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Finance: need to understand banking, money and credit

November 19, 2018 44 comments

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.”

Read more…

Re-estimating wealth inequality in the United States

November 16, 2018 3 comments

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.

Read more…

Hype and facts on free trade

November 12, 2018 4 comments

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.  Read more…

India’s wealthy barely pay taxes

November 7, 2018 2 comments

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.   Read more…

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

November 5, 2018 7 comments

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   Read more…

Economics is an extremely powerful source of ideational content

November 3, 2018 6 comments

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.  Read more…

Can capitalists afford recovery? A closer look

November 2, 2018 1 comment

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.  Read more…

Dystopia and economics

November 1, 2018 9 comments

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. Read more…

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

October 31, 2018 6 comments

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).   Read more…

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

October 26, 2018 4 comments

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.   Read more…

Powers that construct and obstruct transformations in economics

October 26, 2018 10 comments

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

All-time most viewed RWER Blog posts

October 23, 2018 Leave a comment

Title                                                                                                                        Views

Summary of the Great Transformation by Polanyi 50,877
Citigroup attempts to disappear its Plutonomy Report #2 42,171
Reflections on the “Inside Job” 21,729
25 graphics showing upward redistribution of income and wealth in USA since 1979 21,190
Emerging vs. developed countries’ GDP growth rates 1986 to 2015 20,221
Keen, Roubini and Baker win Revere Award for Economics 17,547
Poll Results: Top 10 economics books of the last 100 years 14,936
Key member of Swedish Academy of Sciences calls for immediate suspension of the “Nobel Prize for Economics” 14,178
“If poor people knew how rich rich people are, there would be riots in the streets” 13,618
20 graphs showing inequality in the USA 10,569
Greenspan, Friedman and Summers win Dynamite Prize in Economics 10,381
RWER issue 58: Richard Koo 10,349
“Of the 1%, by the 1%, for the 1%”, Joseph E. Stiglitz 10,008
The Keynes Solution 9,786
IS-LM is bad economics no matter what Krugman says 9,533
Vote here for the Dynamite Prize in Economics 9,333
Graph of the week: USA productivity and real hourly wages 1964-2008 9,139
USA National Debt Graph by President – Roosevelt to Obama 9,120
Chart of the day: Debt to GDP ratios for EU countries 8,730
What is Post Keynesian Economics? 8,593
The 15 largest arms exporters per capita 8,493
Graph of the week: GINI index for 17 countries since WWII 8,284
An open letter to Greg Mankiw 8,097
Deutsche bank: fifteen shades of fraud 8,033
I write to you from a disgraced profession 7,973
Re-thinking the Definition of “Public Goods” 7,925
Poll now open for you to vote for the “Top 10 Economics Books of the Last 100 Years” 7,414
Mathematical modelling in economics 7,027
Vote for the Dynamite Prize in Economics 6,845
Why Free-Market Economics is a Fraud 6,466
Why it is better to be roughly right than precisely wrong 6,432
The ergodic axiom: Davidson versus Stiglitz and Lucas 6,274
USA: The Great Prosperity / The Great Regression : 5 charts 6,266
Chart of the day: Public vs. private US debt to GDP ratios 6,141
Graph of the week: US Employment to Population Ratio 1948-2011 6,017
US tax rates for the rich then and now 5,812
The global wealth pyramid 5,798
New links for secret Citigroup Plutonomy Reports 5,615
Game theory – a critique 5,502
Foresight and Fait Accompli: Two Timelines for the Global Financial Collapse. 5,476
World Stock Market Capitalization: 4 graphs 5,459
Yes, there are ways to reduce unemployment and revive the economy 5,313
Seven technical reasons why ‘(Real) Unit Labour Costs’ are not a valid macro-indicator of competitiveness 5,306
5 suggested common themes for an Economics that takes its subject matter seriously 5,068
Foundations of Paul Samuelson’s Revealed Preference Theory (super wonkish) 5,068

Hype and facts on free trade

October 21, 2018 3 comments

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.   Read more…

The 2008 Economic Crisis Ten Years On

October 17, 2018 1 comment

a WEA online conference
15th October to 30th November, 2018

Discussion Forum Sessions
Visit the Discussion Forum

 

I. The Financialisation of the Economy

  1. Carmelo Ferlito, “The Malaysian Property Boom and Bust Cycle: History Repeating?”
  2. Jake Jennings, “The Crisis and the Asset Driven Household”
  3. Pushpangadan Mangari, “Impact of Financialization: View from India”
  4. Teodoro Dario Togati, “Financialization and the ‘New Normal’. At the Root of the Aggregate Demand Problem Undermining New Capitalism”
  5. Gianni Vaggi, “Financial Mercantilism and Developing Countries”

II. Investment, Employment and Working Conditions

  1. Maria Alejandra Madi, “Pension Funds: Key Issues after the Global Crisis”
  2. Zeeshan, Geetilaxmi Mohapatra, and A K Giri, “Rural Nonfarm Enterprises Diversification, Farm Income and Consumption Expenditure in Different Agroecological Zones of India: Evidence from Longitudinal Farm Households”
  3. Edoardo Pizzoli, “The Green Economy: a Technological Option against
    Economic Crisis?”
  4. Azzurra Rinaldi, ”Female Entrepreneurs, the Crisis and Access to Credit: the Italian Case”
  5. Cameron M. Weber, “Some Observations on the Structure of the Labor
    Market after the Great Recession”

III. Social, Economic and Political Imbalances

  1. Guglielmo Forges Davanzati, “The Monetary Theory of Production and the Modern Money Theory: A Critical Assessment” 
    Guglielmo Forges Davanzati, “Income Inequalities, Public Debt and Social Cohesion: A Postkeynesian-Institutional Approach”
  2. Arturo Hermann, “The Economic Imbalances of our Time and the
    Perspective of Circular Economy”
  3. Davide Gualerzi, “Stagnation in A Historical Perspective”
  4. Laurence A. Krause, “Marx on Credit, Agency Problems, and Crises”
  5. Rodrigo Pérez Artica, “The impact of excess capacity over the investment falloff”

IV. Institutional Challenges and Alternatives

  1. Jesper Jespersen, “The European Monetary Union Failed because of
    Misunderstood Macroeconomics”
  2. Laszlo Kulin, “Alternative institutional frameworks at national and
    supranational level”
  3. Mogens Ove Madsen, “Institutional Challenges and Alternatives: Revision of Fiscal Rules in the EU”
  4. Constantine E. Passaris, “The Transformational Role of The Great
    Recession for Economic Governance”

Visit the Discussion Forum

Conference leaders: Arturo Hermann & Maria Alejandra Madi

new issue of WEA Commentaries

October 16, 2018 Leave a comment

WEA Commentaries

Volume 8, Issue No. 4  Download the issue as a PDF
In this issue

               Please support the WEA by paying a membership fee
                                   or making a small donation.

Brazil

October 16, 2018 1 comment

The necessity and difficulty of shifting our economic paradigms

October 12, 2018 24 comments

from Asad Zaman and the current issue of the RWER

In the wake of the Global Financial Crisis, the failure of economic theories, and of economists, to provide any warnings, analysis, or remedies, became glaringly obvious to all. The Queen of England went to the London School of Economics to ask “Why did no one see it coming?”. The US Congress constituted a committee to investigate why “economics, a field that aspires to be a science … (but) … generally accepted economic models inclined the Nation’s policy makers to dismiss the notion that a crisis was possible.” General discontent with economics has been captured in books too numerous to list; as a small sample chosen at random, consider Steve Keen’s Debunking Economics: The Naked Emperor of the Social Sciences, Joe Earle, Cahal Moran and Zach Ward-Perkins: The Econocracy: The Perils of Leaving Economics to the Experts, and Phillip Pilkington: The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory.

g economists have expressed serious dis-satisfaction with the profession as a whole.  John Cassidy’s article “After the Blowup …” in The New Yorker describes his interviews with apostates from the Chicago creed. Krugman wrote that the “Profession as a whole went astray because they mistook the beauty of mathematics for truth.” David Romer wrote that economists’ “dismissal of fact goes …(so)… far beyond post-modern irony” that it should be called “post-real”. He wrote that the profession has been moving backwards, losing precious insights gained. Olivier Blanchard, Chief Economist at IMF writes that DSGE models make “assumptions profoundly at odds with what we know about consumers and firms”. This is just a small sampler; we can easily find many other similar statements from leading economists, and practitioners intimately involved with finance and central banks on a global level[1]Read more…

Short-termism: culture or power?

October 6, 2018 13 comments

from Shimshon Bichler and Jonathan Nitzan and current issue of the RWER

At stake here is the connection between the two key quantities of the capitalist nomos – the price of capital and its underlying earnings – so the question is obviously important.  Yet, to the best of our knowledge, that question has never been asked, let alone answered. Indeed, as far as we know, the V­­‑shape pattern of the short-term price-EPS correlation shown in Figures 3 and 4 is a new finding.

It is common to argue that, since the 1980s, U.S. capitalism has been marked by a growing emphasis on ‘shareholder value’, heightened ‘short-termism’ and a nearly universal obsession with quarterly increases in profits. This popular view is certainly consistent with the post-1980s surge of the price-EPS correlation shown in Figure 4 – and this consistency should hardly surprise us. With capitalists paying more and more attention to the latest bottom line and analysts glued to the latest bit of news, it is no wonder that equity markets have become increasingly sensitive to the most recent variations in earnings.

But what is the cause of these changes? Why has the capitalist time horizon shrunk? Why have investors – who, for a whole century up until that point, cared less and less about current earnings and often seemed perfectly happy to buy and hold stocks for the long haul – suddenly started to insist on quarterly increases in profits? Is the V­‑shape reversal of the early 1990s merely the consequence of a changing ‘investment culture’? Is it simply a new fad imprinted by the theoretical winds of just-in-time neoliberalism and emboldened by the ideological flare of Margaret Thatcher, Ronald Reagan and Alan Greenspan – or are these developments themselves the result of a deeper change?   Read more…

Krugman vs. Keen

October 5, 2018 11 comments

from John Balder and the current issue of the 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.”   Read more…

Capital and class

October 4, 2018 17 comments

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

The premise and promise of capitalism, going back to Adam Smith, have been that global wealth would increase and serve as a benefit to all of humanity.[1] However, the experience of recent decades has challenged those claims: while global wealth has indeed grown, most of the increase has been captured by a small group at the top. This has continued into the “recovery” in the United States and globally. The result is that an obscenely unequal distribution of the world’s wealth has become even more unequal. Those in the small group at the top have long been able to put distance between themselves and everyone else precisely because they’ve been able to capture the surplus and then convert their share of the surplus into ownership of wealth. And the returns on their wealth allow them to capture even more of the surplus produced within global capitalism. This is accompanied by growing income inequality.

However, although people are aware of inequality, they are typically unaware of its real extent, and mainstream economics and the popular press contribute to this situation, which in turn leads to the reproduction of the system that produces ever-more-grotesque levels of inequality.

Both class and ideology underpin this worsening situation. The tiny group at the top, both nationally and globally, have both an interest and the means to maintain the economic and social rules and institutions that allow them to capture the surplus, and thus create more distance between themselves and everyone else. Meantime, mainstream economic and political discourses, inside and outside the academy, tend to ignore the class conditions and consequences of inequality – and to undermine the possibility of a real debate about the kinds of changes that are necessary to give the majority of people a say in how the surplus is utilized.

Global wealth inequality   Read more…