Inflation, wages, and profits

Inflation continues to run hot—and now, finally, the debate about inflation is heating up.

On one side of the debate are mainstream economists and lobbyists for big business, the people Lydia DePillis refers to as having a simple mantra: “Supply and demand, Economics 101.” In their view, inflation is caused by supply and demand in the labor market, which is allowing workers’ wages to increase at an unsustainable rate (a story that, as I showed in April, has no validity), and supply and demand in the economy as a whole, with too much money chasing too few goods.

Simple, straightforward, and. . .wrong.

Fortunately, there’s another side to the debate, with heterodox economists and progressive activists arguing that increasingly dominant corporations are taking advantage of the current situation (the pandemic, disruptions in global supply-chains, the war in Ukraine, and so on) to jack up prices and rake in even higher profits than they’ve been able to do in recent times.

Josh Bivens, of the Economic Policy Institute, has offered two arguments that challenge the mainstream story: First, while “It is unlikely that either the extent of corporate greed or even the power of corporations generally has increased during the past two years. . .the already-excessive power of corporations has been channeled into raising prices rather than the more traditional form it has taken in recent decades: suppressing wages.” Second, inflation can’t simply be the result of macroeconomic overheating. That would suggest, at this point in a classic economic recovery, that profits should be shrinking and the labor share of income should be rising. As Biven notes, “The fact that the exact opposite pattern has happened so far in the recovery should cast much doubt on inflation expectations rooted simply in claims of macroeconomic overheating.”*

So, we have dramatically different analyses of the causes of the current inflation, and of course two very different strategies for combatting inflation. The mainstream policy (as I also wrote about in April) is to slow the rate of growth of the economy (for example, by raising interest rates) and increase the level of unemployment, thus slowing the rate of increase of both wages and prices. And the alternative? Bivens supports a temporary excess profits tax. Other possibilities—which, alas, are not yet being raised in the debate—include price controls (especially on commodities that make up workers’ wage bundles), government provisioning of basic wage goods (including, for example, baby formula), and subsidies to workers (which, while they wouldn’t necessarily lower inflation, would at least make it easier for workers to maintain their current standard of living).

What we’re witnessing, then, is an important debate about the causes and consequences of inflation. But, as DePillis understands, the debate is about much more than that: “The real disagreement is over whether higher profits are natural and good.“

In the end, that’s what all key debates in economics are about. Profits are the most contentious issue in economics precisely because the analysis of profits reflects both a theory and ethics about two things: whether capitalists deserve the profits they capture and what they can and should do with those profits. For example, profits can be theorized as a return to capital (and therefore natural and fair, as in mainstream economics) or they are the result of price-gouging (and therefore social and unfair, as in Bivens’s theory of corporate power).**

Similarly, capitalists can be seen as investing their profits (and therefore making their firms and the economy as a whole more productive, with everyone benefitting) or they can distribute a significant portion of their profits toward other uses (such as pursuing mergers and acquisitions, engaging in stock buybacks, and offering higher dividends, which do nothing to increase productivity but instead lead to more corporate concentration and make the distribution of income and wealth even more unequal).

Mainstream economists and capitalists have long sought to convince us that profits are both natural and good. In other words, when it comes to corporate profits and escalating charges of “greedflation,” they prefer to see, hear, and say no evil. The rest of us know what’s actually going on—that corporations are taking advantage of current conditions to raise prices, both to increase their profits and to lower workers’ real wages. We also know that traditional attempts to contain inflation through monetary policy will hurt workers but not their employers or the tiny group that sits at the top of the economic pyramid.

It’s clear then: the debate about inflation is actually a debate about profits. And the debate about profits is, in the end, a debate about capitalism. The sooner we recognize that, the better off we’ll all be.

———

*Even the Wall Street Journal admits that the wage share is not in fact growing: “The labor share of national output is roughly where it was before the pandemic.” Moreover, the current situation represents just a continuation of the trend of recent decades: “Over the last two decades. . .the share of U.S. income that goes to labor has fallen, despite periods of low unemployment.”

**Corporate profits can also be theorized as the result of exploitation (and thus a different kind of social determination and unfairness, as in Marxian theory).

Utopia and the economics of control

I have often argued—in lectures, talks, and publications—that every economic theory has a utopian dimension. Economists don’t explicitly talk about utopia but, my argument goes, they can’t do what they do without some utopian horizon.

The issue of utopia is there, at least in the background, in every area of economics—perhaps especially on the topic of control.

Consider, for example, the theory of the firm (which I have written about many times over the years), which is the focus of University of Chicago finance professor Luigi Zingales’s lecture honoring Oliver Hart, winner of the 2016 Nobel Prize for economics, at this year’s Allied Social Science Association meeting.

One of the many merits of Oliver’s contribution is to have brought back the concept of power inside economics. This is a concept pervasive in political science and sociology, and pervasive in Marxian economics, but completely absent from neoclassical economics. In fact, Oliver’s view of the firm is very reminiscent of the Marxian view, but where Marx sees exploitation, Oliver sees an efficient allocation.

Zingales is right: Hart’s neoclassical treatment of control informs a theory of the firm that stands diametrically opposed to a Marxian theory of the firm. And those contrasting theories of the firm are both conditions and consequences of different utopian horizons. Thus, Hart both envisions and looks to move toward an efficient use of control within the firm such that—through a combination of incentives and monitoring—agents (workers) can be made to work hard to fulfill the goal set by the principal (capitalists). Marxists, on the other hand, see the firm as a site of exploitation—capitalists extracting surplus-value from the workers they hire—and look to create the economic and social conditions whereby exploitation is eliminated.

In my view, those are very different utopias—the efficient allocation of resources versus the absence of exploitation—that both inform and are informed by quite different theories of the firm.

As is turns out, the issue of control—and, with it, utopia—comes up in another, quite different context. As George DeMartino and Deidre McCloskey explain, in their rejoinder to Anne Krueger’s attack on their recent edited volume, The Oxford Handbook of Professional Economic Ethics,

When you have influence over others you take on ethical burdens. Think of your responsibilities to, say, your family or friends. And when you fail to confront those burdens openly, honestly, and courageously you are apt to make mistakes. As professional economists we have influence, and we do develop conversations about how we operate. Yet there is no serious, critical, scholarly conversation about professional economic ethics—never has been. That’s not good.

While the DeMartino and McCloskey volume includes contributions from both mainstream and heterodox economists (a point that Krueger overlooks in her review), it is still the case that the discipline of economics, dominated as it has been by mainstream economics, has never had a serious, sustained conversation about ethics.

Consider this: it is possible to get a degree in economics—at any level, undergraduate, Master’s, or doctorate—without a single reading or lecture, much less an entire course, on ethics. And yet economists do exercise a great deal of power over others: over other economists (through hiring, research funding, and publishing venues), their students (in terms of what can and cannot be said, talked about, and theorized in their courses), and the wider society (through the dissemination of particular theories of the economy as well as the policies they advocate to governments and multilateral institutions). In fact, they also exercise power over themselves, in true panopticon fashion, as they seek to adhere to and reinforce certain disciplinary protocols and procedures.

Economics is saturated with power, and thus replete with ethical moments.

Once again, the issue of control is bound up with different utopian horizons. Most economists—certainly most mainstream economists—are not comfortable with and have no use for discussions of ethics. That’s because, in their view, economists adhere to a code of objectivity and scientificity and an epistemology of absolute truth. So, there’s no room for an ethics associated with “influence over others.” That’s their utopia: a free-market of ideas in which the “truth,” of theory and policy, is revealed.

Other economists have a quite different view. They see a world of unequal power, including within the discipline of economics. And the existence of that unequal power demands a conversation about ethics in order to reveal the conditions and especially the consequences of different ways of doing economics. If there is no single-t, absolute truth—and thus no single standard of objectivity and scientificity—within economics, then the use of one theory instead of another has particular effects on the world within which that theorizing takes place. Here, the utopian horizon is not a free market of ideas, but instead a reimagining of the discipline of economics as an agonistic field of incommensurable discourses.

And, from a specifically Marxian perspective, the utopian moment is to create the conditions whereby the critique of political economy renders itself no longer useful. Marxists recognize that they may not be able to control the path to such an outcome but it is their goal—their ethical stance, their utopian horizon.

Time to dethrone economists

The election and administration of Donald Trump have focused attention on the many symbols of racism and white supremacy that still exist across the United States. They’re a national disgrace. Fortunately, we’re also witnessing renewed efforts to dethrone Confederate monuments and other such symbols as part of a long-overdue campaign to rethink Americans’ history as a nation.

In economics, the problem is not monuments but the discipline itself. It’s the most disgraceful discipline in the academy. Therefore, we should dethrone ourselves.

In the United States, thanks to the work of the Southern Poverty Law Center, we know there are over 700 monuments and statues to the Confederacy, as well as scores of public schools, counties and cities, and military bases named for Confederate leaders and icons.

We also know those symbols do not represent any kind of shared heritage but, instead, conceal the real history of the Confederate States of America and the seven decades of Jim Crow segregation and oppression that followed the Reconstruction era. In fact, most of them were dedicated not immediately after the Civil War, but during two key periods in U.S. history:

The first began around 1900, amid the period in which states were enacting Jim Crow laws to disenfranchise the newly freed African Americans and re-segregate society. This spike lasted well into the 1920s, a period that saw a dramatic resurgence of the Ku Klux Klan, which had been born in the immediate aftermath of the Civil War.

The second spike began in the early 1950s and lasted through the 1960s, as the civil rights movement led to a backlash among segregationists. These two periods also coincided with the 50th and 100th anniversaries of the Civil War.

The problem, of course, is those statues have stayed up for so long because, like so many other features of our everyday landscape, they became so familiar that Americans hardly even noticed they were there.

It should come as no surprise, then, that a majority of Americans (62 percent) believe statues honoring leaders of the Confederacy should remain. However, a similar majority (55 percent) said they disapproved of the Trump’s response to the deadly violence that occurred at a white supremacist rally in Charlottesville. As a result, I expect Americans will be engaged in a new conversation about their history—especially the most disgraceful episodes of slavery, white supremacy, and racism—and what those symbols represent today.

The discipline of economics has a similar problem—not of statues but of sexism and hostility to women. It’s been so much a feature of our everyday academic landscape that economists hardly even noticed it was there.

They didn’t notice until reports surfaced—in the New York Times and the Washington Post—concerning Alice Wu’s senior thesis in economics at the University of California-Berkeley. Wu analyzed over a million posts on the anonymous online message board, Economics Job Market Rumors, to analyze how economists talk about women in the profession.

According to Wu,

Gender stereotyping can take a subtle or implicit form that makes it difficult to measure and analyze in economics. In addition, people tend not to reveal their true beliefs about gender if they care about political and social correctness in public. The anonymity on the Economics Job Market Rumors forum, however, removes such barriers, and thus provides a natural setting to study the existence and extent of gender stereotyping in this academic community online.

And the results of her analysis? The 30 words most associated with women were (in order, from top to bottom): hotter, lesbian, bb (Internet terminology for “baby”), sexism, tits, anal, marrying, feminazi, slut, hot, vagina, boobs, pregnant, pregnancy, cute, marry, levy, gorgeous, horny, crush, beautiful, secretary, dump, shopping, date, nonprofit, intentions, sexy, dated, and prostitute.

In contrast, the terms most associated with men included mathematician, pricing, adviser, textbook, motivated, Wharton, goals, Nobel, and philosopher. Indeed, the only derogatory terms in the list were bully and homo.

In my experience, that’s a pretty accurate description of how women and men are unequally seen, treated, and talked about in economics—and that’s been true for much of the history of the discipline.*

But, of course, that’s not the only reason economics is the most bankrupt, disgraceful discipline in the entire academy. It has long shunned and punished economists who endeavor to use theories and methods that fall outside mainstream economics—denying jobs, research funding, publication outlets, and honorifics to their “colleagues” who have the temerity to teach and do research utilizing other discourses and paradigms, from Marxism to feminism. 

Even the attempt to convince economists to adopt a code of ethics—like those in many other disciplines, from anthropology to medicine—was treated with disdain.

Sure, there’s a Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. And, in the United States, both a Council of Economic Advisers and a National Economic Council—but no White House Council of Social Advisers.

Economics may have national and international prominence. But it’s time we give up the hand-wringing and admit there is no standard of decency or intelligence (with the possible exception of mathematics) that economists don’t fail on.

We are, in short, a collective disgrace. That’s why we should dethrone ourselves.

 

*A history that includes Joan Robinson, who should have won the Nobel Prize in Economics but didn’t (because, of course, she was a non-neoclassical, female economist) and can’t (because she’s dead).

Globalization—how did they get it so wrong?

There is perhaps no more cherished an idea within mainstream economics than that everyone benefits from free trade and, more generally, globalization. They represent the solution to the problem of scarcity for the world as a whole, much as free markets are celebrated as the best way of allocating scarce resources within nations. And any exceptions to free markets, whether national or international, need to be criticized and opposed at every turn.

That celebration of capitalist globalization, as Nikil Saval explains, has been the common sense that mainstream economists, both liberal and conservative, have adhered to and disseminated, in their research, teaching, and policy advice, for many decades.

Today, of course, that common sense has been challenged—during the Second Great Depression, in the Brexit vote, during the course of the electoral campaigns of Bernie Sanders and Donald Trump—and economic elites, establishment politicians, and mainstream economists have been quick to issue dire warnings about the perils of disrupting the forces of globalization.

I have my own criticisms of Saval’s discussion of the rise and fall of the idea of globalization, especially his complete overlooking of the long tradition of globalization critics, especially on the Left, who have emphasized the dirty, violent, unequalizing underside of colonialism, neocolonialism, and imperialism.*

However, as a survey of the role of globalization within mainstream economics, Saval’s essay is well worth a careful read.

In particular, Saval points out that, in the heyday of the globalization consensus, Dani Rodrick was one of the few mainstream economists who had the temerity to question its merits in public.

And who was one of the leading defenders of the idea that globalization had to be celebrated and it critics treated with derision? None other than Paul Krugman.

Paul Krugman, who would win the Nobel prize in 2008 for his earlier work in trade theory and economic geography, privately warned Rodrik that his work would give “ammunition to the barbarians”.

It was a tacit acknowledgment that pro-globalisation economists, journalists and politicians had come under growing pressure from a new movement on the left, who were raising concerns very similar to Rodrik’s. Over the course of the 1990s, an unwieldy international coalition had begun to contest the notion that globalisation was good. Called “anti-globalisation” by the media, and the “alter-globalisation” or “global justice” movement by its participants, it tried to draw attention to the devastating effect that free trade policies were having, especially in the developing world, where globalisation was supposed to be having its most beneficial effect. This was a time when figures such as the New York Times columnist Thomas Friedman had given the topic a glitzy prominence by documenting his time among what he gratingly called “globalutionaries”: chatting amiably with the CEO of Monsanto one day, gawking at lingerie manufacturers in Sri Lanka the next. Activists were intent on showing a much darker picture, revealing how the record of globalisation consisted mostly of farmers pushed off their land and the rampant proliferation of sweatshops. They also implicated the highest world bodies in their critique: the G7, World Bank and IMF. In 1999, the movement reached a high point when a unique coalition of trade unions and environmentalists managed to shut down the meeting of the World Trade Organization in Seattle.

In a state of panic, economists responded with a flood of columns and books that defended the necessity of a more open global market economy, in tones ranging from grandiose to sarcastic. In January 2000, Krugman used his first piece as a New York Times columnist to denounce the “trashing” of the WTO, calling it “a sad irony that the cause that has finally awakened the long-dormant American left is that of – yes! – denying opportunity to third-world workers”.

The irony is that Krugman won the Nobel Prize in Economics in recognition of his research and publications that called into question the neoclassical idea that countries engaged in and benefited from international trade based on given—exogenous—resource endowments and technologies. Instead, Krugman argued, those endowments and technologies were created historically and could be changed by government policies, including histories and policies that run counter to free trade and globalization.

Krugman was thus the one who gave theoretical “ammunition to the barbarians.” But that was the key: he considered the critics of globalization—the alter-globalization activists, heterodox economists, and many others—”barbarians.” For Krugman, they were and should remain outside the gates because, in his view, they were not trained in or respectful of the protocols of mainstream economics. The “barbarians” could not be trusted to understand or adhere to the ways mainstream economists like Krugman analyzed the exceptions to the common sense of globalization. They might get out of control and develop other arguments and economic institutions.

But then the winds began to shift.

In the wake of the financial crisis, the cracks began to show in the consensus on globalisation, to the point that, today, there may no longer be a consensus. Economists who were once ardent proponents of globalisation have become some of its most prominent critics. Erstwhile supporters now concede, at least in part, that it has produced inequality, unemployment and downward pressure on wages. Nuances and criticisms that economists only used to raise in private seminars are finally coming out in the open.

A few months before the financial crisis hit, Krugman was already confessing to a “guilty conscience”. In the 1990s, he had been very influential in arguing that global trade with poor countries had only a small effect on workers’ wages in rich countries. By 2008, he was having doubts: the data seemed to suggest that the effect was much larger than he had suspected.

And yet, as Saval points out, mainstream economists’ recognition of the unequalizing effects of capitalist globalization has come too late: “much of the damage done by globalisation—economic and political—is irreversible.”

The damage is, of course, only irreversible within the existing economic institutions. Imagining and enacting a radically different way of organizing the economy would undo that damage and benefit those who have been forced to have the freedom to submit to the forces of capitalist globalization.

But Rodrik and Krugman—and mainstream economists generally—don’t seem to be interested in participating in that project, which would give the “barbarians” a say in creating a different kind of globalization, beyond capitalism.

 

*Back in 2000—and in a series of articles, book chapters, and blog posts since then—I have attempted to rethink the relationship between capitalist globalization and imperialism. Marxist economist Prabhat Patnaik has also made the case for the continuing relevance of imperialism as an analytical construct for understanding and challenging effectively the logic and dynamics of contemporary capitalism.

Love it or leave it?

Those of us of a certain age remember the right-wing political slogan, “America, love it or leave it.” I’ve seen it credited to journalist Walter Winchell, who used it in his defense of Joseph McCarthy’s anti-communist witch hunt. But it’s heyday was in the 1960s, against the participants in the antiwar movement in the United States and (in translation, ame-o ou deixe-o) in the early 1970s, by supporters of the Brazilian military dictatorship.*

I couldn’t help but be reminded of that slogan in reading the recent exchange between the anonymous author of Unlearning Economics and Simon Wren-Lewis (to which Brad DeLong has chimed in, on Wren-Lewis’s side).

Unlearning Economics puts forward an argument I’ve made many times on this blog (as, of course, have many others), that mainstream economics deserves at least some of the blame for the spectacular crash of 2007-08 (and, I would add, the uneven nature of the recovery since then).

the absence of things like power, exploitation, poverty, inequality, conflict, and disaster in most mainstream models — centred as they are around a norm of well-functioning markets, and focused on banal criteria like prices, output and efficiency — tends to anodise the subject matter. In practice, this vision of the economy detracts attention from important social issues and can even serve to conceal outright abuses. The result is that in practice, the influence of economics has often been more regressive than progressive.

Therefore, Unlearning Economics argues, a more progressive move is to challenge the “rhetorical power” of mainstream economics and broaden the debate, by focusing on the human impact of economic theories and policies.

Who could possibly disagree?

Well, Wren-Lewis, for one (and DeLong, for another). His view is that the only task—the only progressive task—is to criticize mainstream economics on its own terms. Even more, he argues that we need mainstream economics, because there should only be one economic theory, on which everyone can and should agree.

Now imagine what would happen if there was no mainstream. Instead we had different schools of thought, each with their own models and favoured policies. There would be schools of thought that said austerity was bad, but there would be schools that said the opposite. I cannot see how that strengthens the argument against austerity, but I can see how it weakens it.

The alternative view is that the discipline of economics has a hegemonic economic discourse (constituted, at least in the postwar period, by an ever-changing combination of neoclassical and Keynesian economics) and a wide variety of other, nonmainstream economic theories (inside the discipline of economics, as well as in other academic disciplines and outside the academy itself). Reducing the critique of austerity (or any other economic policy or strategy) to the issues raised by mainstream economists actually impoverishes the debate.

Sure, there’s a mainstream critique of austerity: cutting government expenditures in the midst of a recession reduces (at least in most cases) the rate of economic growth. But there are also other criticisms, which don’t and simply can’t be formulated by mainstream economists. From a Marxian perspective, for example, austerity (of the sort we’ve seen in recent years in Europe and even to some extent in the United States, not to mention all the other examples, especially as part of IMF-sponsored stabilization and adjustment programs, around the world) often serves to raise the rate of exploitation. Feminist economists, too, have lodged criticisms of austerity, since it often shifts the burden of adjustment onto women. Radicals, for their part, worry about the effects on power relations. And the list goes on.

They’re all different—perhaps overlapping but not necessarily mutually compatible—criticisms of austerity policies. They raise different issues, precisely because they’re inspired by different, mainstream and heterodox, economic theories.

Wren-Lewis, in his response to Unlearning Economics, wants to limit the debate to the terms of mainstream economics, which is the disciplinary equivalent of “love it or leave it.”

 

*There’s also the awful song by Jimmie Helms, recorded by Ernest Tubb:

Crash and learn?

Mark Tansey, “EC 101” (2009)

The case for changing the way we teach economics is—or should be—obvious.

It certainly is apparent to the students of Manchester University’s  Post-Crash Economics Society and to the other 44 student groups, members of Rethinking Economics, pressing for pedagogical changes on campuses from Canada to Italy and from Brazil to Uganda.

But as anyone who teaches or studies economics these days knows full well, the mainstream that has long dominated economics (especially at research universities, in the United States and elsewhere) is not even beginning to let go of their almost-total control over the curriculum of undergraduate and graduate programs.

That’s clear from a recent article in the Financial Times, in which David Pilling asks the question, “should we change the way we teach economics?”

Me, I’ve heard the excuses not to change economics for decades now. But it still jars to see them in print, especially after the spectacular failure of mainstream economics before, during, and after the worst economic crisis since the first Great Depression.

Here’s one—the idea that heterodox economics is like creationism, in disputing the “immutable laws” captured by mainstream theory:

Pontus Rendahl teaches macroeconomic theory at Cambridge. He doesn’t disagree that students should be exposed to economic history and to ideas that challenge neoclassical thinking. (He prefers the word “mainstream”, since neoclassical, like neoliberal, has become a term of near-abuse.) He is wary, however, of moving to a pluralist curriculum in which different schools of thought are given similar weight.

“Pluralism is a nicely chosen word,” he says. “But it’s the same argument as the creationists in the US who say that natural selection is just a theory.” Since mainstream economics has “immutable laws”, he argues, it would be wrong to teach heterodox theories as though they had equal validity. “In the same way, I don’t think heterodox engineering or alternative medicine should be taught.”

Rendahl also argues that students are too critical of the models they encounter as undergraduates:

When we start teaching economics, we have to teach the nuts and bolts.” He introduces first-year students to the Robinson Crusoe model, in which there is only one “representative agent”. Later on, Friday is brought on the scene so the two can start trading, although no money changes hands since transactions are solely by barter. (Money and credit are strangely absent from most economic curricula.)

Somehow, the “simplification” involved in presenting a theory of capitalism without money and credit—and therefore without the mechanisms that, from the start, invalidate Say’s Law—is presumed to be innocent.

Then, of course, there’s the ever-present worry about banishing mathematical modeling, which is taken to be the necessary condition for intellectual rigor:

Angus Deaton, who won the Nobel Prize in economics and teaches at Princeton, says economics is a broad church, but one that needs to be kept rigorous.

He gives the example of Daron Acemoğlu, a “young superstar” at the Massachusetts Institute of Technology, whose research includes the study of how institutions foster or inhibit growth. “He’s a very good example of the way things ought to be going, which is you do history but you know enough mathematics to be able to model it too. Banishing mathematics is not the solution,” he says. “The model is the cross-check on whether you actually know what you’re talking about.”

For economists like Deaton, rigor is identified with mathematics, not with knowing the assumptions of a theory or being acquainted with various theories.

And, finally, there’s the idea that part of economics is broken but the rest is just fine:

In Manchester, Diane Coyle also defends the basic methodology of economics. She says there is confusion among critics between microeconomics, the study of the behaviour of individuals and firms, and macroeconomics, the study of whole economies. Macroeconomics, she admits, “is broken”. But microeconomics is both robust and often verifiable with real-world data. What, she asks, can heterodox economists contribute to typical concerns of microeconomics, such as discovering the right mix of policy incentives to discourage obesity?

In Coyle’s case, the assumption is that there’s a set of theory-independent, “real-world data,” against which neoclassical microeconomics has been compared and ultimately verified. That, of course, is news to other economists, who use different theoretical lenses, and see very different data.

The assumptions built into each and every one of these defenses of mainstream economics and attacks on heterodox economic theories as well as any hint of pluralism in the teaching of economics are, at best, outdated—the leftovers from positivism and other forms of post-Enlightenment scientism. They comprise the “spontaneous philosophy” of mainstream economists who have exercised hegemony in the practice and teaching of economics throughout the postwar period.

And, yes, Pilling is right, when that hegemony is challenged, as it has been by economics students and many economists in recent years, “the clash of ideas gets nasty.”

Interpret this!

I know I shouldn’t. But there are so many wrong-headed assertions in the latest Bloomberg column by Noah Smith, “Economics Without Math Is Trendy, But It Doesn’t Add Up,” that I can’t let it pass.

But first let me give him credit for his opening observation, one I myself have made plenty of times on this blog and elsewhere:

There’s no question that mainstream academic macroeconomics failed pretty spectacularly in 2008. It didn’t just fail to predict the crisis — most models, including Nobel Prize-winning ones, didn’t even admit the possibility of a crisis. The vast majority of theories didn’t even include a financial sector.

And in the deep, long recession that followed, mainstream macro theory failed to give policymakers any consistent guidance as to how to respond. Some models recommended fiscal stimulus, some favored forward guidance by the central bank, and others said there was simply nothing at all to be done.

It is, in fact, as Smith himself claims, a “dismal record.”

But then Smith goes off the tracks, with a long series of misleading and mistaken assertions about economics, especially heterodox economics. Let me list some of them:

• citing a mainstream economist’s characterization of heterodox economics (when he could have, just as easily, sent readers to the Heterodox Economics Directory—or, for that matter, my own blog posts on heterodox economics)
• presuming that heterodox economics is mostly non-quantitative (although he might have consulted any number of books by economists from various heterodox traditions or journals in which heterodox economists publish articles, many of which contain quantitative—theoretical and empirical—work)
• equating formal, mathematical, and quantitative (when, in fact, one can find formal models that are neither mathematical nor quantitative)
• also equating nonquantitative, broad, and vague (when, in fact, there is plenty of nonquantitative work in economics that is quite specific and unambiguous)
• arguing that nonquantitative economics is uniquely subject to interpretation and reinterpretation (as against, what, the singular meaning of the Arrow-Debreu general equilibrium system or the utility-maximization that serves as the microfoundations of mainstream macroeconomics?)
• concluding that “heterodox economics hasn’t really produced a replacement for mainstream macro”

Actually, this is the kind of quick and easy dismissal of whole traditions—from Karl Marx to Hyman Minsky—most heterodox economists are quite familiar with.

My own view, for what it’s worth, is that there’s no need for work in economics to be formal, quantitative, or mathematical (however those terms are defined) in order for it be useful, valuable, or insightful (again, however defined)—including, of course, work in traditions that run from Marx to Minsky, that focused on the possibility of a crisis, warned of an impending crisis, and offered specific guidances of what to do once the crisis broke out.

But if Smith wants some heterodox macroeconomics that uses some combination of formal, mathematical, and quantitative techniques he need look no further than a volume of essays that happens to have been published in 2009 (and therefore written earlier), just as the crisis was spreading across the United States and the world economy. I’m referring to Heterodox Macroeconomics: Keynes, Marx and Globalization, edited by Jonathan P. Goldstein and Michael G. Hillard.

There, Smith will find the equation at the top of the post, which is very simple but contains an idea that one will simply not find in mainstream macroeconomics. It’s merely an income share-weighted version of a Keynesian consumption function (for a two-class world), which has the virtue of placing the distribution of income at the center of the macroeconomic story.* Add to that an investment function, which depends on the profit rate (which in turn depends on the profit share of income and capacity utilization) and you’ve got a system in which “alterations in the distribution of income can have important and potentially offsetting impacts on the level of effective demand.”

And heterodox traditions within macroeconomics have built on these relatively simply ideas, including

a microfounded Keynes–Marx theory of investment that further incorporates the external financing of investment based upon uncertain future profits, the irreversibility of investment and the coercive role of competition on investment. In this approach, the investment function is extended to depend on the profit rate, long-term and short-term heuristics for the firm’s financial robustness and the intensity of competition. It is the interaction of these factors that fundamentally alters the nature of the investment function, particularly the typical role assigned to capacity utilization. The main dynamic of the model is an investment-induced growth-financial safety tradeoff facing the firm. Using this approach, a ceteris paribus increase in the financial fragility of the firm reduces investment and can be used to explain autonomous financial crises. In addition, the typical behavior of the profit rate, particularly changes in income shares, is preserved in this theory. Along these lines, the interaction of the profit rate and financial determinants allows for real sector sources of financial fragility to be incorporated into a macro model. Here, a profit squeeze that shifts expectations of future profits forces firms and lenders to alter their perceptions on short-term and long-term levels of acceptable debt. The responses of these agents can produce a cycle based on increases in financial fragility.

It’s true: such a model does not lead to a specific forecast or prediction. (In fact, it’s more a long-term model than an explanation of short-run instabilities.) But it does provide an understanding of the movements of consumption and investment that help to explain how and why a crisis of capitalism might occur. Therefore, it represents a replacement for the mainstream macroeconomics that exhibited a dismal record with respect to the crash of 2007-08.

But maybe it’s not the lack of quantitative analysis in heterodox macroeconomics that troubles Smith so much. Perhaps it’s really the conclusion—the fact that

The current crisis combines the development of under-consumption, over-investment and financial fragility tendencies built up over the last 25 years and associated with a finance-led accumulation regime.

And, for that constellation of problems, there’s no particular advice or quick fix for Smith’s “policymakers and investors”—except, of course, to get rid of capitalism.

 

*Technically, consumption (C) is a function of the marginal propensity to consume of labor, labor’s share of income, the marginal propensity to consume of capital, and the profit share of income.

 

Ignoring the experts

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.”

 

Capitalist trade and its discontents

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.

Cult of CEOs

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.