Paul Samuelson and the Cold War rebirth of David Ricardo

August 15, 2020 Leave a comment

from Erik Reinert and issue 92 of RWER

In complete contradiction to the ruling practice of the Marshall Plan at the time, Paul Samuelson started building what was to become Cold War economic theory with two articles in The Economic Journal in 1948 and 1949. Communism advanced under the utopian slogan “from each according to his ability, to each according to his needs”. With his renewed interpretation of David Ricardo, Paul Samuelson produced a counter-utopia: under the standard assumptions of neo-classical economics free trade would produce a tendency towards factor-price equalization: the prices of labor and capital would tend to equalize across the planet. This became the noble lie of the neo-classical economics and of neoliberalism as the West faced the evils of communism.

Today’s economists would naturally tend to believe that Cold War Economics – the theories that stood victorious after the 1989 Fall of the Berlin Wall – is part of a tradition that has ruled in economic science since David Ricardo’s 1817 book. However, recent n-gram technology has made it possible to illustrate how David Ricardo and his theory of “comparative advantage” were virtually neglected until the Cold War. Read more…

Inequality and morbid symptoms of a financialised system

August 14, 2020 Leave a comment

from Ann Pettifor and issue 92 of RWER

Today as the world endures the crisis of a global pandemic, “an old order is ending in convulsions”. So writes Rebecca Spang, historian of the French revolution in The Atlantic (Spang, 2020). In the 1790s, money, debt and the non-payment of taxes by France’s rentiers, played a critical role in revolutionizing France. Today purveyors of money and debt – creditors, investors and speculators – both avoid taxes and prey on a global economy radically weakened by the Great Financial Crisis and the policy response to the events of 2007-9. As a result, and unsurprisingly, the international economic system is  both unprepared for, and prone to increasingly frequent “convulsions”. COVID19 is but the latest, and will cause long-lasting economic damage. Above all, and according to Case and Deaton, COVID19 is expected to widen the US’s “already vast inequalities in health and income”.2

The “pillars” of the global economic system are fabricated on shaky, “liberal” foundations (see Pettifor, 2006, 2017a). It is an international system specifically designed to expand markets for creditors and investors; and to protect, above all others, the interests of private creditors. The most important foundations of the system are capital mobility, the marketisation of interest rates and exchange rates. The system is largely maintained by the world’s hegemon – the United States – which uses its role as issuer of the world’s reserve currency to protect the interests of private finance, in particular Wall Street. US monetary power is backed in turn by military power, used to maintain control over access to, or the denial of access to markets worldwide.

A central tenet of the system is that wherever possible, the policy autonomy of governments (whether democratic or not) must be constrained and subordinated to governance by those active in capital, goods and labour markets. The global system – its regulations and laws  – are thus largely governed by private authority.  Read more…

In the middle of a pandemic, the World Bank wants slum dwellers to lose their water supply

August 13, 2020 3 comments

from  Norbert Häring

Developing countries are trying to contain the corona pandemic under the most adverse conditions. In the middle of this, the World Bank is proposing that the water supply of slum dwellers be cut off, if their landlords do not pay the water bill. It is an inhumane philosophy of development that is behind such monstrosities.

For about two decades, the World Bank’s philosophy has been “sustainable development”; “sustainable” in the sense of profitable in the long run. Wherever possible, development work should be carried out in partnership with private companies and their foundations, because only if some corporation can earn money sustainably from development policy will enough money flow in to make a lasting difference. The derivation from this is to privatize and commodify as much as possible, i.e. to make it a tradable commodity. Read more…

More thoughts on the post-pandemic economy

August 12, 2020 1 comment

from Dean Baker

I have written before on the post-pandemic economy and how it should actually provide enormous opportunities, but it is worth clarifying a few points. First and most importantly, there is an important measurement issue with GDP that people will need to appreciate.

It is often said that GDP is not a good measure of well-being, we see this in a very big way in the post-pandemic period. It is likely that many of the changes in behavior forced by the pandemic, first and foremost telecommuting, will be enduring.

Most immediately, this will show up as a sharp drop in GDP. We will be consuming much less of the goods and services associated with commuting to and from work. This means that we will be driving less. That means we will be buying less gas and needing fewer cars, car parts, and car repair services. We’ll also need less auto insurance. In addition, there will be many fewer taxi or Uber trips, as well as trips on busses, trains, and other forms of public transportation. Read more…

The missing middle?

August 11, 2020 20 comments

from Peter Radford

A couple of things before we get started:  when I say that economics is not history, I mean exactly that.  Geology is not history either.  That is not the same as saying that economics ought pay no heed to history.  Let’s not get confused over that.  Economics is its own discipline with rules and territory that its exponents determine.  That might frustrate or annoy some of us who would like to think of it more broadly, but it’s up to us to find doors to open to help in that broadening.

Fortunately there are plenty of such doors because the current core of economics is rather narrow with respect to the full range of interesting topics or phenomena that appear to be economic.  In its endeavor to become a more formal activity economics has ceded swathes of territory to related fields of enquiry.   As I mentioned in the past couple of weeks, it has limited itself so that things like increasing returns are treated as novelties that periodically pop up  and need pressing back down so as not to cause a thorough re-thinking of its core principles.  The list of similar oddities is quite long and results, by and large, from the effort economists have put in to their relentless focus on market activities and their desire to hunt for the mysteries of hidden hands and so on.  Economists have, of course, every right to pursue this narrow and often sterile activity.  And there are many economists who diligently work away at investigating the oddities, although too many seem to want to bend their subject of study to obey the rules of the core rather than to state the more reasonable conclusion that the core itself needs a look at. Read more…

Epistemic humility — an intellectual virtue

August 10, 2020 3 comments

from Lars Syll

Being a true expert involves not only knowing stuff about the world but also knowing the limits of your knowledge and expertise. It requires, as psychologists say, both cognitive and metacognitive skills. The point is not that true experts should withhold their beliefs or that they should never speak with conviction. Some beliefs are better supported by the evidence than others, after all, and we should not hesitate to say so. The point is that true experts express themselves with the proper degree of confidence—meaning with a degree of confidence that’s justified given the evidence …

t-shirt-daily-nous-design-4dcropEpistemic humility is an intellectual virtue. It is grounded in the realization that our knowledge is always provisional and incomplete—and that it might require revision in light of new evidence. A lack of epistemic humility is a vice—and it can cause massive damage both in our private lives and in public policy …

It’s never been more important to learn to separate the wheat from the chaff—the experts who offer well-sourced information from the charlatans who offer little but misdirection. The latter are sadly common, in part because they are in greater demand on TV and in politics. It can be hard to tell who’s who. But paying attention to their confidence offers a clue. People who express themselves with extreme confidence without having access to relevant information and the experience and training required to process it can safely be classified among the charlatans until further notice.

Eric Angner

A brief history of inequality in modern economics

August 10, 2020 Leave a comment

from James Galbraith and Jaehee Choi and issue 92 of RWER

In the years following World War II the division of labor between neoclassical micro- economics and pseudo-Keynesian macroeconomics was pioneered at MIT and disseminated worldwide from there. Macro held a narrow strip of economic territory: unemployment, inflation, interest rates and money supply, the business cycle, the rate of growth and their interrelations through the quantity theory, the Phillips Curve and Okun’s Law. The personal distribution of income fell squarely into the microeconomics of labor markets, governed by supply and demand for various levels of skill, alongside such ad hoc matters as firm-size effects, industry-specific labor rents, imperfect competition and efficiency wages. A theory of changing inequality was offered for developing countries by Simon Kuznets in 1955, positing a rise in inequalities in the early stages of development but a decline later on. For the rich,  the Kuznets evolution was supposedly complete, the Cobb-Douglas distribution theory with Hicks Neutral Technical change predicted stable functional shares, and national income accounts appeared to bear this out. So the functional distribution – the division between wages, profits and rent – was hardly spoken of. Read more…

Wages and productivity

August 9, 2020 19 comments

from David Ruccio and issue 9 of RWER

Mainstream economists continue to insist that workers benefit from economic growth, because wages rise with productivity.

Here’s the argument as explained by Donald J. Boudreaux and Liya Palagashvili: 
Firms cannot afford a misalignment of their workers’ pay and productivity increases – the employees will move to other firms eager to hire these now more productive workers. Higher economy-wide productivity, after all, means that workers add more to the bottom lines of employers throughout the economy. To secure the services of these more-productive workers, firms bid up worker pay. This competition for labor services is what links pay to productivity.

Except, of course, the link between wages and productivity has been severed for decades now, going back to the late-1970s. Since then, as the research staff of the Economic Policy Institute have shown, productivity has increased by 70.3 percent but average worker’s wages have risen by only 11.1 percent.

Figure 5


Read more…

Inequality challenge in pursued economies

August 7, 2020 6 comments

from Richard Koo and issue 92 of RWER

Income inequality has become one of the hottest and most controversial issues in economics not only in the developed world but also in China and elsewhere as well. Many are growing increasingly uncomfortable with the divide between the haves and the have-nots, especially after Thomas Piketty’s Capital in the 21st Century2 sparked a fresh debate on the optimal distribution of wealth, an issue that had been largely overlooked by the economics profession.

This paper argues that the determinants of income inequality changes depending on the stage of economic development. The three stages of industrialization identified for this purpose are: urbanizing era, when the economy has yet to reach the Lewis Turning Point (LTP), post-LTP maturing or golden era when the economy moves along an upward sloping labor supply curve, and pursued era, when the return on capital is higher abroad in emerging economies than at home. The LTP refers to the point at which urban factories have finally absorbed all the surplus rural labor. (In this essay, the term LTP is used only because it is a well-known expression for a specific point in a nation’s economic development; the use of this term does not refer to the model of economic growth proposed by Sir Arthur Lewis.)

At the advent of industrialization, most people are living in rural areas. Only the educated elite, who are very few in number, have the technical knowledge needed to produce and market goods. Families whose ancestors have lived on depressed farms for centuries have no such knowledge. Most of the gains during the initial stage of industrialization therefore go to the educated few, while the rest of the population simply provides labor for the industrialists. And with so many surplus workers in the countryside, worker wages remain depressed for decades until the LTP is reached.

Exhibit 1 illustrates this from the perspective of labor supply and demand. read more

Global inequality in a time of pandemic

August 3, 2020 2 comments

from Jayati Ghosh and issue 93 of RWER

A global pandemic is a particularly bad time to be reminded of existing inequalities. But there is no doubt that the Covid-19 pandemic has highlighted the extent of inequalities between and within countries. Whatever may be the fond sentiments expressed by at least some global leaders, we are clearly not “all in this together”. It is true that in principle, a virus is no respecter of class or other socio-economic distinctions: it enters human hosts without checking for such attributes. And the rapid global spread of this particular virus has shown that it is no respecter of national borders either, which points to the more fundamental truth that as long as anyone anywhere has a contagious disease, everyone everywhere is under threat. This should have made it obvious that ensuring universal access to health care and prevention is not about compassion, but about the survival of all. Unfortunately, that obvious truth is still not adequately recognised, mainly because existing structures of authority and power imbalances ensure that the rich and powerful continue to be more protected from both health risks and material privation. Read more…

The World Economic Forum is planning the “Great Reset” to prevent it from happening

August 1, 2020 20 comments

from Norbert Häring

The club of the world’s richest people and the largest nature-destroying corporations wants the “Great Reset”. Instead of poverty, disease, overpopulation and destruction of nature, the mega-rich promise us a fair world in harmony with nature. Despite its obvious absurdity and the cynicism behind it, this initiative should not be ignored. There is a dark plan behind it.

According to its own description, the World Economic Forum is “THE international organisation for public-private cooperation” and has as its main objective “to improve the state of the world”. The foundation, founded in 1971 by German economist Klaus Schwab, lacks neither power nor self-confidence. For years now, almost all the world’s major heads of government have made the pilgrimage to the annual meeting in Davos to pay their respects to multinational corporations and billionaires.

The World Bank, a close collaborator of the Forum, has made it a strategy to only support development projects that the member companies of this club can earn money from. The United Nations (UN) have been made highly dependent on the money of the corporations and can do practically nothing that does not promote their interests or even runs counter to them. Even the International Monetary Fund (IMF) now acts quite unabashedly as a door-opener for multinationals when it is supposed to help a poor country in difficulty or assess its financial system.

So this powerful organization, the World Economic Forum, has been working for nearly 50 years to make the world a better place, with great success, it claims:

Read more…

Damn facts

July 31, 2020 43 comments

from Peter Radford

It seems appropriate to mention increasing returns today.  After all, this is the day on which several of our modern titans of industry are appearing before Congress to respond to the concerns raised by the gargantuan size that their respective businesses have grown to become.  The CEOs of Apple, Amazon, Google, and Facebook are all under the gun to defend the enormous clout that each wields in the modern marketplace.  Today is the culmination of a long investigation by Congress into the problems, or perceived problems, that these four companies represent.  Whatever the outcome the simple fact that the four are being clustered into one band of rogues taints them with an aura of indecency we normally associate with the pharmaceutical, banking, or tobacco industries.  That’s bad company to keep.

But back to increasing returns.

It’s one of those topics that economists like to tuck away and discuss out of the glare of public gaze. It represents a considerable challenge to the foundation of contemporary economics.  Economists love letting us know that they know about the potential various errors that might devastate the core of what they believe, but they equally love sweeping such anomalies under the rug so as not to have to re-invent their discipline. Read more…

USA record 32.9 percent drop in GDP

July 30, 2020 5 comments

from Dean Baker

The saving rate hit a record 25.7 percent level in the first quarter, indicating that few of the pandemic checks were spent

The Gross Domestic Product (GDP) shrank at a record 32.9 percent annual rate in the second quarter. While almost all the major categories of GDP fell sharply, a 43.5 percent drop in consumption of services was the largest factor, accounting for 22.9 percentage points of the drop in the quarter. Nonresidential fixed investment also fell sharply, dropping at a 27.0 percent annual rate. Residential investment fell at a 38.7 percent annual rate.

The plunge in service consumption was expected, since this was the segment of the economy hardest hit by the shutdowns. Within services, health care, food services and hotels, and recreation were the biggest factors reducing growth by 9.5 percentage points, 5.6 percentage points, and 4.7 percentage points, respectively.

Spending on health care services fell at a 62.7 percent annual rate in the quarter. This was due to people putting off a wide range of medical and dental checkups and procedures, which far more than offset the care needed by coronavirus patients. The annual rate of decline for food and hotel services was 81.2 percent and for recreation services 93.5 percent. Read more…

Zombie capitalism

from David Ruccio

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Capitalism’s crises are clearly becoming deeper and more severe. After the crash of 2007-08, the United States (and much of the rest of the world) was subjected to the Second Great Depression, the worst economic downturn since the depression of the 1930s. Now, in the midst of the novel coronavirus pandemic, business activity has ground to a halt and unemployment has soared to levels reminiscent of the first Great Depression.

Not surprisingly, both Main Street and Wall Street firms have once again turned to the U.S. government to be bailed out through a series of programs that dwarf anything the world has seen before.

Read more…

Why economics is an impossible science

July 28, 2020 14 comments

from Lars Syll

In a word, Economics is an Impossible Science because by its own definition the determining conditions of the economy are not economic: they are “exogenous.” Supposedly a science of things, it is by definition without substance, being rather a mode of behavior: the application of scarce means to alternative ends so as to achieve the greatest possible satisfaction—neither means, ends, nor satisfaction substantially specified.stun Exogenous, however, is the culture, all those meanings, values, institutions, and structures, from gender roles, race relations, food preferences, and ethnicities, to technical inventions, legal regulations, political parties, etc., etc. The effect is a never-ending series of new theoretical breakthroughs, each an Economics du jour worthy of a Nobel prize, consisting of the discovery that some relevant little bit of the culture has something to do with it. Only to be soon superseded and forgotten since the continuous development and transformation of the culture, hence of the economy, leaves the Science in its wake. An impossible Science, by its own premises.

Marshall Sahlins

The increasing mathematization of economics has made mainstream economists more or less obsessed with formal, deductive-axiomatic models. Confronted with the critique that they do not solve real problems, they often react as Saint-Exupéry’s Great Geographer, who, in response to the questions posed by The Little Prince, says that he is too occupied with his scientific work to be able to say anything about reality. Read more…

Thoughts on Zachary Carter’s The Price of Peace

July 27, 2020 3 comments

from Dean Baker

I just finished reading Carter’s book and I will agree with the general assessment. It is an outstanding book that brings together much useful material on the life and influence of Keynes.

While I am of course familiar with Keynes’ history and the history of Keynesianism, there is much that I learned here. In particular, I am impressed with the importance he gives Joan Robinson in spreading the ideas of Keynes, especially to followers from the United States.

When I first start taking economics, I hugely appreciated Robinson’s writing. She both did very important analytic work, especially her pathbreaking analysis of imperfect competition, but was also tremendously witty in her popular writing. I will always remember her great comment on unemployment (paraphrasing): “The only thing worse than being exploited by capital is not being exploited by capital.”

Anyhow, I am happy to see her given the starring role in the spread of Keynesian thought, especially given that, as a woman, she had a huge amount to overcome in a field that was, and is, tremendously sexist. Read more…

Radical uncertainty

July 26, 2020 10 comments

from Lars Syll

61jCsB2gyQLIn Radical Uncertainty, John Kay and Mervyn King, two well-known British economists, state that rather than trying to understand the ever-changing, uncertain and ambiguous environment by trying to understand “what’s going on here”, the economics profession has become dominated by an approach to uncertainty that requires a comprehensive list of possible outcomes with well-defined numerical probabilities attached to them. Drawing widely on philosophy, anthropology, economics, cognitive science, and strategic management and organisation scholarship, the authors present an argument that probabilistic thinking gives us a false understanding of our power to make predictions and a false illusion of utility-maximising behaviour. Instead of trying to produce probability calculations to fill the unknown gaps in our knowledge, we should embrace uncertainty by adopting robust and resilient strategies and narratives to consider alternative futures and deal with unpredictable events …

The authors’ “radical uncertainty” is not about “long tails” (for example, imaginable and well-defined events whose low probability can be estimated). The authors emphasise the vast range of possibilities that lie in between the world of unlikely events which can nevertheless be described with the aid of probability distributions, and the world of the unimaginable. This is the world of uncertain futures and unpredictable consequences, about which there is necessary speculation and inevitable disagreement which often will never be resolved. In real life this is the world which we mostly encounter, and it extends to individual and collective decisions, as well as financial, economic and political ones.

Kay and King’s book is a thoughtful and welcome call for economists and policymakers to accept “radical uncertainty” and start rethinking their models.

IEA

The financial crisis of 2007-2008 hit most laymen and economists with surprise. What was it that went wrong with our macroeconomic models, since they obviously did not foresee the collapse or even made it conceivable?

Read more…

MMT = Keynes 2.0

July 24, 2020 16 comments

from Lars Syll

As time goes on, and 2020 turns into 2021, the long-held idea that governments are like households and businesses that have to repay their debts, or even that government deficits must be financed by debt at all, will increasingly be exposed as a mistake.

20It will be more or less a return to Keynes, except with the twist that the Keynesian aim of balancing the budget over the course of the cycle – deficits in bad times, surpluses in good times – doesn’t matter, not that anybody has actually achieved that lately anyway.

In future 2020 will be seen as the year when Keynes 2.0 got underway – when monetary and fiscal policy merged and a more sophisticated theory of government took hold, in which spending has no limit apart from the capacity of the economy.

As debt continues to be monetised, it will become obvious that without economic bottlenecks, spending and deficits can increase with no negative inflationary and welfare impacts.

Alan Kohler / The Austral

The $24 an hour minimum wage

July 23, 2020 16 comments

from Dean Baker

The push for a $15 an hour minimum wage has developed considerable political momentum over the last decade. It is a very real possibility that we will see legislation imposing a national minimum wage of $15 an hour by 2024 if Joe Biden wins the election this fall.

That would be a great thing, it would mean a large increase in pay for tens of millions of workers, but it is still very modest compared to what the minimum wage would be if it had kept pace with productivity growth. As is often mentioned, the purchasing power of the minimum wage hit its peak in 1968, at roughly $12 an hour in today’s dollars. However, productivity (output per hour work) has more than doubled over the last 52 years.[1]

This means that if the minimum wage had kept pace with productivity growth it would be over $24 an hour today. Furthermore, if we go out four years to 2024, and we see normal inflation and productivity growth, a productivity adjusted minimum wage in that year would be almost $27 an hour, nearly twice the $15 an hour target.

The idea that the minimum wage would keep pace with productivity should not seem far-fetched. It actually did follow productivity growth fairly closely in the first three decades in which we had a national minimum wage, from 1938 to 1968. This did not lead to soaring unemployment. In 1968 the unemployment rate averaged 3.5 percent. So, the idea that the minimum wage track productivity growth should not be far-fetched. Read more…

Ontology, framing, and all that jazz

July 22, 2020 27 comments

from Peter Radford

The collection of papers edited by Uskali Mäki and published in 2001 under the title: “The Economic World View, Studies in the Ontology of Economics” seems to be quite pertinent given the reaction to my recent comments on complexity.  It is a wonderfully rich source of thought about what, exactly, economics is, which is something that seems to confound a great number of people.  Quite often I get the sense that some critics are upset with economics because it isn’t physics, or chemistry, or, more controversially, biology.  No it isn’t.  Nor are they economics.  Hopefully we all agree on that.  Nor is it history or any other thing.  It is economics.  Which is something that has coalesced around certain ideas over the last couple of hundred years.  Quite what it is, though, remains a work in progress.

Economics is way more complex than the “natural” sciences simply because it involves us and our confounded intentionality, controversy, whimsy, and so on.  Physicist have it easy: atoms don’t “think”.  Which is why those economists who try to nail people down as if they are atoms do what they do.  It simplifies what is otherwise an enormous fog.  I happen to think they oversimplify, but I don’t criticize them for trying. Read more…