The principal problem of Political Economy

from David Ruccio

 

The discussion of capital and labor shares puts the issue of class at the top of the agenda. No wonder, then, that mainstream economists are expending so much effort these days attempting to define away the problem.

Let me explain. 

Deception and democracy: convincing the masses to help the rich

from Asad Zaman and the WEA Pedagogy Blog

There is widespread agreement on the proposition that people act according to their self-interest. Marx went further to suggest that people subscribe to ideologies conforming to their class interests. For example, agricultural laborers would believe in land reforms, while big landlords would believe that small farms are inefficient. Gradually the weight of strong empirical evidence has led me to understanding that this proposition is false. Large segments of the population can be brought to believe in, and act according to, ideologies extremely harmful to their self interest. As Dani Rodrik has written in “How the Rich Rule”, political scientists Gilens & Page found that on issues where there was a conflict between the interest of the elite and that of the public, Congress voted in favor of the elite and against the public interest. In the past, the elites have enforced their interests by the use of power. In a democratic age, the same effect is achieved by the use of propaganda. This is striking because the propaganda must convince the public to act against their own self-interest, in favor of the ruling elites. It would seem that you can fool most of the people most of the time. Here is some empirical evidence for my thesis:  read more

Economics and civil society

from Peter Radford

I have been subject to quite a bit of push back on my repeated critique of the anti-democratic nature of orthodox/classical/neoclassical economics.

So I am going to double down on the basis that when you’ve hit a nerve and produce a knee-jerk reaction it is wise to hammer away.

Allow me to restate my opinion in brief: economics in the general tradition of Smith’s invisible hand up to and including the notions of Hayek, Friedman, and their disciples is, at its core, an attempt to conceive of a society stripped of politics. By this I mean it is an attempt to argue that passivity in the face of overwhelming “forces” that are “objective”, “decentralized”, and “systemic” will allow for an optimal distribution of wealth, and the attainment of the maximum possible total wealth compatible with that optimum. All that is needed is a goodly dose of rational decision making, a hopelessly large level of cognitive ability, enormous foresight, and an unobstructed view of absolutely everything. Oh, and under no circumstances ought there be any active interference in the economy to adjust the perfect outcomes. It is a perfect-in-perfect-out wonderland in which no one need concern themselves as to the ethics of the outcome. It is, after all, perfect. It cannot be improved upon. Free markets rule!

This wonderland system, so constructed, will, we are assured, give back to everyone a return justified by their so-called marginal productivity.

Piketty wars: episode III—revenge of the Right

from David Ruccio

In episode I of Piketty wars, Harvard University Press published Capital in the Twenty-First Century. In episode II, the reviews of Piketty’s book, by liberal mainstream economists, were generally positive. Now, in episode III, the Right can be found on their Invisible Hand ship, launching a series of attacks against Piketty.*

Why did Britain’s political class buy into the Tories’ economic fairytale?

from Ha-Joon Chang

The UK economy has been in difficulty since the 2008 financial crisis. Tough spending decisions have been needed to put it on the path to recovery because of the huge budget deficit left behind by the last irresponsible Labour government, showering its supporters with social benefit spending. Thanks to the coalition holding its nerve amid the clamour against cuts, the economy has finally recovered. True, wages have yet to make up the lost ground, but it is at least a “job-rich” recovery, allowing people to stand on their own feet rather than relying on state handouts.

That is the Conservative party’s narrative on the UK economy, and a large proportion of the British voting public has bought into it. They say they trust the Conservatives more than Labour by a big margin when it comes to economic management. And it’s not just the voting public. Even the Labour party has come to subscribe to this narrative and tried to match, if not outdo, the Conservatives in pledging continued austerity. The trouble is that when you hold it up to the light this narrative is so full of holes it looks like a piece of Swiss cheese.

Inequality: government is a perp, not a bystander

from Dean Baker

In his speech on inequality earlier this month President Obama proclaimed that the government could not be a bystander in the effort to reduce inequality, which he described as the defining moral issue of our time. This left millions convinced that Obama would do nothing to lessen inequality. The problem is that President Obama wants the public to believe that inequality is something that just happened. It turns out that the forces of technology, globalization, and whatever else simply made some people very rich and left others working for low wages or out of work altogether. The president and other like-minded people feel a moral compulsion to reverse the resulting inequality. This story is 180 degrees at odds with the reality. Inequality did not just happen, it was deliberately engineered through a whole range of policies intended to redistribute income upward. 

Inequality is political

from Peter Radford

Let me end the week by tying a few things together. Bear with me.

First, I have spent some time talking about inequality. I see this as our greatest long term issue, but more in terms of politics than economics. Why? Because the extent of inequality in society is something we choose through our political action or inaction. There will always be some degree of inequality. I see that a a fact of life. Asymmetries abound. Inconsistencies, mistakes, and plain dumb luck all conspire to make the distribution of society’s spoils a very lumpy and uneven affair. This we cannot change. But we can, I believe, expand or contract the difference between top and bottom if we so choose. There is no “natural” level of inequality, it is entirely a function of policy.

With that said, I see our current level as both morally unacceptable and socially disruptive.

I will leave the moral commentary as self explanatory: there is no way our CEO’s can justify their disproportionate share of the spoils. It was not long ago that they were satisfied with much less. Only in the past few decades has it become socially acceptable for them to rake in what they do now.

As for the social impact, I see two vectors through which damage is done.

Unequal austerity and its economics

from Peter Radford

Inequality is much discussed nowadays. Pundits of all political stripes are weighing in on its causes and on its effects. As usual there is no agreement. So, also as usual, I suspect there will be no action.

This is not a new problem, nor is it trivial. The steadily increasing privilege afforded capital – higher profits, dividends, and rents, and the consequent steady erosion of the rewards to work – wages and salaries, have been accumulating beneath the surface for decades. I believe that in the years ahead the emergence of our highly unequal society will be the hallmark of the entire Reaganite era.

I don’t think this problem is as complicated as some people make it out to be. It is a direct consequence of the shift in the dominant economic theory that infuses our decision making across all relevant domains of activity in our economy. It was an intentional consequence. It was not, as Bill Gross tries to make sound, a happy accident of being alive at the right moment. If you’re  capitalist that is. If you’re a regular worker, then tough.

What happened?

Well, back before the shift took place the dominant economic theory guiding decision making was the post-war version of Keynesianism. It seemed to explain things well, and seemed to produce excellent results: the western world bounced back from its wartime trauma and produced a golden age of growth that propelled living standards, wages, and profits all together.

Then it hit a snag.

Edward Snowden and Financial Speculation Taxes

from Dean Baker

In the last few weeks Edward Snowden has been holed in Moscow’s airport trying to negotiate terms of asylum with various countries around the world. Thus far it doesn’t seem that Snowden has been able to find any acceptable offers.

Part of the reason is that the United States government has been openly threatening governments that are considering offering asylum, warning of dire consequences. Governments throughout the world take these threats seriously.

In fact, governments take threats from the United States very seriously. France and Portugal both broke with international conventions a few weeks back and refused to allow Bolivia President Evo Morales to use their airspace because the Obama administration had heard rumors that Snowden was on board his plane.

Clearly when something matters to the United States government, it is willing to go to extraordinary lengths to get what it wants. And even relatively powerful countries like France quickly bow to its wishes, even when it means breaking with well-established international protocols.

This is important background for understanding the effort in Washington to block financial speculation taxes.

Wall Street Journal turns news section over to the financial industry

from Dean Baker

Everyone knows that the Wall Street Journal has a strong pro-rich perspective in its opinion pages. Its guiding philosophy is a dollar in a pocket of a poor or a middle class person is a dollar that could be in the pockets of the rich. But its news section is mostly reasonably fair.

That may no longer be the case. The financial industry is on the warpath against a financial transaction tax in Europe. The proposed tax would be 0.1 percent on stock trades (one fifth the size of the tax that has been in place for centuries in the United Kingdom) and 0.01 percent on transfers on most of options, futures, and most other derivatives.

Since the price of trading has plummeted over the last four decades due to developments in computer technology, this tax would just raise trading costs back to where they were ten or twenty years ago. That would not seem to be too horrible on its face, since Europe certainly had a well-developed and active capital market in 2000 or even 1990.

But the financial industry needs to scare people in order to discourage Europe from going the route of the tax. So

Rethinking Keynes’ non-Euclidian theory of the economy

from Fred Zaman

“In his General Theory, John Maynard Keynes stated that classical economists ‘resemble Euclidean Geometers in a non Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight—as the only remedy for the unfortunate collisions which are occurring. Yet in truth there is no remedy except to throw over the axiom of parallels and to work out a non Euclidean geometry. Something similar is required today in economics.’” (Paul Davidson, The Keynes Solution, Ch. 4)

In this Euclidean analogy with the classical analysis of free
markets, which is based on “efficient market theory,” Davidson explains that
full employment is the Euclidean equivalent of parallel lines which never meet.
He nonetheless notes, however, that in the real world these lines, although
parallel in an Euclidean analogy with economics, nevertheless unfortunately do
often meet, thereby significantly and persistently producing economic
“collisions” understood as unemployment; the blame for which collisions always
is placed on workers for not passively accepting lower wages, and consequently
also a lower standard of living. Keynes’s solution,

The meaning of Aaron Swartz

from Peter Radford

This weekend has seen a flurry of comment about Aaron Swartz, whose recent suicide has set me thinking about the way in which society is dogged by bureaucracy that serves either itself or a limited elite. So many of the rules that beset us all on a daily basis exist only to protect the interests of those with access to power. The rest of us are left to flounder on our own, and to conform as best we can to the contours of society as we find them. Our ability to shape those contours is minimal.As a result, we have precious few moments when our voices really matter.

Swartz was no anarchist. He was a liberal and someone who understood that most bureaucracy is a thin veil drawn over deep seated power structures.

He was being threatened by a massive legal challenge in Massachusetts.

Will the Romney campaign lead Democrats to adopt better economics?

from Dean Baker

Now that Representative Paul Ryan has been added to the ticket we’ll have to see the extent to which Governor Romney embraces his running mate’s rather extreme economic positions. But earlier in the week, the Romney economic team made its first effort to argue for the merits of Romney’s somewhat more moderate economic plan. It went down in flames.

The basic problem is that they have an impossible story. They want to try to blame President Obama for the current weakness of the economy. Their argument of necessity focuses on the weakness of the recovery since their guy, President Bush, was calling the shots went things fell apart. This inconvenient fact means that the Romney crew can’t focus on the real problem, the severity of the downturn.

Weekend Thoughts

from Peter Radford

Some quick thoughts for a summer weekend:

I am reading Richard Posner’s book: “The Crisis of Capitalist Democracy”. He and I do not agree on much, if anything, but the book is s decent read and gives a perspective worth knowing. But I could not avoid choking on my coffee when he describes the activities and policy decisions way back during the height of the crisis. Various actions were considered, most dismissed as inappropriate. My favorite, nationalization, was knocked down early. Why? Let Posner tell us: 

Eurozone austerity faces increasing political challenges as economy worsens

from Mark Weisbrot

It has become a ritual: every six months I debate the IMF at their annual meetings, most recently represented by their Deputy Director for Europe. It takes place in the same room of that giant greenhouse-looking World Bank building on 19th Street in Washington, D.C. And the IMF’s defense of its policies in the eurozone is not getting any stronger.

Maybe it’s because most economists at the IMF don’t really believe in what they are doing. The Fund is, after all, the subordinate partner of the so-called “Troika” – with the European Commission and the European Central Bank (ECB) calling the shots. And most Fund economists know their basic national income accounting: fiscal tightening is going to make these economies worse, as it has been doing. Those that have tightened their budgets the most, e.g. Greece and Ireland, have shrunk the most – as would be predicted. The Spanish government, which today announced a 52 percent unemployment rate among its youth, has projected that the planned budget tightening for this year would by itself take 2.6 percentage points off of 2012 growth.

Argentina’s critics get it wrong again

from  Mark Weisbrot

The Argentine government’s decision to re-nationalize its formerly state-owned oil and gas company, YPF, has been greeted with howls of outrage, threats, forecasts of rage and ruin, and a rude bit of name-calling in the international press.

We have heard all this before. When the Argentine government defaulted on its debt at the end of 2001, then devalued its currency a few weeks later, it was all gloom and doom in the media. The devaluation would cause inflation to spin out of control, the country would face balance of payments crises from not being able to borrow, the economy would spiral downward into deeper recession.

Nine years later, Argentina’s real GDP has grown by about 90 percent, the fastest in the hemisphere. Employment is at record levels, and both poverty and extreme poverty have been reduced by two-thirds. Social spending, adjusted for inflation, has nearly tripled.

Mélenchon could change French politics with strong showing

from Mark Weisbrot

France’s conservative President, Nicolas Sarkozy, ran for office in 2007 on a program of making the French economy more like that of the United States. He picked a bad time for that: the U.S. was on the brink of its worst recession since the Great Depression, and would help drag down Europe and much of the world economy as the American economy collapsed. He probably wouldn’t want to say these things today, after the U.S. has had four years with hardly any economic growth at all.

But Sarkozy did succeed in making the French economy more like the U.S. in some ways. After being one of the few high-income countries that didn’t have an increase in inequality from the mid-1980s to the mid-2000s, France has become more unequal since Sarkozy was elected. For example,

Forbes’ update on the state of plutonomy or “democracy for the few”

from Edward Fullbrook

The current Forbes, the bi-weekly of The One Percent, features an update on the current state of what it, like Citigroup, calls plutonomy.  Also called by its insiders “democracy for the few”, this is the basic economic-political reality of our time, which one-percenters chat about daily and which the rest of us generally pretend doesn’t exist.  Skeptics of the analysis of plutonomy offered in “The Political Economy of Bubbles” in the current issue of RWER are encouraged to read Forbes’ plutonomy update.   Below is a taster. 

The new “us versus them” is not like the racism of colonial times. This is starkly different. It’s the 99% versus the 1%, . . .

Plutonomy Bubble Number Three

from Edward Fullbrook

“The Political Economy of Bubbles”
http://www.paecon.net/PAEReview/issue59/Fullbrook59.pdf

The new political economy of the Eurozone

I might be boring the pants off you with my European Central Bank Posts – but what’s happening in Europe is going very fast and it’s important. Power (lots of it) is shifting towards Frankfurt and Brussels. How will this power be used?

First, the shift. A quote from a recent speech from José Manuel González-Páramo, member of the board of the European Central Bank: