Posts Tagged ‘mainstream’

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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 nance- 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.

 

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Mainstream economists, such as Harvard’s Gregory Mankiw, celebrate international trade (including outsourcing, which they argue is just another form of international trade) at every opportunity. But right now, voters—especially in the United States and the United Kingdom—aren’t buying what mainstream economists are selling. They are (as I’ve argued here, here, and here) ignoring the so-called experts.

That rejection clearly disturbs Mankiw, who just adds fuel to the fire by arguing that the more education people acquire the more they will eventually come around to his view. The implication, of course, is that being against free trade is a sign of ignorance.

We all know that Mankiw and his mainstream colleagues have spent an enormous amount of time and effort—in abstract modeling and lending their support to trade agreements, in the classroom, research, and the public arena—extolling the benefits of more international trade.

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But it’s clear, not only from the Brexit vote and the rhetoric on both sides of the current U.S. presidential campaigns, but also from a survey earlier this year by Bloomberg, that many people remain opposed to free international trade: 65 percent favor restrictions on imported goods to protect American jobs, 44 percent think NAFTA has been bad for the U.S. economy, and 82 percent are willing to pay more for U.S.-made goods.

Clearly, mainstream economists’ campaign hasn’t worked. So, Mankiw turns to the research of two political scientists, Edward Mansfield and Diana Mutz (pdf and pdf) to find what he wants: anti-trade sentiments are positively correlated with isolationism, nationalism, and ethnocentrism and negatively with level of education. So, in his view,

there is reason for optimism. As society slowly becomes more educated from generation to generation, the general public’s attitudes toward globalization should move toward the experts’.

What I find interesting in Mansfield and Mutz’s research is actually something quite different: people’s attitudes toward international trade (including outsourcing) are not determined by narrow self-interest (such as their job skills or the industry within which they work) but, rather, by the “collective impact that trade policy has on the nation” (what they refer to as a “sociotropic influence,” because of the tendency to rely on collective-level information rather than personal experience).

That result is important because it suggests both mainstream economists and the general public, who may be and often are using very different representations of the economy, have an equally global view of the impact of international trade. Both groups are referring to and forming their judgements based on the nation as a whole. However, while mainstream economists tend to celebrate international trade based on the idea that the nation as a whole benefits (because of the efficient allocation of resources, cheaper imports, and so on), everyday economists may be emphasizing the fact that their nation is internally divided. Thus, in their view, many of their fellow citizens have been negatively affected by international trade and the only real beneficiaries are their employers. So, they continue to be critical of free trade and international trade agreements (such as NAFTA and the Trans-Pacific Partnership).

As I see it, more education won’t eliminate that critical view—as long as trade agreements are enacted within a profoundly unequal society and workers have no say in designing the policies that govern international trade.

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Peggy M. Hart, The Magic of Coal (1945)

As I have argued many times on this blog, representations of the economy are produced and disseminated in many different spaces (in addition to academic economics departments) and through many different media (in addition to the usual, mostly mainstream economics textbooks).

One example of this proliferation of economic representations is children’s literature. Children are the targets of educators and writers, most of whom (at least these days) are determined to make sure children get the “correct” understanding of key concepts and institutions. And, for the most part, they mirror the kinds of knowledges produced by mainstream economists, albeit with language and illustrations appropriate for children.

Scholastic offers such a list (which features Homer Price by Robert McClosky, through which students learn the “law of demand”). So does Choice Literacy (which includes Tomie dePaola’s Charlie Needs a Cloak, “good for discussing the four factors of production”). And then there’s the Rutgers University Project on Economics and Children, which groups books by concept (such as Markets and Competition, Opportunity Cost, and so on).

Motoko Rich’s view is that “By and large, the economic lessons in children’s books lean left of center” (and that may be true of books that teach the importance of sharing and gift-giving) but, at least for the books on the lists provided by economics educators these days, the tendency is much more mainstream, if not purely neoclassical.

That was not always the case, as Kimberley Reynolds [ht: ja] explains, in the Soviet Union but also during the interwar period in the United Kingdom.

The fact that children’s books can have a strongly formative influence upon the young has often attracted the attention of new leaders and regimes. In the early days of the Soviet Union, Lenin and his followers harnessed the power of children’s books to shape culture. Some of the artistically vibrant work that resulted from co-opting leading writers and artists is currently on exhibit at London’s House of Illustration with the title, A New Childhood: Picture Books from Soviet Russia. In interwar Britain too, a group of socially and aesthetically radical children’s books underpinned the work of making Britain a progressive, egalitarian, and modern society. But unlike their Soviet counterparts, these books have since remained a largely hidden secret, with most scholars of the period overlooking them altogether.

A good example is Peggy M. Hart’s The Magic of Coal, which was published as a Puffin picturebook in 1945. It was the British equivalent of the Soviet “production books.”

Production books detailed the production process of economically essential resources such as coal or steel. Emphasis was placed on the difference between the capitalist and communist machinery used to create these resources; where capitalist machinery was shown to feed greed and overproduction, communist machinery provided a helping hand in creating a prosperous future everyone could enjoy. Thus production books clearly directed the child reader’s attention to a wider political narrative beyond the specificities of the text.

Production books were aesthetically modernist, combining ideas from abstract painting with typography to create a visual language strikingly different from what had gone before. Pictures held a machine-like appearance, using straight lines and elementary forms. By championing newness, it was conveyed to the child reader that they had the potential to be aesthetically innovative. Rather than simply encouraging them to learn to copy what was already seen as beautiful, aesthetic modernism puts more at stake for the child; if whatever they create has the potential to be considered beautiful, there is more incentive for them to attempt to create. Similarly, if a transformed communist society is shown to be a plausible alternative to today’s society, there is a greater incentive for the child to become an activist to help bring this society about.

Apparently, the Magic of Coal contained all the features of a production book:

Reference is made to, ‘our gas works’ and ‘our community, implying collective ownership, and all images are aesthetically modernist. Thus it is an example of the attempts of a popular front of left-wing publishers to bring the production book genre and its associated radicalism to Britain in the interwar period.”

As such, it was quite different from what passes today for children’s economics literature:

Taking the child on a journey, it tells not only of the production of coal but also elevates the miner as an important and  respectable member of society. In doing so, the text and its illustrations point towards a political goal.

The text focusses on the production process rather than around any one character. Each role within the mine is shown through illustrations and accompanying text, implying that there is something for everybody. Every individual has a skill set to offer in the production of coal and is a valuable cog in the machinery of the mine. A sense of a community at work is created and when combined with impressionist illustrations of tiny black figures and miners whose faces are blurred or have their backs to the reader, this sense of community solidifies into the socialist theory of collectivism.

The text informs the reader that the miners can attend the ‘pitbaths’ before or after work, challenging class boundaries as it suggests that before he enters the mine, a working-class man looks like, and therefore is like, any other man going about any other business. The text also tells us of the miner’s life outside of work, mentioning societies, theatre visits and higher education, indicating that the miners are not only important members of coal-fueled, modern society, but also respectable citizens with good standards of living and a thirst for culture.

I don’t know if children’s economics books of this sort—whether about coal mining or Wall Street—are being written and produced today. If they’re not, they need to be. If they are, then they need to be included in the lists that promote the economics education of children.

There is—and there needs to be—a lot more than mainstream economic ideas in representations of the economy, both inside and outside the official discipline of economics.

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Hans Haacke, “The Invisible Hand of the Market” (2009)

Mainstream economists have attempted to model and disseminate the idea of the invisible hand, especially in their textbooks.*

And, not surprisingly, many others—from heterodox economists to artists—have challenged the whole notion of the invisible hand.

But one of the best critiques of the invisible hand I have encountered can be found in Kim Stanley Robinson’s story, “Mutt and Jeff Push the Button” (which appears in Fredric Jameson’s recent book, An American Utopia: Dual Power and the Universal Army).

Here’s a longish extract:

“So, we live in a money economy where everything is grossly underpriced, except for rich people’s compensation, but that’s not the main problem. The main problem is we’ve agreed to let the market set prices.”

“The invisible hand.”

“Right. Sellers offer goods and services, buyers buy them, and in the flux of supply and demand the price gets determined. That’s the cumulative equilibrium, and its prices change as supply and demand change. It’s crowdsourced, it’s democratic, it’s the market.”

“The only way.”

“Right. But it’s always, always wrong. Its prices are always too low, and so the world is fucked. We’re in a mass extinction event, the climate is cooked, there’s a food panic, everything you’re not reading in the news.”

“All because of the market.”

“Exactly. It’s not just there are market failures. It’s the market is a failure.”

“How so, what do you mean?”

“I mean the cumulative equilibrium underprices everything. Things and services are sold for less than it costs to make them.”

“That sounds like the road to bankruptcy.”

“It is, and lots of businesses do go bankrupt. But the ones that don’t haven’t actually made a profit, they’ve just gotten away with selling their thing for less than it cost to make it. They do that by hiding or ignoring some of the costs of making it. That’s what everyone does, because they’re under the huge pressure of market competition. They can’t be undersold or they’ll go out of business, because every buyer buys the cheapest version of whatever. So the sellers have to shove some of their production costs off their books. They can pay their labor less, of course. They’ve done that, so labor is one cost they don’t pay. That’s why we’re broke. Then raw materials, they hide the costs of obtaining them, also the costs of turning them into stuff. Then they don’t pay for the infrastructure they use to get their stuff to market, and they don’t pay for the wastes they dump in the air and water and ground. Finally they put a price on their good or service that’s about 10 percent of what it really cost to make, and buyers buy it at that price. The seller shows a profit, shareholder value goes up, the executives take their bonuses and leave to do it again somewhere else, or retire to their mansion island. Meanwhile the biosphere and the workers who made the stuff, also all the generations to come, they take the hidden costs right in the teeth.”

 

*As I have discussed before, the invisible hand is a powerful metaphor “for which neoclassical economists have worked very hard to invent a tradition beginning with Adam Smith.” Smith himself only used the term twice in his published writings—once in The Theory of Moral Sentiments and again in The Wealth of Nations—and never to refer to a self-equilibrating market system, which is the way the term is used by mainstream economists today.

P&B 13.5 Monopoly Smaller Output & Higher Price

It’s the most obvious criticism of mainstream, especially neoclassical, economics.

All of the major models and policy proposals of neoclassical economics—from the theory of the firm through the gains from trade to the welfare theorems—are based on the assumption of perfect competition.

But, as is clear in the diagram above, if there’s imperfect competition (such as a single seller or monopoly), the price is higher (PM is greater than PC), the quantity supplied is lower (QM is less than QC)—and, in consequence, excess profits are not competed away and the amount of employment is lower. (Of course, the monopolist can increase demand, and therefore output, through advertising, which for mainstream economists makes no sense for perfectly competitive firms since they are presumed to be able to “sell all they want to at the going price.”)

PPF

The existence of imperfect competition by itself undoes many of the major propositions of neoclassical economics—including (as I explained back in April) the idea that there’s no such thing as a free lunch (since, as in the Production Possibilities Frontier depicted above, point A inside the frontier represents an inefficient allocation of resources, and no new resources or technology would be required, just the elimination of monopolies and oligopolies, to move to any point—B, C, or D—on the frontier).

Readers may not believe it but imperfect competition is mostly an after-thought in mainstream economics. It’s there (and extensively modeled) but only after all the heavy lifting is done based on the presumption of perfect competition—and then none of the major theoretical and policy-related propositions is revised based on the existence of imperfect competition. (The usual mainstream argument is either imperfect competition isn’t extensive or, even if prevalent, imperfectly competitive firms act much like perfectly competitive firms, not restricting output or raising prices by very much. Therefore, perfect competition remains a valid approximation to real-world economies.)

market share

Now, however, imperfect competition seems to have returned as an area of concern—in the White House Council of Economic Advisers and in the Federal Reserve Bank of Minneapolis. The irony, of course, is that the market power of a few giant firms in many industries has been growing after decades of neoliberalism and the celebration of free markets.

As James A. Schmitz, Jr. explains for the Minneapolis Fed, new research

shows that monopolies are not well-run businesses, but instead are deeply inefficient. Monopolies do drive up prices, as conventional theory suggests, but because they also reduce productivity, they often ultimately destroy most of an industry’s profits. These productivity losses are a dead-weight loss for the economy, and far from trivial.

The new research also shows that monopolists typically increase prices by using political machinery to limit the output of competing products—usually by blocking low-cost substitutes. By limiting supply of these competing products, the monopolist drives up demand for its own. Thus, in contrast to conventional theory, the monopolist actually produces more of its own product than it would in a competitive market, not less. But because production of the substitutes is restricted, total output falls.

The reduction in productivity exacts a toll on all of society. But the blocking of low-cost substitutes particularly harms the poor, who might not be able to afford the monopolist’s product. Thus, monopolies drive the poor out of many markets.

The last time monopolies came to the fore in the United States was during the first Great Depression, when Thurman Arnold (from 1938 to 1943) ran the Antitrust Division at the Department of Justice, “taking aim at a broad range of targets, from automakers to Hollywood movie producers to the American Medical Association” in order to protect society from monopoly.

Is it any surprise that now, in the midst of the second Great Depression, attention is being directed once again to the idea that gigantic national and multinational corporations with growing market power are responsible for reducing productivity and crushing low-cost substitutes, thus hurting workers and the poor?

One possibility is to get tough again with antitrust legislations and rulings, and try to restore some semblance of competitive markets. The other is to resist the temptation to turn the clock back to some mythical time of small firms and perfect competition and, instead, through nationalization and worker control, transform the existing firms and allow them to operate in the interest of society as a whole.

-Let_Them_Eat_Crack-_(Banksy_mural_in_Manhattan,_2008)

As if in direct response to one of my recent posts on “ignoring the experts,” the best mainstream economist Noah Smith can come up with is there is no single, unified elite opinion—perhaps on Brexit but not on most economic issues.

The “elite” isn’t a single unified bloc. There are many different kinds of elites. Politicians, bureaucrats, wealthy businesspeople, corporate managers, financiers, academics and media personalities can all be labeled elites. But there are huge fissures and rivalries both within and between these groups. They are almost never in broad agreement on any issue — Brexit was the exception, not the rule.

That’s not saying much. Of course, elites and elite opinions are divided. They have always have been and certainly are now.

The issue is not whether different groups or fractions within the elite hold different opinions, but the limits of those differences and the views that are marginalized or excluded as a result.

Consider the views of mainstream economists (which is really what my original post was about). They hold different views about most economic issues—from labor markets to international trade—but the range of differences is very narrow. As I explained back in January:

while conservative mainstream economists believe that efficiency, growth, and full employment stem from allowing markets to operate freely, liberal mainstream economists argue that markets are often imperfect and therefore the only way to achieve (or at least approximate) those goals is to intervene in and regulate markets. Those are the terms of the mainstream debate in economics, from the origins of modern economic discourse in the late-eighteenth century right on down to the present.

Think about it as the difference between the invisible hand and the visible hand.

Liberal mainstream economists, of course, hotly contest the free-market doctrine of their conservative counterparts. But notice also that they hold in common both the goals and the limits of economic policy with conservatives. Liberals and conservatives share the idea that the goals of an economy are to ensure efficiency, growth, and full employment. And they share the idea that economic policy should be limited to tinkering with capitalism—in the direction of more regulation or, for conservatives, more free markets—in order to achieve those goals.

That’s it, the limits of the mainstream debate.

Mainstream economists use different theories and promote different policies within those narrow limits. What they exclude are theories and policies that fall outside those limits—and thus, in their view, don’t deserve a hearing.

Their expertise ends when it comes to theories that focus on such things as the inherent instability of capitalism or the role of class in determining the value of goods and services and the distribution of income. And they exclude policies that either change the fundamental rules of capitalism or look beyond capitalism, to alternative ways of organizing economic and social life.

What that means, concretely, is mainstream economists tend to minimize the damage—to different groups of people and to society as a whole—of existing economic arrangements. Just as Paul Krugman minimizes the loss of jobs from deindustrialization (“we’re talking about 1.5 percent of the work force”), Smith understates the disruptive effects of globalization (in referring to “some economic setbacks” for the middle-class of rich nations while presuming everyone else has gained).

So, yes, mainstream economists (like the elites whose position they never contest) often find themselves disagreeing among themselves about theories and policies. But it’s precisely because the limits of their disagreements are so narrow, there’s always a surplus of meaning that falls outside of and escapes their purview. That’s when alternative theories and policies flourish—and all mainstream economists can do is invoke their self-professed expertise to attempt to quash the alternatives and relegate them to (or beyond) the margins.

Sometimes, of course, it works and non-elite opinion falls in line. But other times—after the crash of 2007-08, in the lead-up to the Brexit vote, and so on—it doesn’t and the narrow limits of expert opinion are challenged, parodied, or ignored. And other possibilities, always just below the surface, acquire new resonance.

Elites, who simply can’t or don’t want to understand, suggest the masses just eat cake (or, today, crack)—and, like Smith, hide behind the idea that “there are no easy answers to the challenges of the modern global economy.”

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David Howell is right: attempts to raise the federal minimum wage in the United States (from the current $7.25 to, say, $12 or $15 an hour) have been stymied by a no-job-losses rule—the idea (promoted by mainstream economists and employers alike) that the minimum wage should be set so that there are no job losses for anyone anywhere in the country.

Determining a suitable federal minimum wage based solely on a zero job loss rule is a public policy straightjacket that would effectively rule out any significant raise of the wage floor above that which already exists. Yet from a historical perspective, strict adherence to such policymaking criteria would have also made it impossible to ban child labor (job losses!), as well as many critical environmental and occupational health and safety regulations. It would also foreclose any consideration of policies like paid family leave, which exists in every other affluent country.

As Howell correctly explains, the possibility of some job losses—for some workers, in some places—as a result of significantly raising the minimum wage can be countered by a combination of “emergency relief” (like extended unemployment benefits) and creating new jobs (e.g., through expansionary fiscal policy and public works programs).

So, what stands in the way? Howell focuses on methodological problems (“because the identification of the wage at which there is expected to be zero job loss must be evidence-based, there is no way to establish the higher nationwide wage floors necessary for empirical tests”) and misplaced priorities (such as forgetting about “the moral, social, economic, and political benefits of a much higher standard of living from work for tens of millions of workers”).

Both are valid points. But I’d point to a third: profits. The fact is, when employers threaten to let workers go (or not hire additional workers) if the minimum wage is increased (or mainstream economists make the argument for them), they’re attempting to protect their bottom line. If they kept their existing workers, so the argument goes, their profits would fall; and if they wanted to maintain their current level of profits, they’d have to fire some of their workers and replace them with one or another form of automation. It’s all about pumping out the maximum profits from their employees.

Profits also enter the story in a second way. Private employers see the possibility of compensating for minimum-wage-related job losses—by offering workers public relief and by creating new jobs through public programs—as a challenge to their existing control over workers, jobs, and ultimately profits. That’s the second reason they oppose an increase in minimum wage, because they know full well society has the means to make up for their willingness to eliminate jobs. But then their own role in the economy and the profits that come from that role are called into question.

For both those reasons—the threat to fire workers and the threat to their monopoly as employers—profits are the real obstacle to raising the minimum wage.

There’s no getting around it. We have to challenge the sanctity of private profits, presumed and promoted by both employers and mainstream economists, in order to guarantee American workers a decent minimum wage.