Posts Tagged ‘Marx’
Tags: Amazon.com, cartoon, Christmas, corporations, drones, food stamps, gifts, Keynes, Marx, minimum wage, Nelson Mandela, profits, workers
Tags: capitalism, IS/LM, Keynes, macroeconomics, mainstream, Marx, models, New Keynesian, Post Keynesian, Second Great Depression
You can’t but agree with Mark Thoma’s observation concerning the debate within the dismal science about the Second Great Depression: “There is no single class of macroeconomic models that is best for all questions.”
Sure. Absolutely. There are different models for different questions and problems.
But then Thoma unnecessarily limits the debate to a single choice—between IS/LM and New Keynesian models, between the older type macroeconomic model with non-dynamic money and product markets and the newer models with individual agents guided by rational expectations, various kinds of imperfect markets, and dynamic reactions to external shocks. And he asks for tolerance among the advocates of each type of model for those who use the other type.
The New Keynesian model was built to explain a world of moderate fluctuations in GDP. It features temporary price rigidities, and the macroeconomic aggregates in the model are consistent with the optimizing behavior of individual consumers and producers. For certain types of questions – how should policymakers behave to stabilize an economy with mild fluctuations induced by price rigidities – it is the best model to use. Hence it’s popularity during the “Great Moderation” from 1984-2007 when there were no large shocks to the economy.
The IS-LM model, on the other hand, was built in the aftermath of the Great Depression to examine precisely the kinds of questions we faced throughout the Great Recession, issues such as a liquidity trap, the paradox of thrift, and how policymakers should react in such an environment. Why is it surprising that a model built to explain a particular set of questions does better than a model built to explain other things? Especially when the model is used in a way that incorporates the lessons we’ve learned in the intervening decades about its shortcomings.
OK. But what about all the other models out there, which represent critiques of and alternatives to mainstream economics? Models (from both the Marxian and Post Keynesian traditions) in which the boom and bust cycles of capitalism occur as endogenous events, as a result of the inner workings of a capitalist economy. Why aren’t they included in the choice of appropriate models?
The fact is, macroeconomists have little to offer in terms of understanding either the causes and consequences of the current crises—which, remember, have now been going on for over six years, with no end in sight—much less effective solutions for the economic mess we’re in. Merely tweaking and tinkering with the hydraulic mechanisms of either class of models is simply not going to get us very far.
And we’re going to remain stuck here unless and until we confront the limitations imposed by the dismal choice between the IS/LM and New Keynesian models, which are the only ones mainstream economists teach and use to make sense of what is going in the world today.
Tags: capital, capitalists, cartoon, Catholic Church, exorcism, foreign policy, freedom, healthcare, Iran, Israel, jobs, Marx, pope, Republicans, wages
Tags: Adam Smith, capital, economics, human capital, Marx, neoclassical, workers
Economic reality is always stranger than economic theory. Human capital is no exception.
While we can trace ideas akin to human capital back to the classical political economists (such as Smith) and the critics of political economy (including Marx), the notion of human capital really takes hold within neoclassical economics (in the work of Arthur Lewis, Ted Schultz, and especially Gary Becker). It came to refer to the stock of skills, knowledges, and social and personality attributes individual workers had acquired, which in neoclassical models determined their productivity and their appropriate compensation (which, these days, means that CEOs are “worth” 323 times average workers).
But, however offensive and misguided the use of human capital within neoclassical economics has been, it still doesn’t capture the latest development in the economy: human capital contracts [ht: sm].
We’ve heard a lot about corporate personhood – the idea that, as one former Massachusetts governor put it, “Corporations are people.” But there’s a new hot concept in the land of personal finance: personal corporatehood, the notion that people can act like corporations. Increasingly, amid record-high stock markets that have rewarded anything with a ticker symbol, normal people are finding new ways to sell stock, lash themselves to investors, and throw themselves at the market’s mercy.
The latest such deal was the IPO of Arian Foster, the NFL running back who partnered with a sports-marketing agency called Fantex to offer himself up on the public markets. Under the terms of the deal, Foster would earn $10 million by selling 20 percent of his future earnings to investors in the form of a personalized “tracking stock.” (The IPO fell through after Foster sustained a season-ending injury.)
But you don’t have to be a millionaire NFL star to play the stock-selling game. There are now a handful of companies offering what are called “human capital contracts” or “income-share arrangements” to normal people. These contracts don’t involve actual stocks, but they have stocklike characteristics. People who sign up for these programs agree to give a percentage of their income to their financial backers for a period of several years, in exchange for a one-time cash infusion. It’s a sort of Kickstarter for people, a crowd-funding platform that provides backers with monthly royalty checks instead of signed T-shirts.
It used to be the case that workers were encouraged to invest in their human capital portfolio in order to improve their own lot. But economic events have moved us beyond that idea of human capital, making it possible for wealthy investors to acquire portfolios that include a claim on workers’ future earnings.
Tags: Alvin Hansen, capitalism, economics, history, history of economic thought, interest-rate, Knut Wicksell, Larry Summers, mainstream, Marx, Michal Kalecki, Minsky, MIT, Paul Krugman, Paul Samuelson, stagnation, wages
My better half has insisted for years that I not be too hard on Paul Krugman. The enemy of my enemy. Popular Front. And all that. . .
But enough is enough.
I simply can’t let Krugman [ht: br] get away with writing off a large part of contemporary economic discourse (not to mention of the history of economic thought) and with his declaration that Larry Summers has “laid down what amounts to a very radical manifesto” (not to mention the fact that I was forced to waste the better part of a quarter of an hour this morning listening to Summers’s talk in honor of Stanley Fischer at the IMF Economic Forum, during which he announces that he’s finally discovered the possibility that the current level of economic stagnation may persist for some time).
Krugman may want to curse Summers out of professional jealousy. Me, I want to curse the lot of them—not only the MIT family but mainstream economists generally—for their utter cluelessness when it comes to making sense of (and maybe, eventually, actually doing something about) the current crises of capitalism.
So, what is he up to? Basically, Krugman showers Summers in lavish praise for his belated, warmed-over, and barely intelligible argument that attains what little virtue it has about the economic challenges we face right now by vaguely resembling the most rudimentary aspects of what people who read and build on the ideas of Marx, Kalecki, Minsky, and others have been saying and writing for years. The once-and-former-failed candidate for head of the Federal Reserve begins with the usual mainstream conceit that they successfully solved the global financial crash of 2008 and that current economic events bear no resemblance to the First Great Depression. But then reality sinks in: since in their models the real interest-rate consistent with full employment is currently negative (and therefore traditional monetary policy doesn’t amount to much more than pushing on a string), we may be in for a rough ride (with high output gaps and persistent unemployment) for some unknown period of time. And, finally, an admission that the conditions for this “secular stagnation” may actually have characterized the years of bubble and bust leading up to the crisis of 2007-08.
That’s where Krugman chimes in, basking in the glow of his praise for Summers, expressing for the umpteenth time the confidence that his simple Keynesian model of the liquidity trap and zero lower bound has been vindicated. The problem is, Summers can’t even give Alvin Hansen, the first American economist to explicate and domesticate Keynes’s ideas, and the one who first came up with the idea of secular stagnation based on the Bastard Keynesian IS-LM model, his due (although Krugman does at least mention Hansen and provide a link). I guess it’s simply too much to expect they actually recognize, read, and learn from other traditions within economics, concerning such varied topics as the role of the Industrial Reserve Army in setting wages, political business cycles, financial fragility, and much more.
And things only go down from there. Because the best Summers and Krugman can do by way of attempting to explain the possibility of secular stagnation is not to analyze the problems embedded in and created by existing economic institutions but, instead, to invoke that traditional deus ex machina, demography.
Now look forward. The Census projects that the population aged 18 to 64 will grow at an annual rate of only 0.2 percent between 2015 and 2025. Unless labor force participation not only stops declining but starts rising rapidly again, this means a slower-growth economy, and thanks to the accelerator effect, lower investment demand.
You would think that a decent economist, not even a particularly left-wing one, might be able to imagine the possibility that a labor shortage might cause higher real wages, which might have myriad other effects, many of them really, really good—not only for people who continue to be forced to have the freedom to sell their ability to work but also for their families, their neighbors, and for lots of other participants in the economy. But, apparently, stagnant wages (never mind supply-and-demand) are just as “natural” as Wicksell’s natural interest rate.
And then, finally, this gem:
The point is that it’s not hard to think of reasons why the liquidity trap could be a lot more persistent than anyone currently wants to admit.
No, it’s not hard to think of many such reasons. But when the question is asked in the particular way Krugman poses it—in terms of natural rates of this and that, of interest-rates, population, wages, innovation, and so on—the only answers that need be admitted into the discussion come from other members of the close-knit family (and thus from Summers, Paul Samuelson, and Robert Gordon). All of the other interesting work that has been conducted in the history of economic thought and by contemporary economists concerning in-built crisis tendencies, long-wave failures of growth, endogenous technical innovation, financial speculation, and so on is simply excluded from the discussion.
It is no wonder, then, that mainstream economists—even the best of them—are so painfully inarticulate and hamstrung when it comes to making sense of the current economic malaise.
I’ll admit, it wouldn’t be so bad if it was just a matter of professional jealousy and their not being able to analyze what is going on except through the workings of a small number of familiar assumptions and models. They talk as if it’s only their academic reputations that are on the line. But we can’t forget there are millions and millions of people, young and old, in the United States and around the world, whose lives hang in the balance—well-intentioned and hard-working people who are being made to pay the costs of economists like Krugman attempting to keep things all in the family.
Tags: American Dream, class, Horatio Alger, Marx, mobility, United States
Apparently, Jonathan Sperber wants to offer a more accurate translation of that famous phrase, the one that begins in the original “Das stehende und das ständische verdampft.”
The problem is, “everything that firmly exists and all the elements of the society of orders” are not in fact evaporating. They are become even more fixed and frozen, at least when it comes to economic mobility in the United States.
According to the latest report from the Economic Mobility Project of the Pew Charitable Trusts, 43 percent of Americans raised at the bottom of the income ladder remain stuck there as adults, and 70 percent never make it to the middle.
Looking at the other end of the distribution, a 2012 study from the Federal Reserve Bank of San Francisco showed that those born into the top income quintile are quite likely to remain in the top. Among children born into the top quintile, 47 percent are still there as adults. Only 7 percent fall to the bottom quintile.
if the American Dream means rising in rank in the income distribution, then the findings are not so encouraging. In this case, an individual’s ability to reach the highest economic ranks of society seems at least partially determined by the income rank into which they were born.
Maybe, in the end, it’s the Horatio Alger myth—and, with it, the American Dream—that is being melted away.
Tags: crisis, economics, forecasting, Keynes, mainstream, Marx, neoclassical, prediction
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.
Here’s the graph Bruce is referring to in the comments on this post:
And here’s the same series going back earlier:
Tags: crisis, economics, education, heterodox, Keynes, mainstream, Marx, neoclassical, United Kingdom
Yesterday in class, after explaining to students that graduate students in economics no longer study either the history of economic thought or economic history, they asked me if I thought, in the wake of the crash of 2007-08, the training of students in economics—at either the undergraduate or graduate levels—would change.
My answer was, “I don’t know. But, the last time ‘business as usual’ in economics was challenged, in the late 1960s and early 1970s, it was students in economics—at the University of Michigan and elsewhere—who were the ones to initiate the change.”
The financial crisis represents the ultimate failure of this education system and of the academic discipline as a whole. Economics education is dominated by neoclassical economics, which tries to understand the economy through modelling individual agents. Firms, consumers and politicians face clear choices under conditions of scarcity, and must allocate their resources in order to satisfy their preferences. Different agents meet through a market, where the mathematical formulae that characterise their behaviour interact to produce an “equilibrium”. The theory emphasises the need for micro-foundations, which is a technical term for basing your model of the whole economy on extrapolating from individual behaviour.
Economists using this mainstream economic theory failed to predict the crisis spectacularly. Even the Queen asked professors at LSE why nobody saw it coming. Now five years on, after a bank bailout costing hundreds of billions, unemployment peaking at 2.7 million and plummeting wages, economics syllabuses remain unchanged.
The Post-Crash Economics Society is a group of economics students at the University of Manchester who believe that neoclassical economic theory should no longer have a monopoly within our economics courses. Societies at Cambridge, UCL and LSE have been founded to highlight similar issues and we hope this will spread to other universities too. At the moment an undergraduate, graduate or even a professional economist could easily go through their career without knowing anything substantive about other schools of thought, such as post-Keynesian, Austrian, institutional, Marxist, evolutionary, ecological or feminist economics. Such schools of thought are simply considered inferior or irrelevant for economic “science”. . .
We propose that neoclassical theory be taught alongside and in conjunction with a broad variety of other schools of thought consistently throughout the undergraduate degree. In this way the discipline is opened up to critical discussion and evaluation. How well do different schools explain economic phenomena? Which assumptions should we build our models upon? Should we believe that markets are inherently self-stabilising or does another school of thought explain reality better? When economists are taught to think like this, all of society will benefit and more economists will see the next crisis coming. Critical pluralism opens up possibilities and the imagination.
The current state of affairs is not good enough. Our classmates tell us that they are embarrassed when their family and friends ask them to explain the causes of the current crisis and they can’t. One of our professors was told that he should follow the dominant research agenda or move to the business school or politics department. Another was told that if he stayed he would be “left to wither on the vine”. This situation is reflected in economics departments across the country – it is national problem. Economics academia can and should be better than this, and that’s why we are calling for change.
Tags: capitalism, inequality, Marx, poor, rich
You have to look both ways before crossing—because, if the driver is rich, they’re more likely to run you over.
That’s one of the results of the research project directed by Dacher Keltner, which I wrote about back in 2011. The video above [ht: ke] presents other results of their project on the behavioral effects of inequality.
The key, it seems to me, is not that rich people per se display behavioral pathologies—or, for that matter, that poor people are noble. It’s that, within the context of the grotesque inequalities created by current economic arrangements, the rich person is “just as enslaved. . .as is his opposite pole,” the poor person, “albeit in a quite different manner.”*
*The full quotation, one of my favorites from volume 1 of Capital, in the section on the “Results of the Immediate Process of Production” (p. 990), is as follows:
The self-valorization of capital—the creation of surplus-value—is therefore the determining, dominating, and overriding purpose of the capitalist; it is the absolute motive and content of his activity. And in fact it is no more than the rationalized motive and aim of the hoarder—a highly impoverished and abstract content which makes it plain that the capitalist is just as enslaved by the relationships of capitalism as is his opposite pole, the worker, albeit in a quite different manner.
Tags: economics, empiricism, epistemology, Keynes, Marx, neoclassical, Nobel Prize, rationalism, relativism, science
I’ve been around economics long enough now that, upon reading the latest defense of economics as a science, I just have to chuckle. Or I would, if the implications were not so devastating.
The latest comes from Harvard professor Raj Chetty, who cites the recent surge of work based on randomized experiments and big data as evidence that economics is finally becoming a real, empirical science (like, in his view, medicine).* As if the facts and testing hypotheses—the results of what we might call the innocent eye test—were going to settle the ongoing debates about the causes and consequences of economic problems such as poverty, unemployment, and inequality.
I remember when it was exactly the opposite that was supposed to guarantee the scientificity of economics, which reached is zenith with the formal modeling of neoclassical general equilibrium theory. Then, it was rationalism; now, it’s supposed to be empiricism.
In both cases, the supposedly scientific nature of economics is bound up with an absolutist epistemology, which is invoked to establish a clear separation between science and non-science (which, as I explained to students the other day, if you say it quickly, becomes nonsense). Attempting to make that separation presumes both a strict dichotomy between theories and facts and a one-way determination of one way by the other. (Thus, either innocently gazing at the facts determines the appropriate theory or deductions from the theory determine the rational order of the facts.)
The alternative, of course, is a nonabsolutist theory of knowledge according to which the theories and facts mutually determine one another. This is a kind of relativism according to which economics is made up of different groups of theories and facts—neoclassical theories and facts, Keynesian theories and facts, Marxian theories of facts, and so on. (Thus, for example, the most recent Nobel Prize in economics was shared between the mainstream efficient and inefficient market hypotheses and not to an alternative view, which I would call the “crisis market hypothesis.”)
It’s actually a partisan relativism, since given the effects of different approaches to economics, it is important to consider the economic and social consequences of the different groups of theories and facts in assessing their validity. And then to choose which one makes sense.
The more general point is that theoretical differences in economics matter, for how we think about the world and how we choose to intervene in it. As it turns out, the shifting battle over which absolutist theory of knowledge provides a firmer foundation of economic science is a sideshow. But a sideshow with enormous implications in determining which facts and which theories are allowed into the conversation—and which, of course, are excluded.
That’s why the innocent eye test is, in the end, not so innocent.
*The analogy to medicine is perhaps more weighted than Chetty imagines, since it is still governed by an oath to keep the sick “from harm and injustice.” As George DeMartino has forcefully argued, there is no such ethical injunction in economics.