In Thrall to the Infallible Hand

from Duncan Austin

While Adam Smith’s Invisible Hand has many beneficial attributes, somewhere along the way the Invisible Hand was recast as the Infallible Hand, seeding today’s widespread faith that markets can solve large-scale social and ecological problems they are ill matched for.

In the formidable shadow of the Infallible Hand, non-market solutions – policy, regulatory, cultural, behavioural – are often deemed ‘impractical’, so remain under-utilized. ‘Green growth’, ‘sustainable profit’ ‘shared value’ etc. are the solutions of the day.

Yet, if a market system denies its external costs and consequences – as contemporary markets do in spades – then the Hand is not Infallible at all, but rather it is powerfully, ubiquitously, and possibly existentially very fallible indeed.

Excess faith in markets is starting to feel like a major wrong turn of human cognition – indeed, a trap that seems very difficult to reverse out of.

The Keynesian revolution and the monetarist counter-revolution

from Asad Zaman  and RWER current issue

The intimate connection between economic theory and political power is clearly illustrated by the rise and fall of Keynesian Economics in the 20th Century. Confidence generated by theories glorifying the workings of a market economy led leading economists to predict permanent prosperity, just prior to the Great Depression of 1929. After the crash, Keynes set out to resolve the most glaring contradiction between economic theory and reality. While economic theory maintains that free markets automatically eliminates unemployment, the Great Depression created high unemployment which persisted for more than a decade. Keynesian theory recognized this failing of free markets, and placed responsibility for creating full employment on the government. Application of Keynesian theory led to a period of unprecedented prosperity in Europe and USA following the 2nd World War. However, there was a snake in the Garden of Eden: the wealth share of the top 1% declined precipitously between 1930 and 1980:

The fossil-fuel business should be actively dismantled

from Blair Fix and RWER current issue

From the moment the first veins of coal were opened (thousands of years ago), one thing has been certain: the fossil-fuel business would eventually die. But what’s always been uncertain is the when and the how. That’s because there is no law of nature that tells us how much of a non-renewable resource humans will exploit.

One possibility is that we will harvest fossil fuels to the point of utter exhaustion. Of course, there will always be some scraps left over. But eventually, fossil fuels will become so sparse that we’ll put more energy into harvesting them than we receive back. When that happens, the game is up. But although this end game is conceivable, the realities of climate change make it suicidal. There are likely enough fossil fuels left in the ground to render much of the Earth uninhabitable.

Faced with the specter of climate change, another possibility is that technology will come to the rescue.

On that front, there is some historical precedent. Humans didn’t stop riding horses because we ran out of grass. We stopped because grass-eating horses were replaced by gas-burning cars. So perhaps we’ll stop harvesting fossil fuels because renewable energy renders them obsolete. Admittedly, this scenario is comforting. Unfortunately, there’s little evidence that it is actually happening. Yes, humans have been ramping up our production of renewable energy. The trouble is, we’ve also been ramping up our exploitation of fossil fuels. In other words, renewable energy has mostly just added to the energy mix (instead of replacing non-renewable energy).

And that brings me to the most rational road forward. Yes, we should invest in renewable energy — far more than we’re doing today. But we shouldn’t just wait for this technology to replace fossil fuels. Instead, the fossil-fuel business should be actively dismantled.

How?

Read the full paper

Copyrights: What to do?

from Spencer Graves and RWER current issue

To the extent that copyrights and paywalls on academic journals are obstacles to “the progress of science and the useful arts”, there are things that individual researchers, academic administrators, and the public can do to help overcome these obstacles:

• Researchers can submit their work only to open-access journals and refuse to submit their work to journals that will put their work behind a paywall. (No one who wants to be cited wants their work behind a paywall if there is a reasonable alternative, because the paywall would likely reduce their audience.)

• Administrators managing research that produce articles for academic publications can insist that their researchers submit their work only to open-access journals. (Anyone wanting to build the reputation of their research wants their publications to be read. Paywalls and copyrights are obstacles to that.)

• Citizens should demand that their elected officials enact two reforms affecting copyrights:

1. All government funded research should be freely available, not behind a paywall, and should either be in the public domain or with a license no more restrictive than the Creative Commons Attribution–ShareAlike (CC BY–SA) 4.0 International license.

2. Copyright law should be changed to forbid restrictive copyrights on “works for hire” when they are not actually written with a plausible expectation of receiving substantive income derived from copyright royalties. This would leave in place current practices for publications other than academic journals.
   read full essay

Self-employed workers in India

from C. P. Chandrasekhar and Jayati Ghosh

Well over half of all workers in India are self-employed. The proportions of self-employed workers are significantly higher in rural areas, and among women. In rural areas, it is presumed that it is the dominance of small-scale agriculture that leads to more self-employment, but in fact self-employed workers are around half of those engaged in non-agricultural employment as well. Even in urban areas, those working without any defined employer account for around two-fifths of male workers and more than one-third of the proportion of women in some form of paid employment.

Remember that self-employment in most cases in India (other than in farming, some small family enterprises and skilled professionals able to work on their own terms) is rarely a choice. Rather, it reflects the absence of good quality paid employment, or in extreme situations, the lack of any paid employment at all.

new issue of Real-World Economics Review

real-world economics review

issue 103
31 March 2023

You may post comments on these papers here.
Please click here to support this open-access journal and the WEA

download whole issue

How to Make the Oil Industry Go Bust
Blair Fix     2

Technological Change and Strategic Sabotage:
A Capital as Power Analysis of the US Semiconductor Business
Christopher Mouré     26

Do copyrights and paywalls on academic journals violate the US Constitution?
Spencer Graves     56

Mainstream economics – the poverty of fictional storytelling
Lars P. Syll     61

Why do economists persist in using false theories?
Asad Zaman     84

Revisiting the Principles of Economics through Disney
Junaid Jahangir     89

On the Employer-Employee Relationship
David Ellerman     111

Why is yield-curve inversion such a good predictor of recession?
Philip George     122

Book Review: Thomas Picketty, A Brief History of Equality
Junaid Jahangir     128

Book Review: John Komlos, Foundations of Real-World Economics, 3^rd Edition
Alan Freeman     132

please support this open-access journal

Weekend read – Inflation! The battle between creditors and workers

from Blair Fix

I’ve been writing about inflation for the better part of three months. It’s been exhausting. Most of my time has been spent debunking misconceptions promoted by mainstream economists. Fortunately, I’m ready to move on.

What’s interesting about inflation is not the fact that prices rise. What matters is that prices rise at different rates. In other words, inflation creates winners and losers — it redistributes income.

In this post, I’ll dive into the redistribution dynamics between wage workers and creditors.¹ When inflation rears its head, both groups try to bolster their income. But they rarely have equal success.

Looking at over two centuries of US price history, I find (perhaps surprisingly) that inflation tended to benefit workers at the expense of creditors. Since the 1970s, however, the reverse has been true; inflation has systematically benefited creditors at the expense of workers.

So what changed?

Two things. First, the US labor movement was crushed. Second (and far less discussed), US policy makers adopted a new way to ‘fight’ rising prices. When inflation reared its head, central banks attempted to quell it by aggressively hiking interest rates. Today, it’s received wisdom that this policy ‘works’.

Weekend satire: The key to managing inflation? Higher wages

from Blair Fix

To manage inflation, governments have a simple tool at their disposal:
raise wages as fast as possible.
— Milton Fryman

For the last few months, I’ve been diving into the economics of inflation. In this post, I’m excited to review some forgotten history.

Our journey starts with a basic question: what is the key policy tool for managing the rate of inflation?

According to mainstream economics, the key tool is the rate of interest. Hike this rate, economists argue, and you will cool an overheated economy, solving the problem of inflation. As you probably know, I don’t think much of this idea. (Criticism here and here.) And so I’ve been looking for alternative theories of inflation management.

After months spent in the library stacks, I’m happy to report that I’ve discovered some lost theory. During the mid-20th century, it seems that while most economists were jumping on the interest-rate bandwagon, a few researchers went in the opposite direction. They proposed that inflation could be treated with a dose of wage hikes.

Needless to say, this alternative theory remains virtually unknown. And on its face, it seems absurd. But as I’ll show, the wage-hike approach is strongly supported by evidence. Using standard economic tools, I find that rapid wage growth tends to be followed by a drop in inflation.

The message? Policy makers should reverse course. Instead of greeting inflation with a dose of interest-rate hikes, governments should reach for the wage-rate lever. Hike wages as fast as possible, and you will surely reduce inflation.

The Swisher effect

Our dive into inflation management starts with some well-known history. The standard approach to regulating inflation was set in motion by the economist Irving Fisher.

Cryptocurrency after FTX

from Jamie Morgan

If you think cryptocurrency is priapic capitalism’s latest attempt to dick you, you are probably not alone. In the last year or so most people’s perception of cryptocurrency has fallen about as far as it could. Opinion, much like the value and solvency of the assets, has plummeted from ‘the sky’s the limit’ to a soft sewage-landing. Great swathes of the population of the US and UK invested in cryptocurrency over the pandemic period. Since then, a swift spiral of contagions and bankruptcies has hit the headlines and FTX is only the highest profile of these. The anodyne mainstream economics term ‘market correction’ scarcely does justice to what has gone on.

At the heart of the problem were crypto exchanges. These provided customers with ‘accounts’, paid interest on assets in those accounts, offered ‘brokerage-type’ services and allowed customers to buy and trade on margin. This produced all of the hallmarks of a regulated financial sector with little of the reality. Disclaimers and small-print notwithstanding, the language invited self-deception. Offering an ‘account’ does not make a service equivalent to a bank account and offering brokerage-type services does not make one a broker. Protections were few and the temptations many… The situation was ripe for a Kindleberger and Aliber style Mania, Panic and Crash and the only surprise is that anyone would be surprised how this has turned out.

We have, however, been here before, and not just in the sense that crypto is prone to bubbles.

Invisible hand and unmentionable foot

from Duncan Austin

. . . it is an empirical matter whether the Hand is stronger than the Foot, or vice-versa.  Unfortunately, various environmental and social trajectories indicate that the Foot is now overpowering the Hand in important ways. Note that the situation is not that markets are outright ‘good’ or ‘bad’ – as polarizing capitalism-versus-socialism debates so often quickly descend to – but rather how helpful or harmful current markets are based on how well they reflect known reality.

A critical factor in evaluating the relative strength of the Hand and the Foot is how broadly one chooses to look. If the world becomes ‘smaller’ because population grows and communications technologies connect everyone so that we become more aware of inequalities, and if the world becomes ‘smarter’ so that we identify hard-to-discern trends of climate change and biodiversity decline, the damages of the Foot become more visible than they were, and ever harder to unsee. 
The Towering Problem of Externality-Denying Capitalism

 

Further growth has become uneconomic: The diagram the World Bank refused

from Herman Daly and RWER issue 102

Let’s draw a big circle around the rectangle and label it “”Environment”.  The Earth-environment, let us say, has one input from space, solar energy, and one output back to space, waste heat. No significant material inputs from or outputs to space.^[1] Materials circulate as energy flows through the environment. The inputs to the economy come from the containing finite environment and constitute depletion, a cost. The final outputs return to the environment as wastes and constitute pollution, also a cost.

The changing frequency of biblical and economics jargon

from Blair Fix

We’re now in a position to look at the changing ideological landscape that is written in the English language. To quantify ideological change, I measure how the frequency of biblical/economics jargon has changed with time in the Google English corpus.

Figure 10 shows my results. Here the blue line shows the annual frequency of biblical jargon. The red line shows the annual frequency of economics jargon. Note that the frequency is expressed per thousand words, so you can interpret it like a batting average. For example, during the 1950s, for every 1000 words contained within the Google corpus, about 130 of them were economics jargon. (If our economics jargon ‘batted’ 1000, it would mean that English writing consisted entirely of economics jargon.)

Figure 10: The changing frequency of biblical and economics jargon in the Google English corpus.

Externality-downplaying economics

from Duncan Austin

A major first response to our sustainability challenges has been to try and turn profit to more sustainable ends. Alas, even ‘purposeful profit’ seems unable to overcome the deeper momentum of what might be termed ‘externality-denying capitalism’ – ‘externality-denying’ in that billions of daily investment and consumption decisions ignore certain of their social and environmental consequences.

As just one example, the World Bank reports that less than 4 percent of global carbon emissions are currently priced at levels consistent with the Paris Agreement’s temperature goals, endorsed by 194 nations.^[1] Hence, hardly any of today’s market transactions are fully costed, in terms of reflecting their contribution to climate change. The same neglect repeats to varying degrees for certain other environmental and social problems.

We don’t call our predominant socio-economic system ‘externality-denying capitalism’, but possibly we should, to constantly remind ourselves of what we are doing.

Figure 1

Matt Tweed

Caught in this embracing dynamic, first-response market-led sustainability strategies – such as socially responsible investing (SRI), corporate social responsibility (CSR), and an environmental, social and governance (ESG) movement – are showing signs of exhaustion.

Weekend read – The cause of stagflation

from Blair Fix

In my last post, I looked at the relation between economic growth and inflation. As per usual, the evidence didn’t sit well with mainstream economics.

According to standard theory, there is a trade off between low inflation and high economic growth. The idea is that you can have one or the other, but not both. So if you want to keep inflation low, you have to ‘cool off’ the economy by slowing economic growth. (Like many things in economics, this idea comes from the totem of supply and demand.)

The trouble is, the empirical evidence shows that the opposite is true. Rather than being driven by ‘excessive’ economic growth, inflation tends to come during periods of stagnation. So despite what mainstream economists proclaim, there is little evidence for a ‘growth-inflation trade off’. Instead, ‘stagflation’ seems to be the norm.

Now, the question is why?

Soon after I published ‘Is Stagflation the Norm?’ several readers pointed out that I should take a look at causation. The idea is that we want to know what drives what. Does (low) inflation drive (high) economic growth? Or does (low) economic growth drive (high) inflation?

Well, I’ve done the math, and the results may surprise you. But before we get there, let’s take a look at what the theory of capital as power has to say about the causes of inflation.

Stagflation as sabotage

Ecological reasoning demands perspectives that economics is designed to obliterate

from Gregory A. Daneke 

Given the numerous disasters exhibited of late involving Mainstream Economics, various heterodox economists have called for much greater consideration of ecological processes (both natural and social, see Fullbrook & Morgan, 2001).  Such processes, in turn, have become increasingly illuminated through the burgeoning science of complex adaptive systems (e.g., Preiser, et al, 2018). What some of these earnest observers fail to fully appreciate, however, is that ecological reasoning demands perspectives that economics as a policy enterprise is specifically designed to obliterate.  Merely invoking alternative perspectives without first exploring the stranglehold that mainstream economists have over specific institutions and the culture at large is mostly a fool’s errand. Economics and ecology stem from the same Greek root “oikos” or eco (meaning home) and referring to the art of life.  Yet, they have become like the twins in the swashbuckling tale by Dumas, The Man in the Iron Mask (with one the vile usurper the other the innocent prisoner). Fairly early on economics abandoned concern for widespread human welfare and focused on what the Greeks called “chrematistics” (or “the art of acquisition”, see Stahel, 2021).

During the middle of the 20^th century, Mainstream Economics became less of a science and more like a primitive cult (for a bit comic relief see Leijonhufvud, 1973). It is now primarily practiced to conceal the contradictions and extoll the virtues of yet another predatory epoch (much like the Guided Age, see Veblen 1899). Mainstream Economics is a pretty much a static system virtually out of touch with the dynamics of “living systems” (popularized by Capra, 1996). It is particularly hostile to anything systemic and symbiotic, especially those theories and methods associated with sustainable socioecological systems. Over the last few decades, the mainstream has morphed to ignore mounting incongruities, moving from Neoclassical to Neoliberal and now Neofeudal representations, further enshrining  inequality and environmental devastation.

An age of crisis

from Oxfam

An age of crisis, causing huge suffering for most of humanity

As billionaires, government leaders and corporate executives jet in to meet atop their mountain in Davos, Switzerland, the world faces a dramatic, dangerous and destructive set of simultaneous crises. These are having a terrible impact on the majority of people, something Oxfam sees in its work across the world.

In 2022, the World Bank announced that we will fail to meet the goal of ending extreme poverty by 2030, and that ‘global progress in reducing extreme poverty has come to a halt,’ amid what it said was likely to be the largest increase in global inequality and the largest setback in addressing global poverty since World War II.

The IMF is forecasting that a third of the global economy will be in recession in 2023. For the first time, the UNDP has found that human development is falling in nine out of 10 countries.

Oxfam analysis shows that at least 1.7 billion workers worldwide will have seen inflation outpace their wages in 2022, a real-terms cut in their ability to buy food or keep the lights on.

Whole nations are facing bankruptcy, with debt payments ballooning out of control. The poorest countries are spending four times more repaying debts – often to predatory, rich, private lenders – than on healthcare. Many are also planning brutal spending cuts. Oxfam has calculated that over the next five years, threequarters of governments are planning to cut spending, with the cuts totalling $7.8 trillion dollars.

An age of crisis, creating huge fortunes for a tiny few

Meanwhile, the scale of wealth being accumulated by those at the top, already at record levels, has accelerated. The global polycrisis has brought huge new wealth to a tiny elite. Over the last 10 years, the richest 1% of humanity has captured more than half of all new global wealth. Since 2020, according to Oxfam analysis of Credit Suisse Data, this wealth grab by the super-rich has accelerated, and the richest 1% have captured almost two-thirds of all new wealth. This is six times more than the bottom 90% of humanity. Since 2020, for every dollar of new global wealth gained by someone in the bottom 90%, one of the world’s billionaires has gained $1.7m.  read more here

Increase in billionaire wealth 1987 to 2022

How not to deal with a debt crisis

from Jayati Ghosh

In the 1920s and early 30s, John Maynard Keynes was embroiled in a controversy with the ‘austerians’ of his time, who believed that balancing the government budget, even in a time of economic volatility and decline and financial fragility, was necessary to restore ‘investor confidence’ and therefore provide stability. Keynes was horrified by the idea.

Zachary Carter’s brilliant biography notes that Keynes felt a package of government spending cuts and tax increases would be ‘both futile and disastrous’. It would be an affront to social justice to ask teachers and the unemployed to carry the burden of deflating a doomed currency, in the name of balanced budgets. Even worse would be imposing austerity on debtor countries, as American banks were then demanding of several European nations.

Keynes was concerned with more than just the lack of efficacy and adverse distributional effects of austerity. He worried that such measures would alienate working people, cause them to lose faith in their leaders and make them prey to right-wing demagogy and incitation to violence. His arguments were not heeded and fascism in Europe followed. Deflation in Germany under Heinrich Brüning as chancellor left six million unemployed when Adolf Hitler assumed power in early 1933.

Nearly a century on and after more than a hundred sovereign-debt crises those in charge of global economic governance appear however to have learnt nothing. Those who do not learn from history are condemned to repeat it and, sadly, the worst effects of their decisions are likely to be felt by others, not themselves.

Victoria Chick (1936-2023) – RWER 2018 paper “Industrial policy, then and now”

Abstract

After 40 years of neoliberalism, even governments believe that they are inefficient when compared to the private sector. And economics, in its swing to the right, reinforces this view. The philosophy behind public expenditure for social purposes and the criteria for judging such projects has not been a subject for public debate until recently. In particular, industrial policy was very simple: leave it to the private sector to allocate resources as the market prompts. In Keynes’s time this was not the case. This article reviews some of the issues concerning industrial policy that were aired in the interwar period. The debate needs to be revived, revisited and, where appropriate, revised to suit the present day, but on basic principles there is much to learn from the interwar discussions. The contrast between the recent (2018) UK government’s White Paper on Industrial Strategy and the Liberal Industrial Inquiry’s Britain’s Industrial Future (1928) is quite instructive.

read more

Share of new wealth gained by richest 1% between 2020-21

Source: Oxfam calculation based on Credit Suisse Global Wealth Report.