Archive for January, 2012

Hyman Minsky’s papers are available here [ht: Naked Keynes].

That’s one less excuse for mainstream economists to ignore his work on financial fragility.


And here’s a link to John Cassidy’s 2008 article on the relevance of Minsky’s “financial-instability hypothesis.”

Many of Minsky’s colleagues regarded his “financial-instability hypothesis,” which he first developed in the nineteen-sixties, as radical, if not crackpot. Today, with the subprime crisis seemingly on the verge of metamorphosing into a recession, references to it have become commonplace on financial Web sites and in the reports of Wall Street analysts. Minsky’s hypothesis is well worth revisiting.

Rod Hill and Tony Myatt, in an interview conducted by Philip Pilkington, explain what students learn—and don’t learn—in mainstream introductory economics courses.

PP: The issue of power is an interesting one. I think what many students who feel instinctively critical of economics courses note from the outset is that the theories taught imply some sort of level playing field. Yet, you would have to be blind not to notice divisions of class and race in even the most prosperous societies. Could you talk about this a bit?

Rod Hill: I think power is central to understanding the reality of economic life. For that reason, it’s important that it be effectively obscured in the principles texts as students are taught how to ‘think like an economist’. The texts typically manage this very well, although I’m sure their authors have no conscious intention to set out to do this. (This remarkable aspect of our propaganda system helps to make it so effective.)

The texts do indeed imply a sort of ‘level playing field’ between buyers and sellers in both markets for goods and services as well as in the labour market. This follows from the central place that’s given to the supply and demand model (which is “short-hand” for the perfectly competitive market).

There, everyone is a ‘price taker’. There is no room for businesses to use their bargaining power to squeeze workers’ wages, to prevent workers from unionizing, to force down their suppliers’ prices, or to raise their selling prices once they’ve eliminated their competition. (Think Walmart.) . . .

PP: You say that no alternative models are taught in the classroom. I’ve heard this criticism raised many times before and it has always struck me as rather strange. In just about every other social sciences class it is a prerequisite that the lecturer teach the major different approaches, to do otherwise would be considered biased. In your opinions, how do economists get away with this where others cannot?

Tony Myatt: Well, we need to be careful here. Other models of market structure besides perfect competition are taught. Monopoly, monopsony, imperfect competition, and oligopoly are all taught. But they are placed towards the end of the book. Later, when we need to explain the distribution of income, or the benefits of trade, the texts return to assuming perfect competition, to the demand and supply framework, as if that intervening stuff never happened. The argument is that perfect competition is simpler, and is good enough as a first approximation to all markets. But perfect competition is actually a lot more complicated than monopoly. Why not apply monopoly as a first approximation? But that would have a huge ideological impact. It would mean that power, cronyism, and exploitation are potentially important. It would mean that the economy doesn’t necessarily operate efficiently (as a first approximation), and that unions don’t necessarily cause inefficiencies. It would mean that there is a potentially much bigger role for government regulation. And the point is, when discussing a particular topic – international trade say – the texts don’t say “if we assume perfect competition we get these predictions; if we assume imperfect competition we get these predictions; now let’s compare the predictions to the facts”. This is thought to be too complicated, too advanced. But this is a cop out, a dereliction of duty, and is inconsistent with the methodology which the textbooks purport to endorse.

Chart of the day

Posted: 31 January 2012 in Uncategorized
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Special mention

Here are some of the conclusions from the report by the Congressional Budget Office comparing the compensation of federal and private-sector employees:

  • Overall, the federal government paid 2 percent more in total wages than it would have if average wages had been comparable with those in the private sector.
  • On average, the benefits earned by federal civilian employees cost 48 percent more than the benefits earned by private-sector employees.
  • Overall, the federal government paid 16 percent more in total compensation than it would have if average compensation had been comparable with that in the private sector.

Good! Now raise the wages and benefits of all private-sector workers to match those of federal workers.

The report also notes two other items of interest:

1. Federal government employment has been shrinking as a percentage of total employment in the United States.

In 1980, when about 79 million people worked in the private sector and 13 million worked for state or local governments, federal employees made up 2.3 percent of the workforce. By 2010, private-sector employment had reached 111 million and employment by state and local governments had reached 20 million. As a result, federal civilian employees accounted for 1.7 percent of the workforce in 2010.

2. The difference in benefits between federal and private-sector workers is a result of worsening benefits in the private sector not overly generous federal benefits.

The federal government provides retirement benefits to its workers through both a defined-benefit plan and a defined-contribution plan, whereas many large private-sector employers have replaced defined-benefit plans with defined-contribution plans. The federal government also provides subsidized health insurance to qualified retirees, an arrangement that has become uncommon in the private sector.

OK, that should set the record straight.

Protest of the day

Posted: 30 January 2012 in Uncategorized
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Stand Up Chicago [ht: ab] invited Chicago’s wealthy elite to take a seat on the golden throne.

The coalition awarded the golden toilet to Terrence Duffy, Chairman of the Chicago Mercantile Exchange (CME), as a way of protesting the CME’s recent gift of $109 million from Illinois taxpayers. Close to a hundred Chicagoans—each representing one of the millions that the CME received from city and state tax breaks as well as TIF funding for bathroom renovations, a new fitness center, a cafe, and state-of-the art audio-visual conference room at the Chicago Board of Trade—presented Duffy with the gift and asked for a meeting with him.

My students generally think of the United States as the leader, or a top-ranked nation, in most areas. But, as a 24/7 Wall St. study [ht: ja] shows, the United States has been losing that first place, usually to China, one industry at a time.

1. Steel

  • China production: 627 million metric tons in 2010
  • U.S. production: 80 million metric tons in 2010
  • U.S. position: 3rd

2. Cotton

  • China production: 7.3 million metric tons in 2011
  • U.S. production: 3.4 million metric tons in 2011
  • U.S. position: 3rd

3. Initial Public Offerings

  • China production: $73 billion raised in 2011
  • U.S. production: $30.7 billion raised in 2011
  • U.S. position: 2nd

4. Tobacco

  • China production: 3 million metric tons in 2010
  • U.S. production: 0.33 million metric tons in 2010
  • U.S. position: 4th

5. Autos

  • China production: 18.3 million autos in 2010
  • U.S. production: 7.8 million autos in 2010
  • U.S. position: 3rd

6. Beer Production

  • China production: 443.8 million hectoliters in 2010
  • U.S. production: 227.8 million hectoliters in 2010
  • U.S. position: 2nd

7. High-Technology Exports

  • China production: $348 billion in 2009
  • U.S. production: $142 billion in 2009
  • U.S. position: 2nd

8. Coal Production

  • China production: 3.24 billion short tons produced in 2010
  • U.S. production: 985 million tons produced in 2010
  • U.S. position: 2nd