Posts Tagged ‘Paul Krugman’

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John Baldessari, “Man Running/Men Carrying Box” (1988-1990)

It was Paul Samuelson who, in 1997, declared with morbid optimism that “Funeral by funeral, economics does make progress.”*

What Samuelson presumed is that, over time, wrong ideas would be killed and laid to rest and better ideas would flourish, thus creating the foundation for progress in economic thought.

That’s what I consider to be the epistemological utopianism of mainstream economic thought: using the correct scientific methods, the work that economists do gets closer and closer to the Truth—the singular, incontestable, capital-t truth. It used to be the case (for Samuelson and many others, such as fellow Nobel laureates Kenneth Arrow, Gerard Debreu, and Paul Krugman) that mathematical models represented the best way of making progress (inspired by a particular conception of nineteenth-century physics).** The current fad is to rely on randomized experiments and big data as evidence that economics is finally becoming a real, empirical science (akin to biology and medicine).

In the first case, rationalism is the reigning theory of knowledge; in the second case, it’s empiricism. However, both theories represent two sides of the same epistemological coin, defined by a radical separation between theory and reality and some sort of correspondence between them. In other words, both rationalism and empiricism are foundationalist theories of knowledge according to which the gap between theory and reality is eventually—”funeral by funeral”—closed.

It’s a utopianism that serves as both the premise and promise of mainstream economists’ practice. And we know something about the consequences of that epistemological utopianism—for example, the combination of ignorance and arrogance when it comes to the work of nonmainstream economists (who stand accused of not doing science and therefore of not contributing to the progress of economics), noneconomists (whose methods are neither mathematically nor empirically rigorous enough), and everyday economists (who either produce cultural representations that accord with the lessons of mainstream economics, in which case they be invoked as illustrations, or whose work is dismissed and needs to be attacked and eradicated, because it runs counter to mainstream economics). Not to mention the idea that, in the midst of the worst economic crises since the first Great Depression, mainstream economists could blithely assert that their theories had done just fine; the only problem was the fact that policymakers hadn’t adequately listened to or followed the advice of mainstream economists. Finally, of course, there’s the closing-off of publishing venues (like the leading journals), research funding (especially the National Science Foundation), teaching positions (especially in research universities), and so on—all in the name of a singular scientific method and conception of truth.

As I have shown (e.g., here and here), mainstream liberals today are also obsessed with the defense of science and capital-t Truth. In their zeal to attack Donald Trump and the right-wing media’s defense of his administration’s outlandish claims about a wide variety of issues—from climate change to the Mueller investigation—they increasingly invoke and rely on an absolutist theory of knowledge. And then, of course, claim for themselves the correct side in the current debates. They, too, are guided by the utopianism of essentialist theories of knowledge.

The problems with epistemological utopianism are legion. I’ve mentioned some of the nastier consequences above. But there are other issues. For example, in their defense of absolute truth, they invoke a time—before the current “post-truth” regime—when a set of institutions (such as journalism, science, and the academy) supposedly got it right. Except they can’t ever cite an example of how those institutions successfully adjudicated the facts in play—when, supposedly, there was universal assent to the truth claims, either within the academy or the wider society—and they ignore all the times when they simply got it wrong.

Moreover, they’re willing to admit that the claims to truth are often deflected by lots of other influences—such as narratives, confirmation bias, ethics, and information overload. But the problem is always “out there,” among regular people, and not the scientists themselves (whether in economics or other disciplines). Epistemological utopians simply can’t acknowledge that, in their daily practice, mainstream economists and liberal thinkers are also engaged in story-telling, that they accept evidence that confirms their preconceived notions and assess counter evidence with a critical eye, make ethics-laden decisions based on relations of unequal power, and operate with overconfidence based on the illusion of knowledge.

There are, of course, many alternatives to the utopianism of absolutist epistemology. One of them is what I call “partisan relativism,” associated with the Marxian critique of political economy.

In fact, I (with my friend and frequent coauthor Jack Amariglio) have just published an entry on “epistemology” in the Routledge Handbook of Marxian Economics. There, we discuss many different contributions to Marxian epistemology and highlight the role that postmodernism has played in providing an alternative to and moving beyond the long history of attributing to Marx a modernist project of attempting to delimit the certainly of scientific knowledge from non-science (or ideology). Thus, we write, postmodern Marxists

frequently call attention to the “relativism” that they believe is Marx’s main epistemological message and/or is exemplified in his texts. Marx’s aleatory materialism, for postmodern Marxists, also establishes an under-determination in the realm of knowledge; a discursive whole cannot close itself. Influenced by Jacques Derrida’s conception of “deconstruction,” postmodern Marxists insist that discourse is always marked by slippages, aporia, displacements, and deferments. For them, meaning is overdetermined and uncertain. A certain knower is thus a contradiction in terms.

In addition, if scientific discourse is not the mirror of nature, then there is an “ethical” dimension to all knowledge production. Cornel West, utilizing Richard Rorty among other “pragmatist” philosophers, brings out the enduring, constitutive ethical and political aspects of how and what we know, and what we intend to do with this knowledge.

Thus, we go on to explain, relativist Marxists dispute the claims of a certain knowing subject (indeed, they challenge the very idea that knowledge begins with a knowing subject) and focus instead on how knowledge claims are internal to theoretical frameworks and the manner in which knowledges produce within different theories or discourses have specific—and often quite different—conditions and consequences in the world within which those knowledges are produced.

Thus,

For many Marxist epistemologists, knowledge is active and actionable, and its existence as material image/image of the material is one requisite condition for the revolutionary socioeconomic—especially class—change that Marx vehemently proposed.

And that, in the end, is the utopian moment of Marxian epistemology—not a utopian appeal or aspiration to absolute truth, but instead a practice (one might even call it an ethics) of materialist critique. That critique operates at two different levels: it is a critique of all theoretical claims (such as those made by mainstream economists) that normalize or naturalize the existing economic and social order and a critique of capitalism itself, since from a Marxian perspective capitalist societies are based on and serve to reproduce an exploitative class structure.

It should come as no surprise then that the utopian horizon of Marxian epistemology is summarily rejected by mainstream economists and liberal thinkers—or that the latter’s epistemological utopianism often serves to locate itself within and ultimately to justify, by treating as normal or natural, the existing set of economic and social institutions.

 

*“Credo of a Lucky Textbook Author,” Journal of Economic Perspectives 11 (Spring): 159.

**It’s a particular conception of physics that has been disputed by many others, including Thomas Kuhn (and his theory of “scientific revolutions”), Paul Feyerabend (who argued that there are no useful and exceptionless methodological rules governing the progress of science or the growth of knowledge), Richard Rorty (who criticized the idea of knowledge as representation), and Michel Foucault (who showed that different systems of thought and knowledge—epistemes or discursive formations, in Foucault’s terminology—are governed by different sets of rules). Their criticisms of essentialist epistemologies apply as well to the more recent turn to “empirical” methods as the foundation of economic knowledge.

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Donald Trump’s decision to impose import tariffs—on solar panels and washing machines now, and perhaps on steel and aluminum down the line—has once again opened up the war concerning international trade.

It’s not a trade war per se (although Trump’s free-trade opponents have invoked that specter, that the governments of other countries may retaliate with their import duties against U.S.-made products), but a battle over theories of international trade. And those different theories are related to—as they inform and are informed by—different utopian visions.

In one sense, Trump and his supporters are right. Capitalist free trade has destroyed cities, regions, livelihoods, and industries. The international trade deals the United States has signed in recent decades have been rigged for the wealthy and have cheated workers. They are replete with marketing scams, hustles, and shady deals, to the advantage of large corporations and a small group of individuals at the top.

But Trump, like all right-wing populists, as I explained recently, offers a utopian vision that looks backward, conjuring up and then offering a return to a time that is conceived to be better. For Trump, that time is the 1950s, when a much larger share of U.S. workers was employed in manufacturing and American industry successfully competed against businesses in other countries. The turn to import tariffs is a way of invoking that nostalgia, the selective vision of a utopia that was exceptional, in terms of both U.S. and world history, and that conveniently conceals or overlooks many other aspects of that lost time, such as worker exploitation, Jim Crow racism, and widespread patriarchy inside and outside households.

It should come as no surprise that mainstream economists, today and in a tradition that goes back to Adam Smith and David Ricardo, oppose Trump’s tariffs and hold firmly to the gospel of free international trade. Once again, Gregory Mankiw has stepped forward to articulate the neoclassical view (buttressed by classical antecedents) that everyone benefits from free international trade:

Ricardo used England and Portugal as an example. Even if Portugal was better than England at producing both wine and cloth, if Portugal had a larger advantage in wine production, Portugal should export wine and import cloth. Both nations would end up better off.

The same principle applies to people. Given his athletic prowess, Roger Federer may be able to mow his lawn faster than anyone else. But that does not mean he should mow his own lawn. The advantage he has playing tennis is far greater than he has mowing lawns. So, according to Ricardo (and common sense), Mr. Federer should hire a lawn service and spend more time on the court.

That’s the basis of neoclassical utopianism—the gains from trade: when international trade is unregulated, and every country specializes according to its comparative advantage, more commodities can be produced at a lower cost and as a result average living standards around the world are improved.

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Like Mankiw, most mainstream economists, who are the only ones represented in the IGM Economic Experts panel, oppose import tariffs (as seen in the chart above) and celebrate the utopianism of free international trade.

That’s true even among mainstream economists who have argued that, in reality, the causes and consequences of international trade may not coincide with the rosy picture produced within the usual textbook versions of neoclassical economic theory.

For example, Paul Krugman was awarded the Nobel Prize in economics for his work demonstrating that the relative advantages most neoclassical economists take as given are in fact products of history. Thus, it is possible for countries to enhance their trade advantages (through creating internal economies of scale) by regulating international trade. But Krugman was also quick to belittle “a steady drumbeat of warnings about the threat that low-wage imports pose to U.S. living standards” and, then, in his first New York Times column, to denounce the critics of the World Trade Organization.

A few years later Paul Samuelson, widely recognized as the dean of modern mainstream economics, published an article in the Journal of Economic Perspectives in which he challenged the presumed universal benefits of free trade. It is quite possible, Samuelson argued, that if enough higher-paying jobs were lost by American workers to outsourcing, then the gains from the cheaper prices may not compensate for the losses in U.S. purchasing power. In other words, the low wages at the big-box stores do not necessarily make up for their bargain prices. And then Samuelson was immediately taken to task by other mainstream economists, most notably Jagdish Bhagwati (along with his coauthors, Arvind Panagariya and T.N. Srinivasan [pdf]), who argued that “that outsourcing is fundamentally just a trade phenomenon [and] leads to gains from trade.”

Finally, Dani Rodrick, the mainstream economist who has been most critical of the role his colleagues have played as “cheerleaders” for capitalist globalization, still defends the standard models of international trade:

It has long been an unspoken rule of public engagement for economists that they should champion trade and not dwell too much on the fine print. This has produced a curious situation. The standard models of trade with which economists work typically yield sharp distributional effects: income losses by certain groups of producers or worker categories are the flip side of the “gains from trade.” And economists have long known that market failures – including poorly functioning labor markets, credit market imperfections, knowledge or environmental externalities, and monopolies – can interfere with reaping those gains.

But Rodrick, like Krugman, Samuelson, and other mainstream economists who have identified problems with the story told by Mankiw, Bhagwati, and other free-traders—who have “consistently minimized distributional concerns” and “overstated the magnitude of aggregate gains from trade deals”—still holds to the neoclassical utopianism that, with “all of the necessary distinctions and caveats,” more international trade can and should be promoted. Thus, as Rodrick argued just last week,

If our economic rules empower corporations and financial interests excessively, then the correct response is to rewrite those rules — at home as well as abroad. If trade agreements serve mainly to reshuffle income to capital and corporations, the answer is to rebalance them to make them friendlier to labor and society at large.

The goal is to make sure everyone, not just “corporations and financial interests,” benefits from international trade.

But recent criticisms of trade deals from within mainstream economics still don’t include the possibility that capitalism itself, with or without free international trade and multinational trade agreements, however the rules are written, privileges one class over another. Capital gains at the expense of workers because it is able to extract a surplus for literally doing nothing. That kind of social theft occurs—both when international trade is regulated and controlled and when it is allowed to operate free of any such interventions.

That’s why Karl Marx ironically came out in support of free trade in his famous speech to the Democratic Association of Brussels at its public meeting of 9 January 1848:

If the free-traders cannot understand how one nation can grow rich at the expense of another, we need not wonder, since these same gentlemen also refuse to understand how within one country one class can enrich itself at the expense of another.

Do not imagine, gentlemen, that in criticizing freedom of trade we have the least intention of defending the system of protection.

One may declare oneself an enemy of the constitutional regime without declaring oneself a friend of the ancient regime.

Moreover, the protectionist system is nothing but a means of establishing large-scale industry in any given country, that is to say, of making it dependent upon the world market, and from the moment that dependence upon the world market is established, there is already more or less dependence upon free trade. Besides this, the protective system helps to develop free trade competition within a country. Hence we see that in countries where the bourgeoisie is beginning to make itself felt as a class, in Germany for example, it makes great efforts to obtain protective duties. They serve the bourgeoisie as weapons against feudalism and absolute government, as a means for the concentration of its own powers and for the realization of free trade within the same country.

But, in general, the protective system of our day is conservative, while the free trade system is destructive. It breaks up old nationalities and pushes the antagonism of the proletariat and the bourgeoisie to the extreme point. In a word, the free trade system hastens the social revolution. It is in this revolutionary sense alone, gentlemen, that I vote in favor of free trade.

That’s because Marx’s critique of political economy embodied a utopian horizon radically different from the utopianism of classical and neoclassical economics. He sought to transform economic and social institutions in order to eliminate capitalist exploitation. And if free trade was the quickest way of getting to the point when workers revolted and changed the system, then he would vote against protectionism and in favor of free trade.

As it turns out, as Friedrich Engels explained forty years later, both protectionism and free trade serve, in different ways, to produce more capitalist producers and thus to produce more wage-laborers. In our own time, Trump’s protective tariffs may do that in the United States, just as free trade has accomplished that in other countries that have increased their exports to the United States.

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But neither protectionism nor free trade can succeed in undoing the “elephant curve” of global inequality, which in recent decades has shifted the fortunes of workers in the United States and Western Europe and those in “emerging” countries and still left all of them falling further and further behind the top 1 percent in their own countries and globally.

Reversing that trend is a goal, a utopian horizon, worth fighting for.

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Economic inequality is arguably the crucial issue facing contemporary capitalism—especially in the United States but also across the entire world economy.

Over the course of the last four decades, income inequality has soared in the United States, as the share of pre-tax national income captured by the top 1 percent (the red line in the chart above) has risen from 10.4 percent in 1976 to 20.2 percent in 2014. For the world economy as a whole, the top 1-percent share (the green line), which was already 15.6 percent in 1982, has continued to rise, reaching 20.4 percent in 2016. Even in countries with less inequality—such as France, Germany, China, and the United Kingdom—the top 1-percent share has been rising in recent decades.

Clearly, many people are worried about the obscene levels of inequality in the world today.

In a famous study, which I wrote about back in 2010, Dan Ariely and Michael I. Norton showed that Americans both underestimate the current level of inequality in the United States and prefer a much more equal distribution than currently exists.*

In other words, the amount of inequality favored by Americans—their ideal or utopian horizon—hovers somewhere between the level of inequality that obtains in modern-day Sweden and perfect equality.

What about contemporary economists? What is their utopian horizon when it comes to the distribution of income?

Not surprisingly, economists are fundamentally divided. They hold radically different views about the distribution of income, which both inform and informed by their different utopian visions.

For example, neoclassical economists, the predominant group in U.S. colleges and universities, analyze the distribution of income in terms of marginal productivity theory. Within their framework of analysis, each factor of production (labor, capital, and land) receives a portion of total output in the form of income (wages, profits, or rent) within perfectly competitive markets according to its marginal contributions to production. In this sense, neoclassical economics represents a confirmation and celebration of capitalism’s “just deserts,” that is, everyone gets what they deserve.

From the perspective of neoclassical economics, inequality is simply not a problem, as long as each factor is rewarded according to its productivity. Since in the real world they see few if any exceptions to perfectly competitive markets, their view is that the distribution of income within contemporary capitalism corresponds to—or at least comes close to matching—their utopian horizon.

Other mainstream economists, especially those on the more liberal wing (such as Paul Krugman, Joseph Stiglitz, and Thomas Piketty), hold the exact same utopian horizon—of just deserts based on marginal productivity theory. However, in their view, the real world falls short, generating a distribution of income in recent years that is more unequal, and therefore less fair, than is predicted within neoclassical theory. So, bothered by the obscene levels of contemporary inequality, they look for exceptions to perfectly competitive markets.

Thus, for example, Stiglitz has focused on what he calls rent-seeking behavior—and therefore on the ways economic agents (such as those in the financial sector or CEOs) often rely on forms of power (political and/or economic) to secure more than their “just deserts.” Thus, for Stiglitz and others, the distribution of income is more unequal than it would be under perfect markets because some agents are able to capture rents that exceed their marginal contributions to production.** If such rents were eliminated—for example, by regulating markets—the distribution of income would match the utopian horizon of neoclassical economics.***

What about Marxian theory? It’s quite a bit different, in the sense that it relies on the assumptions similar to those of neoclassical theory while arriving at conclusions that are diametrically opposed. The implication is that, even if and when markets are perfect (in the way neoclassical economists assume and work to achieve), the capitalist distribution of income violates the idea of “just deserts.” That’s because Marxian economics is informed by a radically different utopian horizon.

Let me explain. Marx started with the presumption that all markets operate much in the way the classical political economists then (and neoclassical economists today) presume. He then showed that even when all commodities exchange at their values and workers receive the value of their labor power (that is, no cheating), capitalists are able to appropriate a surplus-value (that is, there is exploitation). No special modifications of the presumption of perfect markets need to be made. As long as capitalists are able, after the exchange of money for the commodity labor power has taken place, to extract labor from labor power during the course of commodity production, there will be an extra value, a surplus-value, that capitalists are able to appropriate for doing nothing.

The point is, the Marxian theory of the distribution of income identifies an unequal distribution of income that is endemic to capitalism—and thus a fundamental violation of the idea of “just deserts”—even if all markets operate according to the unrealistic assumptions of mainstream economists. And that intrinsically unequal distribution of income within capitalism becomes even more unequal once we consider all the ways the mainstream assumptions about markets are violated on a daily basis within the kinds of capitalism we witness today.

That’s because the Marxian critique of political economy is informed by a radically different utopian horizon: the elimination of exploitation. Marxian economists don’t presume that, under capitalism, the distribution of income will be equal. Nor do they promise that the kinds of noncapitalist economic and social institutions they seek to create will deliver a perfectly equal distribution of income. However, in focusing on class exploitation, they both show how the unequal distribution of income in the world today is affected by and in turn affects the appropriation and distribution of surplus-value and argue that the distribution of income would likely change—in the direction of greater equality—if the conditions of existence of exploitation were dismantled.

In my view, lurking behind the scenes of the contemporary debate over economic inequality is a raging battle between radically different utopian visions of the distribution of income.

 

*The Ariely and Norton research focused on wealth, not income, inequality. I suspect much the same would hold true if Americans were asked about their views concerning the actual and desired degree of inequality in the distribution of income.

**It is important to note that, according to mainstream economics, any economic agent can engage in rent-seeking behavior. In come cases it may be labor, in other cases capital or even land.

***More recently, some mainstream economists (such as Piketty) have started to look outside the economy, at the political sphere. They’ve long held the view that, within a democracy, if voters are dissatisfied with the distribution of income, they will support political candidates and parties that enact a redistribution of income. But that hasn’t been the case in recent decades—not in the United States, the United Kingdom, or France—and the question is why. Here, the utopian horizon concerning the economy is the neoclassical one, or marginal productivity theory, but they imagine a separate democratic politics is able to correct any imbalances generated by the economy. As I see it, this is consistent with the neoclassical tradition, in that neoclassical economists have long taken the distribution of factor endowments as a given, exogenous to the economy and therefore subject to political decisions.

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There is perhaps no more cherished an idea within mainstream economics than that everyone benefits from free trade and, more generally, globalization. They represent the solution to the problem of scarcity for the world as a whole, much as free markets are celebrated as the best way of allocating scarce resources within nations. And any exceptions to free markets, whether national or international, need to be criticized and opposed at every turn.

That celebration of capitalist globalization, as Nikil Saval explains, has been the common sense that mainstream economists, both liberal and conservative, have adhered to and disseminated, in their research, teaching, and policy advice, for many decades.

Today, of course, that common sense has been challenged—during the Second Great Depression, in the Brexit vote, during the course of the electoral campaigns of Bernie Sanders and Donald Trump—and economic elites, establishment politicians, and mainstream economists have been quick to issue dire warnings about the perils of disrupting the forces of globalization.

I have my own criticisms of Saval’s discussion of the rise and fall of the idea of globalization, especially his complete overlooking of the long tradition of globalization critics, especially on the Left, who have emphasized the dirty, violent, unequalizing underside of colonialism, neocolonialism, and imperialism.*

However, as a survey of the role of globalization within mainstream economics, Saval’s essay is well worth a careful read.

In particular, Saval points out that, in the heyday of the globalization consensus, Dani Rodrick was one of the few mainstream economists who had the temerity to question its merits in public.

And who was one of the leading defenders of the idea that globalization had to be celebrated and it critics treated with derision? None other than Paul Krugman.

Paul Krugman, who would win the Nobel prize in 2008 for his earlier work in trade theory and economic geography, privately warned Rodrik that his work would give “ammunition to the barbarians”.

It was a tacit acknowledgment that pro-globalisation economists, journalists and politicians had come under growing pressure from a new movement on the left, who were raising concerns very similar to Rodrik’s. Over the course of the 1990s, an unwieldy international coalition had begun to contest the notion that globalisation was good. Called “anti-globalisation” by the media, and the “alter-globalisation” or “global justice” movement by its participants, it tried to draw attention to the devastating effect that free trade policies were having, especially in the developing world, where globalisation was supposed to be having its most beneficial effect. This was a time when figures such as the New York Times columnist Thomas Friedman had given the topic a glitzy prominence by documenting his time among what he gratingly called “globalutionaries”: chatting amiably with the CEO of Monsanto one day, gawking at lingerie manufacturers in Sri Lanka the next. Activists were intent on showing a much darker picture, revealing how the record of globalisation consisted mostly of farmers pushed off their land and the rampant proliferation of sweatshops. They also implicated the highest world bodies in their critique: the G7, World Bank and IMF. In 1999, the movement reached a high point when a unique coalition of trade unions and environmentalists managed to shut down the meeting of the World Trade Organization in Seattle.

In a state of panic, economists responded with a flood of columns and books that defended the necessity of a more open global market economy, in tones ranging from grandiose to sarcastic. In January 2000, Krugman used his first piece as a New York Times columnist to denounce the “trashing” of the WTO, calling it “a sad irony that the cause that has finally awakened the long-dormant American left is that of – yes! – denying opportunity to third-world workers”.

The irony is that Krugman won the Nobel Prize in Economics in recognition of his research and publications that called into question the neoclassical idea that countries engaged in and benefited from international trade based on given—exogenous—resource endowments and technologies. Instead, Krugman argued, those endowments and technologies were created historically and could be changed by government policies, including histories and policies that run counter to free trade and globalization.

Krugman was thus the one who gave theoretical “ammunition to the barbarians.” But that was the key: he considered the critics of globalization—the alter-globalization activists, heterodox economists, and many others—”barbarians.” For Krugman, they were and should remain outside the gates because, in his view, they were not trained in or respectful of the protocols of mainstream economics. The “barbarians” could not be trusted to understand or adhere to the ways mainstream economists like Krugman analyzed the exceptions to the common sense of globalization. They might get out of control and develop other arguments and economic institutions.

But then the winds began to shift.

In the wake of the financial crisis, the cracks began to show in the consensus on globalisation, to the point that, today, there may no longer be a consensus. Economists who were once ardent proponents of globalisation have become some of its most prominent critics. Erstwhile supporters now concede, at least in part, that it has produced inequality, unemployment and downward pressure on wages. Nuances and criticisms that economists only used to raise in private seminars are finally coming out in the open.

A few months before the financial crisis hit, Krugman was already confessing to a “guilty conscience”. In the 1990s, he had been very influential in arguing that global trade with poor countries had only a small effect on workers’ wages in rich countries. By 2008, he was having doubts: the data seemed to suggest that the effect was much larger than he had suspected.

And yet, as Saval points out, mainstream economists’ recognition of the unequalizing effects of capitalist globalization has come too late: “much of the damage done by globalisation—economic and political—is irreversible.”

The damage is, of course, only irreversible within the existing economic institutions. Imagining and enacting a radically different way of organizing the economy would undo that damage and benefit those who have been forced to have the freedom to submit to the forces of capitalist globalization.

But Rodrik and Krugman—and mainstream economists generally—don’t seem to be interested in participating in that project, which would give the “barbarians” a say in creating a different kind of globalization, beyond capitalism.

 

*Back in 2000—and in a series of articles, book chapters, and blog posts since then—I have attempted to rethink the relationship between capitalist globalization and imperialism. Marxist economist Prabhat Patnaik has also made the case for the continuing relevance of imperialism as an analytical construct for understanding and challenging effectively the logic and dynamics of contemporary capitalism.

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Utopian novels, it seems, are no longer published.* Instead, bookstores now feature non-fiction books about utopia (the latest of which is Erik Reece’s just-released Utopia Drive: A Road Trip Through America’s Most Radical Idea) and, as a counterpoint, a burgeoning section of dystopian fiction. Whereas books about actual utopian experiments (especially, as in Reece’s book, those that were imagined and enacted in nineteenth-century America) are inspired by a sense that things could be better (indeed, much better), and we might have something to learn from our radical predecessors, dystopian novels move in the opposite direction, imagining a much worse world, one created by our own evil impulses and institutions (or at least each author’s fears concerning the possible effects of one or another negative feature of contemporary reality).

Dystopias are, perhaps not surprisingly, popular among young-adult readers. Just think of the success (in both book and film form) of Suzanne Collins’s trilogy of novels, The Hunger Games, which take place at some unspecified time in North America’s future. Part social commentary (in the case of the Katniss’s world, a critique of both reality TV and of grotesque inequalities in the wider society), part a mirror of adolescent disaffection and angst (of life with unsympathetic parents and cruel schoolmates)—they’re mostly about “what’s happening, right this minute, in the stormy psyche of the adolescent reader.”

Adult dystopias are something different—more didactic, more scolding, in which the author often issues a dire warning about the dangers of one or another current trend. They make sense when the idea is readers can do something to correct the situation, which most adolescents do not share. The latter are caught in the maelstrom; adults are supposed to be able to shape events (or at least to be held responsible for not doing the right thing).

Lionel Shriver’s The Mandibles: A Family, 2029-2047 is certainly that. It warns, it scolds, and it seeks to teach—perhaps even more than other novels in the new sub-genre of dystopian finance fiction. Given the financialization of the U.S. economy in recent decades and the spectacular crash of 2007-08, which has come to be closely identified with the bubble-and-bust trajectory of Wall Street, it should come as no surprise that the sub-genre itself exists.

But The Mandibles is perhaps even more didactic than other novels in the area, such as the closely related Cosmopolis: A Novel (published before the crash, in 2003) by Don DeLillo. While DeLillo’s novel certainly presents a disturbing view of reclusive billionaire Eric Packer and his financial machinations (including a spectacular bet against the yen, which goes badly for him as he travels in his limousine across New York City to get a haircut), it is more an exaggerated portrayal of certain features of contemporary life (including the deregulation of finance, the growth of inequality, the role of information, and the decline of affect) than a clear explanation of why and how we’re headed to the apocalypse if things continue as they are.

Shriver, however, uses the saga of four generations of the Mandible family after the “crash of 2029” to tell such a didactic story. And the story she has chosen to relate is a pointedly right-wing libertarian version of a cascade of possible events (reinforced by some absurd future slang) that stem from, in her view, a bloated Keynesian state and its escalating national debt (accompanied by out-of-control migration from south of the border and a coalition of hostile foreign powers).

The thinly veiled critique of contemporary political economy, borrowed in equal parts from Rand Paul and Donald Trump (with, toward the end, a celebration of the Free State of Nevada, of which Ayn Rand would be proud), does have its humorous, liberal-tweaking moments. I had to chuckle as I read about the head of the Federal Reserve (Krugman) and, later in the novel, the new presidential administration (of Chelsea Clinton), as well as the fact that one group of academics (economists) are mostly left unemployed as the economic crisis unfold.

But, overall, the economics of the novel (and the author does present a great deal of explicit economic theorizing, from the mouths of members of all four of the generations, especially the precocious self-taught economic savant Willing) are decidedly from the right-wing of the current political and economic spectrum. The economic apocalypse that engulfs the Mandible family and the entire country stems from the precipitous decline in the value of the U.S. dollar occasioned by a debt-financed explosion of federal financing for entitlement programs. A desperate nation (led by a Hispanic president) renounces its debts, both foreign and domestic. Other nations respond by devising an alternative currency, the “bancor” (the hypothetical name for the international bank money of an international currency union once devised by Keynes), which is not convertible into U.S. dollars. To refill the treasury, the federal government confiscates citizens’ gold, right down to their wedding rings.

We are then witness to the inevitable slide that tears apart the entire country, with a focus on East Flatbush where the various members of the clan are forced to gather. Fortunes are lost and people are evicted from their homes. Hyperinflation causes mind-spinning changes in prices, shortages provoke hoarding, and then, when basic goods are no longer available, life as we know it devolves (the replacement of toilet paper by cloth “ass-napkins” is the final ignominious assault on middle-class sensibilities). As for public order, the crime rate soars and public utilities no longer function properly (with water now in short supply). The Mandibles are forced to escape by traveling upstate to work on a farm (although a mercy killing-suicide en route means not all of them make it).

Years later, the remaining members of the clan (at least those who haven’t died or made it across the wall into the newly prosperous Mexico), led by now-grownup Willing, travel across the country, past factories (now owned by foreign capitalists and staffed by low-wage American workers) and geriatric facilities (for the elderly sent from abroad, attended to by low-wage American orderlies) to the only remaining sanctuary: the Free State of Nevada. The seceded state is on the gold standard, with a flat tax rate of 10 percent, no social safety net and no gun control, and where everyone has a chance to be a successful entrepreneur. It’s a society everyone there describes as “not a utopia”—with the obvious implication it’s the best alternative to the oppressive liberal-paradise-turned- dystopia the Mandibles have left behind.

If only they’d listened to the warnings about the “dodgy hocus-pocus” of Keynesian economics and the social-welfare state. They could have avoided the breakdown and their self-inflicted dystopia. That’s the lesson Shriver wants us to learn today.

As readers know, there is a well-founded critique of Keynesian economics and the problems of contemporary capitalism (which I’ve attempted to develop in some detail on this blog). However, the pressing issue, at least in the United States with its own sovereign currency, is not national debt or “easy money.” That’s for the Chicken Littles who stoke fears about a falling fiscal sky and want nothing more than low taxes, a diminished safety net, and the freedom of capital.

But that’s Shriver’s story and she spares no moment or patch of dialogue over the course of more than found hundred pages to attempt to drive it home.

 

*In fact, Fredric Jameson argues in his recent book, An American Utopia: Dual Power and the Universal Army, that the last real utopian novel was Ernest Callenbach’s Ecotopia, published in 1975.

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The latest bank to admit criminal fraud is Wells-Fargo. The largest U.S. mortgage lender and third-largest U.S. bank by assets, Wells-Fargo deceived the U.S. government into insuring thousands of risky mortgages, and formally reached a record $1.2 billion settlement of a U.S. Department of Justice lawsuit. Several lenders, including Bank of America Corp, Citigroup Inc, Deutsche Bank AG, and JPMorgan Chase & Co, previously settled similar federal lawsuits.

To read Paul Krugman (who’s “been doing a lot of shovel work for the Hillary Clinton campaign lately”), the real problem in the run-up to the spectacular crash of 2007-08 was not Too Big to Fail banks like Wells-Fargo, but the so-called shadow-banking system. But, as Matt Taibi [ht: db] explains, “Krugman is just wrong about this.”

The root problem of the ’08 crisis lay in a broad criminal fraud scheme in the mortgage markets. Real-estate agents fanned out into middle- and low-income neighborhoods in huge numbers and coaxed as many people as possible into loans, whether they could afford them or not.

Those loans in turn were bought up by giant financial companies on Wall Street, who chopped them up into a kind of mortgage hamburger. Out of this hamburger, they made securities. These securities were then sold to institutional investors like pension funds, unions, insurance companies and hedge funds.

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source (pdf)

There’s no doubt shadow-banking activities surpassed those of the traditional banking system in the years leading up to the crash. But—and this is crucial—they weren’t two separate systems or sets of institutions; they were just two different sets of activities by a wide variety of firms within the financial system. And so-called traditional banks were heavily involved in the shadow-banking activities.

The two economically most important shadow banking activities are securitization and collateral intermediation. According to Stijn Claessens, Zoltan Pozsar, Lev Ratnovski, and Manmohan Singh,

The first key shadow banking function, securitisation, is a process that repackages cash flows from loans to create assets that are perceived by market participants as almost fully safe and liquid. The repackaging occurs in steps, and takes the form of risk transfer. First, risky long-term loans are ‘tranched’ into safe and complementary (‘equity’ and ‘mezzanine’ respectively) tranches. Then the safe tranche is funded in short-term money markets, with additional protection provided by liquidity lines from banks. The resulting assets, such as Asset-Backed Commercial Papers (ABCPs), were regarded prior to the crisis by market participants as safe, liquid, and short-term, i.e. almost money-like, but with returns exceeding those on short-term government debt. . .

Another key function of shadow banking is supporting collateral-based operations within the financial system. Such operations include secured funding (of bank and, especially, nonbank investors), securities lending, and hedging (including with OTC derivatives). Collateral helps deal with counterpart risks and more generally greases financial intermediation. One of the main challenges in using collateral is its scarcity. The shadow banking system deals with the scarcity through an intensive re-use of collateral, so that it can support as large as possible a volume of financial transactions. The multiplier of the volume of transactions to the volume of collateral (the ‘velocity’ of collateral) was recently about 2.5 to 3.

The key is that traditional banks (such as Goldman Sachs, Morgan Stanley, JP Morgan, Bank of America-Merrill Lynch, and Citibank in the United States, in addition to Barclays, BNP Paribas, Crédit Suisse, Deutsche Bank, HSBC, Royal Bank of Scotland, Société Générale, Nomura, and UBS elsewhere—all of them classified as “strategically important financial institutions”) both financed and directly participated in shadow-banking activities. The traditional banks made record profits from those activities and served both to expand shadow banking and to increase the degree of risk, instability, and contagion.

In other words, traditional banks played a key role in creating the financial house of cards that came crashing down in 2007-08.

So, it’s simply wrong to assert that Too Big to Fail or Jail banks were peripheral in creating the conditions that caused the global financial crisis—or, for that matter, that continue to plague the financial system today.

What this means is that regulating and transforming the financial system—by taxing financial transactions, breaking up the now-Too Bigger to Fail banks, and creating new forms of financial intermediation (such as various forms of public and community banking)—are still on the agenda.

It’s time, then, to bring both the financial system and arguments by mainstream economists that attempt to shield traditional banks and their favorite political candidates out of the shadows.

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source

A week ago, I noted the pushback against liberal mainstream economists’ attacks on Bernie Sanders’s plans and Gerald Friedman’s analysis of those plans.

The first set of attacks, as Bill Black explained, plumbed “new depths of moral obtuseness, arrogance, and intellectual dishonesty.”

More recently, Christina D. Romer and David H. Romer (pdf) have responded with a more detailed critique of Friedman’s calculations, which has led to additional gloating by Paul Krugman and more publicity to only one side of the debate in the pages of the New York Times.

But, fortunately, that didn’t end the debate.

James K. Galbraith reminded us that “all forecasting models embody theoretical views.”

All involve making assumptions about the shape of the world, and about those features, which can, and cannot, safely be neglected. This is true of the models the Romers favor, as well as of Professor Friedman’s, as it would be true of mine. So each model deserves to be scrutinized.

In the case of the models favored by the Romers, we have the experience of forecasting from the outset of the Great Financial Crisis, which was marked by a famous exercise in early 2009 known as the Romer-Bernstein forecast. According to this forecast (a) the economy would have recovered on its own, in full and with no assistance from government, by 2014, (b) the only effect of the entire stimulus package would be to accelerate the date of full recovery by about six months, and (c) by 2016, the economy would actually be performing worse than if there had been no stimulus at all, since the greater “burden” of the government debt would push up interest rates and depress business investment relative to the full employment level.

It’s fair to say that this forecast was not borne out: the economy did not fully recover even with the ARRA, and there is no sign of “crowding out,” even now. The idea that the economy is now worse off than it would have been without any Obama program is, to most people, I imagine, quite strange. These facts should prompt a careful look at the modeling strategy that the Romers espouse.

Mark Thoma, for his part, argues that, while he does not believe that “we can sustain 5% growth over the next eight years. In the short-run—over the next two to four years—the situation is different.”

I’m worried people will accept without question that the gap is small due to the pushback against Friedman’s analysis of the Sander’s plan, and that will justify policy passivity when we need just the opposite. So let’s stop arguing, put the policies we need in place, and push as hard as we can to increase employment until inflation reveals that we have, in fact, hit capacity constraints. Maybe that happens quickly, but maybe not and we owe it to those who remain unemployed, have dropped out of the labor force but would return, or took a job with lousy wages to try. People who had nothing to do with causing the recession have paid the costs for it, and if we experience a short bout of above target inflation I can live with that. We’ve been wrong about this before in the 1990s, and we may very well be wrong about this again.

Finally, there’s a much more mainstream supporter of the idea that it’s not technologically impossible to imagine “materially super-normal rates of growth in the coming four years”: former Minneapolis Federal Reserve President and University of Rochester economist Narayana Kocherlakota. His view is that “given current economic circumstances, demand-based stimulus is likely to be more effective than supply-based stimulus.”

Why? Because, as Kocherlakota explained elsewhere, labor’s share remains extremely low by historical standards. So, faster growth would serve to push the share of income going to labor back to their historical (pre-1990) ranges and thus boost economic growth above the so-called consensus among economists.

And that’s exactly the basis of Bernie Sanders’s economic plans and Friedman’s analysis : raising labor’s share via redistributive measures is a spur to faster economic growth and encouraging unemployed and underemployed workers to take decent, better-paying jobs will sustain those faster rates of economic growth.

As I’ve written before, that’s not so much a forecast of what will happen as a mirror that demonstrates how diminished are the expectations created by contemporary capitalism and the policies that continue to be put forward by liberal mainstream economists.