Posts Tagged ‘economics’

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Peggy M. Hart, The Magic of Coal (1945)

As I have argued many times on this blog, representations of the economy are produced and disseminated in many different spaces (in addition to academic economics departments) and through many different media (in addition to the usual, mostly mainstream economics textbooks).

One example of this proliferation of economic representations is children’s literature. Children are the targets of educators and writers, most of whom (at least these days) are determined to make sure children get the “correct” understanding of key concepts and institutions. And, for the most part, they mirror the kinds of knowledges produced by mainstream economists, albeit with language and illustrations appropriate for children.

Scholastic offers such a list (which features Homer Price by Robert McClosky, through which students learn the “law of demand”). So does Choice Literacy (which includes Tomie dePaola’s Charlie Needs a Cloak, “good for discussing the four factors of production”). And then there’s the Rutgers University Project on Economics and Children, which groups books by concept (such as Markets and Competition, Opportunity Cost, and so on).

Motoko Rich’s view is that “By and large, the economic lessons in children’s books lean left of center” (and that may be true of books that teach the importance of sharing and gift-giving) but, at least for the books on the lists provided by economics educators these days, the tendency is much more mainstream, if not purely neoclassical.

That was not always the case, as Kimberley Reynolds [ht: ja] explains, in the Soviet Union but also during the interwar period in the United Kingdom.

The fact that children’s books can have a strongly formative influence upon the young has often attracted the attention of new leaders and regimes. In the early days of the Soviet Union, Lenin and his followers harnessed the power of children’s books to shape culture. Some of the artistically vibrant work that resulted from co-opting leading writers and artists is currently on exhibit at London’s House of Illustration with the title, A New Childhood: Picture Books from Soviet Russia. In interwar Britain too, a group of socially and aesthetically radical children’s books underpinned the work of making Britain a progressive, egalitarian, and modern society. But unlike their Soviet counterparts, these books have since remained a largely hidden secret, with most scholars of the period overlooking them altogether.

A good example is Peggy M. Hart’s The Magic of Coal, which was published as a Puffin picturebook in 1945. It was the British equivalent of the Soviet “production books.”

Production books detailed the production process of economically essential resources such as coal or steel. Emphasis was placed on the difference between the capitalist and communist machinery used to create these resources; where capitalist machinery was shown to feed greed and overproduction, communist machinery provided a helping hand in creating a prosperous future everyone could enjoy. Thus production books clearly directed the child reader’s attention to a wider political narrative beyond the specificities of the text.

Production books were aesthetically modernist, combining ideas from abstract painting with typography to create a visual language strikingly different from what had gone before. Pictures held a machine-like appearance, using straight lines and elementary forms. By championing newness, it was conveyed to the child reader that they had the potential to be aesthetically innovative. Rather than simply encouraging them to learn to copy what was already seen as beautiful, aesthetic modernism puts more at stake for the child; if whatever they create has the potential to be considered beautiful, there is more incentive for them to attempt to create. Similarly, if a transformed communist society is shown to be a plausible alternative to today’s society, there is a greater incentive for the child to become an activist to help bring this society about.

Apparently, the Magic of Coal contained all the features of a production book:

Reference is made to, ‘our gas works’ and ‘our community, implying collective ownership, and all images are aesthetically modernist. Thus it is an example of the attempts of a popular front of left-wing publishers to bring the production book genre and its associated radicalism to Britain in the interwar period.”

As such, it was quite different from what passes today for children’s economics literature:

Taking the child on a journey, it tells not only of the production of coal but also elevates the miner as an important and  respectable member of society. In doing so, the text and its illustrations point towards a political goal.

The text focusses on the production process rather than around any one character. Each role within the mine is shown through illustrations and accompanying text, implying that there is something for everybody. Every individual has a skill set to offer in the production of coal and is a valuable cog in the machinery of the mine. A sense of a community at work is created and when combined with impressionist illustrations of tiny black figures and miners whose faces are blurred or have their backs to the reader, this sense of community solidifies into the socialist theory of collectivism.

The text informs the reader that the miners can attend the ‘pitbaths’ before or after work, challenging class boundaries as it suggests that before he enters the mine, a working-class man looks like, and therefore is like, any other man going about any other business. The text also tells us of the miner’s life outside of work, mentioning societies, theatre visits and higher education, indicating that the miners are not only important members of coal-fueled, modern society, but also respectable citizens with good standards of living and a thirst for culture.

I don’t know if children’s economics books of this sort—whether about coal mining or Wall Street—are being written and produced today. If they’re not, they need to be. If they are, then they need to be included in the lists that promote the economics education of children.

There is—and there needs to be—a lot more than mainstream economic ideas in representations of the economy, both inside and outside the official discipline of economics.

Can-A-Charter-City-Make-Honduras-Prosperous-800x500_c

Sebastian Mallaby referred to Paul Romer’s scheme of building charter cities as Empire 2.0 (which is much the same connection I made back in 2010).

the largest obstacle Romer faces, by his own admission, still remains: he has to find countries willing to play the role of Britain in Hong Kong. Despite the good arguments that Romer makes for his vision, the responsibilities entailed in Empire 2.0 are not popular. How would a rich government contend with the shantytowns that might spring up around the borders of a charter city? Would it deport the inhabitants, and be accused of human-rights abuses? Or tolerate them and allow its oasis to be overrun with people who don’t respect its city charter? And what would the foreign trustee do if its host tried to nullify the lease? Would it defend its development experiment with an expeditionary army, as Margaret Thatcher defended the Falklands? A top official at one of Europe’s aid agencies told me, “Since we are responsible for our remaining overseas territories, I can tell you there is much grief in running these things. I would be surprised if Romer gets any takers.”

According to an announcement on his own blog, Romer is now headed to the World Bank.

There, Romer will be able to develop his imperial scheme—and, presumably, as I described his work last year, eliminate political “mathiness” and steer the focus of attention to “nonrival ideas” and away from capital and the real problems of growth within capitalist economies.

P&B 13.5 Monopoly Smaller Output & Higher Price

It’s the most obvious criticism of mainstream, especially neoclassical, economics.

All of the major models and policy proposals of neoclassical economics—from the theory of the firm through the gains from trade to the welfare theorems—are based on the assumption of perfect competition.

But, as is clear in the diagram above, if there’s imperfect competition (such as a single seller or monopoly), the price is higher (PM is greater than PC), the quantity supplied is lower (QM is less than QC)—and, in consequence, excess profits are not competed away and the amount of employment is lower. (Of course, the monopolist can increase demand, and therefore output, through advertising, which for mainstream economists makes no sense for perfectly competitive firms since they are presumed to be able to “sell all they want to at the going price.”)

PPF

The existence of imperfect competition by itself undoes many of the major propositions of neoclassical economics—including (as I explained back in April) the idea that there’s no such thing as a free lunch (since, as in the Production Possibilities Frontier depicted above, point A inside the frontier represents an inefficient allocation of resources, and no new resources or technology would be required, just the elimination of monopolies and oligopolies, to move to any point—B, C, or D—on the frontier).

Readers may not believe it but imperfect competition is mostly an after-thought in mainstream economics. It’s there (and extensively modeled) but only after all the heavy lifting is done based on the presumption of perfect competition—and then none of the major theoretical and policy-related propositions is revised based on the existence of imperfect competition. (The usual mainstream argument is either imperfect competition isn’t extensive or, even if prevalent, imperfectly competitive firms act much like perfectly competitive firms, not restricting output or raising prices by very much. Therefore, perfect competition remains a valid approximation to real-world economies.)

market share

Now, however, imperfect competition seems to have returned as an area of concern—in the White House Council of Economic Advisers and in the Federal Reserve Bank of Minneapolis. The irony, of course, is that the market power of a few giant firms in many industries has been growing after decades of neoliberalism and the celebration of free markets.

As James A. Schmitz, Jr. explains for the Minneapolis Fed, new research

shows that monopolies are not well-run businesses, but instead are deeply inefficient. Monopolies do drive up prices, as conventional theory suggests, but because they also reduce productivity, they often ultimately destroy most of an industry’s profits. These productivity losses are a dead-weight loss for the economy, and far from trivial.

The new research also shows that monopolists typically increase prices by using political machinery to limit the output of competing products—usually by blocking low-cost substitutes. By limiting supply of these competing products, the monopolist drives up demand for its own. Thus, in contrast to conventional theory, the monopolist actually produces more of its own product than it would in a competitive market, not less. But because production of the substitutes is restricted, total output falls.

The reduction in productivity exacts a toll on all of society. But the blocking of low-cost substitutes particularly harms the poor, who might not be able to afford the monopolist’s product. Thus, monopolies drive the poor out of many markets.

The last time monopolies came to the fore in the United States was during the first Great Depression, when Thurman Arnold (from 1938 to 1943) ran the Antitrust Division at the Department of Justice, “taking aim at a broad range of targets, from automakers to Hollywood movie producers to the American Medical Association” in order to protect society from monopoly.

Is it any surprise that now, in the midst of the second Great Depression, attention is being directed once again to the idea that gigantic national and multinational corporations with growing market power are responsible for reducing productivity and crushing low-cost substitutes, thus hurting workers and the poor?

One possibility is to get tough again with antitrust legislations and rulings, and try to restore some semblance of competitive markets. The other is to resist the temptation to turn the clock back to some mythical time of small firms and perfect competition and, instead, through nationalization and worker control, transform the existing firms and allow them to operate in the interest of society as a whole.

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René Magritte, “The Infinite Recognition” (1963)

Dan Rodrick, like most mainstream economists, wouldn’t know left-wing economics if it bit him on the proverbial nose (as I explained in early 2015). What he’s really referring to—in his essay, “The Abdication of the Left”—is liberal economics, the left-of-center wing of mainstream economics.

But, if you replace all his references to “the Left” with “liberalism,” you can read Rodrick’s latest column as a forceful indictment of left-of-center mainstream economics over the course of the past few decades.

As an emerging new establishment consensus grudgingly concedes, globalization accentuates class divisions between those who have the skills and resources to take advantage of global markets and those who don’t. Income and class cleavages, in contrast to identity cleavages based on race, ethnicity, or religion, have traditionally strengthened the political left. So why has the left been unable to mount a significant political challenge to globalization?. . .

Economists and technocrats on the left bear a large part of the blame. Instead of contributing to such a program, they abdicated too easily to market fundamentalism and bought in to its central tenets. Worse still, they led the hyper-globalization movement at crucial junctures.

Rodrick is correct. The liberal wing of mainstream economics (in the academy, as advisers to liberal political parties, and in multinational financial and development agencies) did, in fact, embrace market fundamentalism—from domestic financial markets to international trade and capital flows—and the policies they promoted did serve to accentuate existing income and class cleavages. And then, after creating the conditions (in the form of growing inequality and financial fragility) for the crash of 2007-08, they proceeded to manage the imposition of austerity policies, both within and across countries.

So, indeed, liberals are in large part responsible for the resurgence of the Right, in the form of anti-immigrant protests and nativist populism. Those movements, which have been moving from the fringe to center stage in the United States and Europe, are the more-or-less inevitable backlash against free-market fundamentalism and economic austerity.*

That’s not to say those on the Left—the real Left, not Rodrick’s liberal mainstream economists—do not share some of the blame. Their own weak opposition to market fundamentalism and economic austerity, which often meant little more than a return to Keynesian macroeconomics and the defense of existing welfare-state programs, created a vacuum for other policies and strategies. What was needed (both where the Left was in power, from Greece’s Syriza to Brazil’s Workers’ Party, to where it was not, including the United States and the rest of Europe) was an approach that, at one and the same time, highlighted the structural causes of growing income and class cleavages and proposed alternative economic and social institutions.

If, as Rodrick explains, “the right thrives on deepening divisions in society – ‘us’ versus ‘them’.” and liberalism looks to enact “reforms that bridge” those cleavages, the Left aims to overcome those cleavages by creating new, noncapitalist ways of organizing economic and social life. Not just managing the cleavages but actually eliminating them.

That, as I see it, is the challenge for the Left moving forward.

 

*As Brad DeLong admits, the liberal fantasy of free markets and globalization—his own view of the world—”did go horribly wrong”:

Financial globalization was intended to take down barriers to capital inflows erected by rent-seekers in developing countries, and so speed growth in economies that had been starved of capital while also equalizing incomes. Financial deregulation was supposed to break up the cozy investment banking and other oligarchies of Wall Street and diminish their private-sector tax on the American economy. Financial deregulation was supposed to provide the poorer half of America with the access to fairly priced credit that it lacked and with the opportunity to invest in assets that would yield equity-class returns, which it also lacked. And, in a world in which central banks had the powers and the will to successfully stabilize aggregate demand, there seemed little downside to letting people who could not put together a 20% down payment buy a house, to forcing Morgan Stanley and Goldman Sachs to deal with competition from Citigroup and Bank of America, and to allow entrepreneurs in Mexico to raise funds not just from a cozy oligarchy of Mexico City banks but on the global capital market.

And France’s socialist technocrats were right: in highly-open economies the task of managing aggregate demand has to be a global, or at least a North Atlantic-wide, or at least a continent-wide exercise. In a good world, large exchange rate changes should only take place in response to persistent fundamental disequilibria rather than being used as first-line tools for demand management.

It all did go horribly wrong.

-Let_Them_Eat_Crack-_(Banksy_mural_in_Manhattan,_2008)

As if in direct response to one of my recent posts on “ignoring the experts,” the best mainstream economist Noah Smith can come up with is there is no single, unified elite opinion—perhaps on Brexit but not on most economic issues.

The “elite” isn’t a single unified bloc. There are many different kinds of elites. Politicians, bureaucrats, wealthy businesspeople, corporate managers, financiers, academics and media personalities can all be labeled elites. But there are huge fissures and rivalries both within and between these groups. They are almost never in broad agreement on any issue — Brexit was the exception, not the rule.

That’s not saying much. Of course, elites and elite opinions are divided. They have always have been and certainly are now.

The issue is not whether different groups or fractions within the elite hold different opinions, but the limits of those differences and the views that are marginalized or excluded as a result.

Consider the views of mainstream economists (which is really what my original post was about). They hold different views about most economic issues—from labor markets to international trade—but the range of differences is very narrow. As I explained back in January:

while conservative mainstream economists believe that efficiency, growth, and full employment stem from allowing markets to operate freely, liberal mainstream economists argue that markets are often imperfect and therefore the only way to achieve (or at least approximate) those goals is to intervene in and regulate markets. Those are the terms of the mainstream debate in economics, from the origins of modern economic discourse in the late-eighteenth century right on down to the present.

Think about it as the difference between the invisible hand and the visible hand.

Liberal mainstream economists, of course, hotly contest the free-market doctrine of their conservative counterparts. But notice also that they hold in common both the goals and the limits of economic policy with conservatives. Liberals and conservatives share the idea that the goals of an economy are to ensure efficiency, growth, and full employment. And they share the idea that economic policy should be limited to tinkering with capitalism—in the direction of more regulation or, for conservatives, more free markets—in order to achieve those goals.

That’s it, the limits of the mainstream debate.

Mainstream economists use different theories and promote different policies within those narrow limits. What they exclude are theories and policies that fall outside those limits—and thus, in their view, don’t deserve a hearing.

Their expertise ends when it comes to theories that focus on such things as the inherent instability of capitalism or the role of class in determining the value of goods and services and the distribution of income. And they exclude policies that either change the fundamental rules of capitalism or look beyond capitalism, to alternative ways of organizing economic and social life.

What that means, concretely, is mainstream economists tend to minimize the damage—to different groups of people and to society as a whole—of existing economic arrangements. Just as Paul Krugman minimizes the loss of jobs from deindustrialization (“we’re talking about 1.5 percent of the work force”), Smith understates the disruptive effects of globalization (in referring to “some economic setbacks” for the middle-class of rich nations while presuming everyone else has gained).

So, yes, mainstream economists (like the elites whose position they never contest) often find themselves disagreeing among themselves about theories and policies. But it’s precisely because the limits of their disagreements are so narrow, there’s always a surplus of meaning that falls outside of and escapes their purview. That’s when alternative theories and policies flourish—and all mainstream economists can do is invoke their self-professed expertise to attempt to quash the alternatives and relegate them to (or beyond) the margins.

Sometimes, of course, it works and non-elite opinion falls in line. But other times—after the crash of 2007-08, in the lead-up to the Brexit vote, and so on—it doesn’t and the narrow limits of expert opinion are challenged, parodied, or ignored. And other possibilities, always just below the surface, acquire new resonance.

Elites, who simply can’t or don’t want to understand, suggest the masses just eat cake (or, today, crack)—and, like Smith, hide behind the idea that “there are no easy answers to the challenges of the modern global economy.”

wind-blows-dylan-1

Chris Dillow’s latest post reminds me of a point I overlooked in my own post yesterday on the public’s declining trust in the expertise of mainstream economists: the effects of inequality.

The argument I made was that, because mainstream economists relegate issues like power and class to the margins, they literally don’t see (for themselves) or show (to others) the unequal distributions that are either presumed by capitalism or that follow from capitalist ways of organizing economic and social life. Therefore, many members of the public who are affected by and/or concerned with such issues have become more likely to ignore and even challenge the self-professed expertise of mainstream economists.

What Dillow adds to this is the idea that trust itself has declined with growing inequality (which, as it turns out, I wrote about back in 2014).

As a way of expanding my original argument, we may be witnessing a self-reinforcing vicious cycle: the policies promoted by mainstream economists have led to increasing inequality, which mainstream economists tend to overlook or ignore. That growing inequality has, in turn, decreased the level of trust in the wider society, including trust in so-called experts. Together, the falling level of trust and the fact that mainstream economists literally don’t see or show the distributional consequences of the policies they support have propelled the larger public to question the presumed expertise of mainstream economists.

And rightly so. As Bob Dylan once sang, “You don’t need a weather man/To know which way the wind blows.”

banksy-wall-street-rat

Clearly, mainstream economists don’t like it when their advice is ignored. But that’s what seems to have happened with Brexit, Britain’s decision to exit the European Union.

In the lead up to the 23 June referendum, 12 Nobel Laureates and 175 U.K.-based mainstream economists launched their version of Project Fear to warn voters about the economic dangers—recession, inflation, falling investment, lower growth, and higher taxes—from deciding against Remain. But the people ignored the dramatic pleas for economic stability on the part of the “high priests of capitalism” and voted instead to Leave.*

Jean Pisani-Ferry sees the result as one example of a much broader “angry attitude toward the bearers of knowledge and expertise”—but one that is specifically aimed at mainstream economists. Why? The presumed expertise of mainstream economists was compromised because they “failed to warn them about the risk of a financial crisis in 2008,” they’re biased toward “mobility of labor across borders, trade openness, and globalization more generally,” and because they “tend to disregard or minimize” the effects of openness on particular classes or communities.

While Pisani-Ferry gives greater weight to the third explanation, the fact is they’re related. The thread running through all three factors is the issue of distribution. Mainstream economists tend to treat the inequalities that are both the cause and consequence of capitalism as either irrelevant (because everyone gets what they deserve) or as exogenous (created outside and independent of the economy itself). Thus, they ignored the role of inequality both in creating the conditions leading up to the crash of 2007-08 and as a consequence of the way the recovery was crafted and took place; and they tend to model and support economic globalization—in people, trade, finances, and much else—as if everyone benefits, rather than seeing winners and losers. Because mainstream economists relegate issues like power and class to (and, in many cases, beyond) the margins, they literally don’t see for themselves or show to others the unequal distributions that are either presumed by capitalism or that follow from capitalist ways of organizing economic and social life.

Neil Irwin, too, has expressed his concern about the rejection of expert opinion with respect to Brexit (and, he adds, the success of Donald Trump’s campaign). And draws much the same lesson: mainstream economists (and, more generally, the members of the economic elite whose views they tend to celebrate) focus their attention on efficiency and economic growth—with respect to issues ranging from rent control to international trade—and not on the unequal outcomes of those policies. Thus, he asks, “what if those gaps between the economic elite and the general public are created not by differences in expertise but in priorities?”

In the end, the problem identified by Pisani-Ferry and Irwin is not really one of economic expertise. It is, rather, a question of priorities and perspectives. Mainstream economists hold one set of theories, according to which capitalist markets lead to (or, at least can, with the appropriate policies, end up with) efficient, dynamic outcomes from which everyone benefits. But other economists—both other academic economists and everyday economists—use different economic theories, many of which highlight the unequal conditions and consequences of capitalist activities and institutions. In other words, each of these groups has a different expertise, informed by a different way of organizing their knowledge about the economy, including the effects of economic practices and policies.

What we’re seeing, then—with Brexit, but also after the most recent financial crash and the uneven recovery, the success of the campaigns of both Trump and Bernie Sanders, not to mention the battles over austerity and much else across Europe and the rest of the world right now—is a widespread challenge to the self-professed expertise of mainstream economists. It’s also a challenge to the economic and social system glorified by mainstream economists and by the elites that both govern and gain from that system.

Those academic and economic elites are clearly worried their opinions, backed up by their presumed expertise, no longer hold sway in the way they once did. And for good reason.

All they have to do is remember the fate of their predecessors who suggested the downtrodden and everyone else who had been marginalized or otherwise beaten down by the system just eat cake.

 

*As Rafael Behr explains, “People had many motives to vote leave, but the most potent elements were resentment of an elite political class, rage at decades of social alienation in large swaths of the country, and a determination to reverse a tide of mass migration. Those forces overwhelmed expert pleas for economic stability.”