :
Credit creation and the financialization above the consumer level of this new-money
creation is an unlimited privlege held by financial system actors, we saw this blatantly in
2000-2006, so IS is demonstrably not true, the amount of available Investment funds Is unlimited.
There is no such thing as loanable funds at the macro level, the financial system can make
financial positions then manages the cash liquidity (until ... .).
Defining currency as a liability on a set of books for a thing called a central bank
and talking about Quantity Theories of Money, are all demonstrably weak notions, at keast in
huge economies. The approach by China ignores a lot of this theory in practice as they Spend
to improve the economic potential of their people, a ka Keynes. They do care about closing
the supply gaps in housing and transport, and clean power, sure, but they care more about helping
more and more and more chinese to get a connection to a modernizing economy. Sure wish Krugman
cared the same way rather than caring fir the cloture of the ISLM theory. He may have been
kinder to Sanders and more challenging of Clinton too.
Krugman is willing to explain that the US can borrow at low rates to build public goods
and other assets and get it paid for by returns, but somehow direct Spending, even using phoney
debt processes to push the financing outward as the chinese do (which is simply helicopter money)
cant do the same.
Right now I see the chinese approaches as undermining credulity to monetary theories while
it is consistent with Keynes not so the extended theories.
And of course I hope I am right for the chinese, no surprise to me if this is the case.
The sky is falling view does come to mind if you believe some of the economic theories, oh
look, so much debt. But as Adair wrote this week,and I commented upon it a year or so ago probably,
if you dont believe in these theoretic tales you can just erase the 'debt' held by the chinese
people via their government when it makes sense, no harm, almost all good.
But I have to say, without the US as its major buyer and without their ability to accumulate
dollar-asset in reserve to the level they have, one wonders if there would be less lattitude.
This raises the question about why Trump continues to voice that the rug will be pulled out soon.
Why? I am pretty sure it isnt because he wants to prove the economic theorests to be right.
China's Market Crash Means Chinese Supergrowth Could Have Only 5 More Years to Run
By Brad DeLong
Now that 90 days have passed, from the Huffington Post from Last August: China's Market Crash
Means Chinese Supergrowth Could Have Only 5 More Years to Run *
Ever since I became an adult in 1980, I have been a stopped clock with respect to the Chinese
economy. I have said--always--that Chinese supergrowth has at most ten more years to run, and
more probably five or less. There will then, I have said, come a crash--in asset values and expectations
if not in production and employment. After the crash, China will revert to the standard pattern
of an emerging market economy without successful institutions that duplicate or somehow mimic
those of the North Atlantic: its productivity rate will be little more than the 2%/year of emerging
markets as a whole, catch-up and convergence to the North Atlantic growth-path norm will be slow
if at all, and political risks that cause war, revolution, or merely economic stagnation rather
than unexpected but very welcome booms will become the most likely sources of surprises....
If you want to put money in China given their still extant massive imbalances ... go right ahead.
I'm still predicting a massive slowdown, if not a crash.
The central government in China has a big warchest and a lot of catchup growth that can keep
it afloat, but at a macro level there simply must be big adjustments (i.e., investment to consumption
demand), which can be put off but not avoided entirely.
Why should an adjustment from investment to consumption cause a massive slowdown or a crash?
[ No matter, after 40 years of an average 9.7% yearly real Gross Domestic Product growth and
8.6% yearly per capita GDP growth, Western analysts been all but unconcerned with how such growth
was managed, especially since no other developing country came anywhere close. Why no other developing
country has come close to matching China in growth, I would think, would make for an important
extensive study, but evidently not. ]
"... If the Fed were to buy treasuries directly, then Wall Street would be losing a big fat paycheck for the horrendous work of two keystrokes. That is why Wall Streets little sock puppets in Congress has not done anything. ..."
"... Academics at least theoretically seek to discourage group think while politicians seek to cultivate group think. Nonetheless, peer review processes instill group think in academics regardless of intentions. Elite groups only think that they are better when in fact they are hardly any different in essential and existential ways, just in customs, habits, and aesthetics. Individual results may vary though in the general population and among elites. ..."
"... In a democratically electoral republic if the mainstream or status quo is the result of majority opinion then how can the opposition be characterized as populist? ..."
"... When we pursue technocrats, elitists, and oligarchs to advance the cause of socialism we do not get social democracy, but we may get liberal policy aimed at quelling discontent when necessary to prevent a popular uprising. That was the catch-22 omitted from Schumpeter's "Capitalism, Socialism and Democracy". Corporatism does not naturally lead to socialism in republican governments as Joseph Schumpeter said that it would. If we want social democracy then we must start by pursuing the electorate to advance the cause of democracy first. ..."
"... But there's a good case for arguing that Friedmanism, in the end, went too far, both as a doctrine and in its practical applications. ..."
"... Still, nothing regarding the monopoly over the money supply. Not addressed. Ignored. That the Treasury can inject debt free money into the money supply, is ignored! That we could have a job guaranteed program is ignored. That we never needed to produce debt for deficit financing is ignored. What the hell! ..."
David Glasner * has been making a series of posts on the legacy of Milton Friedman, some of
them in response to Scott Sumner; they're interesting if you want to delve into the intellectual
history. I'm not personally big on such things - in general, what people thought Keynes or Friedman
meant ends up being more important than what they turn out, on close reading, to (maybe, possibly)
actually have meant. For what it's worth, I think Glasner makes a good case that Friedman was
indeed more or less a Keynesian, or maybe Hicksian - certainly that was the message everyone took
from his "Monetary Framework," which was disappointingly conventional. And Friedman's attempts
to claim that Keynes added little that wasn't already in a Chicago oral tradition don't hold up
well either.
But never mind. What I think is really interesting is the way Friedman has virtually vanished
from policy discourse. Keynes is very much back, even if that fact drives some economists crazy;
Hayek is back in some sense, even if one has the suspicion that many self-proclaimed Austrians
bring little to the table but the notion that fiat money is the root of all evil - a deeply anti-Friedmanian
position. But Friedman is pretty much absent.
This is hardly what you would have expected not that long ago, when Friedman's reputation bestrode
the economic world like a colossus, when Greg Mankiw ** declared Friedman, not Keynes, the greatest
economist of the 20th century, when Ben Bernanke concluded a speech praising Friedman *** with
the famous line,
"Let me end my talk by abusing slightly my status as an official representative of the Federal
Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right,
we did it. We're very sorry. But thanks to you, we won't do it again.
"Best wishes for your next ninety years."
So what happened to Milton Friedman?
Part of the answer is that at this point both of Friedman's key contributions to macroeconomics
look hard to defend.
First, on monetary policy: Even if you give him a pass on the 3 percent growth in M2 thing,
which was abandoned by almost everyone long ago, Friedman was still very much associated with
the notion that the Fed can control the money supply, and controlling the money supply is all
you need to stabilize the economy. In the wake of the 2008 crisis, this looks wrong from soup
to nuts: the Fed can't even control broad money, because it can add to bank reserves and they
just sit there; and money in turn bears little relationship to GDP. And in retrospect the same
was true in the 1930s, so that Friedman's claim that the Fed could easily have prevented the Great
Depression now looks highly dubious.
Second, on inflation and unemployment: Friedman's success, with Phelps, in predicting stagflation
was what really pushed his influence over the top; his notion of a natural rate of unemployment,
of a vertical Phillips curve in the long run, became part of every textbook exposition. But it's
now very clear that at low rates of inflation the Phillips curve isn't vertical at all, that there's
an underlying downward nominal rigidity to wages and perhaps many prices too that makes the natural
rate hypothesis a very bad guide under depression conditions.
So Friedman's economic analysis has taken a serious hit. But that's not the whole story behind
his disappearance; after all, all those economists who have been predicting runaway inflation
still have a constituency after being wrong year after year.
Friedman's larger problem, I'd argue, is that he was, when all is said and done, a man trying
to straddle two competing world views - and our political environment no longer has room for that
kind of straddle.
Think of it this way: Friedman was an avid free-market advocate, who insisted that the market,
left to itself, could solve almost any problem. Yet he was also a macroeconomic realist, who recognized
that the market definitely did not solve the problem of recessions and depressions. So he tried
to wall off macroeconomics from everything else, and make it as inoffensive to laissez-faire sensibilities
as possible. Yes, he in effect admitted, we do need stabilization policy - but we can minimize
the government's role by relying only on monetary policy, none of that nasty fiscal stuff, and
then not even allowing the monetary authority any discretion.
At a fundamental level, however, this was an inconsistent position: if markets can go so wrong
that they cause Great Depressions, how can you be a free-market true believer on everything except
macro? And as American conservatism moved ever further right, it had no room for any kind of interventionism,
not even the sterilized, clean-room interventionism of Friedman's monetarism.
So Friedman has vanished from the policy scene - so much so that I suspect that a few decades
from now, historians of economic thought will regard him as little more than an extended footnote.
It seems that many people misunderstood my post * on Milton Friedman. It was not intended as
Friedman-bashing, as a claim that MF was a bad economist; in fact, I'm on record ** declaring
Friedman a "great economists' economist". His work aimed primarily at a professional audience
- the permanent income theory of consumption, the case for flexible exchange rates, the natural
rate (even if it does break down at low inflation), the optimum quantity of money - was often,
maybe even usually, brilliant, and will live on.
What isn't living on, however, is Friedman's role as a guiding light for conservative economic
policy.
Think about Paul Ryan, who is, like it or not, the leading economic intellectual of the modern
GOP. Ryan sometimes drops Friedman's name - but when he does, it's to cite "Capitalism and Freedom,"
not "A Monetary History of the United States." When it comes to monetary policy, Ryan has said
that his views are based on fictional characters in "Atlas Shrugged." No, really.
Or think about the economics rap video of "Keynes versus Hayek" everyone had fun with. Never
mind that back in the 30s nobody except Hayek would have considered his views a serious rival
to those of Keynes; the real shock should be, what happened to Friedman?
Partly this disappearance reflects real problems with Friedman's analysis. His views on the
omnipotence of monetary policy,let alone the adequacy of a simple quantity-of-money rule, haven't
withstood the test of time. As far as stabilization policy is concerned, he was indeed, as Brad
DeLong archly puts it, a minor post-Hicksian. ***
But the bigger issue, I'd argue, is that modern conservatives can't accept the things Friedman
was right about. Take, in particular, his essay on flexible exchange rates, in which he argued
that a country that finds its wages and prices out of line should devalue its currency rather
than rely on unemployment to push wages down, "until the deflation has run its sorry course."
Contrast this with Ryan's declaration that "There is nothing more insidious that a country can
do to its citizens than debase its currency."
The point is that Friedman was, when all is said and done, a pragmatist; he leaned right ideologically,
but was willing to make room for awkward realities. And these days reality has a well-known liberal
bias. Hence, Friedman has become an unperson.
"What's odd about Friedman's absolutism on the virtues of markets and the vices of government
is that in his work as an economist's economist he was actually a model of restraint."
What's ironic is if you read Krugman pre-2000 his work as an economist was actually a model
of restraint. Then BDS (Bush Derangement Syndrome) kicked in and he turned into a political "science"
crank.
2000 was when George W. Bush lied his way into office. Krugman called out Bush's lies and was
tagged as the Shrill One. Over time - a lot of progressives began to wear being shrill as a badge
of honor.
Kind of like Obama, Clinton and the likes lied to intervene in Libya? They hate us for our freedom?
No they hate us because we fight proxy wars in their territory and kill innocent civilians. As
long as Assad is around Obama can drone bomb innocent people in Yemen and Proggers hail him as
a saint.
Does anyone have any comments about the constitutional monopoly over the money supply awarded
to the Treasury? I don't understand what an economist means when he uses the word 'monetarist'
to describe a set of ideas, but I do understand what it would mean if the Treasury (or a national
Central Bank) stopped issuing debt for net government spending. Why we do issue this debt is beyond
my comprehension. It's incredibly expensive, and there are no guidelines that make any sense to
me when it comes to what is paid for by deficit spending. That we have piled up $17 trillion or
whatever amount of debt when most of it was unnecessary is astonishing.
Kenneth D. Garbade Federal Reserve Bank of New York
Abstract
Until 1935, Federal Reserve Banks from time to time purchased short-term securities directly from
the United States Treasury to facilitate Treasury cash management operations. The authority to
undertake such purchases provided a robust safety net that ensured Treasury could meet its obligations
even in the event of an unforeseen depletion of its cash balances. Congress prohibited direct
purchases in 1935, but subsequently provided a limited wartime exemption in 1942. The exemption
was renewed from time to time following the conclusion of the war but ultimately was allowed to
expire in 1981. This paper addresses three questions: 1) Why did Congress prohibit direct purchases
in 1935 after they had been utilized without incident for eighteen years, 2) why did Congress
provide a limited exemption in 1942 instead of simply removing the prohibition, and 3) why did
Congress allow the exemption to expire in 1981?
Paul Krugman
Be Ready To Mint That Coin
January 7, 2013 9:05 am
.....................
For those new to this, here's the story. First of all, we have the weird and destructive institution
of the debt ceiling; this lets Congress approve tax and spending bills that imply a large budget
deficit - tax and spending bills the president is legally required to implement - and then lets
Congress refuse to grant the president authority to borrow, preventing him from carrying out his
legal duties and provoking a possibly catastrophic default.
And Republicans are openly threatening to use that potential for catastrophe to blackmail the
president into implementing policies they can't pass through normal constitutional processes.
Enter the platinum coin. There's a legal loophole allowing the Treasury to mint platinum coins
in any denomination the secretary chooses. Yes, it was intended to allow commemorative collector's
items - but that's not what the letter of the law says. And by minting a $1 trillion coin, then
depositing it at the Fed, the Treasury could acquire enough cash to sidestep the debt ceiling
- while doing no economic harm at all.
If the Fed were to buy treasuries directly, then Wall Street would be losing a big fat paycheck
for the horrendous work of two keystrokes. That is why Wall Streets little sock puppets in Congress
has not done anything.
Rule number one for a populist (popular) communicator of complicated issues is that you lose any
and all doubt or granularity. The peeps will immediately lose interest in you and think you know
nothing, if you fail to say things with great certainty and great simplicity.
This is the exact opposite of how you communicate in an academic environment. If a scientist
give a talk and fail to acknowledge the weaknesses in the narrative they present; the scientists
listening will dismiss him/her as ignorant or a BS artist (and confront them with those weaknesses).
Academics at least theoretically seek to discourage group think while politicians seek to
cultivate group think. Nonetheless, peer review processes instill group think in academics regardless
of intentions. Elite groups only think that they are better when in fact they are hardly any different
in essential and existential ways, just in customs, habits, and aesthetics. Individual results
may vary though in the general population and among elites.
In a democratically electoral republic if the mainstream or status quo is the result of majority
opinion then how can the opposition be characterized as populist?
"Elite groups only think that they are better when in fact they are hardly any different"
A case of false equivalency. There is a huge difference between a process that is constructed
to reach a correct conclusion (but fails when inappropriately applied) and a process that has
less of a chance of reaching the correct conclusion than a random number pick. Yes there are many
examples where the scientific process has failed to reach the correct conclusion (and we know
that because eventually it cleansed itself of those conclusions). However there are many more
times when the scientific process got things right. That is in contrast to the FoxBot blowhards
who seems almost incapable of getting anything right.
Intellectual conclusions only matter when they influence real world policy decisions. Real world
policy decisions are not governed by science regardless of political control and economics is
not deterministic science and often is not even probabilistic science. Of course that is why real
world policy decisions are not governed by science. The political influence of wealth, custom
and habit, heuristic guidelines obtained from the random walk of history, and popular memes all
have more influence over public policy decisions than science.
When we pursue technocrats, elitists, and oligarchs to advance the cause of socialism we do not
get social democracy, but we may get liberal policy aimed at quelling discontent when necessary
to prevent a popular uprising. That was the catch-22 omitted from Schumpeter's "Capitalism, Socialism
and Democracy". Corporatism does not naturally lead to socialism in republican governments as
Joseph Schumpeter said that it would. If we want social democracy then we must start by pursuing
the electorate to advance the cause of democracy first.
DeDude -> RC AKA Darryl, Ron... , -1
"Real world policy decisions are not governed by science regardless of political control"
Another false equivalency...
The real world is not yes/no, black/white. Just because science sometimes get
corrupted doesn't mean it always is corrupted. Just because one of our main parties have become
addicted to refusing facts and evidence against their narratives doesn't mean that everybody all
the time refuse to listen to facts and evidence. I know that the corruption narrative is what
keeps you alive and thinking you got it all figured out, but it also is what leads you astray
on a regular basis.
Milton Friedman once tried to explain to doctors why their precious cartel known as the AMA was
a bad idea. One would have thought the doctors would have shot him on the spot. But no - Friedman
pitched this as a way to keep away "socialism" aka things like Medicare. The doctors loved it.
Of course I thought this was one of his lower moments. BTW - never tell a doctor we should have
Medicare for all unless you want to endure a tirade of why they don't make all that much.
Yes, you got to give Friedman that he was a good salesman. Scientist and economists: mediocre
- just to easily addicted to his own narratives. But he was a brilliant salesman.
MF proposal to manage economies with monetary policy only and to sideline fiscal and regulatory
policy found favors with free market conservatives.
Free market rules mean that the greedy are free to market their get rich quick scams to the
harm of the rest of us and their own personal enrichment.
Monetary policies such as Volcker's job killing interest rates in 1980 are praised. Fiscal
and regulatory policies such as the CAFE standards and subsidies to move away from oil created
the Great Moderation, yet are dismissed or worse vilified.
Monetary policy is not saving us from climate change. Fiscal incentives for clean energy and
regulation of carbon emissions are the tools that can be applied effectively.
The reformation we need is Post-Monetary with a strong emphasis on the fiscal and regulatory...
The free markets do hate fiscal policy or almost anything else that is sensible policy. But if
they ever really understood what Friedman was saying about monetary policy - they would turn on
him as being some of sort of communist.
Still, nothing regarding the monopoly over the money supply. Not addressed. Ignored. That the
Treasury can inject debt free money into the money supply, is ignored! That we could have a job
guaranteed program is ignored. That we never needed to produce debt for deficit financing is ignored.
What the hell!
anne -> Chris Herbert... , -1
Monopolization of the money supply:
I have been wondering about "demonetization" in India and what that might mean but I have read
no convincing analysis so far:
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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