Posts Tagged ‘economics’

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Last year, as I reported the other day, I published over 800 new posts.

I’ve never done this before. However, I decided to look back over the year and choose one post for each month of 2016:

January—Liberal ideology

February—Who are the capitalists?

March—Yea, they’re angry!

April—Life among the liberal econ

May—Letting capitalism off the hook

June—Globalization, inequality, and imperialism

July—Trump and the Prosperity Gospel

August—The Mandibles and dystopian finance fiction

September—What about the white working-class?

October—Nobel economics—or why does capital hire labor?

November—Condition of the working-class in the United States

December—China syndrome

Enjoy!

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There are two sides to the recent China Shock literature created by David Autor and David Dorn and surveyed by Noah Smith.

On one hand, Autor and Dorn (with a variety of coauthors) have challenged the free-trade nostrums of mainstream economists and economic elites—that everyone benefits from free international trade. Using China as an example, they show that increased trade hurt American workers, increased political polarization, and decreased U.S. corporate innovation.

The case for free international trade now lies in tatters, which of course played an important role in the Brexit vote as well as in the U.S. presidential campaign.

On the other hand, invoking the China Shock has tended to reinforce economic nationalism—treating China as an unitary entity, a country has shaken up world trade patterns, and disregarding the conditions and consequences of increased trade with other countries, including the United States.

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Why has there been an increasing U.S. trade deficit with China in recent decades? As James Chan explained, in response to an August 2016 article in the Wall Street Journal,

Our so-called China problem isn’t really with the Chinese but rather our own multinational companies.

As I see it, U.S. corporations have made a variety of decisions—to subcontract the production of parts and components with enterprises in China (which are then used in products that are later imported into the United States), to purchase goods produced in China to sell in the United States (which then show up in U.S. stores), to outsource their own production of goods (to sell in China and to export to the United States), and so on. The consequences of those corporate decisions (and not just with respect to China) include disrupting jobs and communities in the United States (through outsourcing and import competition) and decreasing innovation (since existing technologies can be used both to produce goods in China and sell in the expanding Chinese consumer market), thereby increasing political polarization in the United States.

The flip side of the story is the accumulation of capital in China. Until the development of the conditions for the development of capitalism existed in China, none of those corporate decisions were possible—not by U.S. corporations nor by multinational enterprises from other countries, all of whom were eager to take advantage of the growth of capitalism in China. Which of course they then contributed to, thus spurring the widening and deepening of capital accumulation within China.

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It should come as no surprise, then, that there’s been an upsurge of strike activity by workers in the fast-growing centers of manufacturing and construction within China—especially in the provinces of Guandong, Shandong, Henan, Sichuan, and Hebei.

According to Hudson Lockett, China this year

saw a total of 1,456 strikes and protests as of end-June, up 19 per cent from the first half of 2015

The problem with the China Shock literature, which has served to challenge the celebration of free-trade by mainstream economists and economic elites in the West, is that it hides from view both the decisions by U.S. corporations that have increased the U.S. trade deficit with China (with the attendant negative consequences “at home”) and the activity by Chinese workers to contest the conditions under which they have been forced to have the freedom to labor (which we can expect to continue for years to come).

It’s our responsibility to keep those decisions and events in view. Otherwise, we risk the economic and political equivalent of the China Syndrome.

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Certainly not by mainstream economists—not if they continue to defend their turf and to attack the new literature on “Slavery’s Capitalism” with the vehemence they’ve recently displayed.

It makes me want to forget I ever obtained my Ph.D. in economics and the fact that I’ve spent much of my life working in and around the discipline.

A recent article in The Chronicle of Higher Education [ht: ja] highlights Edward E. Baptist’s novel book, The Half Has Never Been Told (which I wrote about back in 2014), and some of the outrageous ways it has been criticized by mainstream economists—first in a review in the Economist (which was so over-the-top it was subsequently retracted) and then in a group of reviews published in the Journal of Economic History (unfortunately, behind a paywall).

In my view, this is not a clash between two disciplines (as the Chronicle would have it), but rather a fundamental incompatibility between mainstream economic theory and a group of historians who have refused to adhere to the epistemological and methodological protocols established and defended—with a remarkable degree of ignorance and intolerance—by mainstream economists.

What is at stake is a particular view of slavery in relation to U.S. capitalism—as well as a way of producing economic history (of slavery, capitalism, and much else).

Baptist’s argument, in a nutshell, is that slavery was central to the development of U.S. capitalism (“not just shaping but dominating it”) and systematic torture (a “whipping machine”) was one of the principal means slaveowners used to increase the productivity of cotton-picking slaves and thus boost the surplus they were able to extract from them.

Mainstream economists hold a quite different view—that slavery was an outdated, inefficient system that had little to do with the growth of capitalism in North America, and increased productivity in cotton production was due to biological innovation (improved varieties of seeds that yielded more pickable cotton) not torture in the labor process.

They also use different frameworks of analysis: whereas Baptist relies on slave narratives and contingent historical explanations, mainstream economists fetishize quantitative methods and invoke universal (transcultural and transhistorical) modes of individual decision-making.

Those are the two major differences that separate Baptist (and other “Slavery’s Capitalism” historians) and mainstream economists.

This is how one mainstream economist, Alan L. Olmstead, begins his review:

Edward Baptist’s study of capitalism and slavery is flawed beyond repair.

Olmstead then proceeds to accuse Baptist of being careless with the numbers, of “making things up,” and “misunderstanding economic logic,” all of which leads to “a vast overstatement of cotton’s and slavery’s ‘role’ on the wider economy and on capitalist development.”

He concludes:

All and all, Baptist’s arguments on the sources of slave productivity growth and on the essentiality of slavery for the rise of capitalism have little historical foundation, raise bewildering and unanswered contradictions, selectively ignore conflicting evidence, and are error-ridden.

Baptist, for his part, has responded to Olmstead’s scathing attack (as well as critical reviews by others) in the following fashion:

Some scholars axiomatically refuse to accept the implications of the fact that brutal technologies of violence drove slave labor. They retreat into homo economicus fallacies to resist considering the question of whether in some cases violence increased, or was calibrated over time to enhance production. They evade consideration of survivors’ testimony about those changes, insisting that this data is “anecdotal”—as if the enslavers’ claims on which they build arguments are epistemologically any different.

That’s a problem for those of us who work in and around the discipline of economics: mainstream economists are simply unwilling to give up on homo economicus and doggedly refuse to examine either the economic effects of the brutal system of torture that was central to U.S. slavery or the role slave cotton played in the development of U.S. capitalism. Not to mention their arrogance in responding to the work of anyone who argues otherwise.

And that’s why the other half of the story will never be told by mainstream economists.

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Like the conceptual equivalent of Gresham’s Law, bad ideas about work keep driving out good ones.

The latest example is from Noah Smith, who, like other mainstream economists before him (e.g., Brad DeLong), asserts that “jobs give people dignity and a sense of self-worth.”

That’s bad enough. But even worse is that Smith thinks he’s criticizing and improving on mainstream economic theory, according to which “a job isn’t treated as something inherently valuable — it’s just a conduit through which money flows from employer to employee.” So, he recommends mainstream economists look to sociology to affirm the dignity of labor.

The problem is, sociology—especially the sociology of work—is not going to give Smith what he wants.

A job is, of course, more than “a conduit through which money flows from employer to employee.” That’s just the beginning of the process, the exchange of the ability to work for a wage or salary. That’s already an enormous indignity—to be forced to have the freedom to sell one’s ability to work to a tiny group of employers who have access to the wealth to hire them. And, once the exchange is completed, people have to actually do the job—producing goods or services for their employers, who are able to appropriate the surplus workers create. Thus, in the realm of production, after having sold their ability to perform labor, workers are forced to submit to the control of employers and their hired supervisors, who subject them to whatever conditions are necessary to generate a profit. Otherwise, they wouldn’t be hired in the first place.

Whatever it takes: low wages, long hours, unsafe working conditions, little time off, constant surveillance, no say in what is produced or how it’s produced. And the list goes on.

Where’s the dignity in that?

And all Smith would have to do is read a little of the sociology of work (e.g., in Philip Hodgkiss’s essay on “The Origins of the Idea and Ideal of Dignity in the Sociology of Work and Employment,” in The SAGE Handbook of the Sociology of Work and Employment)—starting with the “classics” (Marx, Durkheim, and Weber) and continuing with the recent literature (including Harry Braverman,  Michael Burawoy, and Arlie Hoschschild).

That’s not to say there’s no place for dignity in and around work. When workers band together to form a union and collectively bargain with their employers, they manage to achieve a level of dignity. And when they eliminate discrimination or bargain to expand benefits. They achieve a different kind of dignity when they are able to participate in decision-making or establish their own firms—whether in the form of cooperatives or worker-owned enterprises.

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So, yes, workers can achieve dignity—not by having jobs (as Smith and other mainstream economists assert) but by struggling over the conditions of those jobs. When they assert and affirm their dignity as human beings, not because of but in spite of the fact that, within current economic institutions, they’re forced to have the freedom to work for someone else. And, even more, when they reject those institutions and become their own bosses.

As Sharon Bolton explains,

There is general consensus, though originating from many different perspectives, that dignity is an essential core human characteristic. It is overwhelmingly presented as meaning people are worth something as human beings, that it is something that should be respected and not taken advantage of and that the maintenance of human dignity is a core contributor to a stable moral order in society. However, when entering the realms of work and the complexities of exchanging labour for a wage the definitions become much less clear. In selling one’s labour does one also relinquish autonomy, freedom, equality and, often, well-being—the very ingredients of life that have been most commonly associated with human dignity.

So, yes, Smith and other mainstream economists might want to spend more time reading in and around the sociology or work. But, once they do, they’re probably not going to experience a great deal of self-worth in relation to their blithe assertions concerning the dignity of work under capitalism.

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I’m always pleased when Marx’s critique of political economy and the theory of value are topics of discussion, especially since students are rarely exposed to those ideas in their usual mainstream economics courses. Their professors generally don’t know about any theory of value other than the neoclassical economics they learned and preach—and, as a consequence, students aren’t taught that there is a fundamental critique of the neoclassical theory of value that stems from Marx’s work.

The result is, in fact, quite embarrassing. When I ask students to compare Marx’s theory of profits with the neoclassical theory of profits, they have no idea what I’m talking about. The way they learn economics from my neoclassical colleagues, profits are competed away. “So,” I ask them, “what you have is a theory of capitalism according to which there are no profits”? Then, of course, I have to start all over, teach them the neoclassical theory of profits (as the normal return to capital, rK, where r is the profit rate and K the amount of capital) and only then explain to them the Marxian critique of neoclassical profits (based on s, the amount of surplus-value that arises through exploitation). I am forced to make up for mainstream economists’ poor understanding and explanation of their own theory.

So, good, we now have a new discussion of Marx’s approach—first in the form of Branko Milanovic’s “primer” and then in Fred Moseley’s response to Milanovic. Both are well worth reading in their entirety—and I agree with many of the ideas they put forward.

But I do have a few major disagreements with their treatments. Milanovic, for example, insists that Marx develops his theory through three kinds of production: non-capitalism, “petty commodity production,” and capitalism. I read Marx differently. My view is that Marx starts with the commodity and then proceeds to develop, step by step (across volumes 1, 2, and 3 of Capital), the conditions of existence of capitalist commodity production, which is the goal of the analysis. These are not different historical stages or kinds of production but, rather, different levels of abstraction. So, conceptually, Marx starts from one proposition (that the value and exchange-value of commodities are equal to the amount of socially necessary abstract labor-time embodied in their production), then proceeds to another (where the value and exchange-value of commodities are equal to the value of capital, both variable and constant, and surplus-value embodied in the commodity during the course of production), and finally to a third level (where value and exchange-value can’t be equal, since the price of production, p, now includes an average rate of return on capital).

My other two concerns pertain to both authors. Milanovic and Moseley assert that Marx’s focus was mainly at the macro level, “the determination of the total profit (or surplus-value) produced in the capitalist economy as a whole.” I didn’t understand that idea back in 2013 and I remain unconvinced today. As I see it, Marx focused on both the micro and macro level and in fact worked to make his theory consistent at the two levels. Starting with the value of individual commodities (as I explained above), Marx concluded that, at the aggregate level, two identities needed to hold: the total value of commodities equaled the sum of their prices, and total surplus-value equalled total profits. That’s both a micro theory and a macro theory, a theory of value, price, and profit at both levels.*

The second, and perhaps most important, idea missing from Milanovic’s and Moseley’s interpretations of Marx’s approach is critique. Both authors proceed as if Marx developed his own theory of labor value, instead of seeing it as a critique of the classicals’ theory of value (which, we must remember, is the sub-title of Capital, “A Critique of Political Economy”). In my view, Marx begins where the classicals leave off (with an “immense accumulation of commodities,” Adam Smith’s wealth of nations) and then shows how the production of wealth in a capitalist society involves the performance, appropriation, and distribution of surplus labor.

That’s Marx’s class critique of political economy, which pertains as much to the mainstream economics of our time as to his.

 

*I don’t have the space here to explain how, for any individual commodity, the amount of value embodied during the course of its production won’t generally be equal to the amount of value for which the commodity exchanges. It is conceptually important that individual commodities have both numbers—value and exchange-value—attached to them, especially when they are not quantitatively equal at the micro level. It speaks to the fact that surplus-value is both appropriated (by capitalists from workers, through exploitation) and redistributed (among capitalists, within and across industries).

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Mark Tansey, “Coastline Measure” (1987)

The pollsters got it wrong again, just as they did with the Brexit vote and the Colombia peace vote. In each case, they incorrectly predicted one side would win—Hillary Clinton, Remain, and yes—and many of us were taken in by the apparent certainty of the results.

I certainly was. In each case, I told family members, friends, and acquaintances it was quite possible the polls were wrong. But still, as the day approached, I found myself believing the “experts.”

It still seems, when it comes to polling, we have a great deal of difficult with uncertainty:

Berwood Yost of Franklin & Marshall College said he wants to see polling get more comfortable with uncertainty. “The incentives now favor offering a single number that looks similar to other polls instead of really trying to report on the many possible campaign elements that could affect the outcome,” Yost said. “Certainty is rewarded, it seems.”

But election results are not the only area where uncertainty remains a problematic issue. Dani Rodrik thinks mainstream economists would do a better job defending the status quo if they acknowledged their uncertainty about the effects of globalization.

This reluctance to be honest about trade has cost economists their credibility with the public. Worse still, it has fed their opponents’ narrative. Economists’ failure to provide the full picture on trade, with all of the necessary distinctions and caveats, has made it easier to tar trade, often wrongly, with all sorts of ill effects. . .

In short, had economists gone public with the caveats, uncertainties, and skepticism of the seminar room, they might have become better defenders of the world economy.

To be fair, both groups—pollsters and mainstream economists—acknowledge the existence of uncertainty. Pollsters (and especially poll-based modelers, like one of the best, Nate Silver, as I’ve discussed here and here) always say they’re recognizing and capturing uncertainty, for example, in the “error term.”

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Even Silver, whose model included a much higher probability of a Donald Trump victory than most others, expressed both defensiveness about and confidence in his forecast:

Despite what you might think, we haven’t been trying to scare anyone with these updates. The goal of a probabilistic model is not to provide deterministic predictions (“Clinton will win Wisconsin”) but instead to provide an assessment of probabilities and risks. In 2012, the risks to to Obama were lower than was commonly acknowledged, because of the low number of undecided voters and his unusually robust polling in swing states. In 2016, just the opposite is true: There are lots of undecideds, and Clinton’s polling leads are somewhat thin in swing states. Nonetheless, Clinton is probably going to win, and she could win by a big margin.

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As for the mainstream economists, while they may acknowledge exceptions to the rule that “everyone benefits” from free markets and international trade in some of their models and seminar discussions, they acknowledge no uncertainty whatsoever when it comes to celebrating the current economic system in their textbooks and public pronouncements.

So, what’s the alternative? They (and we) need to find better ways of discussing and possibly “modeling” uncertainty. Since the margins of error, different probabilities, and exceptions to the rule are ways of hedging their bets anyway, why not just discuss the range of possible outcomes and all of what is included and excluded, said and unsaid, measurable and unmeasurable, and so forth?

The election pollsters and statisticians may claim the public demands a single projection, prediction, or forecast. By the same token, the mainstream economists are no doubt afraid of letting the barbarian critics through the gates. In both cases, the effect is to narrow the range of relevant factors and the likelihood of outcomes.

One alternative is to open up the models and develop a more robust language to talk about fundamental uncertainty. “We simply don’t know what’s going to happen.” In both cases, that would mean presenting the full range of possible outcomes (including the possibility that there can be still other possibilities, which haven’t been considered) and discussing the biases built into the models themselves (based on the assumptions that have been used to construct them). Instead of the pseudo-rigor associated with deterministic predictions, we’d have a real rigor predicated on uncertainty, including the uncertainty of the modelers themselves.

Admitting that they (and therefore we) simply don’t know would be a start.

 

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Are mainstream economists responsible for electing Donald Trump?

I think they deserve a significant share of the blame. So, as it turns out, does Dani Rodrick.

My argument is that, when mainstream economists in the United States embraced and celebrated neoliberalism—both the conservative and liberal versions—they participated in creating the conditions for Trump’s victory in the U.S. presidential election. As I see it, mainstream economists adopted neoliberalism as a set of ideas (about self-governing individuals and an economic system that needs to be understood and obeyed) and a political-economic project (on behalf of corporate bosses) and ignored the enormous costs, especially those borne by the majority of workers, their families, and the communities in which they live. And it was precisely the resentments generated by neoliberalism—which were captured, however imperfectly and in a cynical manner, by Trump’s campaign (and downplayed by Hillary Clinton’s, in the campaigns against both Bernie Sanders and Trump)—that many voters took to the polls one week ago.

Rodrick’s condemnation of mainstream economists is more specific: he focuses on the role that mainstream economists served as “cheerleaders” for capitalist globalization.*

It has long been an unspoken rule of public engagement for economists that they should champion trade and not dwell too much on the fine print. This has produced a curious situation. The standard models of trade with which economists work typically yield sharp distributional effects: income losses by certain groups of producers or worker categories are the flip side of the “gains from trade.” And economists have long known that market failures – including poorly functioning labor markets, credit market imperfections, knowledge or environmental externalities, and monopolies – can interfere with reaping those gains.

They have also known that the economic benefits of trade agreements that reach beyond borders to shape domestic regulations – as with the tightening of patent rules or the harmonization of health and safety requirements – are fundamentally ambiguous.

Nonetheless, economists can be counted on to parrot the wonders of comparative advantage and free trade whenever trade agreements come up. They have consistently minimized distributional concerns, even though it is now clear that the distributional impact of, say, the North American Free Trade Agreement or China’s entry into the World Trade Organization were significant for the most directly affected communities in the United States. They have overstated the magnitude of aggregate gains from trade deals, though such gains have been relatively small since at least the 1990s. They have endorsed the propaganda portraying today’s trade deals as “free trade agreements,” even though Adam Smith and David Ricardo would turn over in their graves if they read the Trans-Pacific Partnership.

This reluctance to be honest about trade has cost economists their credibility with the public. Worse still, it has fed their opponents’ narrative. Economists’ failure to provide the full picture on trade, with all of the necessary distinctions and caveats, has made it easier to tar trade, often wrongly, with all sorts of ill effects.

Rodrick is absolutely right: mainstream economists’ own models include at least some of the losses from trade—in terms of outsourced jobs, declining wages, and rising inequality—but, in their textbooks and public interventions, they routinely ignore those uenqual costs and take the position that globalization and free trade need to be celebrated, protected, and expanded. Lest they create an opening for the “barbarians” who, inside and outside the academy, are critical of the conditions and consequences of capitalist globalization.

Those of us who have been critical of free-trade agreements and the whole panoply of policies associated with globalization and neoliberalism (e.g., here and here) understand they’re not the sole or even main cause for the deteriorating condition the U.S. working-class has found itself in recent years and decades. Neoliberalism is not just globalization, as it includes a wide range of economic and social strategies and institutions that have boosted the bargaining power of employers vis-à-vis workers—from the adoption of labor-saving technologies through the growth of the financial sector to the privatization of public services and the social safety net.

But we also can’t ignore the correlation, since the early-1970s, between globalization (measured, in the chart above, by the sum of exports and imports as a percentage of U.S. GDP, which is the green line on the right-hand axis) and inequality (measured, in the same chart, by the percentage of income, including capital gains, going to the top 1 percent, on the left-hand axis). There are lots of economists, both everyday and academic, who understand that a tiny group at the top has captured most of the benefits of trade agreements and other measures that have allowed U.S. corporations to engage in increased international trade, both importing and exporting commodities that have boosted their bottom-line. Meanwhile, many American workers—such as voters in Pennsylvania, Ohio, Michigan, and Wisconsin—have lost jobs, faced stagnating wages, and suffered as their local communities have deteriorated.

However, mainstream economists, in their zeal to push globalization forward, ignored those problems and concerns. They thus paved the way and deserve a large part of the blame for Trump’s victory.

 

*Readers need to keep in mind that, when Rodrick refers to economists, he’s actually referring only to mainstream economists (which is the only group he seems to recognize). Other, so-called heterodox economists have never been so sanguine about the effects of neoliberalism or capitalist globalization.