Micro-Meso-Macro: Redressing Micro-Macro Syntheses

from Stuart Holland and Andrew Black and the current issue of Economic Thought

When Janet Yellen questioned in her address to the Boston Fed in 2016 why there had been a lack of rethinking in economic theory since the financial crisis, she cited a host of
macroeconomic analyses yet did not even refer to ‘too big to fail’. Whereas one of the
reasons for seeking to redress the missing middle in mainstream economics relates to the
increased concentration of banks in the US since the repeal of the Glass-Steagall Act in 1999 that not only aided the 2007-08 financial crisis, but has increased since it occurred (Grullon, Larkin and Michaely, 2017). Which also has been paralleled by ongoing concentration in global industry, with 100 corporations now representing half of world manufacturing output (UNCTAD, 2016) while 100 of them source over 70%, and 25 over 50% of global carbon emissions (CDP, 2017). 

Is shadow banking a serious threat in emerging markets?

from C. P. Chandrasekhar and Jayati Ghosh

Everyone seems to have woken up to the fact that global debt levels are too high and portent difficulties ahead. As Figure 1 indicates, the levels of credit to GDP, which were so high as to be unsustainable and resulted in the big crisis of 2008, have increased even more since then. There was a phase of deleveraging in the advanced economies until around 2014, and in developing countries and emerging markets until 2011, but since then, credit/debt has been expanding again. So much so that the credit GDP levels in 2017 were 15 per cent higher than in 2008 in the advanced economies, and more than 80 per cent higher for emerging markets (Figure 1).

Figure 1: Since the GFC, credit to GDP ratios have increased significantly in both advanced economies and emerging markets                                     Source for all figures and tables: BIS online database

new issue of Economic Thought

Economic Thought

History, Philosophy and Methodology
Vol. 7, No. 2 

download issue in full

 

A Common Misunderstanding about Capitalism and Communism Through the Eyes of Innovation
Dirk-Hinnerk Fischer, Hovhannes Yeritsyan

Cherchez la Firme: Redressing the Missing – Meso – Middle in Mainstream Economics
Stuart Holland, Andrew Black

The Lucas Critique: A Lucas Critique
Christian Müller-Kademann

Quantum Economics
David Orrell

Computational Agents, Design and Innovative Behaviour: Hetero Economicus
Timon Scheuer

By paying a WEA membership fee here, or by giving a contribution here,
you will be making the WEA possible.

Productive versus financial uses of credit

from John Balder and the current issue of RWER

In addition to the explosive growth in credit, the manner in which credit was deployed also shifted toward financing transaction in housing and other assets (e.g., equities, bonds, et al). As noted above, up until the early 1980s, credit was used mostly to finance production of goods and services. Growth in credit from 1945 to 1980 was closely linked with growth in incomes. The incomes that were generated were then used to amortize and eventually extinguish the debt. This represented a healthy use of debt; it increased incomes and introduced negligible financial fragility.

However, as constraints were lifted, credit creation shifted toward asset-based transactions (e.g., real estate, equities bonds, etc.). This transition was also fueled by the record-high (double-digit) interest rates in the early 1980s and the relatively low risk-adjusted returns on productive capital. The expansion of credit lifted asset prices, fueling creation of more credit. Over time, financial innovations, including securitization and derivative instruments, also contributed to the explosive growth in trading activities that accompanied asset price appreciation.

Unlike credit allocated to the production of goods and services, a decision to allocate credit to finance transactions in already existing assets (e.g., home mortgages) does not increase value-added or GDP (wealth-effects aside). As the International Currency Review stated in December 1987: 

The narrative of globalization

from Thomas Palley and the current issue of the RWER

As regards economics, the conventional wisdom interprets globalization through the lens of trade theory, which maintains there are gains for all countries that participate.[1] The narrative is that there have been two globalizations in the modern era. The first began around 1870 and ended in 1914. The second began in 1945 and is still underway. Globalization is identified with the history of trade, and the narrative is constructed around a temporary inter-war interruption that put globalization on hold in the 1920s and 1930s.

 In a recent paper (Palley, 2018), I have challenged the conventional view and argued that there have been three globalizations, not two. The first Victorian globalization ran from 1870 to 1914. The second Keynesian era globalization ran from 1945 to 1990. Both were driven by gains from trade that provided aggregate benefits to countries and the world economy.

 Since 1990 there has been a third neoliberal globalization which has been driven by industrial reorganization, motivated by redistributing income to capital away from labor. Neoliberal globalization can be described as “barge economics” (Palley, 2007, 2008). The idea draws on the observation by Jack Welch, former CEO of General Electric, that business would ideally like to have “every plant you own on a barge”. Welch envisioned factories floating between countries to take advantage of lowest costs, be they due to under-valued exchange rates, low taxes, subsidies, absence of regulation, or abundant cheap exploitable labor. In such a world, there is an inevitable large increase in trade because goods must cross borders, but trade theory does not explain what is going on.  

Nine years with euro crisis – time to think anew

from Trond Andresen, Steve Keen and Marco Cattaneo

A new means of payment can be part of the solution for the eurozone’s unemployed.

We have now seen nine years of social crisis and huge unemployment in many euro countries. An entire youth generation has barely experienced anything but being out of work. Still no solution has been found or implemented. The time is overdue to think outside the box.

We propose a solution that has circulated internationally for several years: some of us have argued for this since 2011.

Both households and businesses should be provided with an additional national means of payment, “Electronic Parallel Money” (“EPM”).

Our proposal works like this: EPM transactions take place via mobile phone, PC and card. The transactions are logged on a server in the country’s central bank. There are no EPM coins and notes in circulation. The government (and local authorities) have EPM accounts in the central bank. These are debited when the public pays wages and pensions, or purchases goods and services. All citizens and enterprises also receive a user account there.

EPM will greatly reduce unemployment and enable people and businesses to exchange goods and services. It will alleviate the social crisis and reduce pessimism in economics and society. Such a solution is now being discussed in Italy, triggered by the acute budgetary conflict with the EU. 

Economic growth leaves many Americans behind

from David Ruccio and Jamie Morgan and the current issue of RWER

What we’re seeing then, especially in the United States, is a self-reinforcing cycle of high profits, low wages, and even higher profits. That’s why the labour share of business income has been falling throughout the so-called “recovery”:[1]

Finance: need to understand banking, money and credit

from John Balder and the current issue of RWER

To explore the origins of the global financial crisis, the first step is to specify the relationship between banking, money and credit. According to the mainstream view, a bank serves as an intermediary between a borrower and a lender. As a pure intermediary, a bank has no impact on real economic activity. This view – taught in most Economics 101 textbooks – implicitly assumes that money is available in finite quantities that are regulated by the central bank.

Several years ago, Paul Krugman and Steve Keen engaged in an enlightening back-and-forth about banking, money and credit. The discussion examined whether banks lend existing money (implying money is neutral) or newly create the money they lend (money is not neutral).

Economist	Category	Result
Krugman (2012)	Money is neutral	Banks lend already existing money
Keen (2011, 2017)	Money is not neutral	Banks newly create the money they lend

In support of neutral money (mainstream view), Krugman (2012) casually asserts:

“Think of it this way: when debt is rising, it’s not the economy, as a whole borrowing more money. It is rather, a case of less patient people – people who, for whatever reason want to spend sooner rather than later – borrowing from more patient people.”

Re-estimating wealth inequality in the United States

from David Ruccio and Jamie Morgan and the current issue of RWER

If we return to the World Inequality Lab, the share for the top 1 percent in the United States is higher than the global figure. It was, for example, an astounding 41.8 percent in 2012 and 35 percent in 2014 (compared to 45.3 percent for the bottom 90 percent of households) However, depending on how it is measured, actual wealth inequality may be even higher.

Hype and facts on free trade

from C. P. Chandrasekhar

Voices questioning the claim that nations and the majority of their people stand to gain from global trade are growing louder. The one difference now is that the leading protagonist of protectionism is not a developing country, but global hegemon United States under Donald Trump. Free trade benefits big corporations with production facilities abroad, Trump argues, while harming those looking for a decent livelihood working in America. With time Trump has made clear that his words are not mere rhetoric, matching them with tariffs that have frightened European and North American allies and US corporations, besides troubling the likes of China and Japan. A nation that pushed for freer trade is now building economic walls along its borders. This turn in policy at the metropolitan core not only undermines the case for free trade among other nations, but revives arguments usually advanced by developing countries. The benefits of trade under capitalism, they hold, tend to be distributed unequally among nations. They sometimes fail to mention that at the national level as well the gains are asymmetrically distributed, favouring the more powerful. 

India’s wealthy barely pay taxes

from C. P. Chandrasekhar and Jayati Ghosh

Figure 1: India has very unequal wealth distribution

Source: Credit Suisse Global Wealth Report, 2018.

India is often mistakenly seen as a country with relatively low economic inequality. In fact, there were always very significant economic inequalities in India, which intersected with social and locational inequalities in complex ways. More significantly, the country’s inequalities widened after the internal and external economic liberalization measures from the early 1990s, which attracted global financial investors and boosted economic growth considerably.  

The Nordhaus Racket: How to use capitalization to minimize the cost of climate change and win a ‘Nobel’ for ‘sustainable growth’

from Shimshon Bichler and Jonathan Nitzan

The LA Times called the bluff: William D. Nordhaus won the Nobel prize in economics for a climate model that minimized the cost of rising global temperatures and undermined the need for urgent action.

‘The economics Nobel went to a guy who enabled climate change denial and delay’:

It has been a scary month in climate science. Hurricane Michael and a frightening report from the U.N. Intergovernmental Panel on Climate Change underlined the potential costs of human-caused global warming. Then to add insult to injury, William Nordhaus won the economics Nobel Prize.

Nordhaus was recognized for his work developing a model to guide policymakers on how best to address the costs and benefits of limiting greenhouse gases. That’s a noble goal, but Nordhaus’ work has no more helped to defuse the threat of global warming than Neville Chamberlain’s appeasement of Germany prevented World War II. Rather, Nordhaus’ low-ball estimates of the costs of future climate change and high-ball estimates of the costs of containing the threat contributed to a lost decade in the fight against climate change, lending intellectual legitimacy to denial and delay.

Unfortunately, the LA Times missed the nugget in the racket  

Economics is an extremely powerful source of ideational content

from Jamie Morgan and the current issue of RWER

What mainstream economics has become creates limits on what society can be because mainstream economics is an extremely powerful source of ideational content. This is not just a matter of what cannot be explored without models or datasets, since many things that can be explored in this way are not actually explored and some that are, are deformed. One well-known current example is inequality. This problematic was conceptually invisible within the mainstream prior to the popularity of Piketty’s Capital in the Twenty First Century (2014) despite more than two decades of growing (if variable) wealth and income inequality (within states rather than necessarily between them), and despite longstanding work by James Galbraith and others. As Piketty notes, this was not accidental, it was a consequence of the dominant conceptual constructs, mindsets and lack of empirical curiosity amongst economists.

The idea that marginal productivity in competitive markets equals to its price means, from a normative point of view, that labour is paid what it is worth (naturalising social division). Trickle down assumptions lead economists to anticipate incomes are all growing and wealth diffuses (rather than power allows wealth to be captured, concentrated and protected). Given the prevalence of these kinds of ideas and assumptions, little attempt was actually made to establish or critique the relations that were assumed, and this in turn, was reinforced by a reluctance to go beyond standardised tests of readily available datasets. This highlights how the economist’s skillset can be an impediment to empirical work, since testing data is not the same as seeking out all available evidence, some of which only comes into view if one is prepared to think in terms of a range of methods and sources – for Piketty that was many different types of tax record (see Pressman, 2015). Mainstream economics has subsequently been required by circumstance to address inequality. However, its prior invisibility – and focus on incentives to individuals and firms – meant in effect that the most powerful social science discourse acted to reinforce growing inequality, since it was to economics one would look for argument and evidence regarding it as a possible problem. 

Can capitalists afford recovery? A closer look

from Shimshon Bichler and Jonathan Nitzan

Our RWER blog post, ‘Can capitalists afford recovery: A 2018 update’, showed U.S. unemployment to be a highly reliable leading indicator for the capitalist share of domestic income three years later.

An observant commentator, though, suggested otherwise (first comment by jayarava). Although true for much of the postwar period, this association no longer holds, s/he argued. ‘Something changed after the global financial crisis to decouple unemployment from income shares’, s/he posited, pointing to the ‘new power of globalized capital to force down wages even in times of [low] unemployment’ (or rather, that during an expansion, capitalists can raise prices faster than wages, thereby augmenting their income share, which is the conventional view; Profit from Crisis, 2014: 130).

This post assesses this claim more closely, by examining the correlation between (1) absolute levels of unemployment and the capitalist share of income, and (2) their respective rates of change.

Absolute levels

Figure A1 deals with absolute levels. 

Dystopia and economics

from David Ruccio

It’s not the best of times. In fact, it feels increasingly like the worst of times. I’m thinking, at the moment, of the savage attacks in Pittsburgh (at the Tree of Life synagogue) and Louisville, Kentucky (where 2 black people were recently gunned down by a white shooter at a Kroger store) as well as the election of Jair Bolsonaro (who represents, in equal parts, Rodrigo Duterte and Donald Trump) in Brazil. So, it seems appropriate to change gears and, instead of continuing my series on utopia, to turn my attention to its opposite: dystopia. 

Mainstream economics has long been guided by a utopianism—at both the micro and macro levels. In microeconomics, the utopian promise is that, if the prices of goods and services are allowed to reach their market equilibrium, everyone gets what they pay for, everyone is equal, and everyone benefits. Similarly, the shared goal of mainstream macroeconomics is that, with the appropriate institutions and policies, capitalism can be characterized by and should be celebrated for achieving full employment and price stability.

But that utopianism has been disrupted in recent years, by a series of warnings that reflect the emergence of a much more dystopian view among some (but certainly not all) mainstream economists.

The World Bank’s annual report and the reemergence of elite theory

from Jorge Buzaglo and the current issue of the RWER

The World Development Report (WDR) is the World Bank’s annual report on the state of the world economy and crucial economic development topics. However, the 2017 version was atypical because the WDR (World Bank 2017) focused on politics, not the economy. The report, “Governance and the Law,” is symptomatic, not only because of its defection from economics but also for the type of political theory it utilizes.

The WDR straying from economics is not too regrettable because the economic theory that characterized this document was mainstream neoclassicism, and the type of economic policy advice was the associated neoliberal set of recipes labelled the “Washington Consensus.” This change in topic could be interpreted as the result of the growing recognition that mainstream economic theory and neoliberal economic policies have not delivered what they promised; in contrast, they induced increased income stagnation and growing inequality.

The realization of the failure of neoliberalism may even have reached the IMF, that is, the central stronghold of global economic orthodoxy. However, it does not seem as if the increasing doubts about and abandonment of the neoclassical–neoliberal paradigm will find a prospective resolution and replacement any time soon. The present uncertainty about the ruling economic model and policy paradigm reflects an uncertainty about the current global geopolitical evolution, a process of hegemonic transition that may take years or decades to settle. Meanwhile, and characteristically, massive state interventionism (particularly in monetary policy) coexists with orthodox laissez-faire and radical “market reforms” (particularly in labor and social affairs).  

Can capitalists afford recovery? A 2018 update (2 charts)

from Shimshon Bichler and Jonathan Nitzan

In our work, we’ve argued that, contrary to the conventional creed, capitalists dislike recovery. Their main driving force, we’ve claimed, is not the absolute level of their income, but its distributive share, and this later emphasis has far-reaching implication. Whereas the absolute level of capitalist income correlates with the absolute level of economic activity, the distributive share of that income depends on capitalist power. And in the United States – and this is the key point here – the power of capitalists relative to the underlying population depends crucially on the sabotage inflicted by unemployment. Since unemployment is inversely related to growth, it follows that capitalists cannot really afford recovery, particularly a prolonged one.

This claim is illustrated by the first figure, taken from our paper ‘Can Capitalists Afford Recovery’ (Bichler and Nitzan 2013; Nitzan and Bichler 2014a). The chart shows the overall share of capital in domestic income along with the rate of unemployment. The top panel displays the levels of the two variables, both smoothed as 5-year moving averages. The solid line, plotted against the left log scale, shows pretax profit and net interest as a percent of domestic income. The dotted line, plotted against the right log scale, shows the rate of unemployment three years earlier. The bottom panel shows the annual rates of change of the two top variables since 1940.  

Powers that construct and obstruct transformations in economics

from Deniz Kellecioglu and the current issue of the RWER

The academic field of economics has been under an intensified pressure after the Global Financial Crisis (GFC), which began in September 2007 (cf. Backhouse 2010). This pressure involved demands to refine, reform, or completely overhaul the field. The latter group viewed the GFC as another dismal outcome of a dominant economics that is significantly supportive of financial interests, while being hostile to states, peoples, and the environment; unless they functioned in the interest of the prevailing economic and power structures (cf. Dowd 2004, Chang 2014). More than a decade later, dominant economics has not changed much; whether in its theory, education, methodology, or policy (cf. Aigner et al 2018).

This economics ascended over the 1970s, achieving complete dominance in the Global West by the early-1980s, and almost anywhere else by the early-1990s. Its dominance is closely related to the emergence of a new kind of capitalism and power system, often referred to as ‘neoliberalism.’ After all, as concluded by Wolff and Resnick (2012: 311): “over the last one hundred and forty years or so, capitalism not only oscillated among its different forms, but economic theory focused on understanding capitalism also oscillated among alternative kinds of reasoning. Moreover, these two different kinds of oscillations are interconnected.” This paper examines such oscillations from the vantage point of economic theories, focusing on the transitional period of the 1970s. The objective with this ‘political economy of economics’ is to distil lessons to utilise in emancipatory efforts to transform economics today.

Although this history has been extensively reviewed, few studies are directly concerned with transformations in economics. This critical literature exhibits one common conclusion, however: external powers have significantly influenced the character of mainstream economics (cf. Chang 2014, Näring and Douglas 2012, Skidelsky 2013, Dowd 2004). However, this conclusion is often observational, suggestive, and part of a presumptive diagnosis – rarely proven in a systematic manner. This is surprising considering the importance of the issue and the weight of the allegations.  read more

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Hype and facts on free trade

from C. P. Chandrasekhar

Voices questioning the claim that nations and the majority of their people stand to gain from global trade are growing louder. The one difference now is that the leading protagonist of protectionism is not a developing country, but global hegemon United States under Donald Trump. Free trade benefits big corporations with production facilities abroad, Trump argues, while harming those looking for a decent livelihood working in America. With time Trump has made clear that his words are not mere rhetoric, matching them with tariffs that have frightened European and North American allies and US corporations, besides troubling the likes of China and Japan. A nation that pushed for freer trade is now building economic walls along its borders. This turn in policy at the metropolitan core not only undermines the case for free trade among other nations, but revives arguments usually advanced by developing countries. The benefits of trade under capitalism, they hold, tend to be distributed unequally among nations. They sometimes fail to mention that at the national level as well the gains are asymmetrically distributed, favouring the more powerful.