Posts Tagged ‘economics’

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The United States suffers from an obscene cult of CEOs. Whether we’re talking about “Neutron Jack” Welch (who was celebrated for raising GE’s market value while laying off tens of thousands of workers) or Bill Gates (who made Microsoft competitive by engaging in anticompetitive practices) or Lloyd Blankfein (head of the “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”)—they’re routinely feted as being ruthless, “transgressive” leaders who make change happen in the corporate world.

I suppose it comes as no surprise, then, that two business professors—Hamid Bouchikhi and John R. Kimberly [ht: kc]—would extend that celebration to CEOs in the academy, by studying the decision by Dean of Arts and Letters Mark Roche to divide the Department of Economics at the University of Notre Dame.*

Transgressive leaders are those who are expected by members to abide by sacred organizational norms but who deliberately violate them for the sake of what they believe to be the greater good of the organization. . .The model of transgressive leadership we propose emerged in the wake of field work at the University of Notre Dame, where a new Dean of the College of Arts and Letters forced a paradigmatic, organizational, and managerial reorientation of economics after a long period of repeated and failed attempts by others to redirect the department.

What’s bizarre about this study is that the authors make clear that Roche did, in fact, violate many of the “sacred organizational norms” of the academy—and then they go on to celebrate him as a transgressive leader who managed to create a new, exclusively neoclassical department of economics.

What did Roche do to get to the point of forcing a split within the department? According to the authors, he “committed a series of lower intensity transgressive acts,” including expressing his own view of the paradigmatic orientation of the department, producing and publicly sharing numbers about members’ research productivity, and violating “the sacred norm of academic self-governance and democratic decision making in a research university” by appointing an advisory board, vetoing hiring proposals, and recruiting a new outside chair against the formal opposition of the existing departmental faculty. Those, of course, were all in the way—once the department itself didn’t cave to his demands—of preparing for, in 2003, the splitting of the department into two separate and unequal departments.

The department voted (15-6) against the split. So did the College Council (by a tally of 25 to 14). And the decision was challenged by several prominent mainstream economists, including Robert Solow (in a letter to the president of the university):

You should know that I am a mainstream economist, in fact a mainstream mainstream economist. But I am not an uptight mainstream economist. Economics, like any discipline, ought to welcome unorthodox ideas, and deal with them intellectually as best it can. It does pretty well, in fact. To conduct a purge, as you are doing, sounds like a confession of incapacity. I grant that you are not shooting the Trotskyites in the back of the head, but merely sending them to Siberia, That is not much of an improvement.

And Deirdre McCloskey (in an article in the Eastern Economics Journal):

What’s the problem nowadays at Notre Dame? … The Dean of the College of Arts and Letters, one Mark Roche, together with his agent in Economics, Richard Jensen, and with the backing of the Provost, Nathan Hatch, and the apparent entrepreneurship of the Dean of the Graduate School, Jeffrey Kantor, has decided that Notre Dame’s Econ Dept is broke . . . and should become mainstream…The Department has resisted. It’s being punished with appointments imposed on it; its promotions have been turned back. It may be abolished entirely, its distinctive graduate program scrapped, and a new one started that will be drearily Samuelsonian.

But the dean, with the protection of the university administration, ultimately got what he wanted. And, according to the authors, Roche’s transgressions ultimately served the good of his college because he sought to appease the faculty (by opening new communications channels and rewarding faculty members whose work met his criteria), thus leading to a celebratory self-evaluation (in his own private notes):

When I stepped down there was a truly joyful reception, as much like a wedding reception as a retirement party. It may be self-deception, but my sense was that there was more gratitude for what had been accomplished than for my leaving office.

Ultimately, Bouchikhi and Kimberly celebrate the cult of CEOs—who “have a clear vision of what needs to change and accept the collateral human cost, for others and for themselves, if they perceive causing hardship to others as a requirement.” It is a model that is well established in the corporate world and is increasingly becoming the norm in the new corporate university.

 

*Disclaimer: as regular readers of this blog know, I was a member of the Department of Economics when, in 2003, Roche, with the support of the university administration, decided to divide the department into two (one of which, the Department of Economics and Policy Studies, of which I was also a member, was dissolved by Roche’s successor, in 2010). I didn’t know about this research when it was being conducted but I am cited numerous times in the paper.

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I know what liberal ideology in economics is all about. I’ve encountered it at every turn, even before I began my formal studies in economics. The same is true of liberal ideology in politics, which has shown its ugly face once again in the current electoral campaign.

In both cases, liberal ideology is based on the idea that the existing system, while perhaps imperfect, is the only game in town. It is a conception both of what is and of how change can and should take place—gradually and without major disruption. According to liberals, the biggest threat is populism, when the masses of people challenge the existing common sense and seek radical change. It therefore works with conservative ideology, as two bookends of mainstream discourse, to limit the theoretical and policy debate to a narrow set of options.

Here’s how liberal ideology works in economics: At the microeconomic level, capitalism (or, as liberals generally refer to it, the market system) has the potential of achieving an efficient allocation of resources. As for the macroeconomy, capitalism is capable of providing stable growth and full employment. Capitalism, therefore, promises the best possible outcomes both for individuals and for the economy as a whole.

Now, 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.

Liberals, in particular, believe that the appropriate set of government institutions and regulations can move capitalism toward microeconomic efficiency (within individual markets, national economies, and across the global economy) and macroeconomic stability and full employment (especially, during a downturn, with expansionary fiscal and monetary policies). Anything else, from the perspective of liberal ideology, represents an unscientific view of the economy and an unwarranted attempt to dismantle existing economic institutions.

What liberal mainstream economists don’t see is that capitalism, despite its premises and promises, fails to deliver on them. For example, capitalism holds up “just deserts” as an ideal—everybody gets what they deserve—but it actually means that most people are forced to surrender the surplus they create to their employers, who are allowed to either keep it (and do with it what they want) or distribute it to still others (the tiny group at the top that manages the way those enterprises operate). Capitalism also pledges stable growth and full employment but then, precisely because of that private control over the surplus, regularly delivers boom-and-bust cycles and throws millions out of work.

Liberals also don’t see (because they don’t want to or, given their theory, can’t see) that even the policies they endorse to make capitalism work better are frustrated at every turn. Why? Because, even when regulations are imposed (such as they were during the New Deal programs of the 1930s), they leave in place both the interest and means on the part of employers and their allies to first evade and then, eventually, overturn those regulations.

Not only does liberal economic ideology offer a limited view of how capitalism works; it is also serves to keep out of the debate both other theories of capitalism and other ideas of how the economy might be organized. It’s premised on the notion that here are the acceptable terms of discussion—capitalism is characterized by markets that work more or less well, at the microeconomic and macroeconomic levels—and that other conceptions of capitalism—which introduce things like class exploitation into the discussion—are simply wrong or irrelevant. And it limits the discussion to regulating markets and rules out of court the possibility of imagining and creating other economic institutions—ways of organizing the economy that seek, for example, to actually eliminate class exploitation.

Part of the problem is that, from the perspective of liberal ideology, fundamental changes to the way the economy is organized aren’t necessary. That’s the liberal fantasy that markets can be made to work correctly. The other part of the problem is the liberal stoking of fears that changing current institutions—dismantling some and creating new ones—leads to chaos.

The latter is the basis of the ever-present charge of populism. Creating economic institutions that give “too much” to the mass of working people—whether high minimum wages or guaranteed lifetime incomes or taking areas of the economy out of international trade or giving workers some say in how the enterprises in which they labor operate—are deemed to be too costly or simply unfeasible.

And then, when those arguments fail to work, if radical ideas appear to capture the popular imagination, liberal economic ideology casts the final die: fundamentally changing how the economy works would be so disruptive of existing arrangements that it would invite a negative reaction by those currently in charge. It would create, so the argument goes, chaos. Therefore, it is necessary to protect existing regulations and perhaps introduce a few new regulations to markets and leave things at that.

That’s how liberal ideology works in economics. And, as it turns out, that’s exactly how liberal ideology is being deployed in our current political debate—to normalize one, very limited set of options and to marginalize any discontent or desire that threatens to go beyond them.

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Brad DeLong is quite complimentary in his discussion of the heterodox papers presented in the joint Union for Radical Political Economics/American Economic Association session, “Causes of the Great Recession and the Prospects for Recovery,” at the most recent economics meetings in San Francisco.

He then concludes:

What is disappointing to me is the extent to which both the mainstream and URPE are in the same box. They see the same world. They develop very similar analytical perspectives. They evaluate and phrase them differently, true. But there is no magic key in URPE to the lock of the riddle of history that the mainstream has overlooked. And—if you include Hobsonians within the URPE ekumene—there is no magic key in the mainstream that URPE has overlooked.

There’s certainly something wrong with heterodox economics these days if a leading mainstream economist such as DeLong, whose views on the current economic crises are by his own admission closely aligned with those of Larry Summers, finds that both the mainstream and URPE views “are in the same box.”

It’s a case, it seems to me, of damning with fervent praise.

Addendum

Here, for the record, is the lineup of the session in which DeLong participated:

Causes of the Great Recession and the Prospects for Recovery
Presiding: FRED MOSELEY (Mount Holyoke College)

Stagnation and Institutional Structures

DAVID M. KOTZ (University of Massachusetts-Amherst)
DEEPANKAR BASU (University of Massachusetts-Amherst)

Abstract: The recovery from the financial crisis and Great Recession of 2008-09 has been sluggish in the United States, and more so in a number of other developed economies. This has given rise to a literature about possible secular stagnation (Eichengreen 2015; Gordon 2014a, 2014b; Krugman 2014; Summers 2013, 2014). This paper argues that the cause of the sluggish recovery in the U.S. is the transformation of the prevailing “free-market,” or “neoliberal,” institutional structure from a structure that had promoted capital accumulation for some 25 years into an obstacle to further normal expansion following the crisis of 2008-09. The paper cites historical evidence of previous periods in which stagnation gave way to normal long-run expansion only after a new institutional structure had emerged. Drawing on the “social structure of accumulation” theory of accumulation and crisis, the paper argues that the observed pattern of crisis, stagnation, institutional restructuring, and long-lasting normal growth is not an accident but is rooted in the central role in the promotion of normal capital accumulation that is played by a coherent, mutually reinforcing set of economic and political institutions which, however, cannot play that role indefinitely.

Recessions, Depressions, and the Rate of Profit

ROBERT MCKEE (Independent Scholar)

Abstract: Recessions are common; depressions are rare. This paper argues that there is a distinction between economic recessions and depressions and this distinction helps to explain why economic recovery can be weaker and take longer. The paper will argue that the ultimate cause of recessions and depressions is a decline in profitability in the business sector of an economy. The Keynesians (supporters of fiscal expansion) and Austerians (supporters of fiscal contraction) deny the role of profitability in recessions and depressions. So their prescriptions for recovery do not work. The paper will offer empirical evidence from the US economy to support this thesis. But not every depression is the same: each has its own characteristics. The distinctive feature of the current depression is the role of excessive credit or debt. Evidence will be presented to argue that the Federal Reserve quantitative easing programme had little positive effect on US real GDP or investment growth and merely fuelled a new stock and bond market boom.

Understanding the Great Recession: Keynesian and Post-Keynesian Insights

MARIO SECCARECCIA (University of Ottawa)
MARC LAVOIE (University of Ottawa)

Abstract: Basing themselves on the actual experience of the 1930s, a fundamental insight offered by Keynes, Kalecki and subsequent advocates of what became Post-Keynesian economics is that, when responding to a major crisis, the economic system is not self-adjusting. In a modern monetary capitalist economy, private sector stabilizing forces do exist; but, at best, they can be considered very weak, while the destabilizing elements tend to dominate. This underlying asymmetry would suggest that, in the absence of public sector policies to counteract such instabilities, the inexorable outcome of a deep crisis is long-term stagnation. In contrast to other heterodox economists, especially from the Marxian tradition, Post-Keynesians believe that it is possible even within a capitalist economy to counteract effectively these destabilizing tendencies through appropriate macroeconomic policy actions of the state, as it happened to some extent during the post-World War II “Golden Age”. The object of the paper will be to explore both theoretically and empirically the properties of these destabilizing factors so as to shed some light on the nature of the present crisis. A significant insight offered by Keynes in the General Theory and explored by some Post-Keynesians historically has to do with the importance of the fundamental interaction between the rentier and non-rentier sectors of the modern capitalist economy, which can both trigger the crisis and abort the recovery. In particular, once a financial crisis occurs, which usually results from the destabilizing actions of the rentier sector, macroeconomic policy often works in such a way as to maintain the economy in a state of high long-term unemployment. Such a scenario of long-term stagnation, characteristic of the 1930s, is being played out again today and we shall explore possible long-term measures to pull economies out of what has clearly become a macroeconomic austerity trap.

Discussants:

ROBERT J. GORDON (Northwestern University)
BRAD DELONG (University of California-Berkeley)
DAVID COLANDER (Middlebury College)

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John Lennon (on the B side of “Imagine”) thought that life was hard, “really hard.” I can understand that.

But is modeling inequality really all that hard?

Paul Krugman seems to think so, at least when it comes to the size or personal distribution of income. That’s his excuse for why mainstream economists were late to the inequality party: they just didn’t know how to model it.

And, according to Krugman, not even Marx can be of much help.

Well, let’s see. It’s true, Marx focused on the factor distribution of income—wages, profits, and rent, to laborers, capitalists, and landowners—because his critique was directed at classical political economy. And the classical political economists—especially Smith and Ricardo—did, in fact, focus their attention on factor shares.

That was Marx’s goal in the chapter on the Trinity Formula: to show that what the classicals thought were separate sources of income to the three factors of production all stemmed from value created by labor. Thus, for example, laborers received in the form of wages part of the value they created (“that portion of his labour appears which we call necessary labour”); the rest, the surplus-value, was divided among capitalists (“as dividends proportionate to the share of the social capital each holds”) and landed property (which “is confined to transferring a portion of the produced surplus-value from the pockets of capital to its own”).

It is really just a short step to show that, in recent decades (from the mid-1970s onward), both that more surplus-value has been pumped out of the direct producers and that investment bankers, CEOs, and other members of the 1 percent have been able to capture a large share of that mass of surplus-value. That’s how we can connect changing factor (wage and profit) shares to the increasingly unequal individual distribution of income (including the rising percentage of income going to the top 1, .01, and .001 percents).

See, that wasn’t so hard. . .

Inequality

Mainstream economists have gotten much better estimating the obscene levels of inequality that exist today. But imagining equality? They still find that almost impossible.

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Emmanuel Saez, Gabriel Zucman, and Thomas Piketty have been at the forefront of estimating the extraordinary growth of inequality that has taken place since the late-1970s and early-1980s in the United States—when incomes for the top 10 percent grew about three times as fast as those of the bottom 90 percent, thus reversing the trend of more than three decades of the postwar period when they grew at roughly the same rate.

But then, when the BBC asked mainstream economists about the effect inequality has on growth and prosperity, well, they just can’t get themselves to imagine an equal or even a substantially less unequal distribution of income.

Deirdre McCloskey, of course, is very relaxed about inequality “as long as it’s not force or fraud that caused it.” Jared Bernstein, for his part, just wants a better balance between productivity and incomes for middle-class families. And then there’s Jonathan Ostry, who is worried about opportunity and not inequality, and Branko Milanovic, who think we need inequality to provide incentives.

And there, in one package, we have all the ways mainstream economists demonstrate their long-held justification of inequality and their profound inability to imagine an equal distribution of income. Basically, for them, inequality is not a problem and equality is not the goal—because capitalism alone is capable of producing growth (McCloskey); even the levels of inequality we saw in the late-1970s (when the top 1 percent captured about 10 percent of all income) are too high a goal (Bernstein); inequality is not a problem as long as there are “adequate opportunities for the less well-off in society” (Ostry); and, finally, because inequality has always existed (Milanovic).

Milanovic, at least, imagines there might be problems down the road:

“If the gaps keep on increasing as they’ve increased in the last 20 years, you would end up with two types of societies within a single country. If there is no sufficient middle class and if the poor really are very far from the rich, then you really cannot speak of a single society.

“We could end up with a kind of a global plutocracy, this global one per cent or even half a per cent that are very similar among themselves, but really belong to different nations.”

But, basically, all of them, along with most other mainstream economists, take the world as it is—based on capitalist commodity production—as normal, such that inequality is either benign (it’s what we get in exchange for more stuff) or necessary (as the condition for getting people to work).

And they simply can’t imagine anything like what the rest of us envision: a world in which we have eliminated the obscene levels of inequality that current economic arrangements are creating.

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Students often ask me if the discipline of economics has changed since the spectacular crash of 2007-08.

“Not much,” I tell them. “The economists and economic theories that prevailed before the crash are still pretty much the ones that are on top today.”

The good students, of course, get the irony: the mainstream economics they’ve been taught celebrates free markets and “creative destruction” but the discipline itself seems to be anything but.

And that’s exactly what Frederico Fubini found when he compared the rankings of top economists in 2006 and 2015: barely anything had changed.

Despite the profound – and largely unpredicted – financial and economic turmoil of the intervening decade, the intellectual influence of those whose theories suffered the most evidently remains undented.

After a succession of bursting multi-trillion-dollar credit bubbles, you might wonder what to make of Robert Lucas’s view that rational expectations enable perfectly calculating “agents” to maximize economic utility. You might also want to rethink Eugene Fama’s efficient markets hypothesis, according to which prices of financial assets always reflect all available information about economic fundamentals.

You must not be an economist. In fact, Lucas and Fama both moved up in the RePEc rankings during the period I examined, from 30 to nine and from 23 to 17, respectively. And the persistence at the top is striking across the board. Among the top ten economists in September 2015, six were already there in December 2006, and another two were ranked 11 and 13.

Mobility in the RePEc rankings remains subdued even after widening the sample. For example, of the top 100 economists in September 2015, only 14 were absent from the much wider top 5% in 2006, and only two others had advanced more than 200 spots over the previous decade. Among those recently ranked from 101 to 200, just 24 were not in the top 5% in 2006, and only ten others had moved up by more than 200 places. The rate of renewal among the 200 most influential economists was as low as 25% – and just 16% among the top 100 – during a decade in which the explanatory power of prevailing economic theory had been found severely wanting.

So, as mainstream economists gather in San Francisco for their annual meeting, they’ll be listening to pretty much the same figures and presenting the same ideas they did back in 2006.

Addendum

Here is the list of the top 20 economists as of November 2015:

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I don’t attend the American Economic Association annual meetings. And I’m not in San Francisco this year. However, according to Nelson D. Schwartz, mainstream economists have finally discovered the obvious: income inequality is a real problem in the United States.

The economic association’s meeting is something of a barometer of what concerns economists most, drawing more than 13,000 attendees from the ranks of academia, as well as research groups and the private sector. And in panels, research presentations and speeches, what was once mainly a preoccupation of ivory tower Marxists and other players on the margins of the profession is taking center stage. . .

At the same time, there’s a growing consensus among economists of all ideological stripes that inequality is growing — in the United States and abroad — even if the usual political fault lines appear when the discussion turns to the consequences of the trend and whether new public policies are needed to address it.

“It’s pretty much indisputable that the percentage of income being earned by the top 1 percent, or the top quarter of 1 percent, is going up,” said Richard H. Thaler, the association’s president.

“It was true five years ago, but it was not as widely recognized,” said Mr. Thaler, a behavioral economist who teaches at the University of Chicago. “As with climate change, scientific consensus takes a while to build.”

Inequality, as most people (especially “ivory tower Marxists and other players on the margins of the profession”) know, has been growing since the mid-1970s.

According to data from The World Wealth and Income Database, the top 1 percent income share (including capital gains) grew from 8.86 percent in 1976 to 21.24 percent in 2014. The top 0.1 percent share grew even more: from 0.86 to 4.89.

During the same period, the average (real 2014) incomes (including capital gains) of the top 1 percent grew 178 percent (from $353,380 to $983,896) and those of the top 0.1 percent 356 percent (from $904,450 to $4,129,983). Meanwhile, the average income in the United States increased by only 28 percent (from $46,355 to $59,346).

Now, apparently, at least some members of the American Economics Association are acknowledging that income inequality is an issue that needs to be addressed.