Posts Tagged ‘mainstream’

political-22

To judge by Christopher Snyder’s attempt to defend contemporary economists, the answer is clear: nothing!

Yes, Snyder is right, economists have expanded their domain, to analyze such issues as art auctions and corruption. But then he goes off the rails.

That’s because the only kind of economics Snyder appear to know about and give credence to is mainstream economics—in terms of what he argues are the “core concepts” that underlie economists’ thinking.

What are those core concepts, around which all economists supposedly organize their theories and models?

For starters, Snyder thinks the most important one is “scarcity”:

Devoting resources to one project—say, preventing diabetes—means some other worthy project—curing cancer—goes unserved. So, in determining whether a choice should be undertaken, one of the functions of economics is to argue that its benefits should not be considered in isolation but weighed against its costs. Costs put a dollar value on what has to be given up when one choice is made over another.

But he never even considers the possibility that scarcity is institutionally created, not a given. And different economies are characterized by different kinds of scarcities, which are endogenously produced and reproduced. Thus, capitalism both creates and is characterized different scarcities from other economic systems, such as slavery and feudalism. Where is that in Snyder’s definition of what economists do and the core concepts they supposedly hold.

And then there’s “value,” which for Snyder “is the result of the interaction of several impersonal market forces,” illustrated in the usual fashion:

Figure-2-Snyder-768x671

But there’s no mention of long-run “natural” prices (of the sort classical economists such as David Ricardo or, more recently, Piero Sraffa focused on) or a class theory of value (emphasizing surplus labor, which Karl Marx developed in his critique of political economy)—or any one of a large number of other ways value can be, has been, and is being analyzed within economics.

Finally, Snyder, discusses “modern empirical research” and the attempt to uncover “true causal relationships rather than overinterpreting apparent correlations as causation.”

Uncovering causal relationships is difficult in economics. Opportunities to run experiments are limited by the expense and ethics involved in controlled interventions in markets (although these opportunities are growing, owing to an explosion of interest in laboratory and field experiments).

Once again, Snyder overlooks the many alternative approaches—concerning both “facts” and “causation”—within economics.

Sure, mainstream economists might claim they’ve finally solved the problem of “causal identification” (as they’ve claimed so many other times in the past). But they still fail to acknowledge the possibility that different economic theories produce different sets of facts. Nor do they consider the idea that economists actually use different notions of causation: some limit themselves to essentialist, one-way causation (from given causes to effects), while others, criticize essentialism and look at mutual effectivity (in which everything is seen to be both cause and effect).

The existence of different notions of scarcity, value, and causation within economics doesn’t prove that mainstream economists are wrong. It merely shows that reducing economics to a set of core concepts that pertain only to what mainstream economists do is wrong.

The problem, of course, is that’s the only set of concepts to which generations of students, who have been taught by mainstream economists, have been exposed. And Snyder just continues that tradition.

In the end, mainstream economists are good for nothing precisely because they exclude all other ways of thinking about and doing economics.

wage-inequality

Apologists for mainstream economics (such as Noah Smith) like to claim that things are OK because good empirical research is crowding out bad theory.

I have no doubt about the fact that the theory of mainstream economics has been bad. But is the empirical research any better?

Not, as I see it, in the academy, in the departments that are dominated by mainstream economics. But there is interesting empirical work going on elsewhere, including of all places in the International Monetary Fund (as I have noted before, e.g., here and here).

The latest, from Mai Dao, Mitali Das, Zsoka Koczan, and Weicheng Lian, documents two important facts: the decline in labor’s share of income—in both developed and developing economies—and the relationship between the fall in the labor share and the rise in inequality.

I demonstrate both facts for the United States in the chart above: the labor share (the red line, measured on the left) has been falling since 1970, while the share of income captured by those in the top 1 percent (the blue line, measured on the right) has been rising.

labor shares

Dao et al. make the same argument, both across countries and within countries over time: declining labor shares are associated with rising inequality.

And they’re clearly concerned about these facts, because inequality can fuel social tension and harm economic growth. It can also lead to a backlash against economic integration and outward-looking policies, which the IMF has a clear stake in defending:

the benefits of trade and financial integration to emerging market and developing economies—where they have fostered convergence, raised incomes, expanded access to goods and services, and lifted millions from poverty—are well documented.

But, of course, there are no facts without theories. What is missing from the IMF facts is a theory of how a falling labor share fuels inequality—and, in turn, has created such a reaction against capitalist globalization.

Let me see if I can help them. When the labor share of national income falls—the result of the forces Dao et al. document, such as outsourcing and new labor-saving technologies—the surplus appropriated from those workers rises. Then, when a share of that growing surplus is distributed to those at the top—for example, to those in the top 1 percent, via high salaries and returns on capital ownership—income inequality rises. Moreover, the ability of those at the top to capture the surplus means they are able to shape economic and political decisions that serve to keep workers’ share of national income on its downward slide.

The problem is mainstream economists are not particularly interested in those facts. Or, for that matter, the theory that can make sense of those facts.

Henry_P._Moore_American_-_Slaves_of_General_Thomas_F._Drayton_-_Google_Art_Project  5c79dba28c324a9794507ced2a6987c95c392552

As I tell my students, nothing gets a mainstream economist frothing at the mouth quite like mentioning Karl Polanyi.

Or at least it used to, when mainstream economists actually knew who Polanyi was and grasped—however dismissively—what he wrote about the history of capitalism.

To his credit, Eric Hilt (pdf) appears to know something about the author of The Great Transformation and how his work influenced the new history of capitalism. And his review of ten recent books, including Edward Baptist’s The Half Has Never Been Told and Sven Beckert’s Empire of Cotton: A Global History, is not as dismissive as those of other mainstream economists, such as Alan L. Olmstead.

Much of the research of economic historians focuses on questions originating in economic theory, which tend to be quite narrow. In contrast, these book present expansive narratives and explore questions that may not be amenable to the analytical tools of economists. The authors’ critical perspectives also distinguish their work from that of economic historians and make it relevant to the concerns of many popular readers. The historians of capitalism rightly remind us that economic growth and development can have human costs not captured in average incomes; that our economic history includes no small measure of cruelty, coercion, and expropriation, rather than free exchanges occurring in the context of secure property rights; and that the economic system we have today is not a natural condition, but the outcome of policy choices that could have been made differently.

Hilt is, I think, correct: the new history of capitalism does represent a reminder to—and thus an indictment of—contemporary mainstream economics, precisely because it includes an analysis of the “cruelty, coercion, and expropriation” of the emergence and development of capitalism and the idea that contemporary capitalism is “not a natural condition.”

Generations of economics students won’t have seen or heard either of those propositions. Indeed, what little history has been presented to them emphasizes exactly the opposite: that capitalism emerged both smoothly—without conflict, through voluntary decisions and the spread of markets—and naturally—in a manner that corresponds to human nature.

But then, as if he can’t help himself, Hilt chooses the side of mainstream economists against the new historians of capitalism—because they haven’t demonstrated the appropriate respect. On Hilt’s reading, Baptist, Beckert, and the others haven’t respected capitalism, either historically (because of the role of slavery and its coercive institutions in the history of capitalism) or today (especially after the crash of 2007-08 and the misery it has visited on tens of millions of ordinary citizens, in the United States and around the world). And they don’t respect the “rigor” and “sophisticated analyses” of mainstream economic history, which they “have failed to engage.”

The influence of the recent crisis and the Great Recession in these works. . .creates something of a pitfall for their analysis. Just as poor historical analogies can distort our understanding of the present, modern analogies can produce fallacious or unsound is misapplied. Although financial development often leads to volatility, and although venality and corruption among financiers seems to be as close to a historical constant as one can find, not all finance is harmful. The financial sector performs of vitally important function. . .

Ignoring the economic history literature has led historians of capitalism to make assertions that have been refuted conclusively and to get important elements of their arguments wrong.

In the end, what Hilt can’t seem to abide in the new history of capitalism are two things: first, that historically violence played an important role in the emergence and development of capitalism—rather than, as mainstream economists would have it, that the brutal institutions of slavery and government imposition of market forces are fundamentally incompatible with capitalism; and second, that methodologically the new historians fail to articulate and test “counterfactual” statements.

The fact is, mainstream economists always seek to minimize the role of violence and force in the emergence and development of capitalism and to resort to problematic causal inferences in an attempt to isolate the effects of economic, cultural, political and natural forces within a complex, evolving social totality.

So, no, capitalism didn’t need to resort to “cruelty, coercion, and expropriation” over the course of its history. But it did—and those conditions that are often hidden underneath the “very Eden of the innate rights of man” have stamped both its origins and the way it continues to operate today.

Or, as Polanyi (pdf) himself wrote,

the market has been the outcome of a conscious and often violent intervention on the part of government which imposed the market organization on society for noneconomic ends.

 

labor-income

John Hatgioannides, Marika Karanassou, and Hector Sala are absolutely right: mainstream macroeconomists and policymakers never venture beyond the “holy trinity” of economic growth, inflation, and unemployment.* Everything else, including the distribution of income and wealth, is relegated to the fringes.

This problem, while always serious, has been magnified in recent decades as inequality has grown to obscene levels, particularly in the United States. The labor share (the blue line in the chart above) has been falling since 1960 and, in the past decade and a half, it dropped an astounding 10.2 percent. Meanwhile, the share of income captured by the top 1 percent (the red line in the chart) has soared, rising from 10.5 percent in 1976 to 19.6 percent in 2014.

In order to rectify the problem, Hatgioannides, Karanassou, and Sala propose to bring inequality in from the margins as the “missing fourth statistic.”

They focus particular attention on inequality in relation to tax contributions. But they do so in the manner that departs from the usual discussion, which leaves the discussion at absolute income tax contributions (such as the share of income taxes paid by each economic group). Those are the numbers we often hear or read, which seek to show how progressive the U.S. tax system is. For example, according to the Tax Foundation, the top 1 percent paid a greater share of individual income taxes (39.5 percent) than the bottom 90 percent combined (29.1 percent).

Instead, Hatgioannides, Karanassou, and Sala concentrate on the ratio of the average income tax per given income group divided by the percentage of national income captured by the same income group (what they call the Effective Income Tax contribution), whence they calculate an inequality index (the Fiscal Inequality Coefficient).

What the Fiscal Inequality Coefficient shows is the relative contribution of filling the fiscal coffers for different pairs of income groups.

FIC

In the figure above, they plot the Fiscal Inequality Coefficient based on income shares (they also report a related index based on wealth), of the bottom 90 percent versus the top 10 percent, the bottom 99 percent versus the top 1 percent, and the bottom 99.9 percent versus the top 0.1 percent for 1962, 1980, 1995, 2010, and 2014.

Thus, for example, the Fiscal Inequality Coefficient based on income shares remains relatively constant for all pairs for years 1962 and 1980 but increases significantly by 2010—with the bottom 90 percent effectively contributing 6.5 times more than the top 10 percent, the bottom 99 percent 21.4 times more than the top 1 percent, and the bottom 99.9 percent effectively contributing 89.7 times more than the top 0.1 percent.**

Clearly, the relative income tax burden for those at the top has fallen over time, demonstrating that the U.S. tax system has become less, not more, progressive.

And the authors’ conclusion?

In the current era of fiscal consolidation should the rich be taxed more? Our evidence suggests unequivocally yes.

 

*Their paper is discussed in the Guardian by Larry Elliott. The submitted version of their article is available here.

**The results are even more dramatic if one calculates the Fiscal Inequality Coefficient based on household wealth shares: in 2010, the Bottom 99.9 percent contributed 208.9 times more than the Top 0.1 percent, nearly four times more than what it was in 1980!

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Almost very time MFA hears a mainstream economist speak—on topics ranging from the danger of raising the minimum wage to how we all benefit from free trade and globalization—she responds, “Where did they get their degree, from a Cracker Jack box?”

No doubt, she’d react in the same manner if she listened to the members of the closing panel at the 2017 Lindau Meeting on Economic Sciences, who were asked to answer the following question: what could and should we do about inequality?

It’s a terrific question, given the obscene—and still rising—levels of inequality that characterize contemporary capitalism, in the United States and around the world. But those who take the time to watch the video (available here) just aren’t going to learn much about either the causes of inequality or what we can do about it.

Nobel-inequality

The panel consisted of three winners of the so-called Nobel Prize in Economic SciencesDaniel L. McFadden (2000), James J. Heckman (2000), and Christopher A. Pissarides (2000)—and one “young economist,” Rong Hai.

Individually and together, the panelists simply don’t have anything interesting or insightful to say about inequality.

It’s true, none of the men received their Nobel Prizes for research on inequality, although Hai is currently doing research on inequality (e.g., in relation to credit constraints and tax policy). That itself is a comment on how little inequality has figured as an important concern within mainstream economics. And, given the venue, they’re all mainstream economists. Because of that, there’s little they can say—and a great deal they simply can’t say—about inequality.

Their comments (only some of which were actually prepared) range from the obvious—the issue of poverty is different from that of inequality—to the all-too-frequent sidestep—inequality is caused by globalization and technology.

But they don’t have anything to say about contemporary economic and social institutions, especially those of capitalism, or about history. They don’t discuss in any detail the changes in recent decades that have led to the current obscene levels of inequality or, for that matter, the relationship between the factor distribution of income (e.g, between labor and capital) and the size distribution of income (e.g., the growing gap between the 1 percent and everyone else).

Their concern about and knowledge of the causes and consequences of inequality are, at least to judge from their presentations in this panel, stupefyingly limited.

Maybe MFA is right: they did get their degrees from Cracker Jack boxes.

min-wage

A couple of weeks ago, I published a guest post, by minimum-wage expert Dale Belman, about a controversial study of the effects of an earlier decision in Seattle to raise the local minimum wage to a level much higher than the federal minimum wage of $7.25 an hour.

Now, in Trump’s America, we’re seeing exactly the opposite: an attempt, on the part of the Republican-controlled Missouri legislature, to roll back local minimum wages to levels that are no higher than the state minimum of $7.40 an hour.

Of course, that’s already happened in other places, such as Ohio and Alabama, which affected minimum-wage workers in Cleveland and Birmingham. And, in all these places, Republican legislatures have used the arguments mainstream economists—but not most empirical studies—have offered them: higher minimum wages might seem to be the best way of helping low-wage workers but, since they lead to a loss of employment (either though dismissals or automation), workers earning at or just above the existing minimum wage are actually hurt.

Well, I’ve dealt with that argument many times on this blog, including a post I did in July of last year, in which I argued that employers’ profits were the real obstacle:

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.

Republicans and business groups in Missouri, as elsewhere around the country, are doing all they can to push back on the wave of municipal minimum-wage increases in order to safeguard those profits—with the same boiler-plate rhetoric:

“We can’t let the biggest economic engine in the state, St. Louis, become an island that employers avoid due to higher labor costs,” Missouri Chamber of Commerce & Industry President Daniel Mehan said in an interview Friday. Elevated city minimum wages would cost workers jobs, encourage businesses to automate, and create confusion along city borders, he said.

What makes Missouri unique is the higher minimum wage in St. Louis, of $10 an hour, had already been in effect for months before the state pre-emption law kicked in. And workers were already experiencing the benefits:

Bettie Douglas, a worker at a St. Louis McDonald’s restaurant, expects to take a pay cut this week, though she said her manager hasn’t informed her of a new rate. Before May, the 59-year-old received $7.90 an hour, she said. Ms. Douglas, an activist seeking higher minimum wages nationwide, earned about $63 more a week because of the higher wage floor, money she said allowed her to have her water turned back on and buy school supplies for her teenage son.

“It’s made a big difference,” she said Friday. “It’s still a struggle, but I had a little extra to pay my bills.”

Some employers will of course take advantage of the new law and roll back their workers’ wages. But others aren’t convinced it’s a good idea:

“People would be angry and then they wouldn’t do a good job and they’d be resentful,” said Harman Moseley, whose STL Cinemas operates four local theaters, including the Chase Park Plaza, Moolah Theatre and MX Movies.

Of course, workers are going to be angry and resentful—and perhaps even more.

There are, I think, a couple of lessons here: First, working-class movements to improve their lot can in fact succeed, making it difficult—but, of course, not impossible—to roll them back. Second, there’s a reason why working-class Americans are suspicious not only of their employers, but also of politicians and the government. That’s particularly true when politicians are so closely aligned with their employers.

My guess is both of those lessons will be put to the test even more in Trump’s America.

www.usnews

There’s nothing that gets mainstream economists going like a proposal to raise workers’ wages.

Except the idea of raising workers’ wages in other countries.

Then you’re screwing with both wages and international trade. And mainstream thinkers just won’t allow that.

That’s why Eduardo Porter considers the AFL-CIO’s proposal that the North American Free Trade Agreement guarantee that “all workers — regardless of sector — have the right to receive wages sufficient for them to afford, in the region of the signatory country where the worker resides, a decent standard of living for the worker and her or his family” a “fairly loopy idea.”

As I see it, the only thing loopy about the proposal is the idea that the Trump administration would actually take it seriously.

Then there’s MIT’s David Autor:

Stipulating that countries must pay above-market wages when producing export goods for the U.S. feels like outrageous economic imperialism.

And finally Harvard’s Dani Rodrik, according to whom the idea of a living wage

is very difficult to define and can be harmful to employment if enforced too strictly.

So, there you have it: according to mainstream economists, attempting to raise workers’ wages, especially wages in Mexico and elsewhere, is “loopy,” an example of “economic imperialism,” and “harmful to employment” if actually enforced.

Now, to be clear, as I showed earlier this year, workers on both sides of the border have lost out, and their losses are mostly not due to NAFTA. The wage share of national income was declining in both the United States and Mexico before the free-trade agreement was implemented—and it’s continued its slide since then.

Why then are mainstream economists so opposed to raising Mexican workers’ wages—which, after all, is merely an example of leveling-up as against a race-to-the-bottom?

It’s because mainstream economists actually believe workers are paid according to their productivity. They get what they’re worth. In other words, “just deserts.”

But that’s the problem: there’s nothing necessarily just about the prices set in markets, whether for labor power or any another commodity. Raising workers’ wages above current rates—on both sides of the border—represents a different kind of economic justice. It may not be neoclassical justice, which is the only thing Porter, Autor, Rodrik, and other mainstream economists recognize.

It’s a justice based on the idea that workers lose out when they’re paid a wage but create more value than what they receive in the form of wages. They produce a surplus, which their employers appropriate. Both their Mexican employers and their U.S. employers.

Raising workers’ wages would mean there would be somewhat less surplus available to their employers in the form of profits. And that’s a kind of economic justice mainstream economists simply won’t accept.