Cartoon of the day

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Map of the day

In 2011, 21.3 percent of New Yorkers lived in poverty, according to the Center for Economic Opportunity. That’s the third consecutive year the rate of poverty had risen.

Laws of economics don’t exist!

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Zachary Karabell [ht: gh] is right on two counts: First, the “laws of economics” are often invoked to rule out policies and strategies, including alternative institutions, to solve pressing economic and social problems. And second, “laws of economics” don’t actually exist.

Referencing “the laws of economics” as a way to refute arguments or criticize ideas has the patina of clarity and certainty. The reality is that referencing such laws is simply another way to justify beliefs and inclinations. I may agree that the war on drugs is flawed, but not because it violates “laws of economics,” but rather because it fails in most of its basic goals. The test of whether government spending or central bank easing is good policy should be whether they succeed in ameliorating the problems of stagnant growth and high unemployment, not on what the “laws of economics” erroneously say about certain future outcomes.

But the so-called laws of economics don’t exist because people aren’t rational or because economics is based on a limited amount of information. Laws in economics are only artifacts of particular models and theories, and therefore particular sets of assumptions. You only get a law of the sort “if x then y” (e.g., if demand decreases, then price falls or if the government runs a deficit and debt increases, then all hell will break loose and we’re on our way to Greece) because of particular sets of assumptions (often unannounced and overlooked) buried in particular models, which are themselves products of particular economic theories.

Thus, we can have neoclassical laws and Keynesian laws and Marxian laws—but not laws of economics in general.*

The real problem, however, is the invoking of economic laws to stunt the discussion of policies and strategies, of options that might be chosen but are then taken off the table. And that’s part of a more general “economizing” of political debate within contemporary capitalism, especially by the Right. The right-wing within politics and the right-wing within the discipline of economics. (I know, the Left also often invokes laws, which in my view is a problem, but they’re less of a player in contemporary debates.) We as a society can’t do something—tackle poverty or unemployment, tax the rich or create democratic enterprises—because, right-wing politicians and economists say, it would violate the so-called laws of economics.

That’s subordinating society to economics, a product (in Karl Polanyi’s language) of disembedding the economy, of reducing society to obeying the so-called laws of a self-regulating market system.

But a self-regulating market system, just like the laws of economics, doesn’t exist. The real problems arise in the attempt to create such a system, by invoking the laws of economics to eliminate any and all constraints on economic activity. That’s what got us into the current mess in the first place. And following the so-called laws of economics, whether neoclassical or Keynesian, won’t get us out of it anytime soon.

*Although, to be clear, on my interpretation, there are no laws of economics (or, for that matter, of history) in Marx. The laws we find, for example, in Marx’s Capital were actually promulgated by the classical political economists, which Marx then showed were the result of endogenous tendencies within capitalism—rather than, as the classicals tended to argue, the product of an exogenous and transhistorical condition. And, of course, as with the tendency of the general rate of profit to fall, Marx then proceeded to demonstrate how a set of counter-tendencies might move things in a different direction. So, no iron laws, just tendencies, which themselves depended on a particular set of economic and social conditions.

Still think economics is a science?

What’s it going to take to finally bury the idea that mainstream economics is a science?

We all know mainstream economics is not a science at the microeconomic level, taking into account something as studied and debated as the minimum wage. And it’s certainly not a science at the macroeconomic level, give the fact that mainstream economists failed to predict the timing, severity, or duration of the current crises, not to mention the “pay-to-play” activities of such luminaries as R. Glenn Hubbard and Larry Summers.

And now we have the sorry spectacle of the Reinhart-Rogoff mistakes (as noted by Mike Konczal [ht: ms] and Dean Baker, based on new research by Thomas Herndon, Michael Ash, and Robert Pollin, and then weakly defended by Carmen Reinhart and Kenneth Rogoff), which call into question the much-vaunted 90 percent (debt-to-GDP) threshold.

We might be able to simply dismiss mainstream economists’ claims to scientificity, and then move one, if we didn’t also have to consider the widespread misery—of poverty and unemployment, in the United States and around the world—their work has directly caused and otherwise served to justify.

Chart of the day

According to the latest study of the working poor by the U.S. Bureau of Labor Statistics [pdf], the working-poor rate—the ratio of the working poor to all individuals in the labor force for at least half the year—was 7.0 percent, only slightly below the previous year’s figure (7.2 percent).

This means that, four years into the Second Great Depression, the working poor included 10.4 million Americans.*

The working poor included full-time and part-time workers; women as well as men; Blacks, Hispanics, Asians, and Whites; college graduates and those with less than a high-school diploma; those who worked in the service sector and individuals employed in management,  professional, and related occupations; and both young and old workers.

Those workers were all members of the working poor.

 

*The “working poor” refers to people who spent at least 27 weeks in  the labor force (that is, working or looking for work) but whose incomes still fell below the official poverty level (($11,484 for an individual or $23,021 for a family of four per year).

Cartoon of the day

Special mention

Chart of the day

source

Some indicators of how Venezuela has changed since Hugo Chavez first assumed office. . .

Why $19.97? or $23,679,531?

Greg Mankiw wants to know why Obama announced a new minimum wage of $9 an hour.

How did they decide that $9 per hour is the right level?  Why not $10 or $12 or $15 or $20?

But, of course, he never asks why the hourly wage (for production and nonsupervisory employees on private nonfarm payrolls) is $19.97.

Why? Because neoclassical economists like Mankiw just presume that $19.97 is the correct, market-determined wage rate—a level of pay that corresponds to given preferences, technology, and resources.

Nor does Mankiw inquire about the income of the average member of the top 0.01 percent, which was $23,679,531 in 2011. That, too, in a neoclassical world is the correct, market-determined amount.

But let’s take Mankiw at his word. Why, indeed, not $10 or $12 or $15 or $20? Because the opposition to ever raising the minimum wage would go even crazier than it has already. And so, even at $9 an hour, minimum-wage workers will still fall below the poverty line.

Economist of the day

Ecuador’s president Rafael Correa [ht: ke] has been elected to a third term in power.

What policies has your government pursued in order to reduce inequality?

Latin America holds the grim title of most unequal region in the world, and the Andean countries are the most unequal part of that region. This is why it was crazy to apply the neoliberal system, supposedly based on competition and the liberation of the market, in countries like Ecuador in recent decades. What competition were they talking about? It was a massacre. Now we are reducing inequality, and poverty with it, through a combination of four things. Firstly, making the rich pay more taxes. We have instituted a much more progressive taxation system, and people now actually pay their taxes—collection has doubled. These resources, together with oil revenues and the money saved by reducing the debt burden, can be devoted to education, health and so on. This is the second point: giving equality of opportunities. People no longer have to pay for healthcare or education, which were quite expensive for the poor—school enrolment cost $25 per child, but is now completely free; some children are given books and uniforms too.

Thirdly, governing the market and improving the labour system. The market is a reality that we cannot avoid; but believing the market should allocate everything is a different matter. The market needs to be governed by collective action. We are putting an end to forms of exploitation such as subcontracting. We are improving real wages—we have been able to close the gap between family incomes and a basic basket of consumption goods. Around 60–65 per cent of families could afford the basic basket at the start of our mandate, now we’ve reached 93 per cent, the highest in the country’s history. We’ve disproved orthodox economic theory, the idea that to generate employment one needs to lower real wages: here the real wage has risen substantially, and we have one of the lowest unemployment rates in the region—just under 5 per cent. We’ve also paid attention to the quality of employment, making sure businesses comply with labour laws. While raising wages for labour, we’ve reduced the remuneration for capital. In this country, if one proposed raising the minimum wage by a few dollars one was called a demagogue, a populist, but no one was surprised by interest rates of 24–45 per cent. We drastically lowered interest rates, to 8–9 per cent, for the corporate sector.

Fourthly, distributing adequately our social patrimony. We used to give away our oil: before the Palacio government, transnational companies would take the equivalent of 85 out of every 100 barrels and leave us with 15; now we have renegotiated the contracts, the proportions have been reversed. Another example: after the economic crisis of 1999–2000, many enterprises which were used as collateral for loans should have ended up in state hands; it was we who finally seized them. In the case of the Isaías Group, owned by the family of the same name, in 2008 we recovered around 200 enterprises. Other governments would probably have privatized them again, so they would end up in the same hands as usual. We’ve used the public banking system to provide finance so that the workers themselves can buy all or part of these enterprises.

Cartoon of the day

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