Posts Tagged ‘mainstream’

keynes_color

I’m often asked—by students and readers of this blog—why I include Keynesian economics, alongside neoclassical economics, within mainstream economic theory.

The major reason I do so is because the mainstream debate within the discipline of economics is mostly confined within limits defined by neoclassical economics and Keynesian economics—between (as I explained last year), the conservative invisible hand of free markets and the more liberal visible hand of government intervention.

It’s basically what most students of economics are exposed to their in their micro and macro courses:

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.

Keynesian economics was, of course, born as a critique of neoclassical economics, in the midst of the First Great Depression, when the allocation of resources was anything but efficient and capitalism provided neither stable growth nor full employment. Far from it!

Keynes introduced new ideas into economic discourse, emphasizing the role of economic and social structures (such as collective bargaining and, from later Keynesians, imperfect competition), mass psychology (especially with respect to investors and stock-market speculators), and fundamental uncertainty (it was impossible to make rational decisions in the face of an unknown—and unknowable—future).

However, as recent essays by Michael Roberts and Chris Dillow remind us, Keynesian economics has severe shortcomings.

While I think Roberts begins by overstating his case (I, for one, am not convinced that “Keynes is the economic hero of those wanting to change the world”), he does convincingly argue that Keynes’s economic prescriptions are based on a fallacy:

The long depression continues not because there is too much capital keeping down the return (‘marginal efficiency’) of capital relative to the rate of interest on money.  There is not too much investment (business investment rates are low) and interest rates are near zero or even negative. The long depression is the result of too low profitability and so not enough investment, thus keeping down productivity growth.  Low real wages and low productivity are the cost of ‘full employment’, contrary to all the ideas of Keynesian economics.  Too much investment has not caused low profitability, but low profitability has caused too little investment.

Dillow, for his part, explains that Keynes “was largely silent about three related issues: class, power and profits, or least he dismissed them lightly.” In a sense, then,

Keynesianism was profoundly conservative. In believing that technocratic governments could provide workers with decent wages and full employment, Keynesianism did away with the need for industrial democracy: one of the achievements of Keynes was to eclipse movements such as guild socialism. It wasn’t Keynes himself who said “the man in Whitehall knows best” but one of his disciples, Douglas Jay – and that encapsulated a key part of Keynesian ideology, its belief in top-down management.

Populism, of course, is a backlash against just this. That slogan “take back control” and the dismissal of experts represent a rejection of Keynesianism; the baby of decent macroeconomic policy is being thrown out with the bathwater of elitism. It’s far from clear that Keynesianism has the intellectual or political resources to fight back.

In my view, neither neoclassical nor Keynesian economics turns out to have the intellectual or political resources to effectively respond to the issues that motivate and resonate within contemporary populism. If anything, they have served to create the problems that have brought right-wing nationalist populism to the fore.

For good reason, both wings of mainstream economics have ceased to be persuasive.

krug-yourmaniasb-151C2F848E51BAE0241

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:

687474703a2f2f692e696d6775722e636f6d2f6163484d3330786c2e6a7067

Millions of workers have been displaced by robots. Or, if they have managed to keep their jobs, they’re being deskilled and transformed into appendages of automated machines. We also know that millions more workers and their jobs are threatened by much-anticipated future waves of robotics and other forms of automation.

But mainstream economists don’t want us to touch those robots. Just ask Larry Summers.

Summers is particularly incensed by Bill Gates’s suggestion that we begin taxing robots. So, he trots out all the usual arguments, hoping that at least one of them will stick. It’s hard to distinguish between robots and other forms of automation. Robots and other forms of automation produce better goods and services. And, of course, automation enhances productivity and leads to more wealth. So, we shouldn’t do anything to shrink the size of the economic pie.

This last point has long been standard in international trade theory. Indeed, it is common to point out that opening a country up to international trade is just like giving it access to a technology for transforming one good into another. The argument, then, is that since one surely would not regard such a technical change as bad, neither is trade, and so protectionism is bad. Mr Gates’ robot tax risks essentially being protectionism against progress.

Progress, indeed.

What mainstream economists like Summers fail to understand is that not touching the robots—or, for that matter, international trade—means keeping things just as they are. It means keeping the decisions about jobs, just like the patterns of international trade, in the hands of a small group of employers. They’re the ones who, under current circumstances, appropriate the surplus and decide where and how jobs will be created—and, of course, where they will be destroyed. Which, as I explained last year, is exactly how international trade takes place.

And because employers, now and as Summers would like to see the world, are the ones who are allowed to retain a monopoly over jobs and trade, they also decide how the economic pie is distributed and redistributed. Tinkering around the edges—with the usual liberal shibboleths about the need for “education and retraining”—doesn’t fundamentally alter the fact that workers remain subject to decisions about technology and trade in which they have no say. Workers are thus forced to have the freedom to adjust, with more or less government assistance, to decisions taken by their employers.

And to sit back and admire, but not touch, the growth in productivity.*

 

*And that’s pretty much what Brad DeLong also recommends in making, for the umpteenth time, the argument that today, the world’s population is, on average, many times richer than it was during the long preceding age—because both average wealth and consumer choice have increased. Delong, like Summers, doesn’t want us to touch the “innovations that have fundamentally transformed human civilization.”

james-glassman-and-kevin-hassetts-1999-book-dow-36000-predicted-that-the-dow-jones-stock-index-would-more-than-triple-in-the-years-ahead-even-now-16-years-later-the-index-is-only-just-halfway-to-36000

According to recent news reports, Kevin Hassett, the State Farm James Q. Wilson Chair in American Politics and Culture at the American Enterprise Institute (no, I didn’t make that up), will soon be named the head of Donald Trump’s Council of Economic Advisers.

Yes, that Kevin Hassett, the one who in 1999 predicted the Down Jones Industrial Average would rise to 36,000 within a few years.

060214pollock2

Except, of course, it didn’t. Not by a long shot. The average did reach a record high of 11,750.28 in January 2000, but after the bursting of the dot-com bubble, it steadily fell, reaching a low of 7,286 in October 2002. Although it recovered to a new record high of 14,164 in October 2007, it crashed back to the vicinity of 6,500 by the early months of 2009. And, even today, almost two decades later, it’s only just cracked the 20,000 barrier.

But, no matter, mainstream economists and pundits—like Greg Mankiw, Noah Smith, and Tim Worstall—think Hassett is a great choice.

Perhaps, in addition to his Dow book, they want to place the rest of Hassett’s writings on an altar.

Like Hassett’s claim (which I discuss here) that “lowering corporate taxes is the only real cure for wage stagnation among American workers.”

Or his other major claim (which I discuss here), that poverty and inequality in the United States are merely figments of our imagination.

Let’s focus on that last claim. As regular readers of this blog know, income inequality—whether measured in terms of fractiles (e.g., the 1 percent versus everyone else) or classes (e.g., profits and wages)—has been increasing for decades now. But for conservative economists like Hassett (who was an economic adviser to Mitt Romney before being a candidate to join the Trump team), inequality has not been growing and poor people are actually much better off than they and the rest of us normally think. What they do then is substitute consumption for income and argue that consumption inequality has actually not been growing.

So, what’s the big problem?

But even in terms of consumption they’re wrong. As Orazio Attanasio, Erik Hurst, Luigi Pistaferri have shown, once you correct for the measurement errors in the Consumer Expenditure Survey (which Hassett and his coauthor, Aparna Mathur, don’t do), and bring in other sources of consumption information (including the well-regarded Panel Study of Income Dynamics), consumption inequality has increased substantially in recent decades—more or less at the same rate as inequality in the distribution of income.

Overall, our results suggest that there has been a substantial rise in consumption and leisure inequality within the U.S. during the last 30 years. The rise in income inequality translated to an increase in actual well-being inequality during this time period because consumption inequality also increased.

wealth

And, remember, that doesn’t take into account other forms of inequality, such as the increase in the unequal distribution of wealth, which has exploded in recent decades. The poor and pretty much everyone else—the 90 percent—are being left behind.

It’s the spectacular grab for income, consumption, and wealth by the small group at the top that Hassett and the new administration will be trying to protect.

3239432996_28e58b44d9_o

There doesn’t seem to be anything remarkable about mainstream economists’ rejection of the new populism.

Lest we forget, mainstream economists in the United States and Europe (and, of course, around the world) mostly celebrated current economic arrangements. As far as they were concerned, everyone benefits from contemporary globalization (the more trade the better) and from the distribution of income created by market forces (since everyone gets what they deserve).

To be sure, those who identify with different wings of mainstream economics debate the extent to which there are market imperfections and therefore how much interference there should be in markets. Conservative mainstream economists tend to argue in favor of less regulation, their liberal counterparts for more government intervention. But they share the same general economic vision—that capitalism is characterized by “just deserts,” stable growth, and rising standards of living.

Except of course in recent decades it hasn’t. Not by a long shot.

Inequality has skyrocketed to obscene levels (and continues to rise), leaving many people behind. The crash of 2007-08 shattered the illusion of stability—and now there’s a deepening worry of “secular stagnation” moving forward. And, while the conspicuous consumption of the tiny group at the top continues unabated, only rising debt keeps everyone else from falling down the ladder.

No wonder, then, that economic populists, especially those on the Right, are rejecting the status quo—and winning campaigns and elections (often in the form of protest votes).

For the most part, to judge by Brigitte Granville’s survey of a variety of Project Syndicate commentators’ responses to populism, mainstream economists remain blind as to “why so many voters have embraced facile policies and populist politics.”

That’s pretty much what one would expect, given mainstream economists’ general commitment to the status quo.

But even when they admit that “much has gone wrong for a great many people,” as Margaret MacMillan does (“Globalization and automation are eliminating jobs in developed countries; powerful corporations and wealthy individuals in too many countries are getting a greater share of the wealth and paying fewer taxes; and living conditions continue to deteriorate for people in the US Rust Belt or Northeast England and Wales”), we read the spectacular claim that today’s populists—these “new, outsider political forces”—are wrong because they “claim to have a monopoly on truth.”

Now, I understand, MacMillian is a historian, not an economist. But the idea that populists are somehow the only ones who claim to have a monopoly on truth is an extraordinary diagnosis of the problem.

Think of the legions of mainstream economists who have lined up over the years to claim a monopoly on the truth concerning a wide variety of policies, from restricting minimum wages and approving NAFTA to deregulating finance and voting no on Brexit. They are the ones who have aligned themselves with the interests of economic and political elites and who, in the name of expertise, have attempted to trump democratic, public discussion of important economic issues.

It should come as no surprise, then, that mainstream economists—such as Harvard’s Sendhil Mullainathan—are so concerned that economists have been demoted within the new Trump administration. The horror! The chairperson of the Council of Economic Advisers is not going to be a member of the Cabinet.

Yes, it is true, business acumen is not the same as economic analytics. (I teach economics in a College of Arts and Letters, not in a business school—and, as I remind my students on a regular basis, I’m the last person they should turn to for investment or business advice.) But that’s a far cry from claiming a monopoly on the truth, which is only available to those who speak and write in the language of mainstream economics.*

If mainstream economists finally relinquished that claim—and, as a result, spent more time both learning the languages of other traditions within the discipline of economics and listening to the grievances and desires of those who have been sacrificed at the altar of the status quo—perhaps then they’d have something useful to contribute to the larger debate about where the world is headed right now.

 

*According to Andrea Brandolini, the late Tony Atkinson understood this: “‘Economists are too often prisoners within the theoretical walls they have erected’, he recently wrote discussing austerity policies, ‘and fail to see that important considerations are missing”

00ebc906444d5311eb01a1674c8eab26

Mainstream economics presents quite a spectacle these days. It has no real theory of the firm and, even now, more than nine years after the Great Recession began, its most cherished claim to relevance—the use of large-scale forecasting models of the economy that assume people always behave rationally—is still misleading policymakers.

As if that weren’t embarrassing enough, we now have a leading mainstream economist, Havard’s Martin Feldstein, claiming that the “official data on real growth substantially underestimates the rate of growth.”

Mr. Feldstein likes to illustrate his argument about G.D.P. by referring to the widespread use of statins, the cholesterol drugs that have reduced deaths from heart attacks. Between 2000 and 2007, he noted, the death rate from heart disease among those over 65 fell by one-third.

“This was a remarkable contribution to the public’s well-being over a relatively short number of years, and yet this part of the contribution of the new product is not reflected in real output or real growth of G.D.P.,” he said. He estimates — without hard evidence, he is careful to point out — that growth is understated by 2 percent or more a year.

This is not just a technical issue for Feldstein:

it is misleading measurements that are contributing to a public perception that real incomes — particularly for the middle class — aren’t rising very much. That, he said, “reduces people’s faith in the political and economic system.”

“I think it creates pessimism and a distrust of government,” leading Americans to worry that “their children are going to be stuck and won’t be able to enjoy upward mobility,” he said. “I think it’s important to understand this.”

Here’s what folks need to understand: mainstream economists like Feldstein, who celebrate an economic system based on private property and free markets, build and use models in which market prices capture all the relevant costs and benefits to society. And, since GDP is an accounting system based on adding up transactions of goods and services based on market prices, for mainstream economists it should represent an accurate measure of the “public’s well-being.”

Mainstream economists can’t have it both ways—either market prices do accurately reflect social costs and benefits or they don’t. If they do, then Feldstein & Co need to stick with the level and rate of growth of GDP as the appropriate measure of the wealth of the nation. And, if they don’t, all their claims about the wonders of free markets simply dissolve.

Notice also that, for Feldstein, the problem is always in one direction: GDP statistics only undercount social well-being. What he and other mainstream economists fail to consider is that whole sectors of the economy, like financial services (or, more generally, FIRE, finance, insurance, and real estate), are counted as adding to national income.

As Bruce Roberts has explained,

because “financial services” are deemed useful by those who pay for them, those services must be treated as generators in their own right of value and output (even though there is nothing there that can actually be measured as output at all). . .

the standard (neoclassical) approach embedded in GDP accounting means, in concrete terms, that profits in FIRE must be treated as a reflection of rising real output generated by FIRE activities, requiring a numerical “imputation” of greater GDP. And, worse, that *rising* profits in FIRE then go hand in hand with *rising* levels of imputed “output” and hence enhanced “productivity.”

If Wall Street doesn’t add to GDP—if FIRE activities just represent transfers of value from other economic sectors (both nationally and internationally)—then its resurgence in the years since the crash doesn’t contribute to output or growth.

The consequence is that GDP, as it is currently measured, actually overcounts national output and income. Actual growth during the so-called recovery is much less than mainstream economists and politicians would have us believe.

That’s the real reason many Americans are worried they and “their children are going to be stuck and won’t be able to enjoy upward mobility.”

plumber-cartoon-cropped

Apparently, the latest attempt to redefine the role of economists is to encourage them to be plumbers.

Maybe it’s just my age but, when I read plumbers, I immediately think of the covert Special Investigations Unit in the Nixon White House—the operation that began with attempting to stop the leak of classified information (such as the Pentagon Papers) and then branched into illegal activities while working for the Committee to Re-elect the President (including the Watergate break-in).

I don’t think that’s what MIT economist Esther Duflo (pdf) had in mind when, in her Ely Lecture to the American Economic Association meeting last month, she suggested that economists seriously engage with plumbing, “in the interest of both society and our discipline.”

As economists increasingly help governments design new policies and regulations, they take on an added responsibility to engage with the details of policy making and, in doing so, to adopt the mindset of a plumber. Plumbers try to predict as well as possible what may work in the real world, mindful that tinkering and adjusting will be necessary since our models gives us very little theoretical guidance on what (and how) details will matter.

I’ll admit, I have a lot of respect for plumbers (especially when they’re able to fix the mess I’ve made trying to repair an existing fixture or install a new one). And I do think anyone involved in designing new policies and regulations should learn more about how they are actually implemented.

But economists, especially mainstream economists (of the sort Duflo is speaking for and to), are the last people I’d call in to fix the policy plumbing. Me, I’d pay them a large sum of money to learn about how policy formulation and implementation actually works. And then I’d pay them even more not to get anywhere near the process.

I’d much prefer that others—from the people actually affected by the policies to representatives from other academic disciplines and areas (such as anthropology, labor studies, peace studies, and so on)—be the ones who actually engage with the details of policy-making.

A good example of why I would want mainstream economists to be kept as far as possible away from the process of policy and implementation is a recent piece by Laura Tyson and Susan Lund.*

Their view is that capitalist globalization has had “disruptive effects on millions of advanced-economy workers” (and, we should add, on millions of workers—peasants, wage-laborers, and others—in economies that are not so advanced) and has aggravated income inequality within countries. So far so good.

But then they assert, without evidence, that the main culprit is not how globalization has been carried out, but technological change, which “automates routine manual and cognitive tasks, while increasing demand (and wages) for highly skilled workers.”

And because they take technological change as a given (rather than a strategy on the part of employers to boost profits), they recommend that workers (who, they presume, have no say in the development and implementation of new technologies) are the ones who need to adapt.

advanced economies must help workers acquire the skills needed to fill high-quality jobs in the digital economy. Lifelong learning cannot just be a slogan; it must become a reality. Mid-career retraining must be made available not only to those who have lost their jobs to foreign competition, but also to those facing disruption from the continuing march of automation. Training programs should be able to impart new skills in a matter of months, not years, and they should be complemented by programs that support workers’ incomes during retraining, and that help them relocate for more productive work.

Now, it’s true, Tyson and Lund don’t spend any time on the plumbing of creating and implementing lifelong learning programs. But that’s not the problem. Even if they were good economic plumbers, we’d still end up with a situation in which employers set the agenda and workers are forced to have the freedom to scramble to try to keep up.

That’s the plumbing Tyson and Lund leave out of their analysis. It’s what keeps the extra value flowing from workers to their employers. And, if workers are no longer useful for creating that extra value, they’re simply flushed down the drain.

If and when mainstream economists are willing to talk about those parts of the economic system, I’ll be the first to invite them to join the plumbers’ union.

But only, until they prove they can analyze and fix the problem, as plumber apprentices.

 

*This is not to pick on Tyson and Lund. I could have chosen any one of an almost infinite number of essays on economic policy by mainstream economists I’ve read over the years. Theirs just happens to be the latest I’ve run across.