Prospects of the Global Crisis of Capitalism: Post-Keynesianism vs. Marxism?

A discussion on the prospects of the ongoing global crisis of capitalism, and the convergence and/or divergence between the Post-Keynesian and Marxist views of capitalism between:

Julio Huato -- St. Francis College,

David Laibman -- Science & Society,

Matías Vernengo -- Bucknell University,

David M. Brennan -- Franklin & Marshall

At John Jay College of Criminal Justice, The City University of New York. On Sat 5/31 10:00am - 11:50am in Room 9.68.

Not sure about it, but I think I might be the post-Keynesian in the panel. Oh well, I can play that role too.

The quotable Solow or ridicule and New Classical Economics

So my quote of Monty Python reminded a reader (h/t Brandt) of a famous Solow quote about Friedman: "Everything reminds Milton of the money supply. Well, everything reminds me of sex, but I keep it out of the paper." Below my favorite Solow quote:

"Suppose someone sits down where you are sitting right now and announces to me that he is Napoleon Bonaparte. The last thing I want to do with him is to get involved in a technical discussion of cavalry tactics at the battle of Austerlitz. If I do that, I’m getting tacitly drawn into the game that he is Napoleon. Now, Bob Lucas and Tom Sargent like nothing better than to get drawn into technical discussions, because then you have tacitly gone along with their fundamental assumptions; your attention is attracted away from the basic weakness of the whole story. Since I find that fundamental framework ludicrous, I respond by treating it as ludicrous – that is, by laughing at it – so as not to fall into the trap of taking it seriously and passing on to matters of technique." 

(Robert Solow in Arjo Klamer, 1983, p. 146; Italics added)

His quotes were often better than his models. 

Robert Murphy, the Austrian theory of the rate of interest and Piketty's 'Capital'

In the comments to another post it was suggested that I checked Robert Murphy's discussion of the relevance of the capital debates for Austrian economics.* The basis for my comments is Murphy's recent post on the topic here. It seems that the capital debates are somehow connected to a critique of Piketty's views on inequality from an Austrian point of view, but the post here, which was also linked in the comments, is less than clear about that.

The question is why would the capital debates, which basically criticize the main tenets of marginalism, be relevant for a marginalist school of thought like the Austrians. Shouldn't the logical flaws of marginalism affect Austrians too? [The answer is yes, by the way, but we'll get to that].

First of all, Murphy gets the main point of the capital debates wrong. He seems to think that the lack of a natural rate of interest results from the difference between aggregate capital, which must be measured in monetary terms (which he refers to as financial capital), and physical capital (which he, interestingly, refers to in the Sraffian terminology of Marx and the classical political economy authors as produced means of production). Note that it does NOT matter whether capital is in aggregative (monetary) form or if you have an array of physical capital goods, as I explained before, it is still necessary to equate aggregate investment to savings.

In Keynesian economics the equalization of investment to savings is done by the multiplier process and by variations of the level of income leaving space for a monetary story for the rate of interest. In all neoclassical (marginalist) models, including the Austrian, it is the rate of interest that equilibrates investment to full employment savings. That rate of interest is the natural rate of interest.

Murphy seems to think rather confusedly, that the idea of disaggregated capital implies that Austrian (really it would be the case for any model without aggregative measures of capital, like the Arrow-Debreu General Equilibrium too, which is hardly an Austrian model) models do not have a natural rate.** Let me repeat it then, any model with disaggregated means of production (capital goods) still requires for the equilibration of aggregate investment to full employment savings, it requires a measure of the quantity of capital that corresponds to aggregate investment, and that means, by necessity, a rate of interest that equilibrates investment and savings. The point of the capital debates is that there is no direct relationship between the intensity of the use of capital and its remuneration, that is, no guarantee that at lower rates of interest more capital would be used, and full utilization of resources would be produced by the free interplay of market forces (something that Murphy, as an Austrian, believes in).

Worst, Murphy seems to think that the capital debates applies only to the capital market. He says: "the relationship between the productivity of capital and the interest rate is not directly analogous to the relationship between the productivity of labor and the wage rate." As it turns, the point of the capital debates is that if you reduce the wage rate, there is also no guarantee that more labor would be utilized, and there is no necessary relationship between marginal productivity of labor and real wages (and the evidence in favor of that is also flimsy, to say the least). In other words, the capital debates apply to the marginalist labor market too. No 'factor of production' is remunerated according to marginal productivities (Samuelson got that right, all the neoclassical parables are problematic, and it is a bit surprising to find this amount of confusion so long after the capital debates have been resolved).

So its seems that it is not just Piketty that "has no clue about Capital." The fascinating thing about Murphy's critique of Piketty's lack of knowledge about capital, is that for him this suggests that Piketty's  wealth tax would be a bad idea (note that critiques from the left, like Galbraith or Palley are not against a wealth tax, but suggest that inequality must be combated in other ways too, with stronger unions, more regulated capital, full employment policies, etc.). Here Murphy seems to think, like Tyler Cowen, that taxes would punish entrepreneurs and reduce the dynamism of capitalism. Because, you know (wink wink nudge nudge, say no more), without taxes, and other impediments, capital would be more efficiently utilized. So here is an economist that criticizes higher taxes as the solution for inequality, by suggesting that the notion of capital used to defend a wealth tax is flawed, and uses that very same flawed notion of capital (without even getting it) to defend a laissez-faire solution.

* By the way, not the first time I'm asked to comment on Austrians (see here and here). Austrians stand for economics like Libertarians for politics, and they are a militant group, which would be my guess of why there are so many people concerned with Austrian theory. Love for Hayek and Ayn Rand are highly correlated among teenage students, in my experience. And that's not very good company for Hayek.

** The fact that Murphy does think the capital debates are about aggregation is clear when he asks: "Does anyone know, does Piketty’s book elsewhere deal with the problem of aggregating capital?"

The rise and fall of the Tax State

David asked me about this paper, published in an interdisciplinary book (meaning a book that nobody, in any discipline, reads). It is about what Schumpeter referred to as the Tax State (the paper is "The Crisis of the Tax State" from 1918). By the way, this paper, written right before he actually became Finance Minister in Austria, is by far his best, much more relevant than his cycle theory, which remains essentially Austrian and associated to real shocks (yes there is a link between Schumpeter and the Real Business Cycle School).

My take from the conclusion:

The rise of the tax State can be seen as a struggle over who would carry the burden of taxation. Originally taxation was the sole burden of the working class, while the elites were free from taxes. Public debt as a form of repayable taxes fell on the shoulders of the elite; but that was not an excessive burden. Industrial development, urbanization, the democratization process, the enlargement of the franchise and progress in general meant that the burden of taxation was gradually shifted towards the privileged. That, however, has proved to be more problematic. The revolt of the elites has reversed considerably, in a relatively short period of time, the long process of formation of the tax State.

The general unifying theme of the book, I should note, was power, and I suggested (not very originally I might add) that it has been often absent in mainstream economics.

Asian and Latin American shares of world GDP

Reading the April World Economic Outlook (WEO), a biannual IMF publication (more to be posted soon). You can download all the data, which is always useful. Just playing around. Note that in the last decade the share of World GDP produced by advanced economies shrunk from around 80% to approximately 60%.

On the other hand, developing countries expanded from 20% to closer to 40% of World GDP. The fact that China might be the biggest economy in the world has been in the news recently. Note that most of this increase in the periphery is in Asia, which increased from around 7% or so, essentially the same level than Latin America, to 20%, while Latin America (which did expand in the last decade; the graph doesn't show it well because of scale) remains at the same level than 1980, recovering from the lowest point in the 1990s.

Radical and Heterodox Economics

Radical economics, the term as much as the theories behind it, is fundamentally a phenomenon of the 1960s and the academia in the United States, intrinsically tied to the upheavals of that transformative decade, in particular the Civil Rights movement and the war in Vietnam. The Union for Radical Political Economics (URPE) was the result of that boom in interest for alternative approaches to the mainstream. I don’t intend to write a history of URPE, in this brief post, but I want to contrast Radical Economics with the term Heterodox Economics, which has gained traction more recently (see Ngram viewer figure).

Read rest here.

PS: I started blogging at the URPE blog too. Check it out here.

On why the Golden Age of Capitalism was better than this revived Gilded Age

No need for a lot of discussion. The Golden Age of Capitalism (in the graph 1947-79)--the world that resulted from the reforms to deal with the Great Depression (the New Deal) and the reorganization of the world after the victory against Fascism, with strong unions, high taxes for the rich, and a string of social programs for the poor and minorities--was a better world.

Keynes and the Golden Age vs Greenspan and the Great Moderation

Great video post by Trixie the "Haiku Charlatan," who blogs at Hit or Miss. Enjoy!

What's in a name? that which we call Naked Keynesianism

Someone asked me this week why the blog is named Naked Keynesianism. It was in the very first post in February 2011. The story was on Fox News, about what Jamie Galbraith was teaching his students. Naked Keynesianism! And that seemed the perfect title for the blog.

At the end of the day, names do not matter, the content is what is relevant, but the Fixed News 'journalists' turn out to show a lot about the true content of their views. What was the line? "What’s in a name? that which we call a rose; by any other name would smell as sweet." For Fixed News Keynesianism does NOT smell like roses.

More on the UMKC crisis: a graduate student view

A while ago at the New School I participated on a panel on the role of the Economics Department there in academia. As I said back then I think that heterodox graduate programs are in the business of the production of heterodox economists by means of heterodox economists (my definition of the heterodox camp here). In that respect, UMKC is one of the few departments that continues to do that in the US. As I posted earlier, the retirement of two faculty members and the financial cuts may result in a significant additional burden on the economics department there. Note that this is true whether the cuts are ideologically biased or not, and simply result from the financial burdens associated to the economic crisis.

Below a letter from Christian Dodge a graduate student at UMKC. It represents a view of what is going on more broadly at the University. Note that student mobilization can be, and it has been in other cases, important in preserving the character and vitality of the institutions they belong to.

Dear Friends in the Heterodox Community,

As many of you are aware, higher education in the United States is under tremendous pressure to cut costs (i.e. hire exploited adjuncts). UMKC is no exception. As such, our economics department has come under fire as a result of a history of poor funding from the state of Missouri, and from a special initiative of the UM president to build a 60-90 day cash reserve (which is roughly 60-90 million dollars). The budget cuts are crushing our ability to grow with the larger and larger population of individuals dissatisfied with orthodox economics. More than that, we are losing two excellent professors, John Henry to retirement, and are somewhat unexpectedly losing our heterodox microeconomics professor Fred Lee. The bean counters in administration feel that these individuals can be replaced by adjunct faculty; they just don’t understand, like we do, that economics professors are not substitutable goods (nor are other goods!!)!

As members of the student movement, we have been collecting data to argue our case for 4 new professors and to replace our current losses. Here is what we know. UMKC uses the Delaware Cost study to determine how productive each department is relative to peers (University of Kansas and University of Missouri – in our case). One important note: UMKC is an urban commuter college which puts us at a disadvantage relative to our peers who are universities with large residential enrollment. The study uses two, asinine, metrics for determining how costly a department is. One measure counts the costs of compensation for full time faculty, divided by the number of students instructed. The other metric counts the costs of compensation for full time faculty, divided by total student credit hours attributed to the department. As a result, and because of the strong emphasis on the cost side and because we are an urban commuter school, any overstatement of costs can be very harmful to our department.

For one example of overstatement, we are allocated the costs of compensation and overhead of the Missouri Council for Economic Education (MCEE) (a non-profit group), which is unassociated with our department. We have estimated such costs to be roughly $200,000 in salaries. In short, the cost is no spare change. In addition, the MCEE has a fairly neo-liberal agenda, which is diametrically opposed to what we stand for, and you stand for, in our department. We think the costs of such an organization need to be counted somewhere else.

We are asking you today, for your support. If you think, as we strongly do, that heterodox economics is important not only theoretically, but for the betterment of the world, please e-mail, telephone, or write a letter to one of the people listed below. Also, let the individuals listed below know that to continue to be an epicenter of new heterodox thought we need to replace Professor Henry and Professor Lee, and also that to grow with student demand, we need 4 more professors – in fields such as development, labor, feminist economics, and ecological economics.

Thank you to Matias for allowing us this forum, and thank you to all of you for your support.

In Solidarity,

Christian Dodge (3rd year PhD student)

A Handy Link: http://www.umkc.edu/chancellor/leadership-team.cfm
Individuals to Contact:

Wayne Vaught, Dean of the College of Arts and Sciences
Phone: (816) 235-5421
vaughtw@umkc.edu

Gail Hackett, Executive Vice Chancellor and Provost
Phone: (816) 235-1107
hackettg@umkc.edu

Denis M. Medeiros
Vice Provost and Dean, School of Graduate Studies
Phone: (816)235-1301
medeirosd@umkc.edu

Cindy Pemberton
Deputy Provost for Academic Affairs
Phone: (816) 235-5623
pembertonc@umkc.edu 

Lawrence Dreyfus
Vice Chancellor for Research and Economic Development
Phone: (816) 235-5246
dreyfusl@umkc.edu

Dan Chambers
Director of Business Affairs
Phone: (816)235-2760
chamberscd@umkc.edu 

Leo E. Morton
Chancellor
Phone: 816-235-1101
umkcchancellor@umkc.edu 

Sharon Lindenbaum
Vice Chancellor, Finance and Administration
Phone: 816-235-2650
Fax: 816-235-5582
lindenbaums@umkc.edu

More on flimflam and lack of understanding of the capital debates

Paul Krugman has responded to Tom's article and here is his reply. Let me just add my two cents. Krugman says that:

New Keynesians assert — as Keynes did, although I don’t think it matters for this debate what he said — that both liquidity preference and loanable funds are true. There are conditions under which one or the other is the main one to focus on — at full employment, loanable funds are crucial, in a liquidity trap, liquidity preference.

Oh Lord. Paul can you send us the quote were Keynes says that Loanable Funds is correct? And again this is NOT about irrelevant exegesis. If you do have that Investment and Savings are equilibrated by a natural rate of interest, then that means that you must, with interest rate flexibility, reach a point at which investment would equate the full employment level of savings. Krugman and other New Keynesians argue then for a version of what they call a Liquidity Trap (actually a zero lower bound problem), in which the monetary rate of interest (of the Liquidity Preference Theory) is not capable of equating the natural rate (of the Loanable Funds Theory).

Note that here Keynes has a problem. Although Keynes clearly rejected the concept of a natural rate of interest (Keynes, 1936, pp. 242-4), and said very clearly that savings are equated to investment by changes in the level of activity (Effective Demand), his acceptance of the notion of the marginal efficiency of capital implies that there is a sufficiently low interest rate that would be associated with an investment that would produce the full employment level of savings, very much like Krugman. Excluding imperfectionist arguments related to the downward rigidity of the interest rate, or the possibility that a negative interest rate would be required to increase investment to its full employment savings level, it would seem that the acceptance of the marginal efficiency of capital is in contradiction with the notion of a “highly conventional” rate of interest (ibid., p. 203).*

So as noted here you do need to abandon the notion of a natural rate of interest and the marginalist theory of distribution (besides the evidence is that investment does not react to cost of capital, but it does to expected sales, that is expected demand). Here Krugman's comments are disingenous at best. He says:

I think, is a fairly desperate attempt to claim that the Great Recession and its aftermath somehow prove that Joan Robinson and Nicholas Kaldor were right in the Cambridge controversies of the 1960s.

As I noted it is logically required to get rid of the idea of the natural rate, and there is no need to argue that in the 1960s capital debates Robinson and Kaldor (Sraffa really, dude) were right, since Samuelson (1966; subscription required) already did.

* The capital debates show that there is no correspondence between the intensity of the use of capital and its remuneration. No natural rate of interest that would lead to more intensive use (full utilization) of capital. And that's what Samuelson admited. To understand the capital debates go here, and to get its relation to Keynes' theory go here.

PS: Krugman also gets a bit testy suggesting that: "as for wage and price inflexibility as the cause of unemployment — grrr. I’ve written again and again on this subject, pointing out that in a liquidity trap price flexibility probably makes things worse, not better." Yes, grr. Dude, first it's not a liquidity trap that you're talking about, but a lower limit to nominal rates of interest. And debt-deflation and negative effects of income distribution discussed in chapter 19 of the GT occur even if you are not at the lower bound (or the real liquidity trap). And Keynes said that the liquidity trap was irrelevant to explain the Great Depression, it's worth noticing, since really it seems you never read the GT (even though you wrote a preface to one edition). So price flexibility in a world with extensive debt contracts and where income distribution affects spending is always kind of bad. That's Keynes' message. Tom is correct on that one too.

Academic Freedom Watch: We're NOT in Kansas Anymore

Two faculty members at UMKC are retiring, or so it seems, John Henry and Fred Lee, at the same time that cuts led to a new policy according to which full-time faculty would be replaced as they retire with adjuncts. This can only hurt small departments like the economics one. Students have posted here a Statement against this policy. There is a possibility that this is not unrelated in the case of economics to the type of approach of the department. It would be sad indeed if in the post-crisis period, in which many organizations and economists admitted that change in the way economics is taught if another heterodox department was under attack. The infamous Notre Dame case is still fresh enough, and should serve as a cautionary tale. More on this later.

More on Wren-Lewis flimflam according to Palley

Simon Wren-Lewis replied to Tom's previous post on the flimflam defense of mainstream economics and says he cannot find it (the flimflam). Tom provides in a new post some hints on where to look. Note that Tom raises two points, among others, always emphasized in this blog. Namely:

Marginal productivity theory remains at the core of mainstream distribution and production theory. However, marginal productivity can be adjusted for imperfect competition to yield, what might be called, adjusted marginal products. Thereafter, things remain analytically very similar and those adjusted marginal products then determine the stock demand for capital and drive long-run capital accumulation. 

The imperfect competition model of so-called New Keynesians continues to assert price and nominal wage flexibility would restore full employment. In a financialized economy with massive inside debts, that strikes me as an implausible proposition.

Both require to be solved and provide a real alternative that the notion of the natural rate is abandoned. Note that this would strengthen Wren-Lewis and other New Keynesian arguments.