Explaining the Sveriges Riksbank Prize and the Post-Modern Mainstream

The so-called Nobels (not original Nobels, and the Nobel family is against them; I tend to dislike the criteria for the winners, which leaves out Harrod, Kahn, Kaldor, Kalecki, Prebisch, Robinson and Sraffa, to mention a few, but not the prize per se, after all Myrdal and Leontief did get it) are out (here for a journalistic account), and it went to Lloyd Shapley and Alan Roth. I won't explain anything about the Gale-Shapley algorithm, which is not my area of research, even though I sat back in the early 1990s in course taught by Marilda Sotomayor who co-authored some papers with both Gale and Roth. My concern is what it means a prize for a matching algorithm and its applications and the current state of economics science.

The algorithm is actually less about matching preferences, even though that is the most common description, than you might think. For example, one of the practical uses is related to matching kidney donors and recipients, andrather than subjective preferences the matching involves sorting out problems related to the compatibility of immune systems. It is more of an engineering problem really. Arindrajit Dube is right that this is a Nobel for planning, if you think about it (h/t Mark Thoma for pointing this out). Also, the stability of the matches (the fact that there is no mutually preferable match) is irrelevant in this context, since who would 'divorce' a kidney that is perfectly compatible from an immunologically point of view (what, you didn't like the kidney's political views?), or which kidney for that matter wouldn't be satisfied with its match?*

It is particularly important that this prize has little to do with the core of neoclassical economics. Yes, the algorithm is about exchanges, and individual decisions, and hence about allocation, and surely has little if anything to say about production (let alone the social relations of production). However, note that it is an idiosyncratic rule, not a general proposition based on the principle of substitution, according to which relative scarcities determine relative prices and individual choices.

This has been a general trend in neoclassical economics since their defeat in the capital debates demonstrated that the latter proposition does not hold water. The use of the disaggregated General Equilibrium model (as I argued here with Kirsten Ford and Nate Cline) has not been able to change the problems from a logical point of view, and that's why they still use the aggregative model to give policy advice (i.e. structural reforms in Europe to cope with unemployment, meaning lower wages so firms hire the cheap 'factor of production').

It is also why prizes for game theory based research are popular with the Swedish bankers that make decisions about who is an authority in this profession. Game theory is an instrument that fits well the post-modern version of the mainstream, in which everything is possible (but the 'free' markets are still the mantra). So beyond the question of what practical use this particular algorithm might have, there is a deeper question of the bankruptcy of the mainstream, that pretends to be more general and flexible, when is exactly the opposite. It is internally illogical and incoherent, but increasingly attached to the dogmatism of 'free' markets, which has become just a way to defend the interests of the wealthy and corportaions (any similarity to the Conservative movement, and the current GOP in the US, is NOT a coincidence).**

* I'm not suggesting that the algorithm works perfectly in the real world. In fact, in Brazil the National Association of Graduate Economic Centers (ANPEC, in Portuguese), following Marilda's lead, adopted the system in 1997 to match students with centers to produce a stable matching, that is, there would be no mutually preferable matches. Note that before good students were sometimes left without a graduate center, since they were not chosen by anyone (even though some students that had lower grades did), and a few centers were left with empty vacancies. However, as noted in this dissertation supervised by Marilda (in Portuguese), the algorithm did NOT work, and a stable matching was not achieved, with the same problems taking place as before. The algorithm was abandoned the following year.

** Supply-side economics, New Classical and Real Business Cycles authors (as I claimed in another post) are the equivalent in economics to Intelligent Design in Biology, and the GOP has adopted all of these views as part of their world view.

Free Lunch with Paul Davidson at the University of Chicago

If you are near by, do not miss Paul Davidson's talk in Friedman's backyard. The talk is October 17, from 12:00pm to 1:00pm at the Rosenwald Hall, Room 015, University of Chicago (1101 E. 58th Street).

And yes they will provide a FREE LUNCH, brought to you buy the Association of Sarcastic Economists (no, just INET).

Fiscal consolidation, what does it mean really?

There are a few ways you can look at the term fiscal consolidation. Fiscal consolidation is often (in IMF-speak) equated with lower spending and higher revenues, which are policy instruments not outcomes. A more rational way of looking at consolidation is that it is about lower deficits and debt, which are outcomes. The point is that in general it is expansionary fiscal policy (higher spending and lower taxes) that lead to fiscal consolidation (lower deficits and debt), since expansionary policies increase income and revenue.

Hence, lower spending and higher taxes should be properly called fiscal austerity. And austerity, even if you do not follow functional finance, is contractionary. Mind you, it is not just the IMF that confuses consolidation with austerity.

Larry Summers in his recent op-ed on British economic policy says that:

"Britain must change the pace of fiscal consolidation to stand a chance of avoiding a lost decade. Rather than starving public investment, now is the time to add to confidence by making plans for structural reforms to contain the growth of public consumption spending over time. It is also time to take overdue measures to promote exports and, after years of appropriately low investment, to restart housing investment. But when demand is needed for growth and the private sector is hanging back, the first priority must be for the public sector to stop exacerbating the contraction."

Yes, he wants more spending (or lower taxes, God knows). But not much. Note that this continues to be the position of the IMF, even if the IMF has sort of admited that fiscal multipliers are larger than they previously thought (something that has made Krugman very happy; here too). In the last IMF Fiscal Monitor (October, 2012) you can read:

"With downside risks to the global economy mounting, policymakers must once again tread the narrow path that will permit them to continue strengthening the public finances while avoiding an excessive withdrawal of fiscal support for a still-fragile economic recovery."

I for one think that Europe and the US need a huge fiscal stimulus, and forget about consolidation. Consolidation is the result of economic growth and fiscal expansion is the best way to get it.

PS: And by the way, that's what was said in the Trade and Development Report 2011, which basically was a reply to the IMF's lukewarm pro-austerity views.

Bob Pollin's new blog

Yeah, a new blog! No really, since there are lots of blogs, but few that are this promising. From Bob's first post:

Yes, another blog is now being launched into the world as I type these words. Does the world really need yet another blog? Obviously, there are lots and lots of them already out there—many, many bad ones, but some good ones as well. There are even lots of good ones out there already dealing with economics and economic policy, which is the focus on this blog as well. So why take up more cyperspace with this blog, on top of all the other ones already going strong?

The aim of this blog will be to develop, extend, and debate the themes that I present in my new little book, Back to Full Employment. In my view, creating a full employment economy is absolutely crucial to creating a decent society—that is, a society in which everyone has the right to earn a reasonable living through their own efforts or the efforts of family members and friends. It’s that simple a point. But at the same time, it turns out to be not so simple. There are large numbers of controversial economic issues around 1) how to get to full employment; 2) how to stay there, once there; and 3) whether full employment should be a basic goal of economic policy to begin with.

Read the rest here.

The last Marxist? Or shortchanging Hobsbawm

(1917-2012)

According to The Economist, Eric Hobsbawm, who has just died on October 1st, was the last of the Mohicans, I mean Marxists. Its news to me. In my view, the surplus approach which was brought back by Sraffa and builds on Marx is the ONLY coherent economic theory left standing. Marginalism (i.e. neoclassical economics) is nothing but a profession of faith, after the capital debates.

Among other things, because there is a role for historical and institutional analysis in the surplus approach, related to both the theories of distribution and accumulation, the work of Hobsbawm and other surplus approach historians is essential. The obituary was very thin on his contributions to our understanding about key issues in capitalist development.

The review of his contributions in The Economist's obituary was typical of what was written in the press (see also here; the exception here). A lot about his life, and range (yes I know he liked jazz, who doesn't?!), but his research was not quoted at all. Comments on his books were almost always restricted to the surveys on economic growth since the Revolutions, the so-called Age of Trilogy.

According to The Economist:

"That Marxist tag threatened to tarnish his reputation, when his lucid and scholarly books on what he called the long 19th century, from 1789 to 1914 (“The Age of Revolution”, “The Age of Capital”, “The Age of Empire”), on nationalism and on labour movements deserved, and won, an audience well beyond leftist circles and academe.

Defiant, Mr Hobsbawm championed Marx to the last. For his intellectual force; for his grasp of the world as a whole, at once political, economic, scientific and philosophical; and not least for his conviction, as relevant in 2008 as in 1848, that the capitalist system, with its yawning inequalities and naked greed, would inevitably—irresistibly—necessarily—be destroyed by its own internal tensions, and would be superseded by something better."

Marxism not only is not relevant, but it almost tarnished his reputation. There is no mention of what was, in my view at least, his major book, namely: Industry and Empire. His book is part of the tradition that suggests that the Industrial Revolution (IR) was demand driven, not supply constrained (like David Landes used to believe in the 1960s, in his Prometheus Unbound). Further, he argued that external demand (as Phyllis Deane) was crucial, and he insisted that without colonial markets, particularly in India (i.e. without Empire) there would be no Industrial Revolution. Imperialism and the search for global hegemony are joined at the hip with the development of Capitalism.

Also, there is nothing about his views on the standard of living debate during the Industrial Revolution.  To modern economic historians like Jeff Williamson and Peter Temin (subscription required) the IR had a positive impact on the living standars of the working class. Hobsbawm, like other Marxist historians, e.g. E.P.  Thompson, was on the pessimist side of the debate. For a modern pessimistic view see Charles Feinstein (subscription required too).

Hobsbawm was not just a popularizer of history, he was central for important debates in the Marxist tradition, which should be central for understanding of modern capitalism. Hobsbawm's theoretical underpinnings of his views of capitalist development, by emphasizing demand, are in the tradition of what we refer in this blog as classical-Keynesianism. Marx's views on distribution as conflictive, which are part of the broader surplus approach tradition, are essential for Hobsbawm contributions to economic history, and show why Marx is still relevant and required reading for anybody that wants to understand capitalism (i.e. the world we live in).

PS: Other central Marxists contributions to historical analysis are associated to the transition to capitalism, and Dobb and Sweezy are still required readings. Note that Marxists suggest that the origins of capitalism are associated to institutional changes in the productive structure (which might be pushed by expanding demand), and not as a result of cultural or geographical matters.

Heterodox Central Bankers on Debt Deleveraging

Arturo O'Connell is an advisor to the president of the Central Bank of Argentina. He has not given a talk at the last conference, but here is his recent talk "The Challenge of Deleveraging and Overhangs of Debt" at the Institute of New Economic Thinking (INET).

Heteredox Central Bankers and Systemic Crisis

Anwar Shaikh's talk at the Central Bank of Argentina is now available at Revista Circus (h/t Alejandro Fiorito). Anwar's talk, as suggested before, looks at the current crisis from a long term perspective suggesting that this is the first of the 'depressions' of this century, a phenomenon that is recurrent in capitalist societies.

Heterodox Central Bankers and Microcredit

Jayati Ghosh's presentation at the Central Bank of Argentina was a harsh critique of microcredit, which according to her has "gone from hero to zero" in less than a decade. Jayati relies on Bateman and Chang recent critique of microfinance, which suggests that microfinance is actually a barrier to economic growth and poverty reduction. A lot of the microcredit experience in India resembles a loan shark operation, with very high rates and heavy penalties, and is part of a broader drive to liberalize financial markets. It is important to note the perverse effects that fads in economic development might have on policy making.

China and Latin America

Back in the late 1960s and early 1970s the topic in economic development was the so-called Brazilian Miracle. Rates of growth were a staggering 7.5% on average, and in the last phase of the boom were in the two digit level. Forty years later the Brazilian economy is far from that kind of performance. Only the Chinese can boast such a miracle (at least so far). The graph below shows the relative performance of China with respect to both Argentina and Brazil from the 1950s until 2009.

The chart shows that until 1980 Brazil income per capita grew slightly faster than China, while Argentina did basically at the same rate, and both Latin American countries were considerably wealthier than China. By 2007 China's income per capita had surpassed that of Brazil and was approaching fast that of Argentina. Also, it is clear that in the 2000s the comparative performance of Argentina was better than that of Brazil.

These measures are with Geary-Khamis Purchasing Power Parity (PPP) 1990 dollars, which should be taken with some skepticism. From our perspective the important thing is that the data provides a good picture of the relative growth of China, even if the absolute level (whether the average Chinese is better off than the average Brazilian) might be less than precise. The source is from Fundación Norte y Sur, headed by Orlando Ferreres , but the original data (my guess is that with the exception of Argentina for the last few years) is from Angus Maddison.

I'll have more on the problems of PPP measures in a different post.

South facing unfavourable global conditions

By Ylmaz Akyüz

The high-growth performance of many developing countries in 2003 to 2008 and then their quick recovery from the 2008-9 global financial crisis was largely due to favourable external conditions, including the policies in developed countries. (This was analysed in the previous issue of South Bulletin). However, these conditions do not exist today and in fact the global conditions have turned unfavourable. Hence developing countries are now facing serious vulnerabilities and risks to their economic situation, with each category of countries facing their own specific problems. Developing countries have to consider changing their growth and development strategies, in light of the changing global situation.

Read the rest here.

Employment improves, but not much

The BLS Employment Situation Summary shows that 114,000 jobs were created, not a particularly big number, and unemployment fell to 7.8%. It is sort of good news that the employment-population ratio increased by 0.4 percentage point to 58.7 percent, since it had decreased in the previous two months. Yet, the overall trend in the employment-population ratio for this year has been flat.

Heterodox Central Bankers: Kicking Away the Ladder Too

Let me briefly comment on two additional and interrelated presentations at the Central Bank of Argentina's annual conference. Two of the presentations were important in dispelling the myth that central banks were historically only concerned with inflation, and not particularly relevant for economic growth. Jane Knodell presented a paper on the evolution of the US banking sector from the late 18th century up to the Civil War, including the First and Second Banks of the United States, which were in many ways like the Bank of England a quasi-central bank.

Jane's presentation very clearly shows that the main role of the First Bank of the United States was as a fiscal agent of the federal government, its liabilities used to collect revenue and meet federal payment obligations, including debt service, a similar role to the Second Bank. More importantly, she concludes that the closing of the Second Bank by Andrew Jackson had a positive effect on growth, since the evidence suggests that countries with central banks concerned with the Gold Standard, as they tended to be in the 19th century, grew less than the US.

Valerio Cerretano's presentation was on the little known, at least among economists, industrial intervention by the Bank of England and the Bank of Italy in the inter-war period. Both central banks became directly involved in the 1920s and 30s in the administration of industrial firms, through direct management or through participation in holding companies. In the case of Britain the Bank of England was essential for assisting reconstruction of traditional sectors (heavy industries and cotton) and development of innovative industries (man-made fibres, aluminium), some of which were crucial latter in the war effort.

In other words, central banks have been directly involved in the funding of the Treasury and the industrial sector in developed countries, but it seems that, as Ha-Joon Chang has suggested for the case of international trade, once they got up the ladder using their banks to promote development they kicked it, and argued that they should only promote price stability.

Heterodox Central Bankers

The annual conference of the Central Bank of Argentina was held this week. The theme was the role of the Central Bank in the process of development. Jamie Galbraith, the actual author of the draft of the Full Employment and Balanced Growth Act, also known as the Humphrey-Hawkins Act, which gives the Fed its triple mandate of full employment, growth, and reasonably stable prices, opened the conference after the talk by the president of the bank (the video of Jamie's talk is available here; h/t Revista Circus), Mercedes Marcó del Pont. Jamie warned against falling into the trap of assuming that the crisis has only one cause, and was very pessimistic about the possibilities of a more rapid and vibrant recovery in the developed world. Phil Arestis (presentation here) closed the conference, with more emphasis on regulation issues, and his assessment was equally pessimistic. If the policies of central banks, in particular the ECB, and the austerity measures in the developed world are not reversed soon a long period of stagnation might ensue, as Anwar Shaikh (shown above with Stuart Holland, Jamie, and the president of the central bank) reminded us.