Out of the shadows

from David Ruccio

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.

Lengthening shadows

from David Ruccio

While Wells Fargo (whose CEO blamed employees for his bank’s failings) has put traditional banks in the news lately, the resurgence of the so-called shadow banking sector has largely gone unnoticed.

Paul Samuelson and the Cold War rebirth of David Ricardo

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.

RWER issue 56: Wade and Sigurgeirsdottir

Iceland’s meltdown:The rise and fall of international banking in the North Atlantic
Robert H. Wade and Silla Sigurgeirsdottir [1]   [London School of Economics and University of Iceland]“

Iceland should be a model to the world” (Arthur Laffer, November 2007)

 “They [the Icelandic banks] shouldn’t be worried about the fundamental soundness of their business model. I think it is very sound and very good”. (Richard Portes, May 2008)

In 2007 average income in Iceland was almost $70,000, about the fifth highest in the world and 1.6 times that of the United States.

Weekend read – The trouble with words

from Peter Radford

Words are not ideas.  They are our means to capture ideas and make them tangible.  The problem is that words are a porous net that inevitably lets some accuracy slip away, but sometimes captures irrelevant detail that shines brightly in the moment and then dulls in the light of later thought.

Trying to define something so a discussion can follow without ambiguity in meaning sliding in and muddying things.  Slippery isn’t it?

How about this:

“I sometimes wish we could take the energy expended on these antimacassar hand-me-down “rules” and apply it to working out a way to use awkwardly broad words like inclusion, equity, liberty and racism more clearly. The ever-evolving meanings of these words has a way of creating genuine misunderstandings — try defining “neoliberalism” — to the point of actually impeding communication.”

That’s John McWhorter in the New York Times a couple of days ago.  He teaches linguistics.

Try defining “neoliberalism”?

He’s been chatting too much with his fellow academics in the economics department.  They are the last people to ask.  Neoliberalism is easy to define.  It’s just that its definition keeps offending people who want to be neoliberal without having the recent taint associated with it rub off on them.  Or, at least that’s my opinion.

And when I say neoliberal is easy to define I must remind you that it is a term used most often in discussions about the political-economy of the past forty to fifty years.

Weekend read – An order of men

from Peter Radford

And women in this more enlightened era.

One of the great ironies of the last few decades is the ascendancy of “individualistic” thinking in  economic theory combined with the primacy of the “collective” we call the corporation in the real world.  The two offer highly contrasting explanations of how economic activity takes place.  The one is based upon relationships between individuals acting rationally and equipped with amounts of information — and, presumably, the computation power to go with it — that only deities can possess.  The other is based upon the hierarchical assertion of power over a circumscribed set of resources carved out in time and space to defy competition and create rents.  

Individualistic thinking is, of course, highly attractive politically.  It sells well to voters.  No one wants to think of themselves as merely a cog in some vast machine.  Plus, the battles of the past two or three hundred years to unshackle ourselves from the deadweight of religious, monarchic, military, or other authoritarian rule has led us, necessarily, to create a politics of affirmative individuality.  How can we break free of millennia of oppression without first establishing ourselves as free agents to do whatever we please?

Smith’s observation of the incessant division of activity in an economy appeared to create space for the individual-as-agent to co-exist with collective action.  Someone has to occupy the ever increasing speciality niches and someone else has to organize or connect those specialities into a coherent whole.  But that isn’t how theory developed.  Economists bent on defending the hyper-individual argue that no one organizes anything, but that the coherence is emergent from the interplay of the individuals — this is the “hidden hand” argument.  Realists argue that such a coherence cannot emerge without the assistance of considerable energy being spent on forcing connections into being — this is the “visible hand” argument.

Weekend read – Kant: misogynist & racist

from Asad Zaman and WEA Pedagogy Blog

Reducing politics to rational calculation allows the destruction of entire countries, and killings of
millions, for the sake of political power or corporate profits. Today this “rationality” dominates
the world where corporations are busy destroying the planet for the sake profits.

Introduction: The dark underside of leading lights of the European Enlightenment has been skillfully concealed. Nearly all major enlightenment thinkers held abhorrent views about slavery, race, democracy, women, and equality. Even though their views are public, easily available in major works, there is a conspiracy of silence, and suppression of dissent. Even though there is an abundance of nauseating quotes from major Enlightenment thinkers, these remain hard to find . One of the most striking instances Is Immanuel Kant, one of founding fathers of European Enlightenment and modern Western Philosophy. To a far greater extent than we realize, philosophy provides a foundation for our way of life. Philosophy provides answers to the central questions we all face: Who are we? What is the meaning of life? How can we lead good lives, and build a good society? These answers direct our personal and collective efforts, and have enormous, generally unrecognized influence on our lives. An amusing illustration of the foundational importance of philosophy is furnished by the Wikipedia article “Getting to Philosophy”. This article shows that clicking of the first internal link within any Wikipedia entry eventually ends up with an entry classified as philosophy. All human knowledge is built on philosophical foundations.

Even though philosophy plays a central role in shaping our lives, we are largely unaware of this. Keynes expressed this insight colorfully:  “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”. But there is a deeper and darker reason for our ignorance of the profound influence of Western philosophy on the way we lead our lives.

Technology: being and belief

from Peter Radford

Untethered from questions of inflation, infrastructure spending, and cryptocurrencies, all of which have been occupying my time in recent weeks, permit me time to speculate on something a little more provocative [this remains a work in progress]:

E. O. Wilson was here before us when he said:

“We exist in a bizarre combination of Stone Age emotions, medieval beliefs, and god-like technology,”

The development and application of technology has, over the past three hundred years or so, lifted us out of the primordial economic problem.  I define this problem not just in terms of our ability to locate the energy needed to sustain ourselves, but also in terms of providing for ourselves in a relatively secure way.  Safety from predators was as much a problem for our ancestors as was the source of food.  The consistency of safety, food sources, and shelter was never assured.  We live in the shadow of this lack of consistency even today.  It’s almost as if we cannot quite believe our achievement.  We conquered the impress of nature and freed ourselves from the ancient fears that shaped our senses, beliefs, and instincts but have not yet shaped new ones more fitting to our prosperous circumstances.  We are lugging around a set of beliefs that are inappropriate and not at all helpful.  How can we decide what to do next if we are bedeviled by shadows of the past?  

That’s what Wilson is getting at.  And it’s what we often forget when we theorize about human behavior.  We are animals conditioned and evolved in a harsh context.

Carter on Keynes

from Peter Radford

The biography of Keynes by Zachary Carter ends on a decidedly wimpy note.  The concluding chapter is devoted to the financial crisis of 2008 and the subsequent half-hearted sort-0f-Keynesian policy response.  Whilst Carter seems fine with his condemnation of neoliberal policies and is clear about the abject failure of the notion that financial markets act in either a self-correcting or a rational manner, he then goes on to ask why Keynesianism has proven to be so politically weak:

“But pointing the finger at neoliberalism raises uncomfortable questions for Keynes and his defenders.  Why has Keynesianism proven to be so politically weak, even among ostensibly liberal political parties and nations?  The Keynesian bargain of peace, equality, and prosperity ought to be irresistible in a democracy.  It has instead been fleeting and fragile.  Keynes believed that democracies slipped into tyranny when they were denied economic sustenance.  Why, then, have so many democracies elected to deny themselves economic sustenance?”

Surely the answer is obvious.  Indeed, the answer is littered throughout the previous pages of Carter’s book.

Neoliberalism as it cohered in the second half of the twentieth century was essentially a reactionary effort to undermine democracy.

Brave New Money: The trend toward a digital world currency – part 2

from Norbert Häring                                                                                              part 1

The winner takes all is a basic rule of the digital economy. Whoever is ahead has a large advantage, just from being ahead, and has a good chance to end up as a quasi-monopolist. This has two main reasons, called network effects and economies of scale. Network effects make digital services more attractive, if more people use them. This is true for social media or trading platforms as well as for computer programs like Word or Windows. Economies of scale arise, because once a digital service or a programme has been developed, it often costs next to nothing to provide it to more customers. Thus, the leader, who has the most customers, can offer the most attractive digital services at the lowest cost. This is the reason why Google, Amazon, Apple, Microsoft and Facebook have risen to the top of the league of the most valuable American companies within only a few years. Together with their Chinese look-alikes Alibaba, Baidu and Tencent hold the global top-spots. They all have a near-monopoly in their industry and can command very high profit margins.

The winner takes all applies also to money in a digitalized and globalized environment. Digital money can be produced at near-zero cost, and its utility increases with the number of users. What is in the way for one currency to gain a near-monopoly is only the desire of national governments to have their own currency and their power to enforce its usage at home. This power of national governments, however, might wane in an era of globalized digital commerce.  

The market paradigm versus the production paradigm

from Robert Wade

Why have the large majority of professional economists, especially in the academy and in western-dominated international organizations like the World Bank and IMF, been committed to free trade policy, downplaying theoretical and empirical weaknesses in order to remain so?

The teaching of economics in just about all universities of the western world, and in large parts of the developing world, socializes students into belief in the rightness of the “market” paradigm, and the more “rigorous” the training the more thoroughly socialized they become.[1]  The paradigm focuses on price competitiveness – free labor markets, flexible prices, free international trade – as the key to national competitiveness. It treats the market system as “self-organizing”, firms being essentially passive except for competing in price. It treats technology as external to production, as something which firms can buy on the market. It has no built-in process of innovation, no conception of an “industrial ecosystem” of firms competing and cooperating with each other.[2] With all these things stripped out, the culture of the profession elevates belief in comparative advantage and free trade as the litmus test of competence to be an economist, as the earlier quote from Krugman suggests. 

Introduction to “The Scientist and the Church”

from Shimshon Bichler and Jonathan Nitzan

This chapter is the introduction to our new book, The Scientist and the Church  (World Economic Association, 2015).

The Scientist and the Church

Introduction 

Shimshon Bichler and Jonathan Nitzan[*]

Human society, one may argue, is propelled by a dynamic clash of two primordial drives: creativity and power. The urge to invent confronts the impulse to conserve, the desire to change contests the quest to impose, the will to transcend conflicts with the impetus to restrict, harness and sabotage. It seems that the ever-present need to create something new always stands against the itch to redistribute and appropriate. 

Where’s the Structure?

from Peter Radford

In its long search for the illusion of equilibrium economics has had to barter away one aspect of reality after another. Driven by its desire to unearth laws that explain the presence of that illusion economists have long ago lost contact with the grittiness of actual economies. They prefer the pristine and simplified sanctuary of their models no matter how reduced the image of an economy those models portray.

Oddly I do not criticize them for this. No, I think I understand the logic of the process that produced the result. I applaud the effort. I salute the intellectual energy that has been absorbed into the project.

It’s the outcome I abhor. Economists are simply caught in a valley which, unfortunately for them, sits in the shadows of reality rather than sitting on a peak casting light on it.

I was thinking thus because I was trying to relate how economics, most of it anyway, ignores uncertainty. As you know this ignorance vexes me more than somewhat, because I see uncertainty as central to human existence. Without some element of uncertainty there would be no need to learn — we would know everything already. It is the absence of knowledge that incites us to search, to innovate, and to arm ourselves against the unknown. It is the very essence of life: problem solving is the distinguishing characteristic of life. It is how we tell that something is alive. The intentional imposition of order on disorder is the central property of all things we consider to be living.

Why no labor controversy?

from Peter Radford

The familiar so-called “capital controversies” a few decades ago were never fully resolved. This is mainly because the losers of that battle eventually won the war and so were able to overlook their loss. They carried on with a muddled view of what capital actually is and ignored the impact of that muddle as if it were unimportant.

Whichever side you are on in that debate – which still emerges from the shadows now and again – I have a question: why no labor controversy?

Surely labor is as muddled a concept as capital.

If our problem with capital is supposed to be its multitudinous expression in concrete terms – is it a machine? is it money? is it simply a bookkeeping entry on a balance sheet? is it a factory? and so on – then labor too is a similar multitude.

Is labor simply an energy source?

After all people do “work” in the old fashioned sense of that word. They lift, bend, move, and otherwise translate energy into work as they go about business. Labor is thus an energy input.

Is labor a source of skill?

What is inflation?

from David Ruccio

Inflation appears at first sight an extremely obvious, trivial thing. But its analysis brings out that it is a very strange thing…

One one level, inflation is extremely obvious: it’s an increase in the prices of the commodities people buy. Bread, gasoline, housing, and so on. When their prices go up, we are witnessing (and, for many, suffering) inflation. (The opposite, when prices fall, is deflation.)

Why is inflation important? Well, for most of us, our money (or nominal) incomes are eaten away by increases in prices. Therefore, over time, our real incomes are less than our nominal incomes, thus permitting us to purchase less.

Here’s an USA illustration of the difference:

Reformist Economics

from Peter Radford

“… the act of judgement that leads scientists to reject a previously accepted theory is always based upon more than a comparison of that theory with the world. The decision to reject one paradigm is always the decision to accept another, and the judgement leading to that decision involves the comparison of both paradigms with nature and with each other.” – Thomas Kuhn, The Structure of Scientific Revolutions

I will break my recent silence – I am still burrowing down into the issue of inequality – to make a comment on the skepticism I see concerning the Institute for New Economic Thinking.

It is justified.

Let’s think about this a moment.

If we are to set up an institute to support change, provoke discussion, and otherwise meddle about with the established way of thinking, and thus to earn the moniker of “newness”, we ought not to pack our agendas with a steady stream of establishment figures. That is not the way to revolution. It might, however, be the way to raise esteem and thus get the institution media attention.

Business schools and inequailty

from Peter Radford

You may not be aware of the article that has created quite a storm on the New York Times website. It is about inequality at Harvard Business School and the insidious consequences of the emergence of a “class” system there.

Don’t laugh.

If HBS is now afflicted by class issues and the social disaster of inequality, then we can assume the rest of the country is in worse shape. HBS is, of course, partly responsible for the inequality we now suffer from through its relentless production of clever people with great connections who exploit finance and consulting without adding on offsetting social value.

Disclaimer: I graduated from HBS in 1979. Things seem to have changed enormously since I was there. Sure we had our contingent of super privileged kids, but the bulk of our class seemed to me to be from pretty ordinary backgrounds. The obnoxious oppression of class was largely absent. At least we could ignore the super wealthy and the quasi aristocrats because they were too few to have much impact.

Since then things have changed.

Austerity: Democracy versus Capitalism

From: Peter Radford

That’s where we are. That’s where we’ve been for a while. That’s where we’re likely to stay. Get used to it.

Don’t get me wrong: the history of the past two hundred or so years have shown that capitalism – depending on how you define it – has been a good thing. Yes, it has. My ancestors were much the worse for living in the shadows of an aristocratic England, and it is only in the industrial era that their descendants, me included, have prospered. No, capitalism has not been a disaster, it has been beneficial.

And right there I stop endorsing it.

Inequality: The silly tales economists like to tell

from Dean Baker

Some economists don’t get paid to know about the economy, but to justify the trickle-up of wealth.

There is no serious dispute that the United States has seen a massive increase in inequality over the last three decades. However there is a major dispute over the causes of this rise in inequality.

The explanation most popular in elite and policy circles is that the rise in inequality was simply the natural working of the economy. Their story is that the explosion of information technology and globalisation have increased demand for highly-skilled workers while sharply reducing the demand for less-educated workers.

While the first part of this story is at best questionable, the second part should invite ridicule and derision. It doesn’t pass the laugh test. 

Back with a whimper and Ryan Follies

from Peter Radford

Wow. I think it’s fair to say that the US economy is firmly adrift. If it’s possible, that is, to be adrift firmly. I have ignored the news for two weeks only to return and discover that nothing has changed. The same malaise. The same lack of leadership. The same problems. And the same intractable politics. Of course no one imagines that things will perk up any time soon, so why would they have changed while I was away? This is an economy where small inklings are major news, and where disinformation, gossip, and ideological trench warfare dominate any notion of discussion.

Let me see.

The few headlines worth paying attention to tell it all: manufacturing is slowing down; consumer confidence is up, but only by a little; inflation has disappeared; wage growth is next to zero or below; the Fed is dithering over whether to go through with QE3; but the Fed is riven through with ideological divisions, so it doesn’t do anything; unemployment is stuck; claims for unemployment assistance bounce up and down depending on arbitrary events, weather, and holidays; the drought is driving up food prices; and Congress is doing nothing, as usual. Oh. And the banks have been caught cheating. Again.