Posts Tagged ‘markets’

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Mainstream economists and commentators, it seems, are worried that the global economy is going to come crashing down as a result of the COVID crisis. That’s why they’re willing now to consider the possibility that the current crisis is more than a normal recession, more serious even than the so-called Great Recession; in their view, it’s an economic depression.

That, at least, is the argument they present up front. But there’s something else going on, which haunts their analysis—that capitalism itself is now being called into question.

But before we get to that alarming specter, let’s take a look at the logic of their analysis about the current perils to the global economy—starting with the Washington Post columnist Robert J. Samuelson, who is basically taking his cues from a recent essay in Foreign Affairs by Carmen Reinhart and Vincent Reinhart.*

Their shared view is that the current slowdown is both more severe and more widespread than the crash of 2007-08, and the recovery will be much slower. Therefore, they argue, the COVID crisis represents the worst economic downturn since the Great Depression of the 1930s.

This is a big deal: mainstream economists and commentators are uneasy about invoking the term “economic depression.” They certainly resisted it for the crisis that occurred just over a decade ago, eventually devising a Goldilocks nomenclature, dubbing it the Great Recession (not as hot as the Great Depression but not as cold as a normal recession). As regular readers know, I had no compunction about calling it the Second Great Depression. And, according to their own logic, neither Samuelson nor the Reinharts should have either.

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According to Barry Eichengreen and Kevin O’Rourke, the financial crisis and recession had led to as big a downward shock to global industrial production in 2008 as the 1929 financial crisis, and had pounded stock market values and world trade volumes harder in 2008-09 than in 1929-30. Thus, from the perspective of the magnitude of the initial shock, the global economy was in at least as dire shape after the crash of 2008 as it had been after the crash of 1929.

Moreover, the downturn that began in 2007-08 was “largely a banking crisis” (as the Reinharts put it) only if they ignore the grotesque levels of inequality that preceded the crash (based on stagnant wages and rising profits)—which in turn fueled the need for credit on the part of workers and the growth of the finance sector that both recycled corporate profits to workers in the form of loans and led to even higher profits, creating in the process a veritable house of cards. At some point, it would all come crashing down. And, eventually, it did.

In any case, Samuelson and the Reinharts are now willing to take the next step and use the dreaded d-word to characterize current events. Here’s how the Reinharts see things:

In its most recent analysis, the World Bank predicted that the global economy will shrink by 5.2 percent in 2020. The U.S. Bureau of Labor Statistics recently posted the worst monthly unemployment figures in the 72 years for which the agency has data on record. Most analyses project that the U.S. unemployment rate will remain near the double-digit mark through the middle of next year. And the Bank of England has warned that this year the United Kingdom will face its steepest decline in output since 1706. This situation is so dire that it deserves to be called a “depression”—a pandemic depression.

And Samuelson does them one better:

In one respect, the Reinharts have underestimated the parallels between the today’s depression and its 1930s predecessor. What was unnerving about the Great Depression is that its causes were not understood at the time. People feared what they could not explain. The consensus belief was that business downturns were self-correcting. Surplus inventories would be sold; inefficient firms would fail; wages would drop. The survivors of this brutal process would then be in a position to expand.

Something similar is occurring today.

Clearly, Samuelson and even more the Reinharts are worried that the global economy—their cherished vision of the free movement of capital (but not people) and expanding trade according to comparative advantage—is currently being imperiled and may not recover for years to come. The volume of world trade is down; the prices of many exports have fallen; corporate debt is climbing; and the reserve army of unemployed and underemployed workers is massive and still growing. The prospects for a return to business as usual are indeed remote.

That’s pretty straightforward stuff, and anyone who’s looking at the numbers can’t but agree. What we’re witnessing is in fact a Pandemic—or, in my view, a Third Great—Depression.

But that’s when things start to get interesting. Because the Reinharts do understand (although I doubt Samuelson does, since he’s really only concerned about government deficits) that, when you resurrect the term depression and invoke the analogy of the 1930s, you also call forth widespread discontent, massive protest movements, and challenges to capitalism itself. Here’s how they see it:

The economic consequences are straightforward. As future income decreases, debt burdens become more onerous. The social consequences are harder to predict. A market economy involves a bargain among its citizens: resources will be put to their most efficient use to make the economic pie as large as possible and to increase the chance that it grows over time. When circumstances change as a result of technological advances or the opening of international trade routes, resources shift, creating winners and losers. As long as the pie is expanding rapidly, the losers can take comfort in the fact that the absolute size of their slice is still growing. For example, real GDP growth of four percent per year, the norm among advanced economies late last century, implies a doubling of output in 18 years. If growth is one percent, the level that prevailed in the shadow of the 2008–9 recession, the time it takes to double output stretches to 72 years. With the current costs evident and the benefits receding into a more distant horizon, people may begin to rethink the market bargain.

Now, it’s true, their stated fear is that “populist nationalism” will disrupt multilateralism, open economic borders, and the free flow of capital and goods and services across national boundaries. That’s as far as their stated thinking can go.

But the apparition that lurks in the background is that rethinking the “market bargain”—what elsewhere I have called the “pact with the devil,” that is, giving control of the surplus to the top 1 percent as long as they made decisions to create jobs, fund schools and healthcare, and be able to tackle problems like the novel coronavirus pandemic so that the majority of people could lead decent lives—will mean expanding criticisms of capitalism and the search for radical alternatives.

That’s the real specter that haunts the Pandemic Depression.

 

*Samuelson sees the wife-and-husband Reinharts as “heavy hitters” among economists:  “She is a Harvard professor, on leave and serving as the chief economist of the World Bank; he was a top official at the Federal Reserve and is now chief economist at BNY Mellon.”

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It’s time to get back to blog writing—after a 6-month hiatus during which I taught my final two courses at the University of Notre Dame (A Tale of Two Depressions and Marxian Economic Theory) and prepared for my retirement (which involved, among other things, sorting through, packing up, and moving decades of “stuff”). Now, after 38 years of teaching, I am officially Professor of Economics Emeritus. But, rest assured, I plan to continue this blog and other writing projects. 

For the first time in almost four decades (aside from a few research sabbaticals), I don’t face the prospect of returning to campus and teaching economics. But, I can’t help it, I still worry about what millions of students in the United States and around the world will learn—or at least be subjected to—when they enroll in their economics classes this fall.

One of the major issues for any economics class, especially an introductory or principles course, is how to make it useful for students. My own approach has always been to teach the basics of mainstream economics—the key assumptions, the standard models, the relevant conclusions—and then to teach the critique of mainstream economics (including alternative theories within the discipline of economics). Two for one, I used to tell the students. In my view, they would be better students and citizens of the world when they understood both how mainstream economics affected their lives and how they could criticize and explore alternatives to the hegemonic theories within economics.* And I updated the content, and made it more useful to students, as mainstream economic theories changed and as particular issues were taken up in the media and political discourse.

That’s certainly not how mainstream economists approach teaching. For example, Justin Wolfers, a liberal mainstream economist at the University of Michigan, recently announced that he wants to make introductory economics useful to students by teaching them “a set of tools that can empower them, providing insight that will guide them toward better decisions.” And those “better decisions”? Exactly the presumptions and pronouncements that mainstream economists have celebrated since their approach was invented by Adam Smith and then reinvented in the late nineteenth century as neoclassical economics. It’s the entire arsenal of comparative advantage, rational choice, opportunity cost, given scarcity, and so on.

The approach introduced by Wolfers with such fanfare is no different from the miserable and misleading analogy invoked by Harvard’s Greg Mankiw between international trade and hiring someone to shovel snow. And it accomplishes nothing more than demonstrating that current economic arrangements are exactly as they should be because, in the view of mainstream economists, free trade is always mutually beneficial:

Start thinking this way and you’ll quickly see that the ideas that guide your everyday decisions also propel international trade, which is why American engineers design iPhones, while foreign workers — who have fewer alternative opportunities — do the laborious work of putting them together. By assigning tasks this way, Americans have gotten cheaper iPhones, and Chinese and Indian consumers have gotten greater access to advanced technology.

Fortunately, there are many other economists who are devising courses that are much more useful to today’s students. Last year, Aditya Chakrabortty wrote about one such course, in which students learned that the rules of the economy “aren’t laws of nature.” And just last week, Andrew Simms and David Boyle published a new beginners’ guide to economics for non-experts:

In it we ask some heretical questions that that could get us expelled from most university economics departments, such as: is the price mechanism so clever, or rising productivity always a good thing? We talk about the trouble with growth, and why working less might be better. Our common starting point is that the economy should serve rather than dominate people, and that it must work within planetary ecological boundaries.

As against what Wolfers, Mankiw, and so many other mainstream economists teach their students, these approaches are useful to students because they serve to denaturalize both existing economic thought and economic arrangements, thereby creating space for alternative ways of thinking about how the economy is organized and creating other possibilities.

I’ll only be able to rest easy in my retirement when the teaching of economics is taken out of the hands of mainstream economists and the millions of students who enroll in economics classes are taught to think critically and creatively about the economic dimensions of their lives and the world around them.

 

*So, I was heartened and gratified when, on the occasion of my retirement, some of my former students shared their thoughts about what they’d learned along the way:

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Teaching critical literacy.

That’s what professors do in the classroom. We teach students languages in order to make some sense of the world around them. How to view a film or read a novel. How to think about economics, politics, and culture. How to understand cell biology or the evolution of the universe.

And, of course, how to think critically about those languages—both their conditions and their consequences.

I’ve been thinking about the task of teaching critical literacy as I prepare the syllabi and lectures for my final semester at the University of Notre Dame.

Lately, I’ve been struck by the way mainstream economics is usually taught as a choice between markets and policy. Whenever a problem comes up—say, inequality or climate change—one group of mainstream economists offers the market as a solution, while the other group suggests that markets aren’t enough and need to be supplemented by government policies. Thus, for example, conservative, market-oriented economists teach students that, with free markets, everybody gets what they deserve (so inequality isn’t really a problem) and greenhouse gas emissions will decline over time (by imposing a tax on the burning of carbon-based fuels). Liberal economists generally argue that market outcomes are inadequate and require additional policies—for example, minimum-wage laws (to lower inequality) and stringent regulations on carbon emissions (because allowing the market to work through carbon taxes, or even cap-and-trade schemes, won’t achieve the necessary reductions to avoid global warming).*

That’s the way mainstream economists frame the issues for students—and, for that matter, for the general public. Markets or policies. Either rely on markets or implement new policies. Once someone learns the language, they see the world in a particular way, and they’re permitted to participate in the debate on those terms.

The problem is, something crucial is being left out of those languages, and thus the economic and political debate: institutions. The existing set of institutions are taken as given. Therefore, the possibility of changing existing institutions or creating new institutions to solve economic and social problems is simply taken off the table.

Among those institutions, perhaps the key one is the corporation. The presumption within mainstream economics is that privately owned, publicly traded corporations are simply there, allowed to operate freely within markets or nudged in a better direction by government policies. What mainstream economists never encourage students (or, again the general public) to consider is the possibility that institutions—especially the corporation—might be modified or radically transformed to create the foundation for a different kind of economy.

Consider how strange that is. Corporations are the central institution when it comes to the distribution of income and therefore the obscene, and still-growing, levels of inequality in the U.S. and world economies. It’s how most workers are paid (because that’s where jobs are available) and where the surplus is first appropriated (by the boards of directors) and then distributed (to shareholders and others). And as workers’ wages stagnate, and the surplus grows, economic inequality becomes worse and worse.

The same is true with climate change. The major institution involved in producing and using fossil fuels—and therefore creating the conditions for global warming—is the corporation. Especially gigantic multinational corporations. Some make profits by extracting fossil fuels; others use those fuels to produce commodities and to transport them around the world. They are the basis of the fossil-fuel-intensive Capitalocene.

Within the language of mainstream economists, the corporation is always-already there. They may allow for different kinds of markets and different kinds of policies but never for an alternative to the institution of the corporation —whether a different kind of corporation or a non-corporate way of organizing economic and social life.

If the goal of teaching economic is critical literacy, then we have to teach students the multiple languages of economics—including the possibilities that are foreclosed by some languages and opened up by other languages. One of our tasks, then, is to look beyond the language of markets and policy and to expose students to a language of changing institutions.

Now that I begin to look back on my decades of teaching economics, I guess that’s what I’ve been doing the entire time, exploring and promoting critical literacy. I’ve always taken as one of my responsibilities the teaching of the language of mainstream economists. But I haven’t stopped there. I’ve also always endeavored to expose students to other languages, other ways of making sense of the world around them.

Maybe, as a result, some of them have left knowing that it’s not just a question of markets or policy. Economic institutions are important, too.

Addendum

To complicate matters a bit further, the three elements I’ve focused on in this blog post—markets, policy, and institutions—are not mutually exclusive. Thus, for example, at least some conservative mainstream economists do understand that properly functioning markets do presume certain institutions (such as the rule of law and the protection of private property) and policies (especially not regulating markets), while liberals often advocate policies that allow markets to operate with better outcomes (I’m thinking, in particular, of antitrust legislation) and institutions to be safeguarded (especially when they might be threatened by grotesque levels of inequality and the effects of climate change). As for institutions, I can well imagine noncorporate enterprises—for example, worker cooperatives—operating within markets and relying on government policy. However, such enterprises imply the existence of markets and policies that differ markedly from those that prevail today, which are taken as given and immutable by mainstream economists.

 

*Dani Rodrik summarizes the terms of the debate well in a recent column: when a local factory closes because a firm has decided to outsource production,

Economists’ usual answer is to call for “greater labor market flexibility”: workers should simply leave depressed areas and seek jobs elsewhere. . .

Alternatively, economists might recommend compensating the losers from economic change, through social transfers and other benefits.

Once again, it’s a question of markets (in this case, the labor market) and policy (more generous social transfers to the “losers”).

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Last month, Philip Alston, the United Nations Special Rapporteur on extreme poverty and human rights (whose important work I have written about before), issued a tweet about the new poverty and healthcare numbers in the United States along with a challenge to the administration of Donald Trump (which in June decided to voluntarily remove itself from membership in the United Nations Human Rights Council after Alston issued a report on his 2017 mission to the United States).

The numbers for 2017 are indeed stupefying: more than 45 million Americans (13.9 percent of the population) were poor (according to the Supplemental Poverty Measure*), while 28.5 million (or 8.8 percent) did not have health insurance at any point during the year.

But the situation in the United States is even worse than widespread poverty and lack of access to decent healthcare. It’s high economic inequality, which according to a new report in Scientific American “negatively impacts nearly every aspect of human well-being—as well as the health of the biosphere.”

As Robert Sapolsky (unfortunately behind a paywall) explains, every step down the socioeconomic ladder, starting at the very top, is associated with worse health. Part of the problem, not surprisingly, stems from health risks (such as smoking and alcohol consumption) and protective factors (like health insurance and health-club memberships). But that’s only part of the explanation. But that’s only part of the explanation. The rest has to do with the “stressful psychosocial consequences” of low socioeconomic status.

while poverty is bad for your health, poverty amid plenty—inequality—can be worse by just about any measure: infant mortality, overall life expectancy, obesity, murder rates, and more. Health is particularly corroded by your nose constantly being rubbed in what you do not have.

It’s not only bodies that suffer from inequality. The natural environment, too, is negatively affected by the large and growing gap between the tiny group at the top and everyone else. According to James Boyce (also behind a paywall), more inequality leads to more environmental degradation—because the people who benefit from using or abusing the environment are economically and politically more powerful than those who are harmed. Moreover, those at the bottom—with less economic and political power—end up “bearing a disproportionate share of the environmental injury.”

Social and institutional trust, too, decline with growing inequality. And, as Bo Rothstein explains, societies like that of the United States can get trapped in a “feedback loop of corruption, distrust and inequality.”

Voters may realize they would benefit from policies that reduce inequality, but their distrust of one another and of their institutions prevents the political system from acting in the way they would prefer.

But what are the economics behind the kind of degrading and destructive inequality we’ve been witnessing in the United States in recent decades? For that, Scientific American turned to Nobel laureate Joseph Stiglitz for an explanation. Readers of this blog will be on familiar ground. As I’ve explained before (e.g., here), Stiglitz criticizes the “fictional narrative” of neoclassical economics, according to which everyone gets what they deserve through markets (which “may at one time have assuaged the guilt of those at the top and persuaded everyone else to accept this sorry state of affairs”), and offers an alternative explanation based on the shift from manufacturing to services (which in his view is a “winner-takes-all system”) and a political rewriting of the rules of economic game (in favor of large corporations, financial institutions, and pharmaceutical companies and against labor). So, for Stiglitz, the science of inequality is based on a set of power-related “market imperfections” that permit those at the top to engage in extracting rents (that is, in withdrawing “income from the national pie that is incommensurate with societal contribution”).

The major problem with Stiglitz’s “science” of economic inequality is that he fails to account for how the United States underwent a transition from less inequality (in the initial postwar period) to growing inequality (since the early 1980s). In order to accomplish that feat, he would need to look elsewhere, to the alternative science of exploitation.

While Stiglitz does mention exploitation at the beginning of his own account (with respect to American slavery), he then drops it from his approach in favor of rent extraction and market imperfections. If he’d followed his initial thrust, he might have been able to explain how—while New Deal reforms and World War II managed to engineer the shift from agriculture to manufacturing, reined in large corporations and Wall Street, and bolstered labor unions—what was kept intact was the ability of capital to appropriate and distribute the surplus produced by workers. Thus, American employers, however regulated, retained both the interest and the means to avoid and attempt to undo those regulations. And eventually they succeeded.

What is missing, then, from Stiglitz’s account is a third possibility, an approach that combines a focus on markets with power, that is, a class analysis of the distribution of income. According to this science of exploitation or class, markets are absolutely central to capitalism—on both the input side (e.g., when workers sell their labor power to capitalists) and the output side (when capitalists sell the finished goods to realize their value and capture profits). But so is power: workers are forced to have the freedom to sell their labor to capitalists because it has no use-value for them; and capitalists, who have access to the money to purchase the labor power, do so because they can productively consume it in order to appropriate the surplus-value the workers create.

That’s the first stage of the analysis, when markets and power combine to generate the surplus-value capitalists are able to realize in the form of profits. And that’s under the assumption that markets are competitive, that is, there are not market imperfections such as monopoly power. It is literally a different reading of commodity values and profits, and therefore a critique of the idea that capitalist factors of production “get what they deserve.” They don’t, because of the existence of class exploitation.

But what if markets aren’t competitive? What if, for example, there is some kind of monopoly power? Well, it depends on what industry or sector we’re referring to. Let’s take one of the industries mentioned by Stiglitz: Big Pharma. In the case where giant pharmaceutical companies are able to sell the commodities they produce at a price greater than their value, they are able to appropriate surplus from their own workers and to receive a distribution of surplus from other companies, when they pay for the drugs covered in their health-care plans. As a result, the rate of profit for the pharmaceutical companies rises (as their monopoly power increases) and the rate of profit for other employers falls (unless, of course, they can change their healthcare plans or cut some other distribution of their surplus-value).**

The analysis could go on. My only point is to point out there’s a third possibility in the debate over growing inequality in the United States—a theory that is missing from Stiglitz’s article and from Scientific American’s entire report on inequality, a science that combines markets and power and is focused on the role of class in making sense of the obscene levels of inequality that are destroying nearly every aspect of human well-being including the natural environment in the United States today.

And, of course, that third approach has policy implications very different from the others—not to force workers to increase their productivity in order to receive higher wages through the labor market or to hope that decreasing market concentration will make the distribution of income more equal, but instead to attack the problem at its source. That would mean changing both markets and power with the goal of eliminating class exploitation.

 

*The official rate was 12.3 percent, which means that 39.7 million Americans fell below the poverty line.

**This is one of the reasons capitalist employers might support “affordable” healthcare, to raise their rates of profit.

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