Posts Tagged ‘mainstream’


Mike the Mad Biologist [ht: sm] casts doubt on the idea of scarcity. And for good reason:

While they seem to have receded somewhat, a couple of years ago, there were quite a few arguments about the fundamentals of economics (especially macroeconomics) and how to teach them. As an outsider, one thing that struck me as odd was the emphasis on scarcity (e.g., economics is called the science of scarcity). It’s odd because, at least in wealthy societies, there are very few scarce items. We’re definitely not slacking in our ability to produce calories, which arguably for most of human, if not hominin, history was the vital concern.

Mainstream economists, as I teach my students, start with the idea of scarcity—the combination of limited means and unlimited desires. And then, after a great deal of math and a wealth of assumptions, they prove that a system of private property and free markets provides a perfect balance between those limited means and unlimited desires.

But, as I also teach them, the mainstream presumption is that scarcity is universal—both transcultural and transhistorical. In other words, they start with the idea that all human beings, in all times and places, have had to confront and solve the problem of scarcity.

An alternative is to see scarcity as an institutional, historical and social, phenomenon. In particular places, at particular times, the existing set of economic and social institutions makes certain goods and services scarce. Thus, for example, oil is scarce because of the particular configuration of the energy industry, the personal car and truck culture, the government-sponsored expansion of the highway system, and so on. That’s what makes oil scarce. Similar stories can be told about the scarcity of water, arable land, good public transportation, high-quality mass education, and so on. Their scarcity is the product of particular sets of institutions in particular societies.

Why is that important? Because, as against the assumption of mainstream economists that scarcity is always with us (and therefore can’t be changed), the idea that scarcity is an institutional phenomenon means that changing economic and social institutions can change or eliminate scarcities.

The same applies, of course, to abundances. Right now, we’re living in a society that has created a surplus of labor (and, as a result, stagnant wages), which is part and parcel of capitalism’s law of population. If we get rid of capitalist institutions, then we can create a new law of population, one in which the labor workers perform and the value they create are not turned against them.


One of the most studied issues in contemporary economics is the effect of an increase in the minimum wage. But here we have a panel of so-called experts composed of mainstream economists who are uncertain—about whether employment will decrease or output will increase.

Ordinarily, I would applaud a health dose of uncertainty among economists, especially mainstream economists.


But, of course, mainstream economists show themselves to be quite certain about things other than the minimum wage, such as the idea that the median American household, notwithstanding the small increase in household income, is actually much better off.

Just sayin’. . .


I have to laugh when I read the back and forth about who sneered at whom in the battle over mainstream macroeconomics.

According to Paul Romer, Chicago’s rejection of MIT-style macroeconomics was a defensive reaction to the sarcasm of Robert Solow. Paul Krugman says no; Dornbusch, Fischer, and others at MIT tried to meet Chicago halfway but “Chicago responded with trash talk.”


First, is anyone surprised that economists at Chicago and MIT engaged in sarcasm toward each other’s work? That’s what mainstream economists do all the time. They’re dismissive of the work in other academic disciplines. They ridicule radical and heterodox approaches within economics. And, yes, they engage in trash talk about mainstream theories other than their own. All the time. For as long as I’ve been studying economics. And of course even earlier.

Second, we’re going to now explain the pendulum swings of mainstream macroeconomics, back and forth between more Keynesian versions and more neoclassical versions, according to who sneered at whom? There’s a bit more going on here, including developments inside the discipline and events in the world beyond the academy. The trajectory of mainstream macroeconomics both influenced and was influenced by everything else taking place inside and outside the academy (and I doubt trash-talking between schools of thought had a whole helluva lot to do with it).

Modern Economics


So, what did take place? Basically (and Greg Mankiw [pdf] is a pretty good guide here, at least once you set aside the silly language of scientists and engineers), mainstream macroeconomics (the blue and yellow bars in the chart above) was invented in the late-1940s/early-1950s as neoclassical economists (like Paul Samuelson and John Hicks) attempted to domesticate Keynesian economics and combine it with neoclassical economics, thus creating what came to be called the “neoclassical synthesis.” (In those days, the teaching of mainstream economics started with macroeconomics, thus reflecting the problems of capitalist instability that culminated in the first Great Depression, and then turned to the supply-and-demand framework of neoclassical microeconomics. These days, it’s the reverse: micro before macro.) Chicago, too, was part of the synthesis, to the extent that Milton Friedman and others spoke the same language, although of course they arrived at very different conclusions: while Paul Samuelson and Co. believed they’d solved the problem of instability, through active fiscal and monetary policies, Friedman and Co. preached the virtues of free markets and the problems created by government intervention. It was the visible hand of government intervention versus the invisible hand of laissez-faire.*

In the mid-1970s, a new approach emerged at Chicago—the so-called rational expectations revolution of Robert Lucas and Thomas Sargent—that is best described as neo-neoclassical macroeconomics. The idea was that, since on average economic agents had expectations that coincided with the “real” values in the economy (akin to the “correct” predictions of econometricians), including the outcomes of any and all economic policies, it was simply impossible to surprise rational people systematically. Therefore, government policy aimed at stabilizing the economy was doomed to failure.

The “new Chicago” economists then developed a whole series of macroeconomic models based on perfect information, rational expectations, and instantaneously market-clearing prices—whereby the only problems came from “exogenous shocks.” MIT (and Berkeley and other departments) responded by focusing on asymmetric information, “sticky” prices, and other market imperfections that might lead capitalist economies to less than full employment. It’s what we now call call “new Keynesian” economics.

Those are the limits of the current orthodoxy—the limits of the kinds of models that can be used and of the policies that should be adopted. They are the limits of the debate within mainstream economics.

And whatever sneering takes place between the two sides is, for those of us who practice a different kind of economics, merely a storm in a teacup.


*Here I’m referring only to mainstream macroeconomics. All the other approaches, from the Keynesian and Sraffian economics of Cambridge University through Modern Monetary Theory to Marxian economics, were then and continue to be simply sneered at and ridiculed by both MIT and Chicago.


The Federal Reserve Bank of Atlanta has confirmed what many of us have suspected for a long time: job tenure is declining not just for millenials, but for workers of all wages.

What we see in this chart—using the 20- to 30-year-olds, for example—is that the median job tenure was four years among those born in 1953 (baby boomers) when they were between 20 and 30 years old. For 20- to 30-year-olds born in 1993 (millennials), however, median job tenure is only one year. Similar—and some even more dramatic—declines occur across cohorts within each age group.

Declining job tenure is not just all about millennials having short attention spans. In fact, there is a greater (five-year) decline in median job tenure between 41- and 50-year-old “Depression babies” (born in 1933) and 41- to 50-year-old GenXers (born in 1973).

The authors of the report dispute the attention-span explanation for declining job tenure. But then they go on to paint a rosy picture of what this means—for workers (“a world of possibilities that our parents and grandparents never dreamt of”!) and for the economy as a whole (“the flexibility of workers seeking their highest rents and the flexibility of firms to seek better matches for their needed skills mean greater productivity—not to mention growth—all around”).

What the authors fail to mention is that declining job tenure across the board means much higher corporate profits (since employers can hire and shed workers more easily) and a lot more work for workers (since they have to spend more time and energy making themselves “attractive” to employers and figuring out how they’re going to survive between jobs).

Declining job tenure—what mainstream economists refer to as “flexible” labor markets—is the natural outcome of the commodification of labor power. The only solution to the problem, then, is to treat people’s ability to work as something other than a commodity. Then, we would have real flexibility in our work and in the rest of our lives.


We know (e.g., as a result of the 2013 Pew Research Center survey) that most people in the world believe that current economic arrangements favor the well-off and that economic inequality is a very big problem.*

And they’re right: the economy system in most countries is fundamentally unfair (favoring those at the top over everyone else) and that, as a result, the gap (between those at the top and everyone else) is a problem that needs to be solved—if not within the current economy system, then in a different one.

But we also know, since at least the pioneering study by Dan Ariely and Michael I. Norton, that people’s beliefs about inequality are quite different from actual levels of inequality. That notion is confirmed by a new study, by Vladimir Gimpelson and Daniel Treisman, “Misperceiving Inequality.” What they show is that, on a wide variety of measures (of income and wealth inequality, poverty, earnings for different jobs, and so on), what people think they know is often wrong. Perhaps even more important, they show that the perceived level of inequality—and not the actual level—correlates strongly with demand for redistribution and reported conflict between rich and poor.

Why should this matter? Because representations of the economy that minimize the existence of inequality or the problems associated with inequality are bound to reinforce the systematic misperceptions found by researchers.

That’s exactly what much mainstream economics accomplishes. It deflects attention from the existence of inequality (e.g., by focusing on growth versus distribution) and from the economic and social problems created by inequality (by attributing inequality to forces like globalization and technological change beyond our control or invoking more education as the solution).

Mainstream economics therefore forms part of what Gimpelson and Treisman refers to as “ideology,” “which may predispose people to ‘see’ the level of inequality that their beliefs and values convince them must exist.” And the strength of mainstream economics in the United States—in colleges and universities as well as in the media, think tanks, and in government—is one of the main reasons Americans, more than citizens in other countries, tend not to believe in inequality.

*Specifically, the public in advanced (median of 74 percent), emerging (70 percent) and developing (70 percent) economies are mostly in agreement that the current economic system generally favors the wealthy and is not fair to most people in their country. And, in 31 of the 39 countries surveyed, half or more of the population believe that the gap between the rich and the poor is a very big problem in their societies.


A reader [ht: ra] reminded me that the recent column celebrating the Trans-Pacific Partnership and free international trade by Harvard’s Gregory Mankiw has generated a great deal of controversy on the New York Times web site.

Here’s one example (by Pete C. from New York):

The consensus Ricardian view is that free trade is good for nations so long as the “winners” from trade compensate the “losers.”

In this case, it means if the 1% compensate everyone else for the lost jobs, wages, environmental protections, and all the damage “free trade” does to our nation and our communities.

What Ricardo didn’t account for was that the increased wealth and political power granted to the “winners” makes redistribution less likely, and this will probably lead to further rent-extraction and oligarchy by those who benefit from cheap labor and poor working conditions.

Economists are hired by the rich to shill for the views that will benefit the rich, not the nation as a whole. Their confidence is not misguided stupidity, it is a trick.

They are deliberately selective in their accounting of costs and benefits to support their wealthy masters.

The TPP is also supported unanimously by the same Republican party that is trying to enact a 270 billion dollars wealth transfer to the wealthiest 0.1% of the people by repealing the estate tax.

These are not people who are looking out for the economic wellbeing of the nation as a whole.

So when economists like Greg Mankiw say to support this “free trade” deal, run as fast as you possibly can in the other direction.

Much (but certainly not all) of the rest of the commentary follows similar lines, many of them quite sophisticated rebuttals of Mankiw’s free-trade dogma. Basically, the gains from free international trade might look like good in the fantasy world of neoclassical economics (and in the original theory of relative or comparative advantage developed by David Ricardo) but they mostly don’t exist in practice, in the way international trade and free-trade agreements are practiced in the real world.

Here’s one of my favorites (by John M. from Brooklyn):

So the American people are basically racist, lazy socialists and that’s why they oppose TPP, and the answer is to outsource to cheap labor markets i.e. “reduce labor inputs” and then the market will replace high paying manufacturing jobs with minimum wage jobs at McDonalds.

Sure, let the 1% hoard even more money by undercutting wages here at home and all will be well. Yeah, we’ve seen how that works.

And, of course, this one (by Siobhan from New York):

Ah, yes. Those “long run” benefits. Destroy good-paying manufacturing in the US, and increase the number of poor paying “service jobs.”

But also lower the cost of things like clothing with cheap imports. So presumably, people making poverty wages can still afford clothing, right? Never mind the Walmart employees taking up collections if [sic] canned goods for co-workers at Thanksgiving.

And how about Nafta? According to economists, that was a clear winner. According to the majority of the US, living with the results, it was a disaster.

And once again, “who are you going to believe, me or your own lying eyes?”

I’ve taught the theory Mankiw relies on scores of times over the years (although, in contrast to Mankiw, I actually explain the underlying assumptions). Students seem to be genuinely convinced by the elegance of the model (or, perhaps, by the silly examples used in the textbooks, where Jack and Jill can be seen to benefit because they specialize according to their relative advantages and then trade). They rarely pose questions or raise objections at the time. But then they get into the real world and find or develop other economic stories, other economic representations, according to which there are winners and losers and the losers never get compensated for their losses.

That’s not to say all the everyday representations of the economy run counter to the mainstream tales taught in introductory economics courses across the country and around the world. But, at least in a few cases, such as free trade and minimum wages, they’re likely to take Pete C.’s advice and “run as fast as you possibly can in the other direction.”

employment gap

Mainstream economists have, it seems, rediscovered what we’ve known since at least the middle of the nineteenth century: capitalism produces a relative surplus population of unemployed and unemployed workers. And that surplus of labor puts downward pressure on workers’ wages.

Back then it was called the “industrial reserve army.” I have referred to it since 2010 as the “reserve army of the underemployed.” David G. Blanchflower and Andrew T. Levin now point to the same phenomenon in terms of the “employment gap,” that is, the combination of conventional unemployment (individuals who did have a job, are now not working at all, and are actively searching for a job), underemployment (that is, people working part time who want a full-time job), and hidden unemployment (people who are not actively searching but who would rejoin the workforce if the job market were stronger).

What Blanchflower and Levin find is instructive.

First, the conventional unemployment rate has not served as an accurate reflection of the evolution of labor market slack.

it is evident that the U.S. economic recovery remains far from complete in spite of apparently reassuring recent signals from the conventional unemployment rate. Indeed, while the unemployment gap has become quite small, the incidence of underemployment remains elevated and the size of the labor force remains well below CBO’s assessment of its potential. In particular, the employment gap currently stands at 1.9 percent, suggesting that the “true” unemployment rate (including underemployment and hidden unemployment) should be viewed as around 71⁄2 percent. Gauged in human terms, the current magnitude of the employment shortfall is equivalent to about 3.3 million full-time jobs.

Second, in recent years, wage growth has been pushed down by a combination of the unemployment rate, the nonparticipation rate, and the underemployment rate. In particular,

we suspect that the wage curve is relatively flat at elevated levels of labor market slack, i.e., a decline in slack does not generate any significant wage pressures as long as the level of slack remains large. As noted above, our benchmark analysis indicates that the true unemployment rate is currently around 71⁄2 percent—a notable decline from its peak of more than 10 percent but still well above its longer-run normal level of around 5 percent. Thus, the shape of the wage curve can explain why nominal wage growth has remained stagnant at around 2 percent over the past few years even as the employment gap has diminished substantially. Moreover, our interpretation suggests that nominal wages will not begin to accelerate until labor market slack diminishes substantially further and and the true unemployment rate approaches its longer-run normal level of around 5 percent.

In other words, what Blanchflower and Levin have discovered is that there is a large relative surplus population of workers and that the existence of such a reserve army has a dampening effect on workers’ wages.

Now, all they need to do is discover a third component of what we’ve known since the Mohr wrote back in 1867: “The labouring population therefore produces, along with the accumulation of capital produced by it, the means by which it itself is made relatively superfluous, is turned into a relative surplus population; and it does this to an always increasing extent. This is a law of population peculiar to the capitalist mode of production”