Sign the petition requesting the University to keep the heterodox major open here.
Tuesday, November 20, 2012
More on the Indian Economy
The notion that the majority of the Indian people are for the Washington Consensus reforms is surprising to say the least. The basis for his proposition is very flimsy indeed. He suggests the following:
"The opposition parties had claimed that the latest package of reforms would damage millions of shopkeepers (FDI in retail), transport workers (diesel price hike) and urban households (subsidised LPG cylinders). Yet, none could translate that supposed harm into sustained anti-reform demonstrations in the public space."In other words, the evidence for the support for the reforms is the lack of protests on the streets against the reforms. It is far from clear, however, that the absence of protests are a sign of support. Note that for good or bad the Indian economy, even with a slowdown, continues to grow fast, so it would be surprising to find a lot of protesters in the streets.
And yes India has been growing relatively fast since the 1980s, that is a whole decade before liberalization started in 1991. Also, note that one of the key areas in which India has not followed the liberalization and deregulation policies of the neoliberal agenda is in the financial sector, preserving capital controls (even if there have been pressures and a certain amount of liberalization it is way less than what happened in Latin American economies, for example).
The current debate in India has been very heated, following the revelations that Wal-Mart has paid bribes (as much as it happened in Mexico). At any rate, the process of liberalization proceeds with parties being for once in power, but against when in the opposition. This system has been perfect in order to guarantee that no matter who wins the elections, yes this is the largest democracy in world, the process of economic liberalization is not affected.
PS: On a slightly different matter, the RBI study has an interesting study that shows a 10% increase in minimum support price (MSP) of wheat raises wholesale inflation by 1%. That is, price controls, in this case on food supplies, is an important element of anti-inflationary policy in India.
Friday, November 16, 2012
Economic myth and meaning
Earlier this year I had posted on Triplecrisis a critique of the mainstream views of the crisis, pointing out that they were still lagging behind the heterodox discussions and had much to gain from incorporating the insights of progressive economists. One of the surprising things about the readings I did for that post was that Robert Shiller actually was not very prescient about the housing bubble. In the famous paper with Karl Case he argued, as I noted, that: “judging from the historical record, a nationwide drop in real housing prices is unlikely, and the drops in different cities are not likely to be synchronous: some will probably not occur for a number of years. Such a lack of synchrony would blunt the impact on the aggregate economy of the bursting of housing bubbles” [emphasis added].
Now, I'm reading Tom Palley's latest book, The Economic Crisis: Notes from the Underground, and discover that the phenomenon is all too common. He notes (p. ix) that Raghuran Rajan, the ex-chief economist at the IMF, whose paper at Jackson Hole in 2005 was lionized as predicting the limitations of financial innovation in the famous film Inside Job, actually says in his conclusion that he: "believe[s] the changes have, in general, expanded opportunities significantly and have, even on net, made the world tremendously better off. But opportunities can be used for good and for bad" [emphasis added]. Note that if financial innovation has made the world better off, as he concludes, it cannot be that he thinks it has increased risk. However, in the film Rajan said this: "the title of the paper was, essentially: Is Financial Development Making the World Riskier? And the conclusion was, uh, it is." Yep, he should get the Mishkin Prize (awarded after he changed the title of his paper from Stability to Instability).
There are several other interesting cases of oracles that did not predict anything, and of mainstream economists that when they did predict the crisis, they did it for the wrong reasons and got the story and the consequences incorrectly (all bring up more stories from Tom's book in other posts). The essential point that Tom makes, however, is a sociological one, that helps understand the predominance of the mainstream paradigm. The profession suggests that, while predicting the crisis was impossible, a few illuminati within the mainstream did foresee everything, and as a result there is no systemic problem with economics as a science. No need for revolutionary change in the profession.
Levi-Strauss once said that myths are totalitarian stories that eliminate all possibilities of doubt, since they explain everything. In this case, the myth of the lone, foresighted, neoclassical economist preserves the culture of complacency in the profession with the utter irrelevance of mainstream economics.
Thursday, November 15, 2012
An Alternative Vision for the Eurozone Crisis
The Eurozone crisis has been reduced, according to the mainstream diagnosis, to a fiscal crisis caused by excessive public spending and a competitiveness gap between North and South. The mainstream solution is to close this gap by means of ‘expansionary fiscal austerity’ and wage reductions. This has been admitted even by the IMF to be a dead end.
In our opinion the root of the Euro crisis lies in both the inadequate institutional set up of the Eurozone, which lacks a genuine lender of last resort and sufficiently coordinated fiscal and wage policies, and on an over-liquid and under-regulated international financial market that was more than happy to finance any imbalance - no matter how unsustainable it was.
What we had in Continental Europe were mutually dependent models of growth. The mercantilist export-led growth of the North could not have been sustained without a (remarkably easy-to-finance) debt-driven model in the South, accumulating trade deficits and private and public debt. In the aftermath of the financial crisis, the private debt was turned into sovereign debt. The Irish case is an extreme example of this process. The ensuing austerity policies enforced upon the governments increased unemployment to a socially unacceptable level. If continued these policies will lead to a prolonged depression and even more social unrest.
European institutions were and still are not able to deal with such structural imbalances in an adequate way. Mass unemployment and social deprivation resulting from austerity policies is threatening the survival of democracy in the European Union.
Alternative perspectives
In our opinion the root of the Euro crisis lies in both the inadequate institutional set up of the Eurozone, which lacks a genuine lender of last resort and sufficiently coordinated fiscal and wage policies, and on an over-liquid and under-regulated international financial market that was more than happy to finance any imbalance - no matter how unsustainable it was.
What we had in Continental Europe were mutually dependent models of growth. The mercantilist export-led growth of the North could not have been sustained without a (remarkably easy-to-finance) debt-driven model in the South, accumulating trade deficits and private and public debt. In the aftermath of the financial crisis, the private debt was turned into sovereign debt. The Irish case is an extreme example of this process. The ensuing austerity policies enforced upon the governments increased unemployment to a socially unacceptable level. If continued these policies will lead to a prolonged depression and even more social unrest.
European institutions were and still are not able to deal with such structural imbalances in an adequate way. Mass unemployment and social deprivation resulting from austerity policies is threatening the survival of democracy in the European Union.
Alternative perspectives
On the basis of our diagnosis we are convinced that Europe should reverse the current austerity policy regime. This would require profound institutional and policy change.
In terms of monetary policy, we believe that ECB should act as a credible lender of last resort to relieve the sovereign debt crisis. Strict regulation of financial markets is a further step, and it is necessary to separate investment banking from commercial banking.
In terms of fiscal policy, the link between the ECB and fiscal conditionality should be fundamentally changed. Monetary policy should support and accommodate progressive fiscal rules aiming at employment creation and growth. Budget deficits can only be consolidated in a growing economy.
These growth stimulating policies are consistent with the desired long run stabilization of debt-to-GDP ratios. In the present situation of mass unemployment, these policies do not carry a significant risk of inflation.
We also believe that the adjustment has to be supported by stimulation of consumption via higher wages starting from the core surplus countries (like Germany) where wage restraint policies have considerably contributed to the growing income inequalities and current account imbalances in the Eurozone.
If the German finance minister believes in what he said, that no country can live forever beyond its means, then it must also be clear that no country can live indefinitely below its means. This implies that the change in the wage policy in Germany has to be an important part of the solution.
Mutual prosperity of the Eurozone countries and their citizens through demand expansion, rather than demand contraction through fiscal consolidation for the benefit of high finance, must be recognized as the imperative for the political viability of the Euro project. We must have the intellectual honesty and courage to act accordingly.
Signed by
----
Amit Bhaduri
Jawaharlal Nehru University, New Delhi, India
In terms of monetary policy, we believe that ECB should act as a credible lender of last resort to relieve the sovereign debt crisis. Strict regulation of financial markets is a further step, and it is necessary to separate investment banking from commercial banking.
In terms of fiscal policy, the link between the ECB and fiscal conditionality should be fundamentally changed. Monetary policy should support and accommodate progressive fiscal rules aiming at employment creation and growth. Budget deficits can only be consolidated in a growing economy.
These growth stimulating policies are consistent with the desired long run stabilization of debt-to-GDP ratios. In the present situation of mass unemployment, these policies do not carry a significant risk of inflation.
We also believe that the adjustment has to be supported by stimulation of consumption via higher wages starting from the core surplus countries (like Germany) where wage restraint policies have considerably contributed to the growing income inequalities and current account imbalances in the Eurozone.
If the German finance minister believes in what he said, that no country can live forever beyond its means, then it must also be clear that no country can live indefinitely below its means. This implies that the change in the wage policy in Germany has to be an important part of the solution.
Mutual prosperity of the Eurozone countries and their citizens through demand expansion, rather than demand contraction through fiscal consolidation for the benefit of high finance, must be recognized as the imperative for the political viability of the Euro project. We must have the intellectual honesty and courage to act accordingly.
Signed by
----
Amit Bhaduri
Jawaharlal Nehru University, New Delhi, India
Thomas Boylan
National University of Ireland, Galway, Ireland
Sergio Cesaratto
Università degli studi, Siena, Italy
Nadia Garbellini
Università degli Studi di Pavia, Italy
Torsten Niechoj
Rhine-Waal University of Applied Sciences, Kamp-Lintfort, Germany
Gabriel Palma
University of Cambridge, UK
Srinivas Raghavendra
National University of Ireland, Galway, Ireland
Rune Skarstein
Norwegian University of Science and Technology, Norway
Herbert Walther
Vienna University of Economics and Business, Austria
Ariel L. Wirkierman
Università Cattolica di Milano, Italy
Kazimierz Laski
University of Linz, Austria
Corresponding author: Srinivas Raghavendra (s.raghav@nuigalway.ie)
Tuesday, November 13, 2012
Labor Theory of Beer
Heterodox economics under attack
The University of Western Sydney, where Steve Keen teaches, is proposing to shut down its economics program. For an explanation of what is going on go here.
Can we trust each other?
By Rudi von Arnim (Guest Blogger)
About four years ago, the collapse of Lehman Brothers marked the beginning of the Great Recession. The world is still reeling from the consequences of this all-encompassing financial crisis. What, though, were the causes of the crisis? Much has been said about derivatives, failed regulations and greed. These things matter, but here I would like to offer a simpler and maybe deeper explanation: Globalization forces countries to hollow out their social contracts. Reduced real wages promise gains through investment and exports, but ultimately undermine growth everywhere.
If real wages do not sustain growth globally, what can? The answer is that a global credit bubble—from California and Florida to Spain and Ireland—could, until it couldn’t any longer. The underlying trends ultimately catch up: If real wages do not keep up with productivity growth, the labor share of income is falling. The global credit bubble often manifests locally—for example, as a real estate boom in, say, Miami or on the mediterranean coast of Spain—but is propelled by a liberalized global financial market. Thus we can identify three dominant but interdependent drivers in this story: accelerating globalization, increased inequality and financialization.
To trace out very broadly how we got here, consider post World War II economic history split into two periods: the Golden Age of capitalism of the immediate post-World War II era, which ended with the collapse of the Bretton Woods system in the 1970s, and the second era of globalization, which began with the conservative revolution towards the end of that decade. The Golden Age saw fast global growth, including in developing economies. Trade links between economies strengthened, but integration was not as deep as today. Capital account openness was very limited. In many advanced as well as catching-up economies, welfare states deepened. Expanding labor institutions protected jobs and ensured sharing of rapid productivity growth. Generally, these developments supported the labor share of national income. In that manner, global growth was sustained by local demand.
The second era of globalization, in sharp contrast, saw accelerating globalization. Trade integration deepened substantially, international production defragmented into flexible—“footloose”—transnational production networks, and capital accounts were liberalized. All these trends discipline labor through the very real threat of relocation. Indeed, labor contract negotations that are not subject to a threat of offshoring tend to be the exception, partly due to the increased tradeability of services. As a result, real wage growth has lagged productivity growth in many countries, leading to falling labor income shares and increased inequality. Thus, globally, consumption demand cannot absorb what can be produced: global effective demand is lacking and unemployment and stagnation follow.
Open capital accounts take center stage in this narrative. First, countries need to offer low corporate taxes (if not tax exemptions) as well as low wages to attract and hold foreign direct investment of “footloose” multinationals. These tax policies limit fiscal space of the state to support social safety nets, invest in education, and maintain crucial infrastructure systems. Crucially, financialization in combination with open capital accounts tends to produce volatile, pro-cyclical capital flows, which provide fertile ground for unsustainable credit expansion. Such credit growth often feeds into real estate bubbles and debt-led consumption on the way up, but balance-of-payments crises on the way down. In recent years, specifically, financialization—through the presumed innovation in the use of securitization and derivatives—sustained a global credit bubble that served to postpone the day of reckoning: As long as middle and lower class households in advanced countries maintained standards of living through buildup of debt, growth continued despite the underlying “real” lack of demand.
In summary, accelerating globalization and financialization forces nations to dismantle social contracts and welfare states, to suppress wages and weaken labor standards. In the process, inequality rises, demand lacks, and the community of nations undermines itself. To illustrate the issue, consider a scenario originally concocted by Rousseau: Two men are out to hunt. They are on opposite sides of a hill, and can not communicate. Now, they can set off individually to hunt a hare, which will provide food for a day. Alternatively, they can hunt a stag together, which provides food for several days for both of them. Why not go for the stag, every time? Hunting the stag requires trust and cooperation, and institutions that foster and enforce them.
Similarly, it requires trust and cooperation to institute policies that support a thriving middle class—as during the Golden Age. Simply put, two countries benefit if both institute such policies, because it deepens the extent of the market for goods and services. Globalization has made it increasingly difficult for one country to trust that the other won’t give tax breaks to corporations, won’t undermine real wages, won’t manage its exchange rate, all to increase its share of the existing global market.
Joan Robinson called such untrusting tactics beggar-thy-neighbor policies. Many countries pursues these policies since no global economic or political institutions exist that effectively foster and enforce trust and cooperation. But, market economies must be embedded in a web of socio-political institutions that buffer their disruptive effects. The social democracies of the last century managed to do that, to a degree, for the conditions rendered by the Golden Age. It has become clear that globalization destroyed that model—and that renewed efforts at embedment must be pursued on a global scale. Will that be possible?
If real wages do not sustain growth globally, what can? The answer is that a global credit bubble—from California and Florida to Spain and Ireland—could, until it couldn’t any longer. The underlying trends ultimately catch up: If real wages do not keep up with productivity growth, the labor share of income is falling. The global credit bubble often manifests locally—for example, as a real estate boom in, say, Miami or on the mediterranean coast of Spain—but is propelled by a liberalized global financial market. Thus we can identify three dominant but interdependent drivers in this story: accelerating globalization, increased inequality and financialization.
To trace out very broadly how we got here, consider post World War II economic history split into two periods: the Golden Age of capitalism of the immediate post-World War II era, which ended with the collapse of the Bretton Woods system in the 1970s, and the second era of globalization, which began with the conservative revolution towards the end of that decade. The Golden Age saw fast global growth, including in developing economies. Trade links between economies strengthened, but integration was not as deep as today. Capital account openness was very limited. In many advanced as well as catching-up economies, welfare states deepened. Expanding labor institutions protected jobs and ensured sharing of rapid productivity growth. Generally, these developments supported the labor share of national income. In that manner, global growth was sustained by local demand.
The second era of globalization, in sharp contrast, saw accelerating globalization. Trade integration deepened substantially, international production defragmented into flexible—“footloose”—transnational production networks, and capital accounts were liberalized. All these trends discipline labor through the very real threat of relocation. Indeed, labor contract negotations that are not subject to a threat of offshoring tend to be the exception, partly due to the increased tradeability of services. As a result, real wage growth has lagged productivity growth in many countries, leading to falling labor income shares and increased inequality. Thus, globally, consumption demand cannot absorb what can be produced: global effective demand is lacking and unemployment and stagnation follow.
Open capital accounts take center stage in this narrative. First, countries need to offer low corporate taxes (if not tax exemptions) as well as low wages to attract and hold foreign direct investment of “footloose” multinationals. These tax policies limit fiscal space of the state to support social safety nets, invest in education, and maintain crucial infrastructure systems. Crucially, financialization in combination with open capital accounts tends to produce volatile, pro-cyclical capital flows, which provide fertile ground for unsustainable credit expansion. Such credit growth often feeds into real estate bubbles and debt-led consumption on the way up, but balance-of-payments crises on the way down. In recent years, specifically, financialization—through the presumed innovation in the use of securitization and derivatives—sustained a global credit bubble that served to postpone the day of reckoning: As long as middle and lower class households in advanced countries maintained standards of living through buildup of debt, growth continued despite the underlying “real” lack of demand.
In summary, accelerating globalization and financialization forces nations to dismantle social contracts and welfare states, to suppress wages and weaken labor standards. In the process, inequality rises, demand lacks, and the community of nations undermines itself. To illustrate the issue, consider a scenario originally concocted by Rousseau: Two men are out to hunt. They are on opposite sides of a hill, and can not communicate. Now, they can set off individually to hunt a hare, which will provide food for a day. Alternatively, they can hunt a stag together, which provides food for several days for both of them. Why not go for the stag, every time? Hunting the stag requires trust and cooperation, and institutions that foster and enforce them.
Similarly, it requires trust and cooperation to institute policies that support a thriving middle class—as during the Golden Age. Simply put, two countries benefit if both institute such policies, because it deepens the extent of the market for goods and services. Globalization has made it increasingly difficult for one country to trust that the other won’t give tax breaks to corporations, won’t undermine real wages, won’t manage its exchange rate, all to increase its share of the existing global market.
Joan Robinson called such untrusting tactics beggar-thy-neighbor policies. Many countries pursues these policies since no global economic or political institutions exist that effectively foster and enforce trust and cooperation. But, market economies must be embedded in a web of socio-political institutions that buffer their disruptive effects. The social democracies of the last century managed to do that, to a degree, for the conditions rendered by the Golden Age. It has become clear that globalization destroyed that model—and that renewed efforts at embedment must be pursued on a global scale. Will that be possible?
Monday, November 12, 2012
Core and Periphery Countries: Lessons From Economic History and the History of Economic Thought
A fairly interesting meeting of historians of economic thought from Europe and Latin America will be held this year in Buenos Aires. The conference is part of the European Society for the History of Economic Thought (ESHET) activities taking place outside Europe and is the second in Latin America. More info here. Program and papers (or at least most of them) here (h/t Alejandro Fiorito and Revista Circus).
Whatever happened to Latin American Structuralism or memories of underdevelopment
In my view, ECLAC has evolved, like most institutions, partly reflecting its internal dynamics, but also reflecting the evolution of the societies in which they are inserted. In that sense, if Prebisch and the push for Import Substitution Industrialization, and also the overcoming of structural heterogeneity (the fact that the structure of production, and the patterns of consumption and exports are not in sync), dominated the first three decades of the institution, Fernando Fajnzylber (classic book here) and the need for external competitiveness were, and to some extent still are, ubiquitous in the subsequent period. The theoretical basis of his ideas, and of a lot of what is done at ECLAC, is heavily influenced by the neo-Schumpeterian School, but some elements of structuralist/post-Keynesian economics, in particular in what respects to the role of the external constraint remains an essential part of the way of thinking in Santiago.
I'll leave for another post the discussion of the problems that I see in the post-Fajnzylber ECLAC and about some of the limitations of neo-Schumpeterian analysis. I want to concentrate on a few points raised by Mario Cimoli, Ricardo French-Davis, Gabriel Porcile and Osvaldo Sunkel. Cimoli and Porcile (with Verónica Amarante) presented the document Structural Change for Equality. Cimoli suggested that this document goes a long way, even if more work needs to be done, to present a coherent view of development, and emphasized that the ideas are not old, démodé (in his own terms). In part, the ideas are fashionable, according to him, because they follow modern approaches, in particular Schumpterian ones. I find that preoccupation and line of discussion to be a feeble defense of scientific value. Theories should not be measured by their popularity. Sure enough there are fashions in science, as in many other fields, but the ultimate criteria for scientific demarcation is logical consistency and supportive empirical evidence.
Other than that Cimoli suggested that the problems of structural heterogeneity are still with us. Gabriel Porcile presented the macro part, and emphasized the limits associated to the balance of payments, which are to some extent related to the real exchange rate (in this part Amarante presented the numbers on income distribution, including functional income distribution, which I shall comment on another post). He also suggested, I think quite correctly, that Thirlwall's Law, had been in many respects anticipated by Raúl Prebisch.
As the title shows, there is not much that is new in the new report (the 1990 report, based on Fajnzylber ideas, was called Changing Production Patterns with Social Equity). The idea is that external competitiveness (the changing productive patterns and the structural change in both titles) could be achieved without reducing wages (the equity and equality in the titles), and that industrial policy is essential for that goal. What is worrisome to me is that on macroeconomic issues the document seems to be a bit too conventional.
Back in 1990, ECLAC argued for:
"Financing changes in the production patterns naturally calls for some reorganization of fiscal policy in order to increase, public savings that can be used for investment. Every effort should be made to prove the allocation of expenditure, but it seems clear that most of the fiscal adjustment must be through tax reform."In other words, fiscal adjustment. Now (p. 169 in the current Report) they suggest:
"Implementing a countercyclical fiscal policy involves two major challenges. The first is to create enough fiscal space to undertake the extra spending necessary to boost aggregate demand and economic growth during the contractionary phase of the cycle. This extra fiscal space can be generated by increasing public saving during the boom phase so that the impact of adverse shocks can be absorbed without jeopardizing the financial sustainability of the State."So now they only ask for fiscal adjustment during the boom phase, moderating the growth in that part of the cycle, but admit that counter-cyclical policies have been effective in the recessive phase. Note that this conclusion might conflict with the ideas put forward on chapter 3 on the business cycle in the region. The document (p. 100) says that:
"It shows that the Latin American and Caribbean region tends to have truncated expansion phases and that they tend to be shorter than in other regions."But it does not suggest that the causes might be related to macroeconomic policies, including overly restrictive fiscal policies in the boom. It rather suggests that:
"Short expansion cycles reflect the inability of the production structure to transform the momentum of demand growth into sustained endogenous economic growth (through linkages, spillover effects and virtuous circles)."The paper by Pérez and Pineda (2010), which I had discussed here before, seems to suggest that macroeconomic policies (and the demand side) might be more important than supply side conditions in explaining the poor Latin American performance during booms. Finally, two brief comments about French-Davis and Sunkel's talks. French-Davis noted that the region is extremely vulnerable to a collapse of the terms of trade and thought that there are no structural causes for higher commodity prices. Sunkel suggested that in some countries, and he presented some data on Chile, there is a consumption boom, based on credit, which also puts at risk the expansion in the region. More on those two propositions on another post.
Friday, November 9, 2012
Galbraith on the Fiscal Cliff
By James K. Galbraith
Once there, I knew I’d been had. It was about … the public debt. It cited one Lawrence Kotlikoff of Boston University, one of America’s most talented artificers, who “estimates the true fiscal gap is $211 trillion when unfunded entitlements like Social Security and Medicare are included.” Compared to that, what’s a thousand mile-wide hurricane?
Read the rest here.
Tuesday, November 6, 2012
What to expect when you are electing
Today the United States will choose between a moderate Republican, with a pro-business agenda, or Mitt Romney. Yes President Obama has saved the economy from a 1930s like catastrophe with a smaller than necessary, but still very effective, fiscal package, and monetary easing has precluded a collapse of the banking and financial sector like the Great Depression one, but his economic views and the outlook of his policies remains to the right of Richard Nixon. Obama did not disagree with Mr. Romney that government does not create jobs, and has accepted the anti-Keynesian rhetoric of the need of reducing the fiscal deficit, even though the recovery, which is undeniable, has been very slow.
Read the rest here.
Read the rest here.
Monday, November 5, 2012
Confusion and the Failure of Marginalism
In my last post I briefly discussed the Austrian approach. One interesting point, discussed in more detail in the comments, is that several Austrians do not understand that they are neoclassical. Note that the core of neoclassical economics is the determination of prices, initially at least it was long-term prices, by the interaction of supply and demand.
I find a bit surprised that several neoclassical or marginalist economists do not understand the basics of their own theory. This confusion is compounded by the fact that several heterodox economists do not understand it either, and tend to be confused, as a result, on how they depart (when they do) from the mainstream.
I'll give you an example. If you think that prices (long-term normal prices, for those that think that these are analytically important) are determined by supply and demand, then you basically must believe that (with the exception of rigidities and other imperfections) full employment is the natural tendency of the system. Note that if prices are determined by supply and demand, the real wage in the long run would be determined by the supply and demand in that market, and given productivity and preferences you get full employment at the equilibrium real wage.
The failure of some mainstream and heterodox economists to understand the neoclassical approach, in my view, stems from the collapse of the marginalist project after the capital debates (not of its dominance, but the ability to provide coherent responses to the critics). Robert Vienneau has a very good post on the failure of neoclassical economics. Worth reading.
I find a bit surprised that several neoclassical or marginalist economists do not understand the basics of their own theory. This confusion is compounded by the fact that several heterodox economists do not understand it either, and tend to be confused, as a result, on how they depart (when they do) from the mainstream.
I'll give you an example. If you think that prices (long-term normal prices, for those that think that these are analytically important) are determined by supply and demand, then you basically must believe that (with the exception of rigidities and other imperfections) full employment is the natural tendency of the system. Note that if prices are determined by supply and demand, the real wage in the long run would be determined by the supply and demand in that market, and given productivity and preferences you get full employment at the equilibrium real wage.
The failure of some mainstream and heterodox economists to understand the neoclassical approach, in my view, stems from the collapse of the marginalist project after the capital debates (not of its dominance, but the ability to provide coherent responses to the critics). Robert Vienneau has a very good post on the failure of neoclassical economics. Worth reading.
Friday, November 2, 2012
On Austrian Business Cycle
This is not a topic I would normally write about. In particular, because I do not think Hayek was a particularly relevant theorist, even within the mainstream. By the way, that's the reason why within the neoclassical/marginalist school Austrians are sort of marginal. Note that marginal means that they are in the minority, but by no stretch of the imagination Austrians should be seen as heterodox [this is prove that Wikipedia, if you have doubts, is not entirely reliable. Again proper definition of heterodoxy means accepting that distribution is exogenous, and prices do not reflect relative scarcities, and that output and employment are demand determined in the long run, both positions that the Austrians would not accept].
But I got a few questions about Austrians and I think it is important to make one thing clear about their theory of business cycle, namely: it is not particularly different than mainstream theories, and is fundamentally Wicksellian in outlook, whether Austrians get it or not. There should be little doubt that Hayek believed that fluctuations were caused by monetary shocks, and that equilibration was based on the adjustment of a monetary rate to a natural rate [Remember his debate with Sraffa? One of the key issues in Sraffa's critique of Hayek was that he argued that latter's claim that the possibility of a difference between own rates of interest and thus a divergence of some rates from the equilibrium or natural rate is a characteristic of a money economy that is absent in a barter economy was simply wrong since there was no unique natural rate of interest from which the money rate could differ].
Even if you add his stuff on uncertainty, which many believe is close to post-Keynesian analysis, there is little in Hayek that departs from the basic Wicksellian framework [interestingly the Keynes of the Treatise shares that framework]. I should mention here that if you read Paul Davidson carefully, you would note that his concerns about fundamental uncertainty are basically related to lack of demand. When he tells you that firms do not hire workers for a lower wage unless they have demand, that means that government spending can reduce uncertainty very swiftly.
The only interesting Austrian is probably Schumpeter. Schumpeter, in contrast to Hayek, and like Wicksell, believed in real shocks, not monetary ones. Mind you, he was more interested in the sort of long term shocks caused by innovation. Still the framework is very similar, and Wicksellian in the fundamentals. Real shock (innovation) causes the spark for growth, diffusion eventually erodes the advantages of the innovators and the boom winds down. The economy moves from one circular flow, with the economy in Walrasian equilibrium to another one. So Schumpeter too is at core part of the marginalist tradition, as all Austrians are.
But I got a few questions about Austrians and I think it is important to make one thing clear about their theory of business cycle, namely: it is not particularly different than mainstream theories, and is fundamentally Wicksellian in outlook, whether Austrians get it or not. There should be little doubt that Hayek believed that fluctuations were caused by monetary shocks, and that equilibration was based on the adjustment of a monetary rate to a natural rate [Remember his debate with Sraffa? One of the key issues in Sraffa's critique of Hayek was that he argued that latter's claim that the possibility of a difference between own rates of interest and thus a divergence of some rates from the equilibrium or natural rate is a characteristic of a money economy that is absent in a barter economy was simply wrong since there was no unique natural rate of interest from which the money rate could differ].
Even if you add his stuff on uncertainty, which many believe is close to post-Keynesian analysis, there is little in Hayek that departs from the basic Wicksellian framework [interestingly the Keynes of the Treatise shares that framework]. I should mention here that if you read Paul Davidson carefully, you would note that his concerns about fundamental uncertainty are basically related to lack of demand. When he tells you that firms do not hire workers for a lower wage unless they have demand, that means that government spending can reduce uncertainty very swiftly.
The only interesting Austrian is probably Schumpeter. Schumpeter, in contrast to Hayek, and like Wicksell, believed in real shocks, not monetary ones. Mind you, he was more interested in the sort of long term shocks caused by innovation. Still the framework is very similar, and Wicksellian in the fundamentals. Real shock (innovation) causes the spark for growth, diffusion eventually erodes the advantages of the innovators and the boom winds down. The economy moves from one circular flow, with the economy in Walrasian equilibrium to another one. So Schumpeter too is at core part of the marginalist tradition, as all Austrians are.
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