Posts Tagged ‘economics’

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Once again, this coming fall, I’ll be teaching Karl Polanyi’s The Great Transformation in my Topics in Political Economy course.

It’s a course based entirely on books (plus a few political economy films, starting with Charlie Chaplin’s Modern Times). I teach four classic texts of political economy, starting with Adam Smith’s Wealth of Nations and then moving on to different responses to Smith’s theory of capitalism: by Karl Marx (volume 1 of Capital), Thorstein Veblen (The Theory of the Leisure Class), and finally Polanyi.

I match each classic text with a contemporary one: for example, Deirdre McCloskey’s Bourgeois Virtues with Smith, Stephen Resnick and Richard Wolff’s Knowledge and Class with Marx, and Joseph Stiglitz’s The Price of Inequality with Veblen. Next time, I’m planning to teach Thomas Piketty’s Capital in the Twenty-First Century as the follow-up to Polanyi.

The discussion, of course, gets pretty complicated—since, during the semester, the students learn that the various authors are not only responding to Smith (whose text, they also figure out, has been poorly rendered in their other economics classes), but also to each other. Polanyi with Marx, for example. And changes in the world are making those intellectual exchanges even more interesting, as Robert Kuttner understands:

Looking backward from 1944 to the 18th century, Polanyi saw the catastrophe of the interwar period, the Great Depression, fascism, and World War II as the logical culmination of laissez-faire taken to an extreme. “The origins of the cataclysm,” he wrote, “lay in the Utopian endeavor of economic liberalism to set up a self-regulating market system.” Others, such as John Maynard Keynes, had linked the policy mistakes of the interwar period to fascism and a second war. No one had connected the dots all the way back to the industrial revolution.

The more famous critic of capitalism is of course Karl Marx, who predicted its collapse from internal contradictions. But a century after Marx wrote, at the apex of the post–World War II boom in both Europe and the United States, a contented bourgeoisie was huge and growing. The proletariat enjoyed steady income gains. The political energy of aroused workers that Marx had imagined as revolutionary instead went to support progressive parliamentary parties that built a welfare state, to housebreak but not supplant capitalism. Nations that celebrated Marx, meanwhile, were economic failures that repressed their working classes.

Half a century later, the world looks more Marxian. The middle class is beleaguered. A global reserve army of the unemployed batters wages and marginalizes labor’s political power. Even elite professions are becoming proletarianized. Ideologically, the view that markets are good and states are bad is close to hegemonic. With finance still supreme despite the 2008 collapse, it is no longer risible to use “capital” as a collective noun. The two leading treasury secretaries during the run-up to the 2008 financial crash, Democrat Robert Rubin and Republican Henry Paulson, were both former CEOs of Goldman Sachs. If the state is not quite the executive committee of the ruling class, it is doing a pretty fair imitation.

 

Here’s an interesting discussion of markets and market society, with Michael Sandel (Professor of Government, Harvard University) and Chrystia Freeland (journalist and Member of the Parliament of Canada), which might be useful for those of us who teach in and around economics.

One way to think about the video is that Sandel and Freeland take up and expand on many of the themes one finds in the first three chapters of volume 1 of Capital. The drawback, at least for some of us, is that they overlook the rest of the critique of political economy— especially the conditions and consequences of the commodification of labor power.

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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.

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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.

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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.

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Harvard’s Greg Mankiw fancies himself a political philosopher. The problem is, he’s not very good at it. But, even then, he manages to cobble together a political philosophy that serves the interests of the tiny minority at the top of the current economic system.

You won’t learn much about political philosophy from reading Mankiw’s latest. Basically, he rehashes a couple of the main criticisms of nineteenth-century utilitarianism and then resorts to some combination of the principle of natural rights and “do no harm.” Not much new or interesting there. If he wanted to actually be on top of the current literature concerning economics and political philosophy, including what it means to do no harm as an economist, he might start with The Economist’s Oath by George DeMartino.

Actually, the main problem with Mankiw’s approach is he only considers the effects of tinkering with a free-market system, policies such as Obamacare and raising the minimum wage—not the economic system as a whole. And, even then, he hides behind a distinctly non-Rawlsian veil of ignorance: “when a policy is complex, hard to evaluate and disruptive of private transactions, there is good reason to be skeptical of it.”

The effect, then, of invoking economists’ ignorance—we have a hard time calculating all the costs and benefits of any particular policy—is to leave things as they are. What Mankiw doesn’t want to talk about are the insults and injuries meted out by current economic arrangements, even before they are ameliorated however imperfectly by policy interventions. The injustices that are incumbent upon an economic system in which a tiny minority at the top manages to capture and keep a large share of what the other members of society produce.

In that sense, Mankiw does manage to create a political philosophy for the 1 percent.

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Special mention

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More than two decades beyond the Cold War, the Employment Policies Institute yesterday published a full-page ad [pdf] in the New York Times identifying some of the “radicals” among the 600 economists who signed a letter to President Obama in January advocating an increase of the federal minimum wage of $10.10 an hour.*

Peter Coy interviewed Michael Saltsman, the organization’s research director:

I asked Saltsman if he thinks the ad is Red-baiting. “Not at all,” he said. “It’s just, that’s not somebody we should be listening to as an expert as to whether we should raise the minimum wage.”

Wait, that’s not all. The ad concludes by advising readers to “listen to the consensus of 85 percent of the best economic research,” implying that the seven Nobelists and eight former AEA presidents who signed the letter are in a tiny minority. I asked Saltsman where the 85 percent came from, and he pointed me to a literature review by two economists who have written against a higher minimum wage, David Neumark of the University of California-Irvine and William Wascher of the Federal Reserve Board. According to their paper (pdf), 28 of the 33 studies “that we regard as providing the most credible evidence” point to negative employment effects.

Two points to make there. One is that Neumark and Wascher, while highly respectable economists, may not have the last word on which studies are most credible. Second, it might be a good idea to raise the wage floor even if there are negative employment effects, as long as they’re not too large. In fact, that’s pretty much where a lot of the economists surveyed last year by the University of Chicago’s Booth School of Business came down when surveyed last year.

Never mind, though. Let’s talk about the Marxists.

 

*Full disclosure: I am one of the Ph.D.-in-Economics-carrying individuals who signed the letter.

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Yesterday in our class on A Tale of Two Depressions, we discussed Robert McElvaine’s notion of “moral economy” (which he introduces in chapter 9 of his book, The Great Depression: America, 1929-1941). The idea is that, during the first Great Depression, Americans were engaged in an intense debate between different moral economies (which McElvaine characterizes as the difference between the “cooperative individualism” of workers and the “acquisitive individualism” of businesspeople).

As I explained to students, all economic theories—for example, neoclassical, Keynesian, and Marxian theories—represent moral economies. And they arrive at very different conclusions concerning the justice or fairness of capitalism. Thus, for example, neoclassical economists argue that everyone gets what they deserve and, through the workings of the invisible hand, the result will be full employment. In contrast, Keynesian economics is based on the proposition that, while everyone may get what they deserve (with the possible exception of coupon-clippers), it’s quite possible that will result in less-then-full-employment equilibrium, which then requires the visible hand of government intervention. Marxian economists propose a third possibility: even if everyone gets what they deserve in markets, in production things are different (because of exploitation)—and the consequence, whether there’s an invisible or visible hand, is inequality and instability. In other words, the three economic theories represent radically different moral economies.

One student then invoked the idea of moral economy and blamed greed for causing the current crisis. I responded by making the distinction between individual greed and economic institutions, which like the different notions of fairness among economic theories leads to quite different solutions: throw the greedy bankers in jail (which of course we haven’t done) or change the economic institutions (which we haven’t done either).

Chris Dillow makes a similar distinction between “greedy bankers” and “overly powerful bankers.” His view is that “the habit of over-emphasizing individuals’ traits and under-emphasizing situational forces” leads us to “to moralize inequality; the rich are rich because they are greedy whilst the poor are poor because they are lazy.”

What this effaces is the fact that inequalities in capitalism are instead the result of inequalities of power – a power which rests in part upon ideology. Moralizing inequality tends to blind us to this fact. It creates the illusion that capitalism would be acceptable if only those at the top were better people, when in fact the faults in capitalism are structural and not due to the flaws of passing individuals.

That’s pretty much the same distinction I was trying to make, although I still want to characterize the two explanations as different moral economies: one is a moral economy of flawed individuals, while the other is a moral economy of flawed institutions.*

 

*Although I’m willing to admit I’m sympathetic to Dillow’s view for another reason: because he invokes my favorite football club and blames Crystal Palace fans (who greeted Wayne Rooney with chants of “you fat greedy bastard”) for committing the error of “blaming Rooney’s salary upon his personal character rather than upon his situation.”

 

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The debate about inequality, especially the growing gap between the top one percent and everyone else, has gone mainstream—as we can see by the debate between Robert Solow and Greg Mankiw in the pages of the Journal of Economic Perspectives.

First up was Mankiw, in an article I characterized last summer as throwing “everything against the wall in the hope that at least something will stick.” Then, Solow challenges Mankiw on every major facet of his argument, from the role of finance and the political influence of the one percent to economic rents, intergenerational mobility, and the idea of “just deserts.”

who could be against allowing people their “just deserts?” But there is that matter of what is “just.” Most serious ethical thinkers distinguish between deservingness and happenstance. Deservingness has to be rigorously earned. You do not “deserve” that part of your income that comes from your parents’ wealth or connections or, for that matter, their DNA. You may be born just plain gorgeous or smart or tall, and those characteristics add to the market value of your marginal product, but not to your just deserts. It may be impractical to separate effort from happenstance numerically, but that is no reason to confound them, especially when you are thinking about taxation and redistribution. That is why we may want to temper the wind to the shorn lamb, and let it blow on the sable coat.

Finally, Mankiw has the temerity to refer to Solow’s letter as “scattershot” and then to repeat his original arguments—even the silliest ones, such as the idea that tall people earn higher wages (why? because there’s “a positive correlation between height and cognitive skills”).

My own view, for what it’s worth, is that Solow is wrong about one thing: the one percent are not particularly good at defending themselves (as we can see with the recent examples of Sam Zell, Kevin O’Leary, and Tom Perkins). That’s why, as in the classic Three-Card Monte hustle, they have to have a shill. Which is why they need Harvard’s Mankiw, to attempt to defend them. The problem is, as Solow shows, the “cheerful blandness” of Mankiw’s attempt does not succeed in covering over the “occasional unstated premises, dubious assumptions, and omitted facts.”