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.

Inequality and morbid symptoms of a financialised system

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. 

A brief history of inequality in modern economics

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.

Wages and productivity

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

Inequality challenge in pursued economies

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 21^st 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

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.

Heterodox economics needs to develop an agreed ontology and agreed modeling methods

from Ikonoclast

The essential problem is that heterodox economics needs to develop an agreed ontology and agreed modeling methods, including broad agreements on the likely limits to modeling. Peter Radford has pointed out some of the ways (and reasons why) the economy cannot be modeled accurately in key respects.

Orthodox economics has an agreed framework. Orthodox economists mostly agree on their framework and they accept their implied economic ontology, without question or discussion for the most part. Of course, the problem is that their framework lacks an empirically supportable ontology and thus is itself entirely un-empirical. Orthodox economists can’t see it. Every scientist and philosopher of the sciences and social sciences can see it. But while political power supports false ontologies, they are sociopolitically unassailable until effective rebellion and/or until the structures and systems built on false ontologies collide with real system obstacles and limits.

Economics is not a science and it never will be a science in the hard sciences sense. I think it is better to state this up front and as often as necessary. Economics is a prescriptive discipline. The hard sciences are descriptive disciplines: meaning physics, chemistry, biology and the systems sciences which follow on from them like cosmology and ecology.

Why isn’t Modern Monetary Theory common knowledge?

from Blair Fix

I’ve always been baffled why ‘modern monetary theory’ is called a theory. I don’t mean this in a disparaging way. As far as theories of money go, I think modern monetary theory (MMT for short) is the correct one. But having a correct theory of money is a bit like having a correct theory of traffic lights.

Traffic lights (like money) are a social convention. We agree that red means stop and green means go. Why we’ve chosen these particular colors is an interesting question, as is why we choose to put traffic lights where we do. But the fact that red means stop and green means go just is. It’s something we’ve defined to be true. The workings of money are similar. True, money is more complex than a traffic light — but only in application. In conceptual terms, money is equally simple. It’s a social convention that we’ve defined into existence.

To frame our discussion of money, let’s begin with what it isn’t. Money isn’t a thing. True, money can have concrete forms like dollar bills and metal coins. But it needn’t. It can be as abstract as digits in a bank account, or tallies on a stick. Money is an idea. It’s an agreement to tie our social relations to a unit of account. To understand money creation, we need only look at the principles of double-entry bookkeeping. Debt goes on one side, credit goes on the other. The two sides carry opposite signs and so cancel out. This allows us to create money while simultaneously balancing our accounts.

Here’s a simple example. Suppose that a friend does a favor for me. I want to return the favor, but don’t have the time to do so immediately. So I give my friend a note that says “Blair owes you one favor”. This note is money. It is created from nothing using the principles of bookkeeping. On one side is a debt: I owe my friend a favor. On the other side is a credit: my friend is due a favor. And that’s all there is to it. My friend can now exchange my IOU with other people. It becomes money in circulation.

Income inequality between North and South in relation to global income inequality

from Robert Wade and RWER issue no.92

The bottom line is that North and South are coherent blocs in important ways. The income gap between the North-South blocs is – persistently – larger than the income gaps within them. If we plot the share of world population living in countries arranged by average income we see a pronounced bimodal distribution, with not much population in between.

Countries of the North enjoy common economic benefits from their superior position in the world hierarchy, making for common interests in protecting their position from challengers. They translate common interests into political treaties, such as free trade agreements (e.g. NAFTA), political federations (eg European Union), and security agreements (eg NATO); and into common agreements linking groups of northern countries with regions of the South (e.g. Lome Convention, a trade and aid agreement between the European Economic Commission and 71 African, Caribbean and Pacific countries, signed in 1975). The seven leading economies of the North have concerted their actions through the G7 summits, claiming to be the top table of governance for the world (though not replacing the UN Security Council on security issues); and supported by tiers of other G7 coordination forums.

Countries of the South have broadly similar income levels and are subject to broadly similar pressures from the world economy. But they are

There is something new about unemployment today

Fred Zimmerman  (originally a comment)

Taken together, the chapters of Anthropologies of Unemployment, New Perspectives on Work and Its Absence, edited by Jong Bum Kwon and Carrie M. Laneby reveal that there is something new about unemployment today. It is not a temporary occurrence, but a chronic condition. In adjusting to persistent, longstanding unemployment, people and groups create new understandings of unemployment as well as of work and employment; they improvise new forms of sociality, morality, and personhood. Ethnographic studies such as those found in Anthropologies of Unemployment are crucial if we are to understand the broader forms, meanings, and significance of pervasive economic insecurity and discover the emergence of new social and cultural possibilities.

Everyone (media to the ordinary person in the street) make up “what ifs” to help us see and make sense of the unexamined assumptions embedded in the media headlines about unemployment we encounter every day. One of the major strengths of the anthropological approach to studying culture is precisely this exercise of situating the seemingly mundane and taken-for-granted in its wider context. To understand what unemployment means, why it happens, and how it feels, we need to consider it within its appropriate context.

Something must give at this point

from Ikonoclast  (originally a comment)

n C21 Piketty was exposing the automatic outcomes of an axiom-based legal law, regulation and financial system. The real economy is a real system (obviously). The financial economy is a formal system whose operations are prescribed by its axioms. Our system of legal laws, regulations, financial rules and financial calculations (bookkeeping and national accounts) is a formal, prescriptive system founded on ideological property axioms and calculated out via prescribed operations in the numéraire (money or financial capital). The RWER article even happens to mention one property axiom of the modern system: the axiom “for unlimited private accumulation.”

The expression r>g was not put forward by Piketty as a “law”. He put it forward as a tendency under certain conditions. The full expression of the tendency was;

If r>g then inequality increases.

Thomas Piketty’s changing views on inequality

from Steven Pressman and RWER issue no.92

Thomas Piketty established his professional reputation by using income tax returns to measure income distribution over long time periods in several nations. Long before Capital in the Twenty-First Century (hereafter C21) appeared, Piketty (2001; 2003; & Saez, 2003) showed that, in many capitalist countries, income flowed to the top 1% (really the top .1%). C21 made two new contributions – a theory to explain this phenomenon, r>g, and a policy solution, taxing wealth.

Surprisingly, C21 became an international best seller. Nonetheless, it was criticized by a broad array of economists. Heterodox economists objected to the economic theory Piketty used to explain rising inequality. Neoclassical economists disliked his policy proposal and understood that neoclassical economics didn’t support Piketty’s explanation of rising inequality. And many economists criticized Piketty’s data and his interpretation of the distributional facts (see Pressman, 2016).

Piketty’s follow up, Capital and Ideology, was published in France last fall; an English version appeared in March of 2020. There are many similarities between the two books. Both are massive tomes,¹ well-written and packed with economic data. Both use the term “capital” when really talking about wealth. Finally, literary references abound to support key points.

Despite these similarities, there are many changes. Gone are r>g and any analysis of inequality that rests on neoclassical economic theory. Capital and Ideology contains a different perspective on the causes of inequality. As its title proclaims, it is our beliefs that are crucial. Piketty undertakes a broad sweep of history to argue that the degree of inequality we get depends on how people see inequality and that this varies from time to time and from place to place. A progressive ideology, leading to greater equality during the 20^th century, ran out of steam by the end of the century. It was replaced by the view that markets increase human well-being. There is also a new policy proposal – broader representation on corporate boards.

This paper examines Piketty’s changing views on the causes of inequality and the policy solutions needed to remedy the problem. Section 2 provides a brief overview of some general perspectives on understanding income inequality. Section 3 focuses on how C21 views the causes of inequality. Section 4 then discusses the causes of inequality according to Capital and Ideology. Section 5 looks at key policy proposals to reduce inequality in both books. Section 6 concludes.  read more

 

Inter-generational wealth distribution

from Girol Karacaoglu and RWER issue no.92

The growing disparity across generations, in their access to material sources of wellbeing such as income and wealth (including housing), has been well documented (Ingraham 2019, Wolf 2018). Figure 2 provides an example referring to the growing disparity of wealth across generations in the USA (Ingraham 2019).

As Ingraham explains, “baby boomers – those born between 1946 and 1964 – collectively owned 21 percent of the nation’s wealth by the time their generation hit a median age of 35 in 1990. Generation X (born from 1965 to 1980) came of age during the era of wage stagnation and growing inequality ushered in by the 1970s and ’80s.

When the typical Gen Xer reached 35 in 2008, his or her share of the nation’s wealth was just 9 percent, less than half that of boomers at a comparable point in life. Millennials haven’t hit the 35 mark yet – that won’t happen until about 2023 – but their financial situation is relatively dire. They own just 3.2 percent of the nation’s wealth. To catch up to Gen Xers, they’d need  to triple their wealth in just four years. To reach boomers, their net worth would need a sevenfold jump.”

In terms of sources of future wellbeing, there are emerging concerns on a much wider front than simply material sources: “Looking forward, there is no room for complacency. As storm clouds gather on the horizon, mainly from environmental and social challenges, all OECD countries need to take action if they are to maintain today’s well-being for future generations.  read more

Why COVID-19 is the great unequalizer

from Marshall Auerback and RWER issue no.92

In the daily TV press conferences that New York Governor Andrew Cuomo conducted throughout the spring, he referred to COVID-19 as “the great equalizer.” In the sense that anybody can be infected by the virus, the governor is right. Yet after several months, the data shows clearly the impact is unequally landing on the shoulders of people of color and all but the wealthiest. The health impacts and absence of economic measures to protect them are so extreme that Cuomo’s statements are more than hollow – they are cruel cover-ups.

If anything, COVID-19 has been little more than a novelty for the 1 percent and a dystopian nightmare for the rest of us. The U.S. now has the highest number of cases in the world. Nearly 2.1 million people have been infected by the disease and more than 115,000 people have died, according to data from Johns Hopkins University. Had we experienced a repeat economic crash more along the lines of what happened in 2008, that might have forced a true reckoning and consequent reform in our system. Instead, we have a pandemic that is facilitating public looting under the cover of a collective surgical mask as it is entrenching pre- existing inequities. A toxic mix of racial, financial, and geographic disadvantage is literally proving to be a death sentence.

RWER special issue: The Inequality Crisis

sanity, humanity and science                       probably the world’s most read economics journal real-world economics review Please click here to support this journal and the WEA back issues Subscribers: 26,271 subscribe RWER Blog ISSN 1755-9472 A journal of the World Economics Association (WEA) 14,468 members, join Sister journals: Economic Thought and WEA Commentaries Issue no. 92 29 June 2020 The Inequality Crisis download whole issue The three options: an introduction Edward Fullbrook 2 Rethinking the world economy as a two-bloc hierarchy Robert H. Wade 4 Global inequality in a time of pandemic Jayati Ghosh 22 The United States of inequality David F. Ruccio 33 Fixing capitalism: stopping inequality at its source Dean Baker 48 Inequality challenge in pursued economies Richard C. Koo 61 Inequality under globalization James Galbraith and Jaehee Choi 84 Thomas Piketty’s changing views on inequality Steven Pressman 103 Inequality: what we think, what we don’t think and why we acquiesce Jamie Morgan 116 The art of balance: the search for equaliberty and solidarity Peter Radford 134 Climbing to 1011: globalization, digitization,shareholder capitalism and the summits of contemporary wealth David A. Westbrook 151 Poverty and income inequality: a complex relationship Victor A. Beker 167 The inequalities that could not happen: what the Cold War did to economics Erik S. Reinert 186 I LOVE YOU – investing for intergenerational wellbeing Girol Karacaoglu 207 Inequality in development Holger Apel 228 Inequality and the case for UBI funded by sovereign money Geoff Crocker 238 Inequality and morbid symptoms of a financialised system Ann Pettifor 246 Why COVID-19 is the great unequalizer Marshall Auerback 252 Board of Editors, past contributors, submissions, etc. 257 support this open access journal You can post comments on this issue’s papers on its comments page here

COVID-19: state of the unions

Capitalism vs. impact science

from Ikonoclast (originally posted as a comment)

There is clearly a strong correlation between science denialism and COVID-19 case rates in developed and semi-developed countries. Capitalism has an ambivalent relationship with science. Capitalists love production science and technology, including of course mining, industrial, consumerist, military, security, control and persuasion techs but they hate impact science. The impact sciences of course measure the impacts of science and technology (and natural events) on the biosphere, environments, plants, animals and humans. Capitalism does not want any interference from impact science knowledge getting in the way of profits for the few.

https://insideclimatenews.org/news/08042020/science-denial-coronavirus-covid-climate-change

When it comes right down to it Capitalism is anti-science. To accept only the answers you want (from production science) and to deny the answers you don’t want (from impact science) is unempirical and not in the spirit of the proper holistic (complex systems) application of science. Cherry-picking evidence and science disciplines for promotion and demotion on the basis of ideology is not a characteristic of a science-guided or an ethics guided society.

Coronavirus trends in US and EU

Another financial rescue by the US Fed

from  C. P. Chandrasekhar

While forecasters grapple with predictions on the likely contraction in the world’s leading economies, big finance, especially in the US, seems to be prematurely preparing for its next celebration. Recall that while the post-2008 Great Recession was precipitated by the financial collapse triggered by unbridled speculation in financial markets, the subsequent ‘recovery’ from the crisis saved and rewarded finance, but left the real economy limping and workers and the middle class poorer and often homeless. As the US and the rest of the world got accustomed to a new normal of slower growth, financial companies returned to profit, speculative agents had their bonuses restored and the New York stock exchange experienced the longest bull run in its history.

Unlike that crisis, the current ‘Greater’ recession that the Covid-pandemic has precipitated did not originate in the financial sector. But as the real economy contracted, finance too suffered a blow, with the S&P 500 for US stocks falling by almost a third to 2237 over the month ending 23 March. That was as it should be. With major companies experiencing a collapse in revenues and profits, stock prices had to retreat from the inexplicable heights they were ruling at before Covid-19 struck. The surprise element is what followed, with the S&P 500 rising from just above 2200 on 23 March to almost 3,000 two months later.

The illusion of precision

from Ikonoclast (originally posted as a comment)

A policeman puts his knee on the neck of a black man in Minneapolis for 8 minutes 46 seconds. A statue to a slave trader falls down in Bristol. This recalls the butterfly effect of Chaos theory. There is no humanly constructed model which would allow one to predict the second specific event from the first specific event. A broader probabilistic model might make predictions of protests and demonstrations after the first event, especially in a social media connected world. The model might struggle to predict where the protests would spread to, what form they would take, and especially the ramifications when it occurs synchronously with a virus outbreak and a social and economic lock-down predisposing whole systems of people to react more vigorously. Though, in hindsight the general outcomes do look predictable.

“You could not remove a single grain of sand from its place without thereby … changing something throughout all parts of the immeasurable whole”. – Johann Gottlieb Fichte.

The above is a “complex monist system” insight. Yet, chaos theory refers only to deterministic systems. If we accept that non-deterministic aspects to the cosmos and human agency (autonomy) also exist, then we see that the modelling problem for large complex systems becomes even more fraught.