Saving the PIIGS

The latest news is, they’ve settled on a package of 120 billion euros (about $160 billion) to save the Greek economy. And the other PIIGS (Portugal, Italy, Ireland, and Spain). And the European Union. Not to mention the global economy.

That’s what all the pundits are writing about: the problem of “contagion” and whether or not Greece has the “discipline” to get its fiscal house in order. Or, alternatively, whether Greece will be forced to default and leave the Eurozone. And, if so, what the effects will be on other countries.

What they’re mostly not discussing are the conditions that will be imposed in Greece to receive the bailout funds. And who will benefit from the bailout.

Only one commentator, Daniel Gros, has had the temerity to outline the proposed austerity measures. The goal, within Greece, is to lower unit labor costs—to boost profits (in the export sector) and guarantee higher profits (by lowering the fiscal deficit). The goal, outside of Greece, is to repay the bankers that hold Greek debt. Both sides were only too willing until now to shift the burden onto public debt. The Greek state didn’t tax employers for government programs. And bankers throughout Western Europe made handsome profits on Greek debt.

That Ponzi scheme came to an abrupt end (although one could see it coming years ago), and the new deal is going to shift the burden of “adjustment” onto Greek workers. Now. And massively.

Gros explains that unit labor costs need to be cut by 10 percent. To do that, the Greek government and Greek employers will be called on to lower nominal wages (in both the public and private sectors), extend working hours and years, change the tax structure (lower social security taxes and higher value-added taxes), cut social programs. That’s the plan—for Greece and, by extension, for the other countries that are threatening default.

It’s capitalism’s way of saving the PIIGS and its own porcine elites.

Beyond MaxU

René Magritte, "The False Mirror" (1928)

Much of contemporary neoclassical economics remains wedded to an analytical approach based on utility-maximizing individuals. And, as Nick Krafft discovered, neoclassical economists just don’t want to give it up.

Notwithstanding all the criticisms of the idea of MaxU over the years, including the exceptions to utility-maximizing behavior discovered by behavioral economists, the official line is “don’t throw out the baby with the bathwater.” Why? Because they just can’t imagine doing economics without rational, self-interested, utility-maximizing economic subjects. The fact is, letting go of MaxU probably involves moving beyond neoclassical economics but it certainly doesn’t mean the end of economic analysis.

One exception is the work of Deirdre McCloskey, who has, in the name of Bourgeois Virtues, attempted to expand the concept of the individual, beyond utility-maximization. And, of course, she remains firmly rooted in neoclassical economics (what she considers to be old-style Chicago economics, as against Samuelsonian versions of neoclassical theory).

But there are two other alternatives. One is to produce a different concept of the individual economic subject, a nonunitary subject, for which there are many possibilities: the no-self self (as in Buddhist thought), multiple selves (as discussed by Paul Bloom, in “First Person Plural”), the decentered self (favored by postmodern theorists), the Lacanian self, and so on. Each and every one of them would give rise to a distinctly non-neoclassical form of economic analysis—but still an approach to economics grounded in the human subject.

The second alternative is to decenter economics from the subject. This would involve analyzing economic events and institutions without grounding such analysis on a given concept of the human subject. It is, in other words, a post-humanist economics—or, in Louis Althusser’s famous phrase, an economics based on a “process without a subject.”

I can’t take the time here to spell out what such different economic theories look like. My only point is, both approaches—the decentered subject and the decentering of economics from the subject—offer viable alternatives to MaxU and neoclassical economics. And that’s the problem Nick encountered in stubborn resistance to his question: moving beyond MaxU does (with the exception of McCloskey) involve throwing out the neoclassical baby with the dirty bathwater.

Quote of the day

“When I think that I had some input into the creation of this product (which by the way is a product of pure intellectual masturbation, the type of thing which you invent telling yourself: ‘Well, what if we created a “thing”, which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price?’) it sickens the heart to see it shot down in mid-flight. . .It’s a little like Frankenstein turning against his own inventor ;)”

Fabrice (Fabulous Fab) Tourre, email from 29 January 2007

Mexican travel warning

No, not this one.

I’m referring to the warning by the Mexican government about travel to the United States.

“There is an adverse political environment for migrant communities and all Mexican visitors,” Mexico’s ministry said. “It’s important to act carefully and respect the local laws.”

The problem is, acting carefully and respecting local laws don’t protect people from being detained in Arizona if there is “reasonable suspicion” they’re in the country without authorization. All they need to do is be or look Mexican. . .

Goldman’s “shitty deal”

That’s the expression borrowed from an internal Goldman Sachs email that Sen, Carl Levin chose to cite, again and again, in his questioning of current and former Goldman Sachs executives during this morning’s investigative hearings into the financial crisis.

Actually, as I was listening to the committee’s hearings, it was Sen. Claire McCaskill who was the toughest questioner of the lot.

“It’s gambling, pure and simple, raw gambling. They’re called synthetic because there’s nothing there but the gamble, but the bet.”

“You all are the house. You’re the bookie.”

“People are booking their bets with you. That’s what they’re doing. That’s what a synthetic CDO is. I don’t know why we need to dress it up. It’s just a bet.”

“What’s your vig, Mr. Sparks, on these deals?”

And here’s a link to Zero Hedge’s annotation of Lloyd Blankfein’s written testimony for the committee.

Kentucky’s mutton barbecue

Tyler Cowen and I have one thing (and, perhaps, only one thing) in common: an interest in mutton barbecue.

Owensboro, Kentucky is the capital of mutton barbecue in the United States. I’ve had the pleasure of sampling this rare of form of barbecue (in comparison with pork, in the South, and beef, in Texas) in a number of local restaurants, including the Moon-Lite, and it’s pretty amazing stuff.

Apparently, mutton barbecues have long been important church fund-raisers in Owensboro. Its first recorded mutton barbecue, on 4 July 1834, was held at a Baptist church,

but local Catholics have been particularly active barbecuers. Mount St. Joseph’s convent school alone sells about two tons of barbecued mutton at its annual barbecue. Today there’s at least one fund-raising picnic in the Owensboro area nearly every week in May and June.

So, if you’re in or near western Kentucky—in May, June, or any time of the year—don’t forget to try the mutton barbecue.

Not working

Capitalism’s not working. Which means that millions of people are not working. And they’re not working for a very long time.

That’s the conclusion of a new study by the Pew Fiscal Analysis Initiative, which includes calculations of the number and percentage of people who have been unemployed for a year or more. Among the report’s findings:

• The official unemployment rate in March was 9.7 percent (which means that about 15 million people were actively searching for employment but were unsuccessful) while the underemployment rate was 16.9 percent (much higher than the comparable rate after the 2001 recession, which was 10.4 percent).
• Over 44 percent of the currently unemployed have been out of work for a period of 6 months or longer. By comparison, during the severe recession of the early 1980s, the percentage of workers unemployed for six months or longer peaked at 26 percent in 1983.
• The high long-term unemployment rate represents the continuation of a decades-long trend, one that has worsened after downturns but has persisted even during periods of growth. inmarch 2004, at its most recent peak, the percentage of people who had been unemployed for at least six months was 23.4 percent. In November 2007, the last month of economic expansion before the current recession, 19.5 percent of the unemployed had been jobless for at least six months.
• in December 2009, nearly three and a half million Americans, or 23 percent of the unemployed, had been jobless for a year or longer.
• Minorities, men, younger workers and less-educated workers are over-represented on the unemployment rolls. In December 2009, the overall unemployment rate for whites was 8.8 percent, but 15.6 percent of African Americans and 12.9 percent of hispanics were unemployed. Unemployment among workers between the ages of 20 and 24 rose from 8.7 percent in December 2007 to 14.7 percent in December 2009. The unemployment rate for workers 25 or older without a high-school diploma rose from8.2 percent in December 2007 to 15.7 percent in December 2009.
• Once older workers become unemployed, they are more likely than younger workers to stay unemployed for a long period of time. Among unemployed people between the ages of 20 and 24, only 18 percent had been out of work for a year or longer in December 2009. The percentage steadily increases with age: more than 29 percent of unemployed people older than 55 had been out of work for a year or more—a higher rate than any younger age group.

And it’s likely this situation will persist for some time. . .

Capitalism will continue not to work. As a result, millions of people will continue not to be able to work. And, as things stand right now, they’ll be out of work for a very long time.

Ethics and economics

The ironies abound: the University of Notre Dame has just announced the ethics-laden theme of its 2010 forum at the same time as it has decided to dissolve one of its departments of economics, the one most concerned with ethical issues in economics.

The topic of this year’s Notre Dame forum [ht: ck] is “The Global Marketplace and the Common Good.” According to Notre Dame President Rev. John I. Jenkins, C.S.C., the forum “will create a year-long discussion on the role of ethics, values and morals in the rebuilding and reshaping of the global economy.”

By the time the forum takes place (on 3 November), the Department of Economics and Policy Studies will have been eliminated. Nick Krafft notes that department’s strong focus on issues of ethics and social justice and the stark “dissonance between the topic and the decision to close the department.”

A good example of the soon-to-be dissolved department’s focus is the new book, Economics and Ethics: An Introduction, by two of the department’s faculty, Charles K. Wilber and Amitava Dutt. A wide variety of ethical issues are also raised in the teaching, research, and service performed by the other members of the department (including, I should note, in my own contribution to the recently published Handbook of Economics and Ethics).

The ironies surrounding the forum are only compounded by the fact that the first celebrity speaker announced is Thomas Friedman, he of the flat world and the Lexus running over the olive tree. . .

The poverty of Smith

Yinka Shonibare MBE, "The Age of Enlightenment-Adam Smith" (2008)

OK, Nick, I’ll take the bait. . .

Mainstream economists cite Adam Smith’s Wealth of Nations as the founding text of modern economics. But, as I’ve mentioned before, while they often cite the Wealth of Nations, they rarely read it, and they certainly don’t read it in conjunction with Smith’s other great book of moral philosophy, the Theory of Moral Sentiments.

That’s an error Amartya Sen sets out to correct—in his most recent “Manifesto” and as far back as his lectures On Ethics and Economics. Sen reads Smith against the grain of contemporary mainstream economic thought, both inside the academy (in the form of neoclassical economics, which is used to celebrate free-market capitalism) and outside (for example, the views of right-wing politicians and bankers, who rail against any and all government interventions into markets).

And, for the most part, Sen gets Smith right: It’s important to read the Wealth of Nations in conjunction with and against the background of the Theory of Moral Sentiments. Capitalist markets operate not only on the basis of self-interest but other motives, such as humanity, justice, generosity, and public spirit. Smith was in favor of government programs, such as free public education and poverty relief (after discussing, in some detail, the mind-numbing drudgery of factory work), and suspicious of capitalists’ arguments that their projects were always in the public interest. He was opposed to colonial restrictions (although not against the civilizing mission, for the rest of the planet outside Western Europe, of capitalist markets). And so on.

That’s why Sen finds Smith’s vision to have “a remarkably current ring.” Capitalist markets need trust and sympathy, in addition to self-interest; capitalist markets are based on and, in turn, create class divisions, and do not represent an Eden of equality. It’s a testament to how much toward the authoritarian Right mainstream economic thought has moved—in terms both of celebrating free markets and of attempting to eliminate all other forms of economic theory—that Sen’s Smith appears downright progressive.

But, as Nick notes, there is much that is missing from or overlooked within Smith’s attack on mercantilism and celebration of the rise of commercial capitalism. And much that Marx was critical of when he read Smith in the British Museum and started to write Capital.

Let me mention two such criticisms. First, he took issue with the idea that there was a natural and universal “propensity to truck, barter, and exchange one thing for another.” Instead, Marx argued (especially in the section on commodity fetishism) that the set of characteristics that allowed human beings to engage in commodity exchange were a historical and social creation. There was nothing natural and universal about them.

Second, Marx criticized Smith’s theory of value. While Marx engaged Smith (and classical political economy generally) on the basis of the labor theory of value (which of course neoclassical economists rejected, in the late-nineteenth century), he showed that the adding-up theory of value (according to which wages, profits, and rents could be explained as the rewards to separate factors of production, labor, capital, and land, which the neoclassicals kept) could not explain the origin of profits as surplus-value. Once Marx distinguished labor from labor power, he was able to demonstrate that wages came from necessary labor and the rest, profits and rent, from surplus labor. Capitalists appropriated surplus-value (some of which they retained as profits, the rest being distributed to landlords) for doing nothing. Literally. That became the basis of Marx’s theory of capitalist exploitation.

In general terms, Marx started his analysis where Smith left off, with the wealth of nations. Here are the first two sentences of Capital:

The wealth of those societies in which the capitalist mode of production prevails, presents itself as “an immense accumulation of commodities,” its unit being a single commodity. Our investigation must therefore begin with the analysis of a commodity.

That’s the problem with Sen’s economic manifesto. He stops with Smith instead of starting there; he attempts to apply Smith to our times instead of developing a critique of Smith for our times. He wants to add trust and sympathy to unbridled capitalism, and not to take the next step—of understanding capital as an exploitative social relationship, and of abolishing it.

P.S. And, Nick, you’re absolutely right about Krugman: he sees epistemic closure within mainstream economics but not of mainstream economics. Krugman and other saltwater economists wouldn’t recognize heterodox economics if it bit them on the nose, and they certainly don’t raise a hand to include heterodox economists in the larger debate.

Return of the IMF

To judge from this weekend’s meeting, the International Monetary Fund is back from the dead. And it’s still a menace.

The fact is, the mission of the IMF has changed. For decades, it represented the imposition on a host of Third World nations of policies drawn from neoclassical economics and the finance ministries of the advanced capitalist nations. Then, in recent years, it all but died, with few countries seeking to borrow from the IMF and to suffer through IMF conditionality (Turkey being one of the few exceptions). Now, the IMF has found a new lease on life, starting with Greece and expanding to the rest of the advanced capitalist nations themselves.

The policies advocated by the IMF still stem from neoclassical theory and the ideas produced within the finance ministries of the United States and the European Union. But now, according to the Washington Post, their goal is the combination of “rebalancing and consolidation” they believe is necessary within the advanced nations.

Translated, rebalancing means a change in the balance of payments—of net exports and capital flows—to avoid what Ben Bernanke and others have long taken to be a “global saving glut” (an “unnatural” situation, whereby advanced nations run current account deficits and borrow capital, while China and other developing capitalist economies run current account deficits and lend money).  The goal is to promote changes in policies on both sides of the current imbalance, not only improving the “investment climate” within developing capitalist economies but increasing the profitability of the production of exports within the advanced capitalist nations.

Fiscal consolidation means lowering government deficits, by cutting the growth of government programs and increasing taxes. One leading proposal for accomplishing this is making people work more years (thus increasing revenues for social security and decreasing the number of years retirees receive benefits). People who work for a living in the United States are already working longer hours per year and sending more people into the labor force. Now, they’re going to have to spend more years in the labor force.

The translation offered by the Washington Post reporter is more succinct: “Suck it up. The party’s over.” For most people, it’s going to mean the night of the living dead.