Posts Tagged ‘economics’

mark-tansey-recourse-2011

Mark Tansey, Recourse (2011)

One of the great advantages of economics graduate programs outside the mainstream (like the University of Massachusetts Amherst, where I did my Ph.D.) is we were encouraged to read, listen to, and explore ideas outside the mainstream—especially the liberal mainstream.

The liberal mainstream at the time, not unlike today, consisted of neoclassical microeconomics (with market imperfections) and a version of Keynesian macroeconomics (which was, in the usual IS-LM models, best characterized as hydraulic or bastard Keynesianism). Essentially, what liberal economists offered was a theory of a “mixed economy” that could be made to work—both premised on and promising “just deserts” and stable growth—with an appropriate mix of private property, markets, and government intervention.

For many of us, liberal mainstream economics was a dead end—uninspired and uninspiring both theoretically and politically. Theoretically, it marginalized history (both economic history and the history of economic thought) and ignored the exciting methodological debates taking place in other disciplines (from discussions of paradigms and scientific revolutions through criticisms of essentialism and determinism to fallibilist mathematics and posthumanism). And politically, it ignored many of the features of real capitalism (such as poverty, inequality, and class exploitation) and rejected any and all alternatives to capitalism (in a liberal version of Margaret Thatcher’s “there is no alternative”).

Then as now, what liberal economists offer was, as Gerald Friedman has recently pointed out, a “political economy of despair.”

The reaction to my paper — the casual and precipitous conclusion that it must be wrong because it projects a sharply higher rate of GDP growth — comes from the assumption that the economy is already at full employment and capacity output. It is assumed that were output significantly below full employment, then prices would fall to equilibrate the two. This is the political counsel of despair. It is based on classical economic theory and the underlying acceptance of Say’s Law of Markets (named for the great Classical economist Jean-Baptiste Say), which says that total supply of goods and services and the total demand for goods and services will always be equal. The shoe market creates the right amount of demand for shoes — it works out so neatly that the true measure of the supply of shoes, of potential output, can be taken by measuring actual output. This concept is used as a justification for laissez-faire economics, and the view that the market mechanism finds a harmonious equilibrium. . .

There is, of course, a politics as well as a psychology to this economic theory. If nothing much can be done, if things are as good as they can be, it is irresponsible even to suggest to the general public that we try to do something about our economic ills. The role of economists and other policy elites (Paul Krugman is fond of the term “wonks”) is to explain to the general public why they should be reconciled with stagnant incomes, and to rebuke those, like myself, who say otherwise before we raise false hopes that can only be disappointed.

Fortunately, back in graduate school and continuing after we received our degrees, we were encouraged to look beyond liberal economics—both outside the discipline of economics (in philosophy, history, anthropology, and so on) and within the discipline (to strains or traditions of thought that developed criticisms of and alternatives to liberal mainstream economics).

Marx was, of course, central to our theoretical explorations. But so were other thinkers, such as Axel Leijonhufvud (whose work I’ve discussed before). He—along with others, such as Robert Clower and Hyman Minsky—challenged the orthodox interpretation of Keynes, especially the commitment to equilibrium. Leijonhufvud was particularly interested in what happens within a commodity-producing economy when exchanges take place outside of equilibrium.

The orthodox Keynesianism of the time did have a theoretical explanation for recessions and depressions. Proponents saw the economy as a self-regulating machine in which individual decisions typically lead to a situation of full employment and healthy growth. The primary reason for periods of recession and depression was because wages did not fall quickly enough. If wages could fall rapidly and extensively enough, then the economy would absorb the unemployed. Orthodox Keynesians also took Keynes’ approach to monetary economics to be similar to the classical economists.

Leijonhufvud got something entirely different from reading the General Theory. The more he looked at his footnotes, originally written in puzzlement at the disparity between what he took to be the Keynesian message and the orthodox Keynesianism of his time, the confident he felt. The implications were amazing. Had the whole discipline catastrophically misunderstood Keynes’ deeply revolutionary ideas? Was the dominant economics paradigm deeply flawed and a fatally wrong turn in macroeconomic thinking? And if this was the case, what was Keynes actually proposing?

Leijonhufvud’s “Keynesian Economics and the Economics of Keynes” exploded onto the academic stage the following year; no mean feat for an economics book that did not contain a single equation. The book took no prisoners and aimed squarely at the prevailing metaphor about the self-regulating economy and the economics of the orthodoxy. He forcefully argued that the free movement of wages and prices can sometimes be destabilizing and could move the economy away from full employment.

That helped understand the Great Depression. At that period, wages [were] highly flexible and all that seemed to occur as they fell was further devastating unemployment. Being true to Keynes’ own insights, he argued, would require an overhaul of macroeconomic theory to place the problems of coordination and information front and center. Rather than simply assuming that price and wage adjustments would cause the economy to restore an appropriate level of output and employment, he suggested a careful analysis of the actual adjustment process in different economies and how the economy might evolve given these processes. As such, he was proposing a biological or cybernetic approach to economics that saw the economy more as an organism groping forward through time, without a clear destination, rather than a machine that only occasionally needed greasing.

That “path not taken” might also have helped us understand the Second Great Depression and the uneven—and spectacularly unequalizing—recovery that liberal mainstream economists have supervised and celebrated in recent years.

Meanwhile, the rest of us continue to look elsewhere, beyond the liberal political economy of despair, for economic and political ideas that create the possibility of a better future.

 

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In my experience, most mainstream economists have never heard of much less read a word written by Thorstein Veblen, the author of “the most considerable and creative body of social thought that America has produced.”

But my students (e.g., in Topics in Political Economy) and regular readers of this blog certainly know about Veblen.

Why is Veblen relevant today? Certainly because of his analysis and critique of conspicuous consumption, which is precisely one of the effects of the obscene levels of inequality we’re witnessing.

Veblen is also relevant because, as Adam Davidson explains, Bernie Sanders’s economic ideas are, like Veblen’s, both ruthlessly critical of the mainstream and profoundly optimistic:

Sanders believes that raising the minimum wage, spending a trillion dollars on infrastructure and offering free college will fundamentally shift the structure of our economy toward the poor and middle class. It will inspire such enthusiasm and determination that more people will work harder and invest more, and the country will easily generate the tax income to pay for it. Hence, Sanders’s plans won’t cost money; they’llraise money. Like Veblen, Sanders spends much of his time denouncing the excesses of others, but at heart he is one of the world’s greatest optimists. Sanders obviously understands that his vision of the economy is at odds with the existing way of seeing things. His website and his stump speeches ask his followers whether they’re ready to start a “revolution.”. . .

Of course, for many people who support Sanders, the fact that his ideas run counter to decades of established economics is exactly the point. Some economists, like Dean Baker and Robert Reich, told me they like Sanders not because of his take on any technical debate but because he has forced the profession — and everybody else — to take his issues seriously. No matter what happens in this election, Sanders’s idealism has sent a clear message to traditional economists on the left: They are taking too long to develop answers to the problems of inequality and the corrosive effects of concentrated wealth. It’s a message that institutionalists have been screaming for more than a century. Now, it seems, they are being heard.

Today, Veblen’s most famous book might be reissued (with a foreword by Sanders, certainly one of Vermont’s most controversial figures) and retitled “Theory of the 1 Percent.”

market concentration

Mainstream economists (such as Larry Summers and Paul Krugman) are clutching at straws to try to explain capitalism’s poor performance, especially the specter of low investment and slow growth—otherwise known as “secular stagnation.” The latest straw is monopoly power.

Even the Council of Economic Advisers (pdf) is focusing attention on the monopoly straw—although, like others within mainstream economics, they’re not at all clear why it’s happening.

there is evidence of 1) increasing concentration across a number of industries, 2) increasing rents, in the form of higher returns on invested capital, across a number of firms, and 3) decreasing business and labor dynamism. However, the links among these factors are not clear. On the one hand, it could be that a decrease in firm entry is leading to higher levels of concentration, which leads to higher rents. On the other hand, it could be that higher levels of concentration are providing advantages to incumbents which are then used to raise entry barriers, leading to lower entry. Or it might be that some other factor is driving these trends. For example, innovation by a handful of firms in winner-take-all markets could give them a dominant market position in a very profitable market that could be difficult to challenge, discouraging entry. Even though it is not clear whether or how these three factors are linked, these trends are nevertheless troubling because they suggest that competition may be decreasing and could require attention by policymakers and regulators.

While some on the liberal wing of mainstream economics have recently discovered increased concentration within the U.S. economy, they fail to credit the longstanding tradition outside of mainstream economics (e.g., within the Marxian critique of political economy) of analyzing the concentration and centralization of capital and the rise of “monopoly capital.”

Liberal mainstream economists simply have no theory of the contradictory dynamics of capitalism (one that can explain, for example, its recurring boom-and-bust cycles), much less a theory of the firm (other than hanging on to the fantasy of the social benefits of competition). That’s why they don’t have a theory of the causes and consequences of the rise of monopoly capital—nor, for that matter, do they indicate any knowledge of the criticisms of and alternatives to the theory of monopoly capital.

I’m thinking in particular of the work of Bruce Norton who, in a variety of articles, has identified some of the key problems in the theory of monopoly capitalism, especially the presumption that “capitalists always strive to increase their accumulation to the maximum extent possible.”* Norton draws particular attention to the wide variety of distributions of the surplus-value corporate boards of directors appropriate from their workers—not just in the form of dividends, but also “profit taxes, salaries of corporate supervisory managers, lawyers, financial and personnel officers, etc., [which are] equally central to the basic workings of the US economy and particularly aggregate demand.”

Each supports processes shaping in particular ways the social formation, the accumulation process, and the continued appropriation of surplus value, and each is a class process, a distribution of surplus labour. We need accumulation theory which takes pains (1) to identify all these various flows of surplus in a particular social formation and (2) to theorise their variegated inter relationships with other aspects of social life (including the continued extraction of surplus value).

That’s precisely what is missing from mainstream economics, including its liberal wing: a theory of the contradictory class dynamics of capitalist firms and of capitalism as a whole.

 

*See, e.g., his “Epochs and Essences: A Review of Marxist Long-Wave and Stagnation Theories,” published in 1988 in the Cambridge Journal of Economics, and “The Theory of Monopoly Capitalism and Classical Economics,” published in 1995 in History of Political Economy.

The problems surrounding the central institution of capitalism—the corporation—are so widespread and enormous they’ve even provoked concern in sympathetic quarters, such as the Harvard Business School.

This past November, Harvard hosted a conference during which participants attempted to grapple with the tensions between Milton Friedman’s theory of the firm—according to which firms can and should only benefit society by focusing on maximizing shareholder value—and the growing political influence of corporations after Citizens United—when it has become increasingly easy for firms to tweak the rules of the game in their favor.

Now, for the rest of us—citizens, nonmainstream economists, and academics in disciplines outside of business and economics—both the history of corporations and the prevailing neoclassical theory of the firm present so many problems it’s hard to believe Friedman’s ideas are still taken seriously. Long before Citizens United, corporations have exercised a great deal of influence both inside (over their workers) and outside (in politics and in the wider society). That’s why the corporation has been a contested institution—legally, economically, politically—since its inception. Similarly, the neoclassical theory of the firm (initially in its “black box” form, then when the owner-manager agency problem was raised) has swept most of the serious problems under the theoretical rug.*

But for the scholars gathered at Harvard, the key issue (as presented in the brief paper coauthored by Harvard Business School faculty members Paul Healy, Rebecca Henderson, David Moss, and Karthik Ramanna [pdf]) was a relatively narrow one:

if firms have the power to generate profits not only by producing socially beneficial goods and services, but also by tilting public policy and the “rules of the game” to their advantage (whether through aggressive lobbying, effective use of the revolving door between political and corporate appointments, or campaign contributions), then the core assumption that firms can maximize social value by maximizing shareholder value may not hold, and framing managerial responsibility as simply a matter of maximizing shareholder value may well be inappropriate.

Having read the paper, it is extraordinary that there’s no real history—no story about the invention of the corporation as a legal “person,” no Louis Brandeis or the Progressive movement, no Knights of Labor or United Mineworkers, no mention of the role of International Telephone & Telegraph in overthrowing Salvador Allende in Chile, no Massey Energy killing 29 miners in the Upper Big Branch mine. It’s as if the problem of corporate power only emerged after the 2010 Citizens United decision.

Still, from the perspective of neoclassical economics, even that problem looms large. According to the reigning paradigm (which guides much policy and is taught to hundreds of thousands of students every year), under conditions of perfect competition, free markets (including firms that maximize shareholder value) lead to Pareto-efficient outcomes. But if corporations (whether single firms or industries) can shape the institutions of the market (or the rules and ethical customs that help to maintain them), then all bets are off: “Maximizing shareholder value by deliberately distorting critical market institutions or regulations for private advantage seems unlikely to lead to the maximization of social value.”

That’s why the participants in the Harvard conference were caught between the real implications of Citizens United (that corporations can increasingly bend the social rules to their private advantage) and their continued adherence to the neoclassical theory of the firm (according to which maximizing shareholder value also maximizes social value).

I suppose it’s no surprise, then, which won out at the Harvard conference:

“I went into the conference with the understanding that one could question the premise of the Neoclassical paradigm in economics through logical arguments—e.g., the inconsistencies between Friedman’s assumptions and Stigler’s theory. I left with a sense that logical arguments on their own are unlikely to carry the day, because the Neoclassical paradigm is so powerfully ingrained into the discipline, into the fabric of modern economics,” says Ramanna.

 

*Including the problem neoclassical economists share with many of their heterodox counterparts, namely, what exactly does it mean that corporations maximize profits or shareholder value? First, how do we define profits or shareholder value, i.e., what is the appropriate metric, over what time horizon should it be defined, and how should it be measured? Second, corporations do many different things, such as exploit workers, give lavish pay to top managers, attempt to eliminate rivals, chart particular short-run and long-term growth path, buy favors and influence legislation, hoard cash, accumulate capital, and so on—why reduce all of what they do to a single dimension?

beautiful-uncertainty-silk-graffiti-by-aubrie-costello-canvas

Uncertainty, as we wrote years ago, is a real problem. Not a problem in and of itself. But it’s certainly a problem for modernist thinking.

That’s why, time and gain, neoclassical economists have attempted to reduce uncertainty to probabilistic certainty. It also seems to be why a team of scientists (neurobiologists and others) [ht: ja] have devised an experiment to show that we’re hardwired to experience stress under uncertainty.

So what’s the big deal? Everyone knows that uncertainty is stressful. But what’s not so obvious is that uncertainty is more stressful than predictable negative consequences. Is it really more stressful wondering whether you’ll make it to your meeting on time than knowing you’ll be late? Is it more stressful wondering if you’re about to get sacked than being relatively sure of it? De Berker’s results provide a resounding “yes”.

There are two problems with this approach. First, it ignores the possibility that uncertainty is a discursive phenomenon—that the stories we tell about uncertainty affect how we experience it. Second, uncertainty in and of itself need not be stressful. There are plenty of instances in which the outcome is simply unknown—from sitting down to write a paper to starting a new investment project, from starting a new relationship to participating in a political movement—when our uncertainty about what might happen is precisely what propels us forward.

Sure, turning over rocks that might have snakes hidden under them would probably induce stress. But that’s not because of the uncertainty; it’s because they’re snakes! (And, even then, I have herpetologist friends who would be delighted to find those snakes.)

Let’s just say I’m not convinced of the project to domesticate and control uncertainty, either by reducing it to a probabilistic calculus or to locate it in the brain (as part of some evolutionary process).

There’s lots of uncertainty out there but what it is and how we respond to it depend on the stories we tell (as I have written about many times on this blog). Uncertainty, in other words, is always and everywhere a discursive phenomenon.

Sanborn-CSU

James Sanborn, “Adam Smith’s Spinning Top”

As is well known, mainstream economists are generally opposed to significant increases in the minimum wage and in favor of free international trade. That’s what you’ll find in all the major economics textbooks, the articles and books written by mainstream economics, and in the policy advice they give.

You’ll find a good sampling of their views in the IGM Economic Experts Panel—in questions about trade (from 2012) and the minimum wage (from 2015).

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minwage

But there’s a fundamental inconsistency in the case against raising the minimum wage and for free trade. Mainstream economists argue against a minimum-wage increase because it will, so they say, increase unemployment (at least at the bottom of the labor market) . But when it comes to international trade, which has generally hurt employment (at least among certain groups of workers), the argument turns to other things, like efficiency and lower prices for consumer goods.

Their conclusion is that, while the aim of the minimum wage is to help low-wage workers, it actually hurts them. But when it comes to free trade, some workers may be hurt but they (and everyone else) will eventually benefit from lower prices. And, if they don’t all benefit from free international trade, at least it’s possible for the gainers to pay off the losers—but no such argument is made about the minimum wage.

What’s going on? Well, technically, mainstream economists are looking at partial equilibrium (when it comes to the minimum wage) and general equilibrium (concerning free trade) effects. They’re examining a single market in isolation (the labor market) and all markets together (in the case of international trade).

Even more important, they’re demonstrating their theoretical commitment to free markets—the idea that people are hurt by interventions into free markets (like increasing the minimum wage) and benefit from more free markets (especially at the international level). That argument is so ingrained in mainstream markets that it’s impervious to criticism, at least from within mainstream economics.

The idea that the economy might be organized not on the basis of free markets, but on some other foundation—call it community, sharing, subsidiarity, sustainability, or something else—literally makes no sense within mainstream economics.

That’s why mainstream economists continue to spin their free-market top, even though it stops and topples over on a regular basis.

heights

It doesn’t take a genius to understand that international trade under capitalism creates winners and losers. A few winners and lots of losers.

Generations of heterodox economists have demonstrated exactly that—that, both theoretically and empirically, capitalist trade can and often does have diverging class effects. Mainstream economists, however, persist in arguing exactly the opposite: everyone gains from trade.

They were even warned by one of their own, more than a decade ago. Back in 2004, the late Paul Samuelson, widely recognized as the dean of modern mainstream economists, published an article in the Journal of Economic Perspectives in which he challenged the presumed universal benefits of free trade. It is quite possible, Samuelson argued, that if enough higher-paying jobs were lost by American workers to outsourcing, then the gain from the cheaper prices may not compensate for the loss in U.S. purchasing power. In other words, the low wages at the big-box stores do not necessarily make up for their bargain prices.

But that hasn’t stopped mainstream economists from repeating their story about the benefits to all of expanding trade. In fact, in the midst of the current campaign, in which Donald Trump and Bernie Sanders have recognized and responded to (in very different ways, of course) the insecurities and anxieties of American workers, mainstream economists and their elite allies appear to be even more determined to double-down on their free-trade fantasy.

The latest, in the Wall Street Journal, is from Morton Kondracke and Matthew J. Slaughter.*

Where is the leader with the courage to tell the truth? To say that trade made this nation great, and that trade barriers will destroy far more jobs than they can ever “save.” To explain how trade translates into prosperity and new jobs, and how the disruptions inevitable in a trading economy can be managed for the benefit of those who need help.

There’s nothing new here. Kondracke and Slaughter repeat the usual arguments: the advantage of lower prices for imported goods, the gains from creative destruction, and schemes for those who gain from trade to help the losers.

The fact is, however, workers without jobs and those stuck in low-wage jobs can only afford to buy low-price imported goods; the gains from creative destruction and the shift in the U.S. economy toward services, especially in the financial sector, have been captured mostly by a tiny minority at the top; and, while in principle it’s possible for winners to subsidize losers, it simply doesn’t happen. Capitalists continue to negotiate trade agreements and to offshore jobs while forcing U.S. workers to accept lower wages and fewer benefits—and they continue to capture and keep for themselves most of the gains.

That’s why the ranks of the discontents from capitalist trade have continued to grow.**

*Disclaimer: I supervised Slaughter’s senior thesis on Amartya Sen’s writings on ethics and economics.

**And, to be clear, not just in the United States. Worker unrest is apparently growing in China.

Update

The free traders are certainly under fire but they’re not in retreat. On the contrary. Just as I finished this post, I chanced upon Miriam Shapiro’s flimsy attempt to challenge the “demagogy” of denouncing existing trade details.