Posts Tagged ‘crisis’

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183372_600 August 13, 2016

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Special mention

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I cited Andrew O’Heir’s critical review of Boom Bust Boom, Terry Jones and Theo Kocken’s Monty Pythonesque documentary about the crash of 2007-08 back in March but I hadn’t seen the film itself until last night.

In many ways, I wish I hadn’t.

Oh, sure, there are a couple of good moments. Introducing the work of Hyman Minsky to a larger audience. A cameo by John Cusack, who suggests that economics students should pelt their professors with vegetables and rotten fruit if they continue to parrot the party line. “Maybe urinate on them. That’s what I would do.” And some well-deserved attention to the students in the Post-Crash Economics Society at the University of Manchester.

But otherwise, the film is just not very good. For starters, consider the fact that, after the worst crisis of capitalism since the first Great Depression, only once is capitalism itself even mentioned!

Then, as O’Heir wrote, there’s not a single mention of John Maynard Keynes (who published his General Theory in 1936, in the midst of the earlier depression), let alone Karl Marx (who, along with Friedrich Engels, was writing about capitalism’s crisis tendencies in the middle of the nineteenth century). Since Jones and Kocken decided to make forgetting a central part of their story—especially failing to remember and draw lessons from previous financial crises—they might also have mentioned the deliberate forgetting by mainstream economists and economic policymakers of other economic ideas, now as in the past.

And, in this day and age, it smacks viewers in the face that, as Shane Ferro wrote, “Women and minorities are almost entirely left out of this film—not unlike the way they’ve been left out of financial and economics professions.” The only two expert women the movie manages to feature are Lucy Prebble, a playwright who once wrote a play about the collapse of Enron, and Laurie Santos, a Yale psychology professor who studies how monkeys make decisions. Neither, as it turns out, has a background in economics, or much knowledge of capitalism, its history, or the 2007-08 crash.*

But the worst part of this high-budget, cleverly animated documentary is the actual story Terry and Kocken decided to tell. What it boils down to is this: financial crises have always been with us (at least since Tulip Mania in the 1630s), people tend to make irrational decisions (e.g, by forgetting about previous crises and taking on too much risk), and making irrational decisions is part of our human nature, as determined by evolutionary behavioral psychology (hence the monkeys).

Actually, the film is more confused than that. At one point, it features Minsky (in an animated dialogue with his son)—and, if it had continued in that vein, it would have been able to reveal something about the financial fragility inherent in the regular boom-and-bust cycles of capitalism (since the key actors in Minsky’s approach are capitalist enterprises and banks). But then Minksy is dropped and the filmmakers decide to go in a different direction, with a fanciful discussion of human nature (continuing an approach that, from the beginning, features an undifferentiated “we” who is responsible for speculation, risk-taking, euphoria, forgetting, and so on) and then an attempt to ground human nature in primate behavior (this after criticizing the scientistic pretensions of neoclassical economics).

There’s no attempt to identify the dynamics of a particular economic system, which we usually refer to as capitalism. No attempt to identify particular and differentiated actors and institutions within capitalism, such as bankers, workers, consumers, politicians, enterprises, financial markets, and so on. No references to other countries today, in addition to the United States and the United Kingdom. No mention of the grotesques levels of inequality in the lead-up to the crash, and no discussion of unemployment, poverty, homelessness, and so on after the crash.

Instead, what we are presented with is a succession of financial crises, which in the end are grounded in our singular human nature.

That, to say the least, is not a particularly insightful analysis of the causes and consequences of the crash. And the best the filmmakers and the various talking heads can come up with by way of policies is the need, since human nature can’t be changed, to regulate the financial system (perhaps, at its most adventurous, by restoring Glass-Steagal barriers between commercial and investment banking) to keep “us” from making the same mistakes.

To which we can all respond: “Been there, done that. Now let’s try something that might actually work, beginning with the inherent instabilities of capitalism itself.”

 

*Here’s the list of the contributors: Dan Ariely, Dirk Bezemer, Zvi Bodie, Willem Buiter, John Cassidy, John Cusack, John K. Galbraith, James K. Galbraith, Andy Haldane, Daniel Kahneman, Steve Keen, Stephen Kinsella, Larry Kotlikoff, Paul Krugman, George Magnus, Paul Mason, Perry Mehrling, Hyman P. Minsky, Alan Minsky, Lucy Prebble, Laurie Santos, Robert J. Shiller, Nathan Tankus, Sweder Van Wijnbergen, and Randall Wray.

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Special mention

181801_600 Moudakis July 8 2016

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According to Chris Dillow, there’s a direct link from the Tories’ austerity policies to the rise of racism in England and elsewhere in the United Kingdom.

His argument is that economic stagnation since the crash of 2008, which has been exacerbated by the economic policies of Britain’s Conservative Party (under Prime Minister David Cameron andChancellor of the Exchequer George Osborne), has led to stagnant or falling living standards for most working-class households. That deterioration, in turn, created a level of discontent that showed up in support for Brexit.

Now, Dillow makes clear, support for Brexit was not in and of itself a form of right-wing extremism. But the campaign against the European Union, and now its victory, have helped to generate anti-immigrant attacks and expressions of racism.

As he explains,

There’s a direct link from Osborne’s criminal economic mismanagement to hate crimes.

You might think I’m going too far here. I’m not. In fact, this is basic economics. Econ 101 says that people respond to incentives. And the incentive to express racist opinions rather than keep them bottled up has increased recently because when politicians express neo-racist ideas, people believe that the stigma attached to being racist has declined. In this sense, the cost of being a low-level racist has fallen – and a fall in costs generates increased supply.

Granted, Cameron and Osborne sincerely deplore such attacks. But that misses the point – that if you dump a pile of shit on your doorstep, you can’t disown the flies.

And, is turns out, that’s exactly what’s been happening in the United States in recent years—with an economic recovery that has only benefited those at the very top and a campaign by and within the Republican Party that culminated in the nomination of Donald Trump. The cost of being an American racist has definitely fallen.

In both cases, in the United Kingdom and the United States, what we’re witnessing then is the sorry spectacle of the creation of “climate in which migrants and ethnic minorities no longer feel safe.”

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Mainstream economics has clearly had a great fall.

Just two days ago, I argued that—after the crash of 2007-08 and, now, Brexit—mainstream economists have had “nothing to offer, either in terms of insight or a path moving forward.” Also recently, Antonio Callari challenged Brad DeLong’s attempt to reduce economics to the mainstream debate between supply-siders and demand-siders and his argument that there’s no room for economists as public intellectuals.

Now, Mark Thoma has stepped forward to explain why it is that “in recent years the public has lost faith the in the economics profession.” And since by the “economics profession” Thoma is essentially referring to mainstream economists, he’s absolutely correct.

One reason for the lack of faith is the failure to predict the Great Recession, but the public’s dismissal of macroeconomists is based upon more than the failure to foresee the dangers the housing bubble posed for the economy. It is also due to false promises about the benefits to the working class from globalization, tax cuts for the wealthy, and trade agreements – promises that were often used to support ideological and political goals or to serve special interests.

Even more, mainstream economists simply don’t have “a solid understanding of the mechanisms that drive the economy.”*

Therefore, in Thoma’s view, economists need to exercise more humility and flexibility:

more humility about what we do and do not know, more willingness to change our minds when the evidence disagrees with our favorite theoretical model, and the willingness to acknowledge disagreement within the profession. But most of all we need to take a strong stand against those inside and outside the profession who misuse economic theory and empirical results for political and ideological purposes.

I’m all in favor of theoretical humility and flexibility. I certainly do not hold to the idea that our processes of producing knowledge can, or even should aim to, give us access to a complete or definitive model of the world. And I’m quite willing to admit—against the pretensions of most mainstream economists—that all we have (and can have) are partial and local and incomplete knowledges, which themselves are always changing.

But, while a good start (given the arrogance and rigidity with which much mainstream economics has been and continues to be produced and disseminated), that’s not enough. The real challenge, it seems to me, is to go beyond that and criticize both the theoretical models utilized by mainstream economists and their self-identified status as scientists who are somehow outside and independent of the world of politics and ideology.

There are, according to all three of us (Callari, Thoma, and myself), good reasons why mainstream economists have fallen in the eyes of the public. And try as they might, it’s doubtful “All the king’s horses and all the king’s men” can or should put mainstream economics back together again.

What’s needed is a fundamentally different way of doing economics and of thinking about the role of economists—economic theories that focus on issues of power and class (instead of relegating them to the margins) and a conception of economists as real public intellectuals (who play “a galvanizing role in the production of public knowledge and policy, where ‘public’ means not just ‘for’ the public, the people, but also ‘of’ and ‘by’ the people”).

I recognize that’s a radically different way of defining economics compared to the mainstream tradition. But, as it turns out, it’s a move Humpty Dumpty himself would have recognized.

“The question is,” said Alice, “whether you can make words mean so many different things.”

“The question is,” said Humpty Dumpty, “which is to be master—that’s all.”

 

*Thoma’s list of issues on which mainstream economists simply don’t have answers includes the following:

  • Why has productivity fallen? Will it stay low in the future?
  • What has caused the decline in labor force participation?
  • How strong is the economy’s self-correction mechanism in recessions, and how does it work?
  • Is there a Phillips curve (i.e. a reliable relationship between inflation, inflation expectations, and unemployment)?
  • How are expectations formed, and do they converge to rational expectations over time?
  • What is more important in the determination of wage and capital shares of income, marginal products or bargaining power and other institutional features of labor markets?
  • What frictions should we focus on? Price and wage stickiness? Financial frictions? Both? How do these frictions vary over the business cycle?
  • How high can the minimum wage be raised before there are significant employment effects?
  • What is the cause of inequality? Is it baked into the capitalist system, or is it the result of political and institutional forces?

And, according to Thomas, “that’s nowhere near a complete list of the things we don’t fully understand. We don’t even agree about what caused the Great Recession.”