Posts Tagged ‘American Exceptionalism’

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227652  American Exceptionalism

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René Magritte, “La clef des champs” (1936)

Plenty of illusions are being shattered these days, such as the idea that a successful recovery from the worst economic downturn since the Great Depression would keep the incumbents in power. A combination of lost jobs, stagnant wages, and soaring inequality put an end to that illusion. Much the same has happened to American Exceptionalism.

Noah Smith has just discovered another shattered illusion: the independence of supply and demand.

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Mainstream economists generally think about the world in terms of supply and demand—at both the micro and macro levels: supply and demand in the market for oranges or labor (which determine the equilibrium price and quantity), as well as aggregate supply and demand for the economy as a whole (which determine the equilibrium level of prices and output). Perhaps even more important, they think about supply and demand as acting independently of one another: a shift in supply or demand in individual markets (which lead to changes in equilibrium prices and quantities) as well as “shocks” to aggregate supply or demand in macro models (which determine changes in the equilibrium level of prices and output). The presumption is that a shift in demand (at the level of individual markets or the economy as a whole) does not cause a shift in supply (at either level), or vice versa.*

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As it turns out, the independence of supply and demand is just an illusion.

As I wrote back in 2009, it’s quite possible that at the micro level—for example, in the case of the labor market—both supply and demand are determined by something else, such as the accumulation of capital.

Thus. . .if the accumulation of capital leads to rightward shifts in both the demand for and supply of labor, wages may not increase (and quite possibly will decrease).

Therefore, supply and demand in individual markets aren’t necessarily independent.

And then, in 2013, I discussed the illusion of the independence of aggregate supply and demand.

In terms of the mainstream model, the collapse of aggregate demand leading to the crash of 2007-08 has also affected the aggregate supply of the economy—thereby shattering the illusion of the independence of the two sides of the macroeconomy. As the authors put it, “a significant portion of the recent damage to the supply side of the economy plausibly was endogenous to the weakness in aggregate demand—contrary to the conventional view that policymakers must simply accommodate themselves to aggregate supply conditions.”

Not only does the destruction of a significant portion of the future growth potential of the U.S. economy challenge the model mainstream economists use to analyze the macroeconomy and to formulate policy; it also forces us to question the rationality of a set of economic arrangements in which trillions of dollars of potential wealth (which might then be used to improve lives for the majority of the population) are sacrificed at the altar of keeping things pretty much as they are.

It represents the indictment both of an academic discipline and of economic system.

So, Smith is right: the shattering of the illusion of the independence of supply and demand means the way mainstream economists teach basic economics is fundamentally wrong.

What he forgets to mention, however, is that an economic system that is governed by supply and demand that are not independent of one another—and thus is subject to considerable instability on a regular basis, with the costs being shouldered by those who can least afford it—is also open to question.

Perhaps Tuesday’s results will serve notice that the time for challenging mainstream economics and the economic and social system celebrated by mainstream economists has finally arrived.

 

*There can, of course, be simultaneous shifts in supply and demand but the shifts themselves are considered independent of one another.

 

Inequality

Mainstream economists have finally discovered the importance of institutions. But they get it all wrong.

Take Daron Acemoglu (of MIT) and Jim Robinson (of the University of Chicago). In their view (according to Adam Davidson), Donald Trump threatens to disrupt the institutions that serve as the basis of “American Exceptionalism.”

The problem is, the United States does not represent an exception to the rule that “Over most of history, a small élite confiscated wealth from the poor.”

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As I showed the other day, the distribution of wealth in the United States is obscenely unequal (with the top 1 percent owning more than 40 percent of the nation’s wealth), and has been getting more unequal over the course of the past three decades. And it’s the existing set of institutions—economic, political, and cultural—that has made it possible for a small élite to confiscate wealth from the vast majority, including the poor.

Trump is thus a consequence, not a cause, of the institutions that have come to represent the unexceptionally unequal “American way of life.”

work

The rule is, as countries get wealthier, their annual hours worked per capita tend to decrease.

But the United States is the exception. Americans work longer hours than people in any other advanced country (and just a bit less than people in much poorer countries).

American exceptionalism therefore means that people are forced to have the freedom to work longer hours in order to achieve a shorter life expectancy, less leisure time, and higher levels of inequality than in other advanced countries.

 

Note: the chart above show, on the vertical axis, annual hours worked per capita and, on the horizontal axis, GDP per capita as a fraction of U.S. GDP.

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Wages-2-Prof.-Richard-Wolf

It seems, on first glance, that American Exceptionalism is alive and well.

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Judging from a recent survey by the Pew Research Center, Americans still believe that individual initiative and hard work—and not forces outside their control—determine success in life. It’s a view that was born out of a long period (beginning in the nineteenth century and lasting until the mid-1970s) during which people’s standards of living increased within and across generations as, decade after decade, wages roughly kept pace with productivity increases.

Of course, things have changed dramatically over the course of the past four decades, as the gap between wages and productivity has continued to grow.

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But, by and large, the majority of Americans still don’t think inequality is a big problem and continue to express their support for a “free-market system.”

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Yet, Americans do believe that high taxes would do more than low taxes to reduce the gap between rich and poor. And, perhaps most worrisome from the perspective of American Exceptionalism, many more people (65 compared 30 percent) expect that the next generation will be financially worse off than the current generation.

Not only are they correct. As it turns out, there’s nothing particularly exceptional in that view, since the majority of people in the advanced economies share the same dire prospect about the future.

And they should—unless and until fundamental changes are made in the way the economies of their countries are fundamentally transformed and reorganized.