Posts Tagged ‘crisis’

Guardian-Cartoon

No, I’m not referring to the ignominious fall of the once-mighty Red Devils.*

Instead, it’s the news that the University of Manchester [ht: adm] has decided to cancel the year-old Bubbles, Panics and Crashes module, which had been developed to answer student protests at the dominance of orthodox free-market teaching.

Students said the U-turn undermined the credibility of senior staff who promised reforms and meant the department was actively obstructing debate over the causes of the financial crash and why economists failed to see it coming. . .

The row broke out last year when students claimed that mainstream economic teaching failed to address the underlying causes of the banking crash, and was in part responsible for politicians and financial watchdogs relying on free-market theories and light-touch regulation.

Undergraduates in Manchester formed the Post-Crash Economics Society and joined groups at the London School of Economics, Cambridge University and University College London to rebel against what they saw as the dominance of discredited theories that rely on mathematical formulas and not real-world examples.

In response, several university departments agreed to implement a new curriculum that would incorporate a wider range of viewpoints, including Keynesian economic thinking. Sponsored by the Institute for New Economic thinking, based in New York, the Curriculum in Open-source Resources in Economics project was set up to develop “a new approach to economics teaching for undergraduates”.

Manchester University’s economics department, which faced the brunt of student criticism, went further when it agreed to run the Bubbles, Panics and Crashes course. The decision to close it down after only one year has dismayed students.

 

*Manchester United Football Club are now seventh in the table, 17 points off the top, less than one year after winning the Premiership by 11 points.

Protest_Credit_Crisis

Let’s leave aside for a moment whether the participants were the right ones to call on (I would have turned to plenty of better commentators, who have read both Marx and contemporary scholarship on Marxist theory, to offer their opinions) or even whether they get Marx right (very little, as it turns out).

What’s perhaps most interesting is that the New York Times felt the need at this point in time to host a debate on the question “was Marx right?” and, then, that most of the participants admit that Marx did in fact get a great deal right.

The problem is, of course, that at this point in time mainstream economics (in either its neoclassical or Keynesian varieties) is not a particularly good guide for analyzing or proposing solutions to the key economic problems of soaring inequality, massive unemployment, and generalized insecurity of a broad mass of the population in the United States and in other high-income countries. So, I suppose it’s not surprising people continue to turn to Marx for ideas about how to make sense of the economic contradictions that caused the Second Great Depression and the new contradictions that right now are preventing a full recovery of capitalism.

In the end, what is key to Marx is not this or that prediction (of which, as it turns out, there is very little in the texts, although there certainly are lots of tendencies that critics are hard put to ignore or effectively counter) but, instead, the idea of critique. Because what Marx set out to do over the course of the three published volumes of Capital was provide the cornerstones for a far-reaching critique of political economy. And the method of that critique—a two-fold critique, of mainstream economic theory and of capitalism as a system—is what endures, precisely as a challenge to what passes for serious economic analysis today.

Marx, then, was surely right about one thing:

if constructing the future and settling everything for all times are not our affair, it is all the more clear what we have to accomplish at present: I am referring to ruthless criticism of all that exists, ruthless both in the sense of not being afraid of the results it arrives at and in the sense of being just as little afraid of conflict with the powers that be.

economics-cartoon

Once again, the work of Hyman Minsky has been discovered—this time, by the BBC.

Minsky’s main idea is so simple that it could fit on a T-shirt, with just three words: “Stability is destabilising.”

Most macroeconomists work with what they call “equilibrium models” – the idea is that a modern market economy is fundamentally stable. That is not to say nothing ever changes but it grows in a steady way.

To generate an economic crisis or a sudden boom some sort of external shock has to occur – whether that be a rise in oil prices, a war or the invention of the internet.

Minsky disagreed. He thought that the system itself could generate shocks through its own internal dynamics. He believed that during periods of economic stability, banks, firms and other economic agents become complacent.

They assume that the good times will keep on going and begin to take ever greater risks in pursuit of profit. So the seeds of the next crisis are sown in the good time.

Much the same can be said about Marx’s work. In both theories, crises are endogenously produced within the capitalist system itself.

The approaches differ, of course: while Minsky focused on rising debt and complacency, Marx emphasized class exploitation and capitalist competition. But it doesn’t take much work to combine the insights of the two thinkers to identify what we might call the “Minsky-Marx moment”—the moment when, as a result of rising debt and competition over the surplus, the whole house of cards falls down.

But you won’t find either in modern macroeconomics. In fact, if you search inside one of the leading texts—Robert Barro’s Macroeconomics: A Modern Approach—you won’t find even a single mention of Minsky or Marx.

It’s no wonder modern mainstream macroeconomists and their students had so little to offer in terms of understanding how and why the latest crisis occurred or what to do once the house of cards did in fact come tumbling down.

Taupinières_-_Mole-hills

The discussion these days seems to be all about foxes and hedgehogs.

Those are the terms Nate Silver borrows from a phrase originally attributed to the Greek poet Archilochus to define his new journalistic project—the fox who knows many things as against the the hedgehog who knows one big thing. (But see my critique here.)

The pair of animal also turns up in James Surowiecki’s review of Fortune Tellers: The Story of America’s First Economic Forecasters by Walter A. Friedman.

Philip Tetlock, a professor of psychology and management at Penn who conducted a 20-year study asking almost 300 experts to forecast political events, has shown that while experts in the political realm are not especially good at forecasting the future, those who did best were, in the terminology he borrowed from Isaiah Berlin, foxes as opposed to hedgehogs—that is, the best forecasters were those who knew lots of little things rather than one big thing. Yet forecasters are more likely to be hedgehogs, if only because it’s easier to get famous when you’re preaching a simple gospel. And hedgehogs are not good, in general, at adapting to changed conditions—think of those bearish commentators who correctly predicted the bursting of the housing bubble but then failed to see that the stock market was going to make a healthy recovery.

The fact is, the two periods that led to more sources of information for economic forecasting preceded the two greatest crises of capitalism we’ve witnessed during the past 100 years—after which new ideas and movements erupted that provided concrete alternatives to capitalism. It’s not that they had more information. They honestly used the data at hand about what was fundamentally wrong with existing economic arrangements and, instead of sticking with tired formulas and failed policies, dared to imagine a world beyond capitalism.

Someday, then, we too will be able to exclaim, “Well burrowed, old mole!”

Kchroniclessteve

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1bcXEh.St.81 Cable Merger

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trendGDP

This chart, which was prepared by economist Anthony Laramie [ht: ja], is one way of looking at how much trouble we’re in right now as a result of the recent and ongoing crises of capitalism.

As Laramie explains,

these are data derived using the revised National Income and Product Accounts. The blue line is actual real GDP since 2000, first quarter. The green line is the post-World War II trend in real GDP, from the first quarter of 1947 to the third quarter of 2013 (where the average annual growth rate is about 3.2 percent).  The red line is the post-Bretton Woods (i.e., since 1972) trend in real GDP (where the average annual growth rate is about 2.9 percent).

The obvious conclusion from looking at this chart is that the United States has shifted onto a lower trend with a lower growth rate.

Which trend is a better benchmark as to where the economy should be? Well, if we look at the period from 1972 (first quarter) to 2000 (fourth quarter) (i.e., the post-Bretton Woods to the pre-War on Terror period), the average annual growth rate is just over 3.1 percent. Excluding the poor economic growth of the last decade suggests that the better benchmark is given by the trend growing at 3.2 percent (the green line).

Is there any wonder that the notion of “secular stagnation” has reared its ugly ahead again?

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Special mention

140089_600 14.11.13: Steve Bell on the Bank of England's latest economic forecasts

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This semester, I’m teaching a course on Marxian economic theory. It’s been a real eye-opener for the the students, who seem a bit surprised to learn that there is such a wholesale critique of the mainstream economics they’ve been learning. Some are even intrigued by this new way of thinking about the economy, which led one of them to pose the following question: did Marxists predict the crisis better or more accurately than mainstream economists?

Well, I explained, that’s setting the bar pretty low, since mainstream economists simply failed to predict the crash of 2007-08. But, I explained, Marxists did no better. And that’s because economic forecasting is like selling snake oil: lots of folks earn lots of money promising the ability to predict economic events but all they’re doing is selling the promise, not the actual ability, to get the forecasts right. (And, of course, they pay nothing for their failures, since they’ve left town long before people discover the magic elixir doesn’t work.)

And that’s what has happened to the students: they’ve been told mainstream economics is superior to all other approaches, that it’s a “real science,” because of its predictive power. And they’re willing to jump ship, as it were, if an alternative theory offers more predictive power.

The problem is, as Sir David Hendry explains, forecasting only works if the future behaves the same as the past, if it follows the same rules and falls under the same normal distribution. If it doesn’t, then all bets are off. What that means for me (and for Chris Dillow) is that Marxists are no better at predicting the future than mainstream economists. In fact, economic forecasting, of whatever sort, is a false promise.

But then I went on in my response to the student’s question: what really distinguishes different groups of economists is whether or not they include the possibility of a crisis in their theories and models—and what they would suggest doing once such a crisis occurred (including measures to prevent future crises). And there the difference between mainstream and Marxian economics couldn’t be starker: mainstream economics simply doesn’t include the possibility of crises (except as an exogenous event) whereas Marxists start from the proposition that instability is inherent (and therefore an endogenous tendency) in an economy based on the capitalist mode of production. That’s one fundamental difference between them. The other is that, once a crisis occurs (such as in 2007-08), the two groups of economists offer very different solutions: whereas mainstream economists spend their time debating whether or not any kind of intervention is warranted (based on neoclassical versus Keynesian assumptions concerning invisible and visible hands), Marxist economists presume that interventions are always-already being made (in terms of determining who pays the costs of the crisis) and that it’s better both to help those who are most vulnerable and to put in place the kinds of institutional changes that would prevent future crises.

So, no, I don’t put a lot of stock in economic forecasting, whether promised by mainstream economists or others. It’s a promise of control that is a lot like selling snake oil. But I’m willing to throw in my lot with an approach that, first, actually includes the possibility of such crises at the very center of the theory and, second, is willing to move outside the paradigm of private property and markets to help those who are hurt by the crisis and to change the rules so that those who created the crisis in the first place no longer have the incentive and means to do it again in the future.

And you don’t need a crystal ball to know that, if such changes are not made, another crisis is awaiting us just around the corner.

Update

Here’s the graph Bruce is referring to in the comments on this post:

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And here’s the same series going back earlier:

fredgraph