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Realism in economics

from Maria Alejandra Madi

A relevant feature of the current crisis in economic knowledge is the recurrence of the  Ricardian Vice. Joseph A. Schumpeter coined this term in his book History of Economic Analysis when he criticized the habit assigned to Ricardo to represent the economy by a set of simplified assumptions and to use tautologies to develop practical economic solutions. Indeed, Schumpeter rejected the kind of economic thought that mainly favours deductive methods of inquiry – based on mathematical reasoning- because the  habit  known as the Ricardian Vice generates analytical unrealistic results that are irrelevant to solving the real-world economic problems.

Also Keynes warned that the understanding of the economic phenomena demands not only purely deductive reasoning, but also other methods of inquiry along with the  study of other fields of knowledge- such as History and Philosophy. In his own words:

The study of economics does not seem to require any specialised gifts of an unusually high order. Is it not, intellectually regarded, a very easy subject compared with the higher branches of philosophy and pure science? Yet good, or even competent, economists are the rarest of birds. An easy subject at which very few excel! The paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts. He must reach a high standard in several different directions and must combine talents not often found together. He must be mathematician, historian, statesman, philosopher – in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician.” (Keynes, Collected Writings, vol. X: Essays in Biography) read more

Flipped economics classroom

from Maria Alejandra Madi and the WEA Pedagogy Blog

Recent active learning experiences have been associated with “flipped” or “inverted” classroom (Norman and Wills, 2015). Indeed, this method has been receiving increasing attention by professors that search for alternatives to traditional lectures so as to cover some topics of the course content.

By adopting the flipped  classroom in economics instruction, professors out to enhance a larger pre-class involvement of the students not only by reading the selected bibliography but also by watching instructional videos.

Before the class, professors provide instructional short videos (five to fifteen minutes) that cover the main ideas related to a selected topic of the syllabus. The videos generally emphasize theoretical approaches, definitions, formulas and graphs. Recent evidence shows that many professors actually record a narration of the lecture slides and notes.

As students should watch the video before the class, professors can privilege active learning methods during class time. Therefore, the class activities aim to apply the material that was covered in the videos in order to enhance a real-world approach to economics education. These activities- that are supervised and oriented by professors – can include, for instance:  read more

Financialization, austerity and pension funds

February 22, 2017 2 comments

from Maria Alejandra Madi

By 2020, the largest pools of pension fund assets are projected to remain concentrated in the US and Europe. In North America, pension fund assets reached $19.3 trillion in 2012 and PwC estimates that by 2020, pension fund assets will rise by 5.7 percent a year to achieve over $30 trillion of the $56.5 trillion in total global assets, more than 50 percent of the global total.

Indeed, according to the PwC report, Asset Management 2020: A Brave New World, demographic changes, accelerating urbanization, technological innovations and shifts in economic power are reshaping the asset management environment where pension funds have been playing and  will play an outstanding role in the global saving and investment process.  Three key factors seems to stimulate the global growth in assets: i) changes in government-incentivized or government-mandated retirement plans that will turn out to increase the use of defined contribution (DC) individual plans; ii) faster growth of high-net-worth-individuals in South America, Asia, Africa and Middle East regions up to 2020; iii) the expansion of new sovereign wealth funds.

However, in spite of the pension funds’ power to centralize huge amount of “savings from workers”, in this scenario of financial globalization, workers do not seem to have strong defense against the impacts of the current global scenario on the savings of workers and the flows of workers’ income.  read more

Protectionist trends

January 31, 2017 4 comments

from Maria Alejandra Madi

Throughout 2016, many countries around the world keep on competing for market share in high-wage, innovation-based industries. Indeed, these countries have turned to “innovation mercantilism” by imposing protectionist policies to expand domestic production and exports of high-tech goods and services.

In this setting, innovation mercantilist policies are being oriented to high-value tech sectors such as life sciences, renewable energy, computers and electronics, and Internet services. There are new “beggar-thy-neighbor” strategies adopted by nation-states, such as forcing companies to transfer the rights to their technology or forcing them to relocate their production, research and development (R&D), or data-storage activities. These strategies aim at   both replacing imports with domestic production or promoting exports.

At this respect, the 2016 Information Technology and Innovation Foundation annual report shows that:

  • China introduced a new cybersecurity law so as to impose local data-storage requirements, and forced intellectual property and source code disclosures.  This country also introduced new cloud-computing restrictions so as to exclude and prevent foreign firms from operating in the Chinese market.
  • Germany introduced forced local data-storage requirements as part of a new telecommunications data law.
  • Indonesia introduced forced local data-storage requirements for Internet-based content providers. The country also introduced a patent law amendment in order to force local production and technology transfers.
  • Russia introduced forced local data-storage requirements and encryption-key disclosure as part of a new telecommunications data law. The country also introduced new government procurement rules in order to ban the purchase of foreign software.
  • Turkey introduced a new data-protection law that, as a matter of fact, forced local data storage.
  • Vietnam introduced forced local data-storage requirements for Internet-based content providers. The country also introduced a new network-security law that forces disclose encryption keys and source codes a condition of market access.    read more

Current concerns about the zero bound on interest rates

January 22, 2017 2 comments

from Maria Alejandra Madi

Much of the comments on the global financial and economic crisis have focused on the proximate causes and governance issues related to risk management, monetary policy and weak regulation. New political alignments allowed a process of global financial deregulations in the early 1970s. The political ascendancy of financial capital and extensive capital market liberalization, employment goals were abandoned in the economic policy agenda. Indeed,   price stabilization and “fiscal prudence” turned out to be the primary objectives of the economic policy. As a result, prior to the 2008 global crisis, inflation was low and close to official inflation target rates in the advanced economies. However, credit bubbles threaten the macroeconomic stability.

After the Global Crisis, academic economists and policy makers have actively participated in the debate on monetary policy in the United States and European Union. In the face of the outcomes of the crisis, central banks have dealt with a triple challenge

  • how to contain the crisis
  • how to prevent a recessionary downturn
  • how to avoid enhancing financial instability in the form of inflationary pressures or asset  and credit bubbles.

The Federal Reserve (Fed) and the European Central Bank (ECB) have faced major global financial challenges together. However, within their respective zones, they coped with their institutional set-up and governance guidelines.

After the bail-outs, their main concern is whether nominal interest rates really have a lower bound around zero per cent. After the crisis, central banks responded to the large fall in aggregate demand and the under- utilized productive resources by adjusting  the policy interest rates to, or very close to, zero. Indeed, these central banks have focused on lender-of-last-resort program extensions. The main question is: to what extent central banks can deal with huge levels of leverage, structural flaws of financial innovations (securitization, structured finance, and derivatives above all) and  lack of transparency in terms of  risk management?.  read more

Deregulation, austerity and the polarization of labour markets

from Maria Alejandra Madi

The huge growth of deregulated finance has been associated to a new financial regime and great transformations in the pattern of economic growth. Looking back, there has been  a narrow relationship between the crisis of the post-war accumulation pattern, the evolution of the international monetary system and the process of financial deregulation. In fact, as Bello (2006) warned, in the 1980s, Reaganism and structural adjustment were not successful attempts to overcome the post-war accumulation crisis. One decade later, the Clinton administration embraced globalization as an American strategy. First, this strategy aimed to accelerate the integration of production and markets by transnational corporations. Secondly, it aimed to create a multilateral system of global governance centred on the World Trade Organization, the International Monetary Fund and the World Bank.

In the last decades,  financial capital  exercised control over the structural forms necessary for the continuing cycles of valorisation of productive capital, thanks to the centralized money at  disposal. Different growth models overwhelmed this global scenario: while some countries have presented a consumption-driven growth model fuelled by credit, generally followed by current account deficits, other countries have shown an export-driven growth model, mainly characterized by modest consumption growth and large current account surpluses (Stockhammer, 2009). The growth of financial assets, generated by the new debt cycle, included growing and sophisticated risk management practices. Besides, the financial expansion also proved to subordinate the pace of investment to financial commitments. The overall changes strengthened private and public debt and further social inequalities.  read more

Economic growth is not “natural”: re-thinking current economic challenges

October 21, 2016 3 comments

from Maria Alejandra Madi

Since the late 1980s,  the World Bank has been defending a policy agenda that reinforces the free market model of endogenous economic growth where human capital plays an outstanding role since the acquisition of abilities would increase the productivity levels, and as a result, the income levels. In the model of endogenous growth, the evolution of the level of product per worker depends on the increase of productivity. Regarding the human capital model, the long run growth in each country is analysed considering the particular features of infrastructure and human capital. The divergences verified in the levels of product per worker among different countries can be attributed to the abilities accumulated by labour and to the infrastructure of the economies.  The emergence and diffusion of the  model of endogenous growth reflected the intellectual victory of  the  ideas about the supremacy of the competitive economic order and the rejection of interventionism to promote economic growth and social justice. Considering the relevant economic outcomes of this intellectual victory, the main question that arises in the context of economics education is: What is at stake in  the economic discourse that privileges the economic competitive order as the pillar of economic growth?

The competitive order, as a necessary one, is the pillar of Hayek’s theoretical construction.  Hayek’s economic discourse turns out to “naturalize” the competitive market as a superior arrangement. However,  the “naturalization” of the competitive market – by considering it a “natural” arrangement – is overwhelmed by political interests that play a crucial role in the economic and political decision procedures, and in the institutional management of such issues.

Taking into account a real-world approach  to economic growth, it is relevant to highlight  the ideas of  Keynes, Minsky, Kalecki, Rifkin in order to re-think  current economic growth challenges

1. Uncertainty         read more

How unemployment has been considered by mainstream macroeconomic models?

September 24, 2016 1 comment

from Maria Alejandra Madi

From the 1950s onwards, the macroeconomic models of the neoclassical synthesis, based a system of simultaneous equations, focused on the interaction between the market for goods and services and the money market in the context of a general equilibrium analysis. According to John Hicks (1904-1989),  in the general case, the capitalist economy is at full employment level of output.  The underlying employment theory is based on the demand and supply of labour in a competitive market. In fact, this neoclassical approach supposes that price adjustment market mechanisms could guarantee full employment.  In same specific cases, however, the general equilibrium implied by the IS-LM model could not necessarily correspond to a full employment level of output. This situation, called unemployment equilibrium, would be the result of market imperfections, such as rigid money wages, interest-inelastic investment demand, income-inelastic money demand, among others.

In the 1960s, mainstream macroeconomic models expanded the analysis of the negative correlation  between  inflation and unemployment. This correlation was  based on the conclusions drawn from an empirical study  -the Philips curve- about the negative relationship between the evolution of the rate of employment and the rate of variation of nominal wages in England at the turn of the 20th century.  The attempt to incorporate the Phillips curve (trade-off between inflation and unemployment) in the analysis of the labour market dynamics turned out to  put emphasis on the role of nominal wages in determining prices, and ultimately, on the demands of workers that put pressure on inflation.  read more 

Food and Justice – The next WEA Conference

from Maria Alejandra Madi

The Call for papers for the current conference Food and Justice is now open.

We invite you to submit a paper to weafoodconference@gmail.com by 15th  September, 2016. 

A paperback, Food and Justice, of conference papers will be published by WEA Books in the new year.

Visit the Conference website http://foodandjustice2016.weaconferences.net/

Food production has always been present in the economic debate because of the concern about population growth and demographic changes. In spite of the Malthusian concern, new methods of food production have emerged which allowed the increase in food supply. Technological changes, however, have not occurred uniformly throughout the world. Indeed, some countries have managed to expand their production and trade surpluses while situations of hunger remained a reality in many parts of the world.

In addition to technological factors in food production, other political and economic issues are involved in the access to food. In the 21st century, the scenario of changes in food production means that even with a larger supply of food, many people, mainly the poor ones, still live in a situation of starvation. In addition to the challenges in food access, other relevant issue is food waste. Actually, a large percentage of the world food production is lost throughout the different stages of production, transportation, processing and consumption. Indeed, among the current concerns, there is the need to search for actions that can reduce the food losses that could face the situation of hunger of millions of people.

Read more…

Financialization of corporate behaviour

from Maria Alejandra Madi

The global scenario has restated the menace of deep depressions among the economic challenges. Indeed, in the current setting, the principles of corporate behaviour have reinforced the lack of commitment to long-run social and economic sustainability.

Looking backward, in the context of the 1930 Great Depression, John Maynard Keynes pointed out that the evolution of capital markets increases the risk of speculation and instability since these markets are mostly based upon conventions whose precariousness affects the rhythm of investment and employment. Keynes called attention to the fact that the capitalist system has endogenous mechanisms capable of destabilizing the levels of spending, income and employment. He suggested a reconsideration of the understanding of the relations among individuals, society and governments within the market where institutions and conventions could shape human behaviour. Aware of the need to overcome the concept of rationality that overwhelms the homo oeconomicus, his contribution enhances a more extended understanding of the entrepreneurs’ and investors’ behaviour, as well as of their strategies and decisions.   read more

Commodification of science and technology

from Maria Alejandra Madi

At the beginning of XX century, Joseph Schumpeter developed the concept of creative destruction  to characterize the waves of development based on clusters of innovations -both technical and institutional. In the last decades, these waves have included petrochemical products, automobiles, information technologies and biotechnologies, especially genetic modification.

Looking back, throughout the postwar era in advanced Western societies, scientific research and technological development included research councils, scientific advisory boards, expert commissions and specialized government agencies in different areas, such as health, agriculture and especially atomic energy. The target was to transform the scientific and technological development in a profitable process. As a result, for instance, new kinds of chemical products have been introduced, especially fertilizers, insecticides and additives used in food production.

Accordingly Eric Hobsbawn (1997), deep concerns turned out to grow because of the social implications of these scientific and technological trends in the 1960s.  Indeed, in Western societies, signals of social discontent included the critique of science and technology applied to military targets, and of the deleterious effects of automation technologies on labour and working conditions.  In addition, high concern also arose on behalf of health and environmental costs that resulted from the widely-used chemical in agriculture.  Read more

The U.S. supremacy in the age of high finance: expansion and crisis

from Maria Alejandra Madi

In the post-war boom era of 1945 to 1971, the U.S. surplus was at the center of the global economic order. Throughout the Bretton Woods period, the United States recycled part of its surplus via foreign direct investment – mainly in Western Europe and also in Japan. Within the system of international economic flows, the U.S. exported goods to the rest of the world and also finance these purchases.  Besides, the United States created demand for the exports of  foreign countries, primarily Germany and Japan.

After the 1970s, this system of international economic flows changed.  From 1971 to 2008, there is the expansion of the age of high finance where the U.S. deficits have been at the center of the global economic order. Considering this background, What Yanis Varoufakis (2013) calls the “Global Minotaur” is the system of international economic flows built after the 1970s. According to this system, the whole world surpluses aimed to finance the unsustainable expansion of a double deficit on which the US built its political and economic hegemony.  The American trade surplus turned into a large and increasing deficit that joined the government deficit to form the twin deficits. These twin deficits characterize the “Global Minotaur era”.  read more

The Internet of Things and the Future of Work

from Maria Alejandra Madi  

Technological change has significantly transformed the labour scenario as the result of the diffusion of innovative practices at the micro-level. The technological impact on the future of work was deeply analysed by Jeremy Rifkin. According to him, we are facing a new phase of history – Third Industrial Revolution – that is characterized by the steady and inevitable decline of jobs in the production and marketing of goods and services.

Today, the Third Industrial Revolution is a convergence of internet and renewable energy.  The internet technology and renewable energies are currently starting to merge in order to build a new infrastructure for a Third Industrial Revolution (TIR) that will change the distribution of economic power in the 21st century. Indeed, changes in power will provoke a fundamental reordering of human relationships – from hierarchical to lateral power – that will impact the way we conduct economic and social activities.

The intelligent TIR infrastructure—the Internet of Things—will virtually connect every aspect of economic and social life via sensors and software to the TIR platform. The connections will feed Big Data to every node—businesses, homes, vehicles, etc. — in real time.  In turn, the Big Data will be analysed with advanced analytics, transformed into predictive algorithms, and programmed into automated systems. Accordingly Rifkin, this process will improve efficiencies, increase productivity, and reduce the marginal cost of producing and delivering a full range of goods and services across the entire economy.   read more

Engaging students in the WEA Online Conference on CAPITAL and JUSTICE

from Maria Alejandra Madi

The WEA Online Conferences format, designed by Edward Fullbrook and Grazia Ietto-Gillies, makes full use of the digital technologies in the pursuit of the commitments included in the World Economics Association Manifesto: plurality, competence, reality and relevance, diversity, openness, outreach, ethical conduct, and global democracy. The WEA On-line Conferences seek to also engagegraduate and undergraduate students considering: (a) the variety of theoretical perspectives; (b) the range of human activities and issues which fall within the broad domain of economics; and (c) the study of the world’s diverse economies.

The current conference is CAPITAL ACCUMULATION, PRODUCTION AND EMPLOYMENT:Can We Bend the Arc of Global Capital Toward Justice?  It is being led by distinguished professors Gerson Lima and Jack Reardon. This conference focuses on various aspects of global accumulation, production and employment from a broader perspective of examining their interlinkages with other economic, social, and political processes. Concerns with social inclusion extend well beyond purely economic account of justice and fairness, since the degree of economic inequality also affects social cohesion and political stability, and can also have negative implications for economic growth and democratic institutions. Considering the current social and economic challenges, Peter Radford has suggested the need to constrain capital and make it work for all people. In his own words: ‘We can bend the arc of capitalism to our will if we wish”.

In truth, this conference calls for a deep examination of current power, politics and economics in a social context where democratic institutions are being threatened.  read more

Teaching finance for the 21st century students

from Maria Alejandra Madi and the WEA Pedagogy Blog

Considering the current global scenario, the search for financial stability is one of the main contemporary policy issues. In this context, teaching finance presupposes great heterogeneity among  national economic structures, institutions and social outcomes and its target is to enlarge the comprehension of the real- world in its economic dimensions.

What we should teach in undergraduate courses in order to deal with finance from a real-world perspective- both in microeconomics and macroeconomics curriculum?. The understanding of the current financial challenges requires the adoption of new perspectives in a significant learning process where the pillars should be a solid  theoretical background in economics  and a critical attitude towards the political, economic and social reality where the students live.

Finance is not just related to management techniques, procedures or product phenomena, but involves institutions, behaviours and policies. The existence of a monetary economy of production is founded on credit relations, organized markets of financial assets, speculation and uncertainty. Indeed, in a framework of uncertainty and speculation, a set of interrelated portfolios and cash flows between banks, income-producing firms and households may influence the evolution of credit, the pace of investment, and the valuation of capital assets.   read more

Economic discourse and the market

from Maria Alejandra Madi and the WEA Pedagogy Blog

In the last decades, the emergence and diffusion of the neoliberal agenda reflected the intellectual victory of Hayek’s ideas about the supremacy of the competitive economic order and the rejection of interventionism to promote economic growth and social justice. Considering the relevant economic outcomes of this intellectual victory, the main question that arises in the context of economics education is: What is at stake in  the economic discourse that privileges the economic competitive order?

The economic competitive order, as a necessary one, is the pillar of Hayek’s theoretical construction. The competitive market is a necessary order in which men make choices and the fundamental economic problem is that of coordinating the plans of many independent individuals. The main advantage of the competitive economic order, in Hayek’s view, is that rational agents respond to price signals, which convey the relevant information available in the markets, for the purpose of economic calculus. In his view, competition, through the price market system, leads to such an efficient coordination. Individuals, acting in their own self-interest, respond to prices which, in turn, reflect the information available in society for the purpose of economic calculus. Indeed, prices are signals that support an extensive social division of labour in a context of individual freedom.  In Hayek’s approach, the domain of liberty (the market) presupposes the legitimate domain of government intervention.

Taking into account the economics education, it is relevant to highlight that what is really at stake in economic discourse is the sociopolitical function of the scientific and academic work, and hence interests and ideologies.  read more

The formal and the substantive meanings of ‘economics’

from Maria Alejandra Madi

In The Economy as Instituted Process, Karl Polanyi argues that it is necessary to distinguish between the formal and the substantive meanings of ‘economics’ . Reflecting on the epistemological issues that arise in economics as a scientific knowledge, he argues that development of economics mainly depends on formal principles. As a result, a set of assumptions – that becomes premises – are used as the basis for a sequence of logical deductions. Beyond the economic laws, Polanyi’s The Great Transformation highlights the presence of the ideology that supports economic liberalism.  Indeed, the economic changes that resulted from the Industrial Revolution cannot be apprehended if ignoring the political, social and ethical issues underlined by Polanyi. Read more…

Rethinking the economics of migrant’s remittances

from Maria Alejandra Madi

Despite the sluggishness in the global economy, officially recorded remittances to developing countries have been growing and the number of international migrants was expected to surpass 250 million in 2015. Among the migration corridors, Mexico-United States accounted for 13 million migrants in 2013. Russia-Ukraine was the second largest, followed by Bangladesh-India, and Ukraine-Russia.

Remittance flows to developing countries are currently higher than three times the amount of flows related to official development assistance. Accordingly the World Bank’s Migration and Development Unit report, officially recorded remittances to developing countries reached almost $534 billion in 2012 and $601 billion in 2015. As remittance flows include unrecorded flows through formal and informal channels, the actual amount of money that is transferred cross-border to family members might be significantly higher.  read more