Posts Tagged ‘economics’


Noah Smith argues that something he refers to as the recent “empirical revolution” in economics is challenging “a ton of standard, common theories.” These include:

1. If you slap some quick supply-and-demand graphs on the board, it looks like minimum wages should harm employment in the short term. But the data shows that they probably don’t.

2. If there’s any sort of limits to mobility, then simple labor demand theory says that a big influx of immigrants should depress the wages of native-born workers of comparable skill. But the data shows that in many cases, especially in the U.S., the effect is very small.

3. A simple theory of labor-leisure choice predicts that welfare should make recipients work less. But a raft of new studies shows that in countries around the world, welfare programs barely reduce observable work effort.

4. Most standard econ theory doesn’t assume the existence of social norms. But experiments consistently show that social norms (or morals, broadly conceived) matter to people.

I agree.

I’d only add that some of us have been teaching these and many other challenges to mainstream economics for a very long time. That’s because we were fortunate to learn theories other than those of mainstream economics, which we have then used in our own teaching of economics.

We teach our students that mainstream, neoclassical economics is one story about the economy. And, we also teach them, there are many other stories—based on different entry points and logics, and which arrive at conclusions very different from those of mainstream economics.


The American Economic Association was, in the beginning, a radical organization—founded in 1885, according to Marshall I. Steinbaum and Bernard A. Weisberger, by “Richard Ely, an avowedly Christian Heidelberg-trained professor at Johns Hopkins with a calling to make economics a friend of the working man.” Now, of course, it is anything but radical.

What happened?

Steinbaum and Weisberger’s analysis is that

University presidents seeking stature for their institutions appealed to rich donors among the period’s Robber Barons, and that appeal was unlikely to be successful when rabble-rousers in the economics department were questioning the foundations of American capitalism, in particular the monopolization and labor exploitation that made the Robber Barons rich in the first place. . .

What had happened was that economists realized there was much to be gained in terms of professional stature and influence from making themselves appealing to the establishment, so they banished those elements that tainted them by association. In 1895, one of Ely’s students, Albion Small, the founding chair of the new, Rockefeller-endowed University of Chicago’s Sociology Department, did not come to the aid of another Ely student, Edward Bemis, after the latter’s public criticism of the Chicago traction [streetcar] monopoly brought down the wrath of the university’s president William Rainey Harper and its conservative chair of economics, J. Laurence Laughlin. Despite episodes like those of Adams and Bemis, economics was by no means as conservative then as it eventually became starting in the 1970s, but neither would it countenance a direct challenge to the economic status quo nor affiliate itself with radical elements in organized labor or elsewhere. Even Ely himself eventually came around after his own notorious trial before the Wisconsin Board of Regents in 1894. He returned to the AEA as its President in 1900, and though he was long affiliated with the “Wisconsin Idea” and its progressive exponent, Governor Robert LaFollette, he was careful not to stray far from the new, milder orthodoxy.

Perhaps the causes of the transformation in U.S. economics during the first Gilded Age help explain why academic unfreedom in economics is so prevalent now, in the second Gilded Age.


Mainstream economists argued, first, that they had identified the end to capitalism’s severe crises, via the institutional and structural changes that had ushered in the “great moderation.” Then, after witnessing the unexpectedly immoderate crash of 2007-08, mainstream economists assured us that economic growth would quickly be restored.

Well now, more than eight years into the current crisis, it is clear both that the initial downturn was much more protracted than mainstream economists (including central bankers, like Ben Bernanke) had the courage to admit and that the persistent negative effects of that crisis continue to depress actual rates of growth below the earlier trend.

According to a new study by Antonio Fatás and Lawrence H. Summers (pdf), “The global financial crisis has permanently lowered the path of GDP in all advanced economies.” The severity and duration of capitalism’s latest crisis can be seen in the charts above, in the successive downward revisions in economic growth (of both potential and actual growth) for both the United States and Europe that extend far in the future. “In fact,” Fatás and Summers argue,

there is overwhelming evidence, both from the current level of output, seven years after the crisis started, as well as the estimates of potential GDP that this has become a permanent shock. It is by now well accepted that these countries will not regain their pre-trend crisis levels.

This persistent crisis of capitalism, which was ignored by mainstream economists, also challenges the mainstream traditions of explaining business cycles by technology shocks and of separating long-term growth dynamics from short-run business cycles.

What mainstream economics obscures from view is that the pattern of capitalist development leading up to 2007 created the conditions for a much more severe downturn than mainstream economists had been willing to admit, and that the severity of that cyclical downturn undermined the long-term rate of capitalist recovery going forward, which has left mainstream economists without a convincing explanation.

Clearly, the predictions by mainstream economists were wrong. But they continue to ignore the real effects of their mistakes, in both the short and long runs, which are being visited upon the working-classes in the United States and Europe.


Those of us in economics are confronted on a regular basis with the fantasy of perfect markets. It’s the idea, produced and presumed by neoclassical economists, that markets capture all the relevant costs and benefits of producing and exchanging commodities. Therefore, the conclusion is, if a market for something exists, it should be allowed to operate freely, and, if it doesn’t exist, it should be created. Then, when markets are allowed to flourish, the economy as a whole will reach a global optimum, what is often referred to as Pareto efficiency.

OK. Clearly, in the real world, that’s a silly proposition. And the idea of “market imperfections” is certainly catching on.

I’m thinking, for example, of Robert Shiller (who, along with George Akerlof, recently published Phishing for Phools: The Economics of Manipulation and Deception):

Don’t get us wrong: George and I are certainly free-market advocates. In fact, I have argued for years that we need more such markets, like futures markets for single-family home prices or occupational incomes, or markets that would enable us to trade claims on gross domestic product. I’ve written about these things in this column.

But, at the same time, we both believe that standard economic theory is typically overenthusiastic about unregulated free markets. It usually ignores the fact that, given normal human weaknesses, an unregulated competitive economy will inevitably spawn an immense amount of manipulation and deception.

And then there’s Robert Reich, who focuses on the upward redistributions going on every day, from the rest of us to the rich, that are hidden inside markets.

For example, Americans pay more for pharmaceuticals than do the citizens of any other developed nation.

That’s partly because it’s perfectly legal in the U.S. (but not in most other nations) for the makers of branded drugs to pay the makers of generic drugs to delay introducing cheaper unbranded equivalents, after patents on the brands have expired.

This costs you and me an estimated $3.5 billion a year – a hidden upward redistribution of our incomes to Pfizer, Merck, and other big proprietary drug companies, their executives, and major shareholders.

We also pay more for Internet service than do the inhabitants of any other developed nation.

The average cable bill in the United States rose 5 percent in 2012 (the latest year available), nearly triple the rate of inflation.

Why? Because 80 percent of us have no choice of Internet service provider, which allows them to charge us more.

Internet service here costs 3 and-a-half times more than it does in France, for example, where the typical customer can choose between 7 providers.

And U.S. cable companies are intent on keeping their monopoly.

And the list of such market imperfections could, of course, go on.

The problem, as I see it, is that these critics tend to focus on the sphere of markets and to forget about what is happening outside of markets, in the realm of production, where labor is performed and value is produced. The critics’ idea is that, if only we recognize the existence of widespread market imperfections, we can make the market system work better (and nudge people to achieve better outcomes). My concern is that, even if all markets work perfectly, a tiny group at the top who perform no labor still get to appropriate the surplus labor of those who do.

Accepting that our task is to make imperfect markets work better makes us all look like fools. In the end, it does nothing to eliminate that fundamental redistribution going on every day, “from the rest of us to the rich,” which is hidden outside the market.


The distribution of income in the United States is increasingly unequal. We all know that. The problem is, the more we focus on the unequal distribution of income, the more we’re forced to discuss the issue of class.

And that’s a real problem for mainstream economists, who either deny the existence of inequality or deny its connection to class.

That’s the only way of explaining why Jason Furman repeats, in two recent papers (“Global Lessons for Inclusive Growth” [pdf] and, with Peter Orszag, “A Firm-Level Perspective on the Role of Rents in the Rise in Inequality [pdf]), the same argument:

Overall, the 9 percentage-point increase in the share of income of the top 1 percent in the World Top Income Database data from 1970 to 2010 is accounted for by: increased inequality within labor income (68 percent), increased inequality within capital income (32 percent), and a shift in income from labor to capital (0 percent).

In other words, for mainstream economists like Furman who actually do pay attention to rising inequality (e.g., as measured by the share of income going to the top 1 percent), it can’t have anything to do with class (e.g., as measured by changing labor and capital shares).

As it turns out, I’m presenting Marx’s critique of the so-called Trinity Formula in one of my courses this week.* Basically, Marx argued that, if the value of commodities is equal to constant capital plus variable capital plus surplus-value, then both the “profit share” (the “profits of enterprise” plus “interest”) and the “rental share” (“ground rent”) represent distributions of surplus-value. In other words, productive labor—not independent factor services—creates, via exploitation, the incomes of both capitalists and landlords.

Marx’s critique of the Trinity Formula is still relevant today because, even if we assume (as many mainstream economists still do, against all evidence) that wage and profit shares are relatively constant, it’s still possible to show that the rate of exploitation has risen.

Consider the following hypothetical chart:


The blue and red boxes represent profits and wages in 1997 and 2007. However, as we can see, the share of income going to CEOs has risen (Furman’s “increased inequality within labor income”). If we combine profits and CEO salaries as different forms of surplus-value, then indeed it is possible for the rate of exploitation to have risen—even if the conventional measure of profit and wage shares remains the same.

In terms of actual national income data, what we’d want to do is add to corporate profits the distributions of the surplus that go to those at the top (including CEO salaries) in order to to get “capital’s share” and subtract those same distributions from wages to get “labor’s share.”

US labor share

As it turns out, Olivier Giovannoni [pdf] has made something like the latter calculation, by subtracting top 1 percent incomes from the total U.S. labor share. As we can see in the chart above, the real labor share in the United States has fallen dramatically since 1970—from about 77 percent to less than 60 percent—just as it has in Europe and Japan.

The only appropriate conclusion is that the increasingly unequal distribution of income in the United States has a lot to do with the diverging movements of the labor and capital shares, and therefore with class changes in the U.S. economy. And the only way to deal with that problem—that class problem—is not by increasing tax rates at the top or by raising minimum wages, but by eliminating the problem itself: the exploitation of labor by capital.

*For the uninitiated, the Trinity Formula is the classical idea that the “natural price” of commodities is equal to the summation of the natural rates of wages, profit, and rent, that is, the idea that the incomes of workers, capitalists, and landlords are independent of one another. The same idea was later articulated by neoclassical economists, who argue that each “factor of production” receives its marginal contribution to production.


We forget, at our peril, the extent to which academic unfreedom is enforced in departments of economics across North America.

Most departments of economics offer—in the classroom and in terms of research and policy advice—only mainstream economics. By that I mean they hire economists who only teach, conduct research, and offer policy advice defined by one or another version of mainstream (neoclassical and Keynesian) economics. Other approaches to economics—generally, these days, referred to as heterodox economics—simply aren’t recognized by or represented within those departments. That was true in the decades leading up to the crash of 2007-08 and, perhaps even more startling, it has continued to be the case in the years since.

That’s particularly true in departments that have doctoral programs in economics. While heterodox economists are often hired by undergraduate departments (such as, most famously, the University of Southern Maine), you simply won’t find heterodox economics or heterodox economists at Harvard, MIT, Princeton, Yale, and Chicago.

Now, there have been a few departments of economics over the years that have been defined in terms of a significant presence (although generally still a minority view) of heterodox economics. The University of Massachusetts Amherst was certainly one of them (which, to offer the appropriate disclosure, is where I did my doctoral work). The list also includes the New School for Social Research, the University of California-Riverside, American University, and, more recently, the University of Missouri-Kansas City.

I was in fact hired by another of those departments, at the University of Notre Dame, which as readers of this blog know was first split off as a separate department (in 2003) and then (in 2010) simply dissolved by the administration of the university.

What was extraordinary about that episode was the length mainstream economists (and their allies within the university administration) were willing to go to stamp out any and all forms of nonmainstream economics. Not, to be clear, because there was any kind of financial crisis, but simply to first marginalize and then remove entirely the existence of heterodox economics from the curriculum, research profile, and policy recommendations of the department.

I note that history because it was invoked in the extensive investigation of academic freedom in the Department of Economics at the University of Manitoba by the Canadian Association of University Teachers (pdf).* The department at Manitoba is the only place in Canada where doctoral students can receive significant training in nonmainstream or heterodox economics. According to the report,

Prior to 2006, the Department of Economics approached hiring, curriculum and pedagogical issues with an approach that made room for heterodox, as well as mainstream views, although the heterodox group remained a minority of the department. This was achieved through a solid degree of good will that permeated the Department.

After that, the “solid degree of good will that permeated the Department” was undermined by the orthodox or mainstream members of the department who, in various ways, sought to “to change the direction of the Economics Department by moving to a more mainstream/orthodox emphasis.” The problem of academic freedom within the department, according to the student newspaper, has still not been resolved.

What is extraordinary in all of this is how few departments there are in all of North America where doctoral students can be exposed to and learn—not to mention, after they complete their degrees and then find a job, teach, conduct research, offer policy advice associated with—heterodox approaches to economics. And, on top of that, in the few departments where both mainstream and heterodox approaches are in fact represented, the length to which mainstream economists (and, as I wrote above, their allies within university administrations) will go to marginalize or eliminate heterodox approaches to economics.

The University of Manitoba is just the latest example in the long line of attempts to define, impose, and police the rules of academic unfreedom in the discipline of economics in North America.

*Just to correct the historical record, though, the 2003 decision to split the Department of Economics at the University of Notre Dame was opposed by 11 of the 16 members of the department, a group that included both mainstream and heterodox economists. Because they were opposed to the split, they were not invited to join the new Department of Economics and Econometrics, which defined itself from the beginning as a purely neoclassical program.


I understand: the only relevance of Karl Marx for the likes of the Wall Street Journal is to poke fun at Marxists who bristle at the idea of paying a fee to visit his gravesite.

“The Friends” of the cemetery are also anticipating an uptick in interest in Marx and in complaints from Marxists. This graveyard, in a leafy, genteel part of north London, typically sees around 200 visitors a day. Most ask to see Marx.

As it turns out, it’s that “uptick” in interest that is, in fact, more interesting.

Clearly, if all were going well for capitalism, there wouldn’t be any interest in Marx. But it isn’t, by a long shot—certainly not when global capitalism appears to be entering a new recession [ht: ja] and a variety of liberal supporters, from Robert Reich to Hillary Clinton, find it necessary to endeavor to “save capitalism from itself.”

Chris Dillow certainly thinks Marx is relevant today, for a variety of reasons: financialization, secular stagnation, the negative effects of inequality on productivity, and the situation of workers. In fact, Dillow argues, there’s a side of Marx that is particularly relevant for us today:

If you start from Engels’ Condition of the Working Class in England and start reading Capital not from the beginning but from chapter 10, another Marx emerges – one whose thinking was rooted in empirical facts about the working lives of the worst off and in an urge to improve these. It is this Marx which is still relevant today.

Certainly, the interest shown by Marx (and, of course, Engels) in the real situation under capitalism of the working-class—aided by Leonard Horner’s “undying service to the English working-class”—puts most contemporary economists to shame.*

But there’s another side of Marx that is at least as relevant today: the critique of political economy. The fact is, Marx didn’t invent an entirely new method to analyze capitalism. He started where mainstream economists (in his day, the classical political economists, such as Adam Smith and David Ricardo) left off and then, based on their own assumptions, developed his critique of their theories. Marx started with an “immense accumulation of commodities” (what today we call GDP) and “just deserts” (that is, the idea that everyone gets what they deserve and the distribution of income under capitalism is “fair”) and then showed how the growth of the wealth of nations was based on “the vampire thirst for the living blood of labour” on the part of capitalists. Therefore, what is an incontrovertible “good” for mainstream economists (more stuff, more commodities) can be seen as a “bad” (since it means more ripping-off of surplus-value by capitalists from the workers who create it). And that class exploitation can, in turn, be directly tied to financialization, secular stagnation, the negative effects of inequality, the situation of workers under capitalism, and much more.

Both mainstream economic theory and capitalism have, of course, changed since middle of the nineteenth century. That’s why the theoretical claims and empirical observations contained in Capital can’t simply be transferred to our own time. What is relevant, it seems to me, is the example of the “ruthless criticism” of political economy—the critique of both mainstream economic thought and of capitalism itself.

That two-fold critique, as exemplified in Marx’s writings, is precisely what is relevant today.

*Of course, their own Adam Smith puts them to shame, as in this passage on the negative effects of the division of labor on workers from Book 5 of the Wealth of Nations:

In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations, frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. The uniformity of his stationary life naturally corrupts the courage of his mind, and makes him regard with abhorrence the irregular, uncertain, and adventurous life of a soldier. It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expence of his intellectual, social, and martial virtues. But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.