Robert Blecker (1956-2026)

Robert with Jane, that also passed away recently

I've just heard the news that Robert Blecker passed away. I've known him since the 1990s, when I was a graduate student at the New School. His books on the US economy for EPI were particularly important for the work I did with Wynne Godley on the external accounts of the Levy macro model.

He will be remembered for his several contributions to Post Keynesian open macroeconomics. His contributions include extending Kaleckian theories to open economies, in particular the distributive implications of wage-led and profit-led regimes, advancing debates over balance-of-payments-constrained growth and Thirlwall's Law, and extensive work on exchange rates, Mexico, NAFTA and international trade policy.

ROKE devoted its the 2nd issue, this year to his work. You can read about his work in this article by Ricardo Summa, Gustavo Bhering and Nathalie Marins in the introduction to the symposium.

Two letters to The Economist about Donald Harris and what they reveal about ideology

 

Spaghetti economics: Shootout at Harvard Square

There were two letters about the poorly written (not the English, always impeccable, contrasting to my spaghetti English, which is always slightly off, like the Westerns) piece that The Economist had on Donald Harris. One by Robert Blecker, Steve Fazzari and Peter Ho, setting the record straight on the breadth and depth of Harris' contributions to economics. On this, they echo what the Post said about Harris' policy advice in his native Jamaica. The subtitle of the Post piece said: "An unconventional economist at Stanford, Donald J. Harris pushed strikingly nonideological economic solutions to the nation of his birth." Harris was (and still is, from what I can assume) a reasonable man, both as a scholar concerned with knowledge, and as a policy advisor. Nonideological being the key word.

The other one, that I reproduce in full, is by Professor Avinash Dixit, who says:

"You say that Mr Harris 'proposed that firms must choose from a 'book of blueprints', which need different capital goods' in his book published in 1978. Alas, that had been proposed more thoroughly and rigorously in 1953 in a brilliant paper by Edmond Malinvaud, for which he should have won a Nobel prize. And Robert Dorfman, Paul Samuelson, and yes, Robert Solow, whom you cite as author of the aggregate capital-growth model, covered it more comprehensively in a book from 1958. Perhaps the mathematics of all this were beyond the capacity of the so-called Marxists of Cambridge."

This, and The Economist piece itself, confirms the high degree of confusion about the meaning of the capital debates. The problem is not so much the lack of mathematical savvy of the Cambridge, UK, economists, Marxists or otherwise, but the lack of understanding of theory, by some very serious and important mainstream economists, and mainstream magazines (they do think they are a newspaper too, btw).

The Economist piece, commits the mistake that I suggested (see my old post on the Capital Controversies here) was typical of most incorrect views on the debates between the two Cambridges, and suggests, essentially, that it was an aggregation problem, and that:

"Mr Harris did not move on. In his 1978 book he developed a model of growth without an aggregate capital stock. Rather than the smooth 'production function' of Solow, in which the rate of saving and population growth determines capital per worker, Mr Harris instead proposed that firms must choose from a 'book of blueprints', which need different capital goods. Capitalists will compete to ensure the rate of profit is consistent across different industries, picking a blueprint based on the level of wages and profits in the economy."

That's why Dixit suggests that the choice of technique models in Malinvaud, and in Dorfman, Samuelson and Solow, using disaggregated notions of capital would avoid the circularity of the aggregative model. It is always the case that firms will choose, given distribution, the technique that minimizes costs. Of course, that's not the issue. The problem is that one cannot obtain a measure of capital that is independent of distribution, and hence, the idea that supply and demand in factor markets can determine the remuneration of capital and labor cannot stand. The classical concern with distributive conflict, both of Marx, but also of bourgeois economists, as he called them, Smith and Ricardo, becomes relevant again [meaning, if I need to clarify, the notion of conflict in the distribution arena was held both by critics of capitalism, and defenders of what Smith referred to as commercial societies].

Disaggregation does little to solve the problem. First, as noted by Garegnani, long ago, the abandonment of the notion of aggregate capital, and the notion of factors of production, came together with the view that means of production got their own rate of return, but also with the disappearance of the notion that the forces of competition lead to a normal and uniform rate of profit. The traditional long run method of economics, that was the theoretical foundation of the discipline, was abandoned. Further, it is still the case that, even with a disaggregated set of means of production, in the the aggregate, savings must be equalized to investment, and some process for that has to be used. That is why some notion of the quantity of capital was necessary for the mainstream [in recent times, mainstream economists and policy makers have started talking of the natural rate of interest again, a notion that had vanished more or less, and about very simplistic negative relations between investment and interest rates, w/o even knowing the logical problems associated with that, reinforcing problematic views about distribution].

In other words, forget the notion that firms actually face a book of blueprints, and that they can substitute and change the structure of production with relative ease, according to changes in relative prices, and that somehow that, by affecting the relative supply and demand for capital (many capital goods) and labor, would determine distribution, since that is obviously highly improbable in reality. Choices are more limited, and substitution irrelevant, at best. The Cambridge, UK, economists (and not only the Marxists; most were some kind of Post Keynesian, as The Economist notes) and Harris knew better. Distribution is determined by the relative bargaining power of workers and capitalists.

Samuelson knew enough, math and theory, to know when he was wrong. Mr. Dixit thinks his mathematical knowledge puts him above the rabble [the so-called Marxists of Cambridge, and Mr. Harris]. But what his letter [and the piece by The Economist] actually shows is lack of engagement with the theoretical argument, and, in contrast with Mr. Harris, an incredible amount of ideological bias. After all, the idea that distribution is according to effort, and that markets produce optimal outcomes is at play. It shouldn't be. He raised Malinvaud, I counter with Smith, which knew way less math than he does, for sure, but whose book is still worth reading.

Robert Blecker on Thirlwall's Balance of Payments Constrained Growth

New paper available here. From the abstract:

Several recent critiques have questioned the theoretical logic of standard models of balance-of-payments-constrained growth (BPCG) and the empirical support for ‘Thirlwall’s Law’. On the empirical side, critics charge that most econometric estimates of this model have effectively only tested whether exports and imports grow at similar rates in the long-run. On the theoretical side, the criticisms have focused on the role of foreign income growth, capital accumulation, relative prices and country size in BPCG models. This article reviews the current state of the debate over these critiques and also offers a brief discussion and evaluation of three alternative models. The alternative models all highlight a significant role for the level of relative prices (or the real exchange rate) in determining long-run growth, which is consistent with recent empirical studies.

My paper cited there can be downloaded here (in Spanish). Thirlwall's reflections on his classic paper can be found here.

On free trade and economics consensus: a response to Mankiw

Mankiw tells us in his most recent NYTimes column that economists agree that Free Trade is good. He links to a poll in which, essentially, mainstream economists of different persuasions, some Keynesian and some not, and different political views, some liberal and some conservative, say that trade agreements are good. He backs his argument by suggesting that theoretically the argument is at the heart of the economics profession since the beginning; I guess an argument of authority.

And no better authority than Adam Smith. Mankiw says:

"The economic argument for free trade dates back to Adam Smith, the 18th-century author of 'The Wealth of Nations' and the grandfather of modern economics. Smith recognized that the case for trading with other nations was no different from the case for trading with other individuals within a society."

And it is true, Adam Smith was for laissez-faire, in general, and thought that less intervention in trade would be good. But there is in Mankiw's argument an implication that does not follow from careful analysis of Smith's doctrines, namely: that Adam Smith can be seen as a forerunner of modern neoclassical trade theory based on the Heckscher-Ohlin-Samuelson (HOS) comparative advantage argument (for the limitations of that theory go here).

Comparative advantage implies that countries should specialize on the production of commodities for which they have a lower opportunity cost. Specialization would increase productivity domestically, and importation of goods for which other countries have a lower opportunity cost would lead to mutual advantageous trade to all parties involved. This was actually first noted by Ricardo and Torrens more than 40 years after the publication of the Wealth of Nations. Smith believed that absolute advantage, meaning lower costs of production, not comparative advantage determined trade patterns.

Smith thought that free trade was a better policy than protectionism, since he believed that trade would expand the potential markets for home producers, which would lead to more division of labor, that is, higher productivity, leading to lower costs, more access to external markets and additional growth. A cumulative process of export growth and higher labor productivity, referred to as the vent-for-surplus model, was behind Smith trade optimism. It is important to note, however, that Smith's vent-for-surplus works in both directions. Higher costs (e.g. higher real wages) may lead to loss of external markets, no incentives for additional division of labor, and stagnation of domestic industry. In his model, success breeds success, but failure breeds failure.

There were very good reasons for Smith to think that free trade would be good for England in the late 18th century, and there even might be good reasons in the United States now, or at least for American corporations that would gain access to markets abroad. But the argument is far from universal, and the dressing of Smith's theory in modern garb is dangerous (for a classic explanation of Smith views on trade go here; subscription required; or here; also needs subscription).

The idea of absolute advantage, used by Smith, suggests that there is space for managing trade. I noted before that the opposite of Free Trade is not Protectionism, but Managed Trade. Nobody really wants to be in a completely closed economy, probably not even North Koreans. And once you admit a certain amount of management, say for sanitary rules to avoid importing poisoned toys, for example, or for security reasons to preclude defense secrets to leak out, you are discussing what are the good reasons for managing trade. Perhaps employment should be one of the reasons for managing trade. Free trade versus protectionism is a false dichotomy. The question is: how much management and for the benefit of whom (and who bears the costs of more or less trade as a result).

Note that comparative advantage theorems assume that employment is fixed, in the Ricardian system perhaps below full employment, and in the modern neoclassical HOS theory at full employment. Not surprisingly, on employment Mankiw tells us:

"Economists respond that full employment is possible with any pattern of trade. The main issue is not the number of jobs, but which jobs. Americans should work in those industries in which we have an advantage compared with other nations, and we should import from abroad those goods that can be produced more cheaply there."

That full employment is possible with any pattern of trade is theoretically true. But from that does not follow that comparative advantage should guide trade. That is a theoretical non-sequitur and is simply wrong. The US could pursue using macroeconomic policies (not the lower taxes for the rich that Mankiw advocates, but that is another story) full employment.* That would lead to high current account deficits, which for the US, because of the privileged position of the dollar, are sustainable. But that is not true for most countries.

In that case, if free trade is pursued, absolute advantage might determine trade specialization, and lead to large current account deficits that would be unsustainable and lead to a balance of payments crisis, the need for austerity, with lower growth and unemployment following. Even in the US, patterns of trade integration might lead to the elimination of good manufacturing jobs being substituted by low paying service jobs, something that has led to trade unions' reasonable rejection of Free Trade Agreements (FTAs). In other words, "which jobs" one can get if one "import[s] from abroad those goods that can be produced more cheaply there [sic; that's actually absolute not comparative advantage]" might end up leading to lower wages at home.

For that reason it is hard to agree with Mankiw when he says that:

"People tend to underestimate the benefit from conserving on labor and thus worry that imports will destroy jobs in import-competing industries. Yet long-run economic progress comes from finding ways to reduce labor input and redeploying workers to new, growing industries."

And there is evidence for that. The most famous FTA signed by the US with Mexico, has not favored workers in Mexico or the US, the North American Free Trade Agreement (NAFTA), even if corporations and wealthy individuals have benefited in both countries as shown in these reviews of the evidence by Robert Blecker and Mark Weisbrot and co-authors. So if mainstream economists agree on this, once again it is because they ignore logic (that does no require for trade to be determined by comparative advantage) or evidence (which suggests that FTAs might hurt workers).

* And also there is not tendency to a natural rate of unemployment, which Mankiw, of course, also defends.

Arslan Razmi on South-South trade and the limits to wage-led growth

Another presentation from the same session at the ASSA in Philadelphia. Arslan extends (Power Point here) the so-called Neo-Kaleckian model to show that destination of exports matter. He suggested that in this kind of model the limit to wage-led growth does not come from the conventional negative effect of wages on external competitiveness (real exchange rate appreciation, as in Robert Blecker's famous 1989 paper), but as the result of the negative effect of higher wages on capacity utilization and investment in the "homogenous" good sector (tradable, but price taking sector that he suggests might characterize South-South trade).

Jorge Castañeda and the wrong lessons from Liberalization Reforms

Jorge Castañeda, ex-advisor to the left of center candidate Cuauhtémoc Cárdenas, and ex-foreign affairs secretary in the right wing administration of Vicente Fox has written here about the need for further reforms in Mexico. He sings the praises of NAFTA.

"NAFTA brought with it a spectacular increase in Mexican exports, as well as a dramatic shift in their composition. But it proved to be a great disappointment in terms of foreign investment inflows and economic growth, which has averaged 2.6% per year over the last two decades – slower than Peru, Chile, Colombia, Brazil, and Uruguay. As a result, Mexico’s income gap with the US and Canada has barely narrowed."

The change in exports was basically associated to an acceleration of the 'maquilization' process, manufacturing exports with low local value added content. No comments on the massive immigration* and the fact that neither growth nor income distribution have improved after NAFTA (both claims often made about what to expect from it from the free trade crowd).

So what should Peña Nieto do? According to Castañeda:

"Energy reform opens up electricity generation and oil exploration, extraction, and refining to private foreign or domestic investment through licenses, concessions, production sharing, or profit sharing. The oil workers’ union has been banished from the board of directors of Pemex, the national oil company, and new contracts for shale oil and gas, together with deep-water prospecting and drilling, will be signed with a government agency, not with Pemex. 

Once the myriad legal and political obstacles are cleared, Mexico will be able to increase oil and gas production, drive down the price of electricity, and stimulate growth in an otherwise lethargic economy."

In other words, deregulation, weakening of unions to attract foreign capital (more secure environment for capital, since Mexico is such a paradise for workers), and that would lead to growth. No changes from the old Washington Consensus mantra.

You would expect that the failures of "Free Trade", liberalization and deregulation were incorporated, as much as the lessons from financial deregulation in the US after the 2008 crisis, but the resilience of Neoliberal ideas, in the face of adverse evidence, is impressive indeed.

* On lack of convergence with the US and immigration Blecker and Esquivel say: "the data show that there has been no economic convergence whatsoever between Mexico and the United States since NAFTA’s enactment. As a result, the historical Mexico-US economic gap in percentage terms has not been reduced after 15 years of free trade, and the incentives to migrate are probably even greater than before." Read their assessment of NAFTA here.

Where is the elasticity? (or more on devaluation and growth)

Since 2007 mainstream economists, and often some heterodox (or more precisely eclectic) authors, have suggested that the Argentine economy is on the verge of collapse (see for example my good friend Bresser-Pereira here or this). A typical argument made by both orthodox economists (some of which favored the Convertibility Plan of the 1990s) and the more unconventional is that real exchange rate (RER) appreciation is at the heart of the Argentine problems and the more recent lack of growth.

I have discussed this before here with respect to the so-called Sustainable and Stable Competitive Real Exchange Rate literature (see here). The argument for a SSCRER was put forward by Frenkel and Taylor in a well-known paper, but the notion has many defenders (see the good paper by Blecker and Razmi from Setterfield's essential book on growth), including more conventional authors like Rodrik. At the risk of being repetitive let me point out the pros and cons of the arguments for devaluation.

Depreciation protects local industry and leads to a boost to domestic production, and also, by leading to an increase in exports, reduces the external constraint of the economy. That would be the substitution effect associated to the change in the relative prices. Yet depreciation also (everything else constant) reduces wages, increases the profits of exporters, and leads (yes, the economy is wage-led) to a reduction in spending and lower levels of activity. In this case, a depreciation does help reduce your external constraint, but by leading to a contraction. The second effect, associated to an income effect, was well-known by heterodox authors, having been developed by Albert Hirschman and Carlos Diaz-Alejandro (for the Argentine case) and then formalized by Krugman and Taylor (see here; subscription required).

At the end of the day it is an empirical question. All the evidence seems to suggest, at least for the Argentine case (here paper by Fiorito and others in Spanish; but it seems to be more general, see here) that income effects tend to be larger than substitution effects, and hence one might be concerned about possible contractionary effects of a depreciation.

In the case of Argentina, it is clear that the expansion of the volume of exports goes hand in hand with the expansion of the world GDP (Figure below).

The relation between the real exchange rate and exports is less clear. As it is shown below after the large real depreciation in 2002, growth in the volume of exports goes hand in hand with significant appreciation.

No doubt defenders of depreciation will argue that the big depreciation in 2002 was essential for export growth afterwards (see Rapetti here who argues that "competitive RER was a key factor behind Argentina’s recovery and growth"). But if you put the depreciation in the wider macroeconomic context of 2002, and compare with the current one, you are bound to have second thoughts.

The depreciated nominal exchange rate in a context of high unemployment (around 22%) did not lead to inflationary pressures, since wage demands were subdued (and hence the nominal depreciation translated into a large real one). Second, spare capacity meant that the protection afforded by the real depreciation led to a huge expansion of domestic production, spurred by the expansion of domestic demand (higher real wages and expansion of fiscal spending, particularly in social programs). Exports actually don't seem to move much with the depreciation. There is no econometric evidence for large elasticity of exports with respect to the exchange rate, in the short or long-run (if someone has it please, please, pretty please with a cherry on top share it; it's been frustrating to have an argument with people that argue a point for which there is no known evidence).

Note that all the above mentioned conditions are not in place now. Unemployment is considerably lower (around 7% or so), and the expansion of real wages and government spending have slowed down (so much so, that in the last year the economy has stalled). So maybe we need less Frenkel and Taylor and more Krugman and Taylor to understand what is going on in Argentina right now.