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.

Inflation in an unequal world economy: How the Fed’s policies are doubly perverse for the Global South

from C. P. Chandrasekhar and Jayati Ghosh 

Tight monetary policies in rich countries obviously affect people in the countries where they are applied, but they also cause ripple effects across the world. We were already in a very unequal world before the most recent global price increases. Most developing countries were not able neutralize the damage inflicted by the pandemic, largely because they had much weaker fiscal stimuli. Of nearly $14 trillion in additional fiscal spending by the end of 2021, more than 80 percent was from just ten advanced economies, and more than half was from the U.S.

This fiscal inequality worsened after the start of the Ukraine War. Governments of low- and middle-income countries were constrained by declining revenues and externally or self-imposed austerity, because of concerns about high levels of sovereign debt, or IMF conditions imposed on borrowing, or simply the fear of potential credit rating downgrades and capital flight.

So advanced economies experienced faster and stronger recovery from the pandemic. And the highly mobile capital that moved into “emerging” markets in search of higher yields during the years after the global financial crisis, when the global financial system was awash with cheap liquidity, began flowing back to the advanced economies.

All this has been devastating for many economies, especially those with high levels of import dependence.

Social protection for the self-employed

from C. P. Chandrasekhar and Jayati Ghosh

The Covid-19 pandemic highlighted the urgent need for a universal social protection floor—something that has been talked about and even internationally accepted for more than a decade now, but has still received relatively little serious attention from policy makers in most countries. The challenge is to ensure basic levels of food, health, income and livelihood security, not only in periods of crisis like the pandemic or economic shocks but also in the “normal” course of economies and societies.

This has become a major concern because of the dramatically increased economic inequality and greater vulnerability of people to adverse events and processes, as well as the heightened fragility of material life. It has been compounded by the large (and growing) share of informal workers in almost all economies, which means that, even among those in some form of paid employment, there are few forms of legal protection or social security that they can automatically access in periods of difficulty.

While the problems of providing social protection for informal workers are obviously significant and varied, they are even more acute in the case of workers who are described as “self-employed”.  For such workers, there are no declared employers who could be seen as even partly responsible for providing either legal or social protection

It is true that there is widespread prevalence of outsourcing of both goods and services, and an increasing tendency to label small producers of goods and services as “independent contractors”, even when they are effectively dependent on a particular company. This means that though  there is some sort of employment relationship, this is effectively concealed, certainly for legal and policy purposes. Therefore even those who are tied to particular companies as suppliers do not have legal recourse and end up being responsible for their own remuneration, safety and other conditions at work, and social security.

This is a much more extensive concern than is often realised. Figure 1 shows the proportion of self-employed workers to total (recognised) employment, disaggregated by per capita income group of countries.

The debt-trap and self-reliance

from Asad Zaman and the WEA Pedagogy Blog

Why does “Sovereign Default” become a hot topic with annoying regularity in Pakistan? The fundamental problem is the huge imbalance between our exports and imports. In 2021, our exports were USD 30 Billion, while our imports were around USD 62 Billion. In general, since 1960 onwards, our imports have averaged about 18%, while exports have been around 12% of the GNP. After reaching a high of 16.9% in 1996, the export ratio has been declining steadily, varying between 8% to 10% over the past five years. The dollar difference between the imports and exports is the ever-increasing amounts that we must borrow. This trade-gap serves as a brake on any growth spurt. As soon as the economy grows, the trade gap grows even faster, and we are forced to borrow money to finance this gap. IMF terms on loans are designed to slow down growth and create unemployment, breaking the back of the economy, so that the demand for imports is reduced to manageable levels.

So, what is the solution to the debt trap? Faithfully following the prescriptions of the same economic theories which plunged the world into global recession in 2007-8, economists and policy makers alike have been focusing on how to increase exports. The data shows the complete failure of this strategy – despite our best efforts, exports have been shrinking, instead of increasing. Despite this failure, you will not hear any mention, either from the policy makers or from the economists, of the obvious alternative: reduce imports. Why not?  To understand the answer, we must take a deeper look into the nature of economic theory itself.

new issue of RWER

 

real-world economics review

 Please click here to support this journal and the WEA 

Issue no. 102
18 December 2022

download whole issue

Ecological Economics in Four Parables
Herman Daly          2

The Paradigm in the Iron Mask:
Toward an Institutional Ecology of Ecological Economics
Gregory A. Daneke         16 

The Towering Problem of Externality-Denying Capitalism
Duncan Austin          30 

Have We Passed Peak Capitalism?
Blair Fix          55

A Probabilistic Theory of Supply and Demand
John Komlos          89

Unicorn, Yeti, Nessie, and Neoclassical Market
– Legends and Empirical Evidence
Ibrahim Filiz, Jan René Judek, Marco Lorenz, Markus Spiwoks          97

On the Efficacy of Saving
George H. Blackford          119

Occupation Freedoms: Comparing Workers and Slaves
M. S. Alam          137

Book Review: Steve Keen, (2021) The New Economics: A Manifesto
Shimshon Bichler and Jonathan Nitzan          156

Book Review: Fullbrook, E. and Morgan, J. (2020)
Modern Monetary Theory and its Critics
Junaid B. Jahangir          164

End Matter          171

Growth of income inequality: US vs. Europe

Source

Neoliberal economics, Big Pharma and pandemics

from Imad Moosa  

The spread of the virus has been aided by the neoliberal drive to privatise everything under the sun, including healthcare. Forty years of the privatisation of public health institutions (allegedly in the name of efficiency and for the benefit of consumers) has resulted in a disastrous situation as private healthcare providers have no commercial interest in preparing for or preventing emergencies. The spread has been aided by the lack of staff and material capacities in underfunded public hospitals, and the complete inability of the private, profit-motivated healthcare industry to provide even the most basic medical equipment and treatment when they are needed. The followers of neoliberal thinking disagree with this proposition and suggest that only the private sector can deal with the pandemic. 

Free marketeers argue that the development of a vaccine would not have been possible without the free market principles. In his defence of “Big Pharma”, Ralph (2020) praises the “global pharmaceuticals sector”, which “has been working for months with academia and governments to develop vaccines at unprecedented speed and financial risk, but also against a backdrop of cynicism from a public weary of controversies from drug price ‘gouging’ to bribery and marketing scandals”. In an editorial, City A.M. (2020) suggests that only those who know the principles of free market economics, or those who are observant, realise that “over the past hundreds of years it has invariably been the private sector, driven by need, who have innovated the world into progress”.

Those who argue along these lines seem to overlook the fact that vaccines would not have been developed without government action and public sector support. Typically, pharmaceutical companies take the risk of innovation in return for a profitable period under patent protection. If research fails (in the sense that a useful product does not materialise) the underlying company will likely fail to recoup the cost of research and development. This means that the risk of innovation is borne by pharmaceutical companies. However, this time it is different as the risk posed by the pandemic forced governments to accept innovation risk by pre-ordering vaccines without knowing whether or not they would be effective. This acceptance provided the incentive for pharmaceutical companies to develop multiple approaches simultaneously in order to find those that work, while letting the government take the risk of those that do not work. Pharmaceutical companies have also been allowed to progress the vaccines through the necessary regulatory clearance stages more quickly, continuing with testing while seeking regulatory clearance in parallel, rather than sequentially. Those same companies have been assured that they would not face lawsuits if the vaccines produced side-effects that could kill or harm people. And they have been receiving billions of dollars of taxpayers’ money in the form of research grants and subsidies.

Stress, a negative externality, is ubiquitous

from John Komlos 

Stress, the body’s biological response to external threats, is generated in the economic system as a negative externality through countless pathways, that include long working hours, being underpaid, being evicted, income insecurity, unhealthy work environments, tight deadlines, being fired, long spells of unemployment, underemployment, low income relative to the median, reduction of earnings, unexpected medical expenses, college tuition, being victim of predatory loans, financial pressure, inadequate work-life balance, being underinsured, excessive child-care costs, inflation, incarceration, and inadequate government safety net programs, to name some contributing factors.

The relevant literature is humongous: a search of the National Library of Medicine (PubMed) and of the IDEAS/REPEC websites found tens of thousands of articles in which stress and an economically relevant descriptor were both either in the title or in the abstract (Table 1). That these studies have increased exponentially in the 21^st century is indicative of the increasing significance of this phenomenon. For instance, in the year 2000 there were 630 articles with “work” and “stress” in the title or abstract in the PubMed website while there were 4,986, or eight times as many (per annum) even before the Covid pandemic. In 2021 there were 7,299. This pattern obtained for all other keyword pairs investigated.

The real economy is never in equilibrium

from Philip George

What are vectors?

. . . we defined a vector as a quantity having both magnitude and direction and represented it by an arrow. This makes sense in Euclidean 3-dimensional space. But in higher dimensions the idea of direction is not intuitive and we need a more formal definition that is consistent with the definition in three dimensions. In mathematics, an object is defined as a vector if it is an element in a vector space. This seems a circular definition but the additional requirements make it clear why it is defined in this way. Thus, when a vector is multiplied by a scalar (a real number, for our purpose) the result must be an element of the vector space, i.e., another vector. And a vector added to another vector must also be a vector in that vector space.

Consider two 10-tuples of numbers, T₁ = (t₁, t₂, t₃, … , t₁₀) and T₁¢ = (t₁¢, t₂¢, t₃¢,… , t₁₀¢). Let these represent the temperatures at ten points along the lengths of two metal bars. Then it is obvious that these 10-tuples cannot be vectors because they fail the requirement of vector addition; it makes no sense to add t₁ and t₁¢ because, as shown in the section on temperature, adding temperatures is a meaningless operation.

Similarly, consider two 10-tuples of numbers P₁ = (p₁, p₂, p₃, … , p₁₀) and P₁¢ = (p₁¢, p₂¢, p₃¢, … , p₁₀¢). Let P₁ be the prices of 10 goods which an individual consumes on Monday and P₁¢ be the prices of the same goods which he consumes on Tuesday. Now it is meaningless to add the price of a good on Monday to the price of the good on Tuesday. Therefore, it is meaningless to add the elements of the two 10-tuples P₁ and P₁¢. Hence, the two 10-tuples cannot be vectors and, indeed, there cannot be such a thing as a price vector.

We are therefore forced to conclude that General Equilibrium Theory (GET), which in its modern version is nearly three quarters of a century old, is merely highfalutin nonsense.

A bit of history

Einstein described Gibbs as

Knowledge and growth

from Lars Syll

If you have an apple and I have an apple and we exchange these apples then you and I will each have one apple.

But if you have an idea and I have an idea and we exchange these ideas, then each of us will have two ideas.

George Bernard Shaw

 

Adam Smith once wrote that a really good explanation is “practically seamless.” Is there any such theory within one of the most important fields of social sciences — economic growth?

In Paul Romer’s Endogenous Technological Change (1990) knowledge is made the most important driving force of growth. Knowledge (ideas) are presented as the locomotive of growth — but as Allyn Young, Piero Sraffa and others had shown already in the 1920s, knowledge is also something that has to do with increasing returns to scale and therefore not really compatible with neoclassical economics with its emphasis on decreasing returns to scale.

Increasing returns generated by non-rivalry between ideas is simply not compatible with pure competition and the simplistic invisible hand dogma. That is probably also the reason why neoclassical economists have been so reluctant to embrace the theory wholeheartedly.

Mainstream economics has tried to save itself by more or less substituting human capital for knowledge/ideas. But knowledge or ideas should not be confused with human capital. Although some have problems with the distinction between ideas and human capital in modern endogenous growth theory, this passage gives a succinct and accessible account of the difference:

Free trade theory fails to correspond to reality

from Jeff Ferry 

For the last 90 years, the United States has pursued and advocated free trade. For the last 60 of those 90 years, American workers and other observers have watched America lose high-paying jobs to imports and asked: can this really be good for the American economy?

Professional economists have answered, virtually unanimously, that yes, it is good, due to something called the Law of Comparative Advantage.

They are wrong. Their free trade theory, based on the so-called Law of Comparative Advantage, does not work for the U.S. or for many other countries.  We know this because dozens of economists have published studies of the empirical results of import penetration showing that the Law of Comparative Advantage, and the modern economic theory built around it is outmoded and inapplicable to high wage nations like the U.S. Indeed, it can actually worsen the performance of high wage nations.

Economists advocate free trade theory less because they actually believe it than because of what Nobel laureate economist Paul Romer has called “a sense of academic group identity grounded in a common defense of [a] dogmatic position.”^[1] In other words, economists use this dogmatic theory as a weapon to win jobs, influence, and consulting contracts.

In fact, free trade theory fails to correspond to reality, as the evidence published by economists for at least 100 years has shown.

Twitter temporarily suspends Dean Baker’s account after his “right-wing jerk” article

Dean Baker’s article is two posts below this post. 

Here is an article from CEPR about the suspension.

Washington, DC — The Center for Economic and Policy Research (CEPR) expresses concern at the sudden and disturbing temporary suspension of Dean Baker’s Twitter account today. Baker, who co-founded CEPR with Mark Weisbrot in 1999, and who currently works with CEPR as a senior economist, had his Twitter account, @DeanBaker13, “permanently suspended” without warning earlier today, only to see it reinstated a short time later, but with only a small fraction of the over 66,800 followers it had before it was suspended. Baker was not given any explanation for the suspension other than a boilerplate notification, and had never been warned that he had violated any of Twitter’s rules of conduct.

While it may have been due to a technical issue, Baker’s disturbing, temporary suspension follows the removal of some Twitter accounts in recent days that have criticized the company’s new owner, billionaire Elon Musk. The Intercept reports that several prominent antifascist accounts have been suspended since Musk took over Twitter at the end of October. Far-right Twitter accounts have been circulating a list of thousands of accounts that they are urging Musk to also suspend.

Baker has repeatedly criticized Musk on his “Beat the Press” blog and elsewhere, including most recently in a November 29 post in which Baker proposed reforms that could help to stop the spread of disinformation, defamation, and promotion of violence. Notably, in this post and in previous writings, Baker has called for the removal of Section 230 protections for social media platforms such as Twitter “that either sell advertising or personal information. This means that the big platforms could be held liable for defamatory material that they circulated over their platform,” Baker wrote. Baker continued to openly criticize Musk and Twitter after Musk purchased the company.

The monetary policy fallout for developing countries

from C.P. Chandrasekhar and Jayati Ghosh

The monetary policies of the major advanced economies have been obsessively nationalist for more than two decades now, with hardly any genuine international cooperation beyond some coordination among G7 economies. These policies in turn have had all sorts of impacts—often very negative—in the rest of the world, and particularly in the low and middle income countries referred to collectively as emerging and developing economies (EMDEs).

After the Global Financial Crisis, the advanced economies unleashed historically loose monetary policies, with major liquidity expansion and very low or even negative interest rates of their central banks. This enabled and encouraged massive increases in debt both within their own economies and in the rest of the world, as banks and other financial companies sought to use cheap money to maximise returns in sectors and locations that would otherwise not record much capital inflow. Since these cross-border capital flows were inherently speculative, much of this debt was short-term in nature or in bond markets that facilitated easy withdrawal.

This rush of finance of emerging and “frontier” markets did not necessarily result in productive investment. Instead, they typically pushed up domestic assets prices and caused exchange rate appreciation in the recipient countries, which actually worked against encouraging more investment in tradeable sectors even as they made the balance of payments more fragile and vulnerable to sudden shocks.