Demand Drives Growth all the Way

New paper by Lance Taylor, Duncan Foley and Armon Rezai. From the abstract:

"A demand-driven alternative to the conventional Solow-Swan growth model is analyzed. Its medium run is built around Marx-Goodwin cycles of demand and distribution. Long-run income and wealth distributions follow rules of accumulation stated by Pasinetti in combination with a technical progress function for labor productivity growth incorporating a Kaldor effect and induced innovation. An explicit steady state solution is presented along with analysis of dynamics. When wage income of capitalist households is introduced, the Samuelson-Modigliani steady state “dual” to Pasinetti’s cannot be stable. Numerical simulation loosely based on US data suggests that the long-run growth rate is around two percent per year and that the capitalist share of wealth may rise from about forty to seventy percent due to positive medium-term feedback of higher wealth inequality into its own growth."

Read full paper here.

Godley-Tobin Lecture at the EEA in Boston

James k. Galbraith on inequality at the EEA in Boston. Don't miss it!

International Workshop on Demand-led Growth, Conflict Inflation, and Macro Policy

At my alma mater the Federal University of Rio de Janeiro (UFRJ), to be co-sponsored by the Review of Keynesian Economics (ROKE). Call for papers to come soon in this channel. Stay tuned.

The slow recovery in historical perspective: 10 years after the Great Recession

It's hard to believe, but it has been almost a decade since the Great Recession. The official recession started in December 2017, but everybody remembers the collapse of Lehman in September of 2008. When you look at the recovery from the last recession in historical perspective, two things are clear. If you take GDP fall, or increase in unemployment, the Great Recession does not compare to the Great Depression, and that means that fiscal policy (automatic stabilizers and stimulus package) did work. The other is that 10 years into it, we are more or less were we where after 10 years of the Depression (which means the New Deal worked too, since the decline in GDP back then was much more pronounced, and recovery started in 1933).

But what I think is crucial, if one extends the historical data, is the effect of that crucial Keynesian experiment, World War II. Keynes was correct when he wrote in 1940 that: "It is, it seems, politically impossible for a capitalist democracy to organize expenditure on the scale necessary to make the grand experiments which would prove my case -- except in war conditions." And indeed, it seems very hard to see any circumstances that would push spending up to the extent needed to avoid the slow recovery to continue its course, and for 'secular stagnation' to prevail.

Actually if one looks at GDP per capita (per worker in fact), as The Economist (from last December, which was the inspiration for the graph above) does, then it seems that the New Deal/World-War-II policy experiment already looks better than the last decade.

And that is not considering that there seems to be a bubble in asset markets and the Fed is hiking rates (although I doubt that much). So things do not look particularly good.

The Latin American Crisis

Downhill

I have not written on the problems in the region for a while now (last stuff that is more comprehensive here in the talk at Keene, for example), in part, because the whole theme is a bit depressing (more recently the Honduras crisis, and the return of the right in Chile). As I have noted before, there is no doubt that the collapse of commodity prices has played a significant role in the downturn in the region, but it is also true that a lot of the problems are political in nature, and the resurgence of neoliberalism (with the support of the US, btw) has played a significant role too. In my view, the latter is far more relevant.

Two recent issues that I wanted to note, and that prompted my return to the issue of the crisis in the region. One is the downgrading of the Brazilian public debt by Standard & Poor's (I've written on credit rating agencies before here, and on the  previous downgrading of Brazil too). As I noted before, the Brazilian economy didn't face any significant fiscal or external problem. Figure below, from IMF WEO data, shows that the primary balances were actually positive until Dilma decided to cave and do a fiscal adjustment in 2015 (which did not save her from the coup, btw). And the external (current account) deficit was small, and manageable given the humongous external reserves and the great amount of global liquidity.

At any rate, why the new downgrading, you ask. The reason is to force the Brazilian government to push once again for pension reform. The whole point is that the crisis was caused to create the conditions for the dismantling of the old remnants of the very incomplete welfare state, if one can speak of one in Brazil, that survived the neoliberal onslaught of the 1990s under Fernando Henrique Cardoso. One should not minimize the importance of the soft power of US institutions, including the credit rating agencies, and how they can be used to promote certain political agendas.

The other issue is related to Venezuela (see my two previous posts here and here). I noted before that Venezuela's democracy (very problematic one, as I noted, before you complain; read the posts in the links please) is under attack, and that right wingers should not be seen as pushing for democracy against an authoritarian regime. That rhetoric, that still permeates most of the coverage in the US, is simply incorrect. I was somewhat shocked to read the recent op-ed by Ricardo Hausmann asking for military intervention by foreign powers (meaning the US). By the way, this comes from someone with the authority of being a Harvard professor (not that Harvard is supporting the coup, as far as I know). The role of the soft power of US institutions again.

If there were any doubts about their (right wingers that supported the 2002 coup) commitment to democracy I think this clears it up. I'll leave a discussion about the accuracy of the claim that elections have been rigged and the extent of the 'famine' for another post (something old on the latter here). I just wanted to note that here there is that step that is always there in the authoritarian argument about the justification for violence and the removal of the democratic institutions. Unacceptable.

On mainstream Keynesianism

Looking up to Galbraith

The ASSA Meeting was this last weekend in Philadelphia. It was the bomb... cyclone (Nate Cline's joke; I'm sure many others too came up with that one). I don't have much to report actually. I did participate in one section, and will post a link to a preliminary version of my paper soon. I was at the Economists for Peace and Security (EPS) dinner, that honored Jamie Galbraith. This blog was named Naked Keynesianism, as you may know, because years ago Fox News accused him of teaching naked Keynesianism, and I thought that was both funny and a reasonable name for the stuff I did.

Anwar Shaikh was at the dinner, and suggested that Jamie has one foot in each side of the heterodox/orthodox divide, as a result of his paternal influence (Richard Parker noted that as father/son duos come, the Galbraiths do much better than the Friedmans or Steins, and as well as the Gordons), and that for that reason at EPS (presided by Jamie for more than 20 years) we got accustomed to be less segregated from the rest of the profession. That seems about right.

And to prove Anwar right, Joseph Stiglitz was at hand to discuss Jamie's many achievements, and  the many battles, including the one on Greece's debt crisis, and that is far from over, that he fought with Jamie.* Yet, while on policy issues there have been many battles that reasonable, and progressive mainstream Keynesians have fought with heterodox economists (a topic discussed here before), there are important differences between heterodox Keynesians, and their mainstream counterparts. For example, check Stiglitz's new paper on the last issue of the Oxford Review of Economic Policy (OREP).

He acknowledges that: "the economy does not quickly return to full employment," and that "simple models have been constructed investigating how structural transformation can lead to a persistent high level of unemployment, and how, even then, standard Keynesian policies can restore full employment, but by contrast, increasing wage flexibility can increase unemployment." That is essentially correct, and I should add, that perhaps Stiglitz has gone further than most mainstream economists pushing the need for the limits of what he refers to as equilibrium models (mostly of the Monetarist and New Classical/RBC type). But essentially his critiques derive from information problems and limits to rationality, coming from behavioral economics insights.

I often think of Olivier Blanchard when I have to discuss the inability of reasonable mainstream Keynesians incapacity to break with old ways of thinking. Perhaps because of his role until recently at the IMF (now that role was taken over by Maurice Obstfeld). Blanchard tells us in his new paper in the same issue of OREP that: "current DSGE models are flawed, but they contain the right foundations and must be improved rather than discarded."

This is essentially the point of Blanchard's paper on the natural rate too. He essentially suggests that not only the natural rate hypothesis is theoretically reasonable, but that it is relevant for policy makers. Not surprisingly the IMF has not changed its views on macro policy that much (on that see my previous post and the several links to older stuff).

Of course Jamie long ago suggested that the the concept of the natural rate itself should be abandoned. And he did it in the Journal of Economic Perspectives, a journal that was supposed to showcase alternative views in pluralist fashion, but that has failed in being inclusive of heterodox traditions. The inability to ditch the natural rate, even in the face of the last financial crisis (and something that Keynes suggested in the GT) is the main persistent failure of the mainstream.

* Stiglitz acknowledged that Jamie has been studying inequality since before Piketty made it a fashionable topic.

The IMF and fiscal policy

This is a topic I discussed several times here (for example, here, here, here, here or here). Now there is a paper by Marc Lavoie (with co-author) in Intervention, on the same topic. The paper notes that: "There is a paper by Vernengo/Ford (2014) that covers some of the same ground. Their conclusion is that the 2008 crisis prompted only some cautious change in the views being entertained at the IMF" (my paper with Kirsten is here). Just to clarify, that's not exactly our point. The point we make is that while the research department has changed some of their views, without discarding the crucial concept of the natural rate of unemployment in their analytical framework, the policies pursued by the IMF changed very little indeed. So that there is a kind of double discourse. I referred to something like that within the mainstream of the profession as organized hypocrisy. Double discourse in theory, with no significant change in the theories that underlie the policy, and almost no change in policy.* At any rate, as anything that Marc writes this paper is worth your time and attention.

* In our intro we say: "It is concluded that even a most optimistic reading of IMF reports and country arrangements disappoints. The power structure ultimately remains the same: the Fund continues to be the mechanism through which creditor countries enforce contractionary policy on indebted countries." So, in our view, nothing really changed. more window dressing than anything else going on.

Review of Shaikh's Capitalism

woof, woof

I haven't posted in a while. As I noted before, it's harder to post new things after almost 7 years. Also, I've been both busy and not particularly fond of talking about economics (a certain degree of pessimism about the economy and the profession, I guess). But not yet ready to shut the blog down.

Anwar Shaikh was here at Bucknell and gave a lecture on his new book (Capitalism). Here a review by Susan K. Schroder, who was my micro TA back in graduate school a little more than 20 years ago.

"It has long been recognized that the state of economic theory, particularly modern macroeconomics, is in disarray. With the release of Capitalism: Competition, Conflict and Crises, Anwar Shaikh attempts to place the discipline on a more secure footing. Without doubt, this is a very large and complex book. This review essay hopes to assist readers in unlocking its insights.

Anwar Shaikh has been a Professor of Economics at the New School for Social Research in New York for approximately 40 years. As a graduate student at Columbia University , he was stimulated by political and social unrest of the 1960s and 1970s, and began his exploration of alternative approaches to understanding how capitalism functions. He has been particularly intrigued by the surplus approach to theories of value and distribution, especially those that are grounded in some form of a labor theory of value. The New School’s history of providing space to explore alternative, progressive approaches to a variety of disciplines has provided Shaikh with a natural home, encouraged by leading historians of econo mic thought and method, such as the late Robert Heilbroner and Adolph Lowe. Capitalism is the culmination of his life’s work, his magnum opus."

Read rest here.

PS: Anwar uses the term classical-Keynesianism, that I like and that I took from Heinrich Bortis's book Institutions, Behaviour and Economic Theory. There might be some differences on what exactly one means by classical political economy and Keynesianism, but there is a similar preoccupation, which I think is among the most important points of both books.

Hyperinflation and inequality

I'm still reading The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century, which is fun, well-written and in my view less controversial than what most reviews have suggested. Yes, inequality tends to fall mostly by violent means during periods of crisis. Note, also, that Walter Scheidel uses in this book the concept of surplus, and as noted earlier here (or here and here) before is part of this broader group of social scientists that still use the concepts of the old and forgotten classical political economists. There are significant advantages to this approach (see here, for example).

Having said there is an issue that is a bit annoying in the book, which is it simplistic Monetarist view of hyperinflation. For example, he says about the two world wars and the inter-war period that:

“These gargantuan struggles were for the most part funded by borrowing, printing money, and collecting taxes. Borrowing variously translated to future taxation to service public debt, inflation to erode it, or default. Only the leading Western powers successfully managed inflation...
... the United Kingdom, the United States, and Canada were prepared to 'soak the rich,' whereas more autocratic systems such as Germany, Austria-Hungary, and Russia preferred to borrow or print money to sustain their war effort. The latter, however, later paid a high price through hyperinflation and revolution, shocks that likewise compressed inequality.”

There is no more detailed analysis, but one would infer from this that if the elites chose to print money to finance their war incurred fiscal deficits they ended up with hyperinflation. I have discussed hyperinflations before here (see also this one). Don't get me wrong, hyperinflations are destructive forces and certainly played a role in the Great Contraction (the inequality reducing forces that operated in this period, although I would put, as Scheidel seems to do also, more emphasis on the policy variables like New Deal kind of programs, taxation, land reform, etc). However, money supply was simply endogenous and had little impact on economies that were already in shambles. Inflation (hyper) resulted from the collapse of the economies and more often than not the pressing need for foreign currency that led to massive depreciation, and wage resistance.

You can read my paper on inflation and money here, if you're interested.

More on "Why Latin American Nations Fail"

Brief summary of the content of the book published in the newsletter of the World Economics Association.

Institutions are central to explaining the way in which, nations grow and develop. Traditionally the study of institutional economics focused on a very broad range of interests and made contributions in several different areas, including the structure of power relations, the beliefs systems, and also social norms of conduct. Contrarily the New Institutionalist turn in mainstream economics places the weight of its explanation on property rights.

Within the logical construct of neoclassical economic theory, the contribution of the New Institutional Economics is a necessity, basically because exchange and production in a market economy requires the prior definition of property rights (endowments and their distribution are part of the data jointly with technology and preferences that are needed to establish a market equilibrium). Because neoclassical theory is a-historical, the same framework derived from a priori reasoning must have universal validity and be applicable to any particular historical episode underscoring, in this way, the invariance of human behavior in space and over time. This dictates the New Institutionalist Economics´ approach to history which materializes in providing examples of hand-picked empirical evidence across different centuries, regions and countries and interpreting these as coherent with the deductive universal framework of neoclassical theory.

Acemoglu and Robinson’s influential book Why Nations Fail (2012) constitutes one of the most comprehensive and illustrative examples of this line of thought. Its authors argue that the economic failure or success of countries depends on whether these have inclusive or extractive political institutions. Inclusive political institutions are those that distribute power broadly, constrain arbitrary exercise, and make it harder to usurp power or set the basis for rent-seeking behavior. Inclusive political institutions require well defined and secure property rights. Extractive institutions have the opposite characteristics.

Why Latin American Nations Fail is in part a response to this New Institutionalist turn in mainstream economics focusing on the case of Latin America.

Read rest here.

Monitoring the evolution of Latin American economies using a flow-of-funds framework

New paper by Esteban Pérez. From the abstract:

Flow-of-funds accounting permit to monitor the financial sector in terms of flows and stocks and to analyze its relationship with the real sector. These show inter-sectoral financial flows, capture balance sheet positions and all financial transactions by instrument, type and economic sector. The construction of flow-of-funds accounts has been traditionally spearheaded by the central banks of developed nations including the Federal Reserve, the European Central Bank and the Bank of Japan. In spite of its usefulness, flow-of-funds accounting has not experienced a parallel development for developing countries including for those of Latin American, In order to start filling this gap we undertook the construction of a data base of flow-of-funds account matrices for six Latin American countries (Argentina, Brazil, Chile, Colombia, Mexico and Peru) that consider only flows for the period 1980-2015 using yearly and quarterly data when available. As a basis for comparison we also carried out the same exercise for four Asian countries (Malaysia, Philippines, South Korea, and Thailand). The construction of flow-of-funds account matrices follows the methodology proposed by Dawson (2004). In this paper we explain the methodology for the construction of flow-of-funds accounts and we exemplify their use for two source cases of study: the Mexican Crisis (1994-1995) and the Asian Crisis (1997-1998). Using similar sources of data, the same methodology and approach for the construction of all the flow-of-funds matrices allow comparisons among countries relating to the impact, manifestations of these crisis episodes and policy reactions to confront their effects. The use of homogeneous data and methodology also permits to trace contagion effects between countries.

Read full paper here.

The General Theory at 80: Reflections on the History and Enduring Relevance of Keynes’ Economics

New paper by Tom Palley. From the abstract:

This paper reflects on the history and enduring relevance of Keynes’ economics. Keynes unleashed a devastating critique of classical macroeconomics and introduced a new replacement schema that defines macroeconomics. The success of the Keynesian revolution triggered a counter-revolution that restored the classical tradition and now enforces a renewed classical monopoly. That monopoly has provided the intellectual foundations for neoliberalism which has produced economic and political conditions echoing the 1930s. Openness to Keynesian ideas seems to fluctuate with conditions, and current conditions are conducive to revival of the Keynesian revolution. However, a revival will have to overcome the renewed classical monopoly.

Read full paper here.

Why Latin American Nations Fail

Book has finally been published. I just got my copies. And yes it is a critique of New Institutionalist views and the title a play with Acemoglu and Robinson's book title. From the back cover.

"The question of development is a major topic in courses across the social sciences and history, particularly those focused on Latin America. Many scholars and instructors have tried to pinpoint, explain, and define the problem of underdevelopment in the region. With new ideas have come new strategies that by and large have failed to explain or reduce income disparity and relieve poverty in the region. Why Latin American Nations Fail brings together leading Latin Americanists from several disciplines to address the topic of how and why contemporary development strategies have failed to curb rampant poverty and underdevelopment throughout the region. Given the dramatic political turns in contemporary Latin America, this book offers a much-needed explanation and analysis of the factors that are key to making sense of development today."

You can get it here.

The Passage of Time, Capital, and Investment in Traditional and in Recent Neoclassical Value Theory

New paper by Fabio Petri published in Œconomia. From the abstract:

With the shift from traditional analyses where capital is a single value factor of variable ‘form’ to the neo-Walrasian versions, general equilibrium theory has encountered new problems pointed out by P. Garegnani (1976, 1990): impermanence problem, price-change problem, substitutability problem radically question the right to consider neo-Walrasian equilibria as approximating the actual path of real economies. The paper briefly summarizes these problems and then concentrates on a fourth problem, the savings-investment problem, arguing that neo-Walrasian general equilibrium theory assumes that investment is adjusted to full-employment savings but cannot justify this assumption. The attempt to justify it in intertemporal general equilibrium through the tâtonnement is subjected to a new criticism: it is shown that the tâtonnement assumes Says’ Law all along the adjustments, and determines investment in a way that would crumble if it were not assumed that consumers determine their demands for consumption goods on the basis of an assumption of full employment incomes, which is not justified outside equilibrium, and was not assumed in traditional analyses. This reinforces the absence of reasons to view neo-Walrasian equilibrium paths as sufficiently approaching actual paths. It is concluded that behind the reference to intertemporal equilibrium as the microfoundation of macro analyses there is a continuing faith in traditional neoclassical time-consuming adjustment mechanisms, based on the old and untenable conception of capital that the shift to neo-Walrasian equilibria intended to do without.

Full paper available here.

On the jobs report at the Rick Smith Show

A bit old now. On the dismal report from the the first week of October, and Trumponomics in general.

Anwar Shaikh at Bucknell

Anwar will give a lecture at Bucknell next week (Thursday, October 12 at 4pm, in Academic West 112). Open to the public, and if you are in central PA you should NOT miss it up. Above a talk he gave last year at SOAS based on his recent book of the same title available here.

Masters & Sindicalists: Growth, Investment and Productivity in Argentina, from Perón to Kirchner

New paper published in Ensaios FEE. In all fairness, this was the paper that should have been published in 2013 in the volume organized by Ricardo Bielschowky and available here. But the revisions took longer than expected. It is in Portuguese, however. Below the English abstract.

This paper analyzes the three phases of Argentine economic development since the end of the 19th century, namely: the commodity export model, the period of state-led industrialization and the neoliberal reforms initiated in the 1970s, and complemented in the 1990s. The main argument is that the commodity export model had run its course, given the geopolitical changes in the world, and that the abandonment of the industrialization project had less to do with its own limitations, and more to do with the political implications of the model. In particular, the higher wages needed for mass consumption led to recurrent balance of payments problems, and a political backlash that made it ultimately unsustainable. The limits of the abandonment of the neoliberal project during the last commodity boom are briefly discussed.

Marx Capital turns 150

Marx's capital (Volume 1) was published September 14, 1867, exactly 150 years ago. Below a few links to posts on Marx written over the years.

What makes capitalism capitalism? (on the definitions of capitalism as a mode of production)

Sraffa and Marxism or the Labor Theory of Value, what is it good for? (on the labor theory of value)

Was Marx right? Nice of you to ask, but... (on common misconceptions about Marx)

A Note on the Concept of Vulgar Economics (an important idea, often neglected)

Garegnani on Sraffa, Ricardo and Marx (on the relation of Marx with classical economics)

The last Marxist? Or shortchanging Hobsbawm (a critique of The Economist's obituary)

And this one on why Marx and Keynes are essential for a coherent heterodox alternative to the mainstream:

The meaning of heterodox economics, and why it matters

Seminar in Mexico

The 8th international seminar on Coordination of Fiscal, Monetary and Exchange Rate Policies in Developing Countries at the Universidad Nacional Autónoma de México, Facultad de Estudios Superiores Acatlán (UNAM-FES-Acatlán) will take place later this month. Ignácio Perrotini and I will give the opening talks the 26, and Ariel Dvoskin the following day. Many local economists will present too, like Flor Brown, Lilia Domínguez, Noemí Levy, Teresa López, and Luis Ángel Ortiz to name a few. Will post a link to the program soon.

ReOrient

A graph that shows, for a longer span, essentially the same information presented in Robert Allen's graph of manufacturing production, and discussed before here. It is evident that the rise of China (India is not quite yet visible, even if its share did increase) represents a certain rebalancing, which is inevitable as the income per capita grows in that country, even if it does not scape what mainstream economists refer to as the middle income trap. Source here, and the data is, as expected from Maddison.

Note that the first millennia, where Asia (China and India essentially) is much smaller in terms of the graph, which is a result of the paucity of data. In a sense, the graph shows the relatively brief rise, and now relative decline of Western GDP dominance, as Asia regains a space more proportional to its population share.

PS: On issues with GDP measures see here.

Sunday Reading: Economic Letters of Note

Rick Holt edited a superb book with John Kenneth Galbraith's letters from the 1930s until his death in 2006. He wrote to everybody, friend and foe, and displays his usual wit. Here I reproduce parts of his letter to Joan Robinson, that he wrote after having invited her to give the Ely Lecture (subscription required).

The letter is from January 12, 1972. It says:

Dear Joan:

Many thanks for your note. If the meetings were slightly less stuffy and neoclassical than usual, it was owing more to you than to anyone else...

The president of the Association, as I think I said once in New Orleans, has powers closely paralleling the President of Italy, but perhaps less. Indeed this is the way in which all establishments maintain themselves. One diffuses power through people who are reliably like of mind. But I hope to have some slight influence on the Journals, and I'm going to make a particularly determined effort to revise hiring practices in the profession... A good deal has been done in the past couple of years to put the problems of the black and Spanish-speaking minorities on the professional conscience. Discrimination against women remains in some degree the most blatant.

Would you... write me a little more complete observation and complaint... Sometimes the knowledge of an unsatisfied clientele produces some results.

Love, 

John Kenneth Galbraith

I was lucky to see Galbraith give a talk (subscription required) at the New School back in November 1998. Great book. Buy two copies!

Don't be evil... oh well, perhaps a little bit

Don't be evil was, of course, Google's motto. The New York Times had a piece recently on the firing of Barry Lynn from the New America Foundation, a Democratic think tank that, if memory doesn't fail me, was at least initially connected to the Clintons. The whole thing resulted from the fact that Lynn was favorable to the European Union regulation of Google, a major donor to the think tank.

Given that I've been writing about the influence of corporate money in academia, I thought it was a good idea to link to this other story about Google's perverse influence in the public debate. In my view, Google is not on the cancer-denying or climate-change-denying business simply as a result of a market structure phenomena. And in many ways Google and Facebook (don't get me wrong Amazon is also dangerous, but in a different way, they still sell stuff, whereas the other two sell your information), or Big Internet, are more dangerous than Big Tobacco and Big Oil.

'Edupreneurs,' Corporate Universities and Pluralism in Economics

I posted recently on the increasing influence of corporate money in academia, specifically the new Marriner Eccles center funded by the Koch brothers at the University of Utah. The piece by David V. Johnson in the Baffler on this subject is worth reading. As he notes, the new breed of private money goes beyond what they used to do in the past, trying to directly influence what kind of research, the curriculum and what ideas should be disseminated, and, indirectly who should be hired and retained. This is all the more problematic in the context of the retreat of public funding and the rise of the the corporate university, which implies that increasingly money equals voice in academia.

Johnson says that:

private funding that burrows within the very body of public institutions, the better to influence related departments and curricula across the university.

In other words, the edupreneurs sell academic acceptability and prestige for ideas that might have a more difficult time entering the curricula, and getting people published and tenured. The change started in the 80s, but it has accelerated, and the Kochs are a good example of that. As he noted:

All told, the Charles Koch Foundation has invested some $200 million in higher education activities since 1980, with more than $140 million of that money allocated since 2005, funding over fifty free-market research centers and institutes at universities. And these beachheads of private campus cash have become lush islands of ideological purity

One of the examples discussed is a center that is an offshoot, in a sense, of the Mercatus Center at George Mason University, which was at the heart of the discussion of James Buchanan and the Kochs in Nancy MacLean's Democracy in Chains (reviewed here by Heather Boushey). I'm not particularly interested in the details, but what I think is relevant is that the push for free market fundamentalism is seen as a quest for "spreading what he called 'diversity of thought' at universities across the land." You would think that Economics Departments in the US are dominated by Marxists or other types of Radicals. In all fairness, there are only four graduate heterodox programs in the US and a few Liberal Arts Schools that still have heterodox economists.

If anything it seems that it's more likely that studying economics, in US universities, would make you more conservative (The New York Times said Republican citing the same study) and favorable to free markets. And others suggest that it can make you more selfish. Don't get me wrong, I'm for diversity of views, pluralism if you prefer the term, but pro-market views are well represented in academia.

The Economist and the natural rate of unemployment

The Economist new series on 'big ideas' tackled in a recent issue the concept of the natural rate unemployment (subscription required; other ideas included Say's Law and Human Capital, just to give you the broad picture of what they think it's big). I will only comment very briefly on two issues, one related to the history of ideas and the other to the concept itself.

The Economist suggests that the natural rate of unemployment can somehow be connected to the ideas of Keynes. In their words:

John Maynard Keynes, the great British economist, took a first step towards the natural-rate hypothesis when he focused minds on 'involuntary' unemployment. In his book 'The General Theory'.

The idea of a natural rate of interest can be clearly traced back to marginalist economics, and was a central concept discussed by Knut Wicksell. The idea of the natural rate of unemployment, as The Economist correctly points out, is essentially related to Milton Friedman's American Economic Association Presidential address of almost half a century ago, and the Monetarist interpretation of the Phillips Curve (PC).

However, Keynes' Wicksellian days were over by about 1932, when in the aftermath of the Circus discussions, he abandoned the theoretical framework of the Treatise on Money and started on his way to effective demand and the General Theory (GT). Note that the idea of a natural rate of interest is intrinsically connected to the natural rate of unemployment, since the former would be the rate of interest that corresponds to full employment and stable prices, meaning the equilibrium in the labor market.

On the natural rate of interest, Keynes had this to say in chapter 17 of the GT:

... it was a mistake to speak of the natural rate of interest or to suggest that the above definition would yield a unique value for the rate of interest irrespective of the level of employment. I had not then understood that, in certain conditions, the system could be in equilibrium with less than full employment. 

I am now no longer of the opinion that the concept of a 'natural' rate of interest, which previously seemed to me a most promising idea, has anything very useful or significant to contribute to our analysis.

There is little room for doubt that Keynes rejected the natural rate rather than taking the "first steps" in its direction, as The Economist suggests. He was clearly moving away decisively from that flawed concept, which leads me to discuss the concept itself and what the magazine (they think somehow they're a newspaper, strangely enough) thinks one must do to reject the concept.* The Economist says:

... to reject the natural rate entirely, you would need to believe one of two things. Either central banks cannot influence the rate of unemployment even in the short term, or they can peg unemployment as low as they like—zero, even—without sparking inflation. Neither claim is credible.

The second part shows that they presume that the absence of a natural rate means that the economy could be driven to zero unemployment without inflation (I'll deal with the first statement about the effect of monetary policy on employment subsequently). This is the case because for The Economist, as much as for many in the mainstream of the profession, inflation is always a demand phenomenon. Too much spending, often government (meaning fiscal policy) is behind inflationary pressures. Of course, the PC only works empirically when supply side factors, like the price of oil, are included as explanatory variables. So they think that if you reject the natural rate you must think there is no limit to demand expansion.**

Inflation, more often than not, is a cost push phenomenon associated to higher prices of commodities, devalued exchange rates, and more social conflict reflected in higher wage resistance. So, lower unemployment would eventually strengthen the labor force, and would lead to higher wages, and that combined with possible sectoral shortages of raw materials, which would also be more expensive, would lead to inflation. So you might very well get inflation before you reach zero unemployment rate, but the reasons are not the ones the magazine authors think. The point is that there is no reason to think that there is one level of unemployment that magically would lead to inflation. No natural rate, but several possible rates of unemployment compatible with stable prices, depending on a whole set of social and institutional conditions.

And the central bank can affect unemployment, even if its ability is not straightforward and is asymmetrical. In a recession, a lower rate of interest is, as Eccles famously said (he really popularized the phrase, but he did not coin it), like pushing on a string. You need fiscal spending in that situation, as has been painfully obvious during the long Obama recovery. But in a boom a hike to the rate of interest, in particular if it affects debtors, might cause a recession. So The Economist is wrong (I'm shocked, shocked!). You can believe that central banks affect unemployment and that there is some inflation barrier, but that does NOT mean that there is a natural rate.

Interestingly enough, they do admit that they (and economists in general) have no clue what is the correct natural rate of unemployment, and that should make the natural rate concept of limited usefulness for policymakers. So what they propose central banks should do? Use a flawed concept that cannot be measured as the guide for policy? That's some serious thinking, isn't it?

* Too many posts on the problems with the natural rate have been discussed over the years in this blog, just click on the hashtag and check a few if you're interested.

** Note, also, that when demand goes up, firms do invest to adjust capacity, which means that the capacity limit is not fixed either.

Labor share and super firms

I discussed on several occasions before the worsening of income distribution and the squeeze of the labor share in total income. Figure below provides updated information.

Professor Autor and some of his co-authors suggest this in part might result from the rise of the 'superstar firm.' In other words, Facebook, Google (Alphabet), Amazon, Apple, etc and the winner take all economy. This paper (h/t Santiago Capraro) argues that this results from market power reflected in higher mark ups.

Note that the paper by Autor et. al. suggests that superstar firms are more efficient and as their share of the market increase, their higher productivity and reduced labor force leads to a lower share for labor in the aggregate. It is mostly a technological effect for them.

I have my doubts, of course, about any story that leaves out the relative bargaining power of the labor force, and in this story the regulatory environment that has allowed the information age firms to have such large shares of the market. But that's another story.

The Routledge Handbook of Heterodox Economics

(click to enlarge)

The Routledge Handbook of Heterodox Economics presents a comprehensive overview of the latest work on economic theory and policy from a ‘pluralistic’ heterodox perspective. Contributions
throughout the Handbook explore different theoretical perspectives including: Marxian-radical political economics; Post Keynesian-Sraffian economics; institutionalist-evolutionary economics; feminist economics; social economics; Régulation theory; the Social Structure of Accumulation approach; and ecological economics. They explain the structural properties and dynamics of  capitalism, as well as propose economic and social policies for the benefit of the majority of the population. You can buy it here.

A theory of economic policy and the role of institutions

Nicola Acocella published a paper in the Journal of Economic Surveys (a free, preliminary version is available here) on the development of the theory of economic policy. Acocella is clearly fully aware of the differences between classical political economics and marginalism (neoclassical economics).* And he dismisses the pre-margnialist views on economic policy as being unsystematic and devoid of general principles.
In his words:

Most classical writers and the marginalists had suggested cases where public intervention was in order. This had been so for Smith (1776), Ricardo (1817), Mill (1848), Marshall (1890), Walras (1874-1877, 1898). But these cases were mainly what Walras called ‘examples of empirical policy’ rather than consistent policy. They were certainly dictated on the basis of an analytical evaluation of the circumstances suggesting them, but were not part of a systematic and consistent assessment of the foundations and the articulation of public policy.

In his view, economic policy as an autonomous discipline, meaning one based on theoretical principles, only started with Sidgwick,  Marshall and Pigou, that is, with Welfare Economics or Social Choice Theory, which apparently now is referred to as Implementation Theory (I didn't know that, I might confess). So it is in the debate of the 1930s, with Robbins and his followers and critics, and more fundamentally with Arrow's Impossibility Theorem that he sees the development of the main themes of a theory of economic policy.

He also suggests that before the development of a the theory of economic policy proper "the ‘night-watchman’ position became an exception as most classical and marginalist economists tended to state a number of specific or general cases where government intervention was in order." I'm not fully convinced about that. Sure there were some views about government intervention, but for the most part the Victorian consensus, among economists (not necessarily in practice, meaning actual economic policy) was for free trade, adherence to the rules of the Gold Standard, and sound finance. The idea of the minimal state was probably dominant, and the exceptions, particularly among marginalists that dominated in the UK at least, were associated to market failures.

The two major obstacles to this dominant view that government action was possible, in Acoccela's view were due to Arrow and Lucas. In his words, these 'vital failures' were: "the impossibility of taking people’s preferences as a reference for public action, underlined by Arrow (1951) and ‘radical’ objections to effectiveness of public action of the kind raised by Lucas (1976)." I should note that it seems that, in his view, the major critiques have been successfully dealt with, by Sen and his followers in one field and New Keynesians in the other, and the current consensus would be that government action is possible and desirable.

In this view, then, the history of the development of of the field is one in which the profession goes from being in favor of government action up to the development of the theory (essentially the from the beginning of marginalism to the 40s), broadly speaking, to being critical from the 50s to the 80s, with a slow return to a more interventionist consensus ever since. And maybe this describes well the field of Implementation Theory. But it strikes me as being at odds with conventional views of what the profession thinks about the role of government over time.

I mean, normally you would think of the profession as being essentially for laissez-faire, the reason why sometimes there is a conflation of classical and marginalist authors, and then after the Great Depression and the Keynesian Revolution (even if not complete, and dominated by an imperfectionist view) there would be an interventionist turn, which starts to be contested in the 1970s, with the Conservative Revolution and the Great Inflation. The apotheosis of the return of the market would come with the fall of the Soviet Union, shock therapy and the so-called Washington Consensus. The question would be to what extent this neoliberal dominance has been undermined by the last Global Financial Crisis (I would say less than what people think).

I also think that the dismissal of the classical political economy approach to economic policy, which was based on historical understanding of the specific conditions of a particular situation, is a mistake, and that there is a lot be learned from that tradition. Note that for classical political economy authors history and institutions, and, hence, policy analysis, were at a different level of abstraction, and had a different relation with the core of the theory (value and distribution). At any rate, this is an interesting paper worth reading.

* For example, he is careful to note that the meaning of the invisible hand in Adam Smith is often out of context. However, he argues that: "we use the term ‘invisible hand’ as a metaphor of the Smithian position as well as of later theories, in particular neo-classical thinking, which has then prevailed, even if the latter are deprived of some social aspects of the working of the market that certainly were in Adam Smith." This reading of Smith leaves room for intervention in the case of imperfections, and seems to follow the ideas of Acoccela's mentor, the famous Italian economist Federico Caffè.

Racism, the election and more

After writing on Venezuela last week, Trump suggested that the US might intervene there. And then the predictable happened, violence and death ensued... in the US. I don't have much to say about what happened in Charlottesville. It is worth noting that even though the city and the University of Virginia are relatively progressive places these days, they do have a long history that ties them to slavery and white supremacy (see this on NPR; h/t URPE blog).*

At any rate, it's not surprise that Trump didn't condemn his base (and yes the racist voted for him; but as I noticed before 1964 those votes went mostly to Democrats). He certainly is more explicit than previous Republicans going beyond racist dog whistle  politics. I would insist that racism is not the main reason why he won the election, and that a left wing populist right have won.

The topic is still relevant (even in the middle of the violence and crazy confrontation with North Korea; btw, this is a must read for those interested on the history of US-Korea relations), since the lessons of the defeat are important to preclude 8 years of this madness. So this piece in the NYTimes shows that Obama-Trump voters, meaning voted for Obama in 2012 and for Trump in 2016, are real.

As the authors says, echoing what I said here a while ago:

... the national vote doesn’t count, and Mrs. Clinton is not the president. She lost primarily because of the narrow but deep swing among white working-class voters who were overrepresented in decisive battleground states.

The interesting twist is that racism did play a role in the flip from Obama to Trump, at least more than I thought it did by looking at the Rust Belt alone. The piece says:

... racial resentment is the strongest predictor of the Obama-Trump vote in this survey data. White, working-class Obama voters with racially conservative views were very likely to flip to the Republicans.

Note that not all the 'rednecks' in the Rust Belt are racists though. There is an interesting piece on the redneck revolt here.

* It's also the home of the Virginia School, or the Public Choice School of Buchanan (briefly discussed here), that has been the subject of a new book that generated some controversy in economics circles. I'll have more to say about the book later, once I'm done reading it.

On Venezuela, Democracy, Violence and Neoliberalism

Many pieces have been written recently on the situation in Venezuela, including some on the left, that are very critical of the Maduro government (see for example this Jacobin piece that has been widely cited). Interestingly, during the sleepy months of the summer in which I almost didn’t write anything here, this old post on Venezuela has become the most read on the blog (as we approach almost 3 million hits).

Let me first say that I am for democracy and against violence, irrespective of who is behind it. Calls to reduce violence on both sides should be at the top of the international agenda. So, any government constraints on the ability of the people to participate in its own government (some form of democracy) and government repression of manifestations (violence) is wrong. As far as I can tell, the current claims about the lack of democracy in Venezuela are not associated, for the most part, to the election of the president (even though right-wing activists insist, without proof, that Maduro and Chávez have rigged past elections; truth is that they won every time, including the last, even if by a smaller margin), but rather to the Supreme Court reduction of legislative power, and to the new constitutional convention. One could also point out the imprisonment of some opposition leaders, like Leopoldo López, who is under house arrest now. All legitimate concerns, no doubt.

The question then is how much of the push to limits to the power of the legislative assembly dominated by the opposition, and how much of the political repression (including the treatment of opposition leaders, but also the police violence) results from the very violent and anti-democratic push from the opposition itself, that has tried to bring down the government since the very beginning (including a failed coup attempt in 2002). And this is also a valid concern that many (almost all the mainstream media) on the left seem to forget. I can’t honestly respond. But I can provide a perspective, based on my understanding of the Argentine and Brazilian cases that are closer to my experience.

In Argentina, the right-wing neoliberal agenda eventually dislocated the Kirchner governments in the ballot (when Cristina was not a candidate I should add), but it basically needed to lie about its intentions. Macri said he would not devalue the currency (and reduce real wages), that he would not cut the tax on exports, that he would not promote austerity, he also said he would end corruption, and he lied on every single element of his platform. Certainly that undermines democracy in my view. A demagogue that on top has been connected to corruption (for example, his name is in the Panama papers) is not necessarily good for democracy (many on the left here in the US are afraid of what another demagogue with corrupt practices may do to democracy). And there are now at least one ‘desaparecido’ (missing, presumably killed like during the last dictatorship) and at least one famous political prisoner (Milagro Sala). These are significant restrictions on democratic values and certainly indicate some connivance (if not direct participation) with violence. But yet I don’t think Macri is a dictator (and certainly the international media doesn’t think that either).

In Brazil, unlike Argentina, the left won the elections (like in Ecuador, btw). Dilma got a second mandate in 2014, and a fourth electoral victory for the Workers’ Party. The solution there for the right-wingers and their neoliberal agenda was a mediatic-judicial coup (and yes Dilma had accepted some of the economic agenda before the impeachment, in particular austerity; but note that Chávez too tried some neoliberal things before too; see my old piece in Dollars & Sense back in 2005 criticizing the left of center governments in the region). In this case, there have been several people imprisoned as a result of corruption charges, in many cases without other proof than the accusation of self-confessed criminals after plea bargains. Also, there has been a lot of abuse of power, including violence against protestors, and they almost certainly will try to preclude Lula from being a candidate in the next election (he too was condemned because somebody says he owns an apartment, without any formal proof). And yes, I would suggest that the current Brazilian government is not democratic.

So why is this relevant to understand Venezuela you ask. Part of the story is that the opposition in Venezuela says that they need to push the boundaries of the democratic system, because the Chavistas are anti-democratic and would not leave power. The US provides full support to that narrative, suggesting that the Venezuelan government is a threat, and that was true of the Bush, Obama and Trump administrations (there is State policy when it comes to the left in Latin America). That’s why Maduro needs to be recalled, in their view, even though he won the election. At any cost. A coup is acceptable and changing the rules too. That was also repeated ad nauseam in Argentina, and it wasn’t true as it is clear now, since Cristina stepped down and followed democratic principles (also that was kind of the argument used against Allende and many other left of center governments in the region before). In addition, the Brazilian case is important because, when the right-wingers loose, as they did in Brazil, they do push and try to promote a coup (if anything Dilma and the left in Brazil were outmaneuvered, but I don’t think they should not have tried to remain in power, since they did win the election, as did Maduro). In my view what we are seeing is a long slow coup in motion, with the US support (and now Argentina and Brazil too), and the Maduro administration is trying to survive.

So, the stakes are high, and the fall of Maduro may come electorally, later (as in Argentina), or by a coup (as in Brazil, but perhaps more violently), maybe sooner, and should not be a surprise. Note that the constitutional crisis to deal with the contested recall of Maduro, and the taking over of legislative powers by the supreme court do restrict some forms of self-government and are problematic and should be criticized. But I hardly think this means that the government is not democratic. For example, in the US the candidate that won the majority of the vote didn’t win the popular vote, and some may think this is not democratic (and that was the original intent of the electoral college, btw). And yes, the rules were in place already you may suggest. But rules are changed all the time, like the rules for financing of campaigns, or gerrymandering, or the rules for who is eligible to vote. It is quite legitimate to argue that the supreme court has restricted democracy in the US with Citizen United. And several states are trying to restrict the ability of minorities to vote, let alone that voting is done on Tuesdays when a significant number of workers cannot vote. And I could go on.

The point is that the US (which until very recently, 1964 in fact, did not allow a vast majority of the African-American population to vote) is a democracy (some may actually disagree with this), a very imperfect one (and Churchill was right, if he said it, that democracy is the worst form of government, except for all the others), but one none the less, like Argentina, and in my view Venezuela. Reasonable people may disagree, as much as some people may think that the US is not a democracy too.

Violence is a more complicated issue. There has been violence on both sides of the dispute, even though you would think it's all the government's fault if you only get the mainstream media. A lot of the discussion is related to the fact that young, middle class, university students are on the receiving end of some of the violence which is not common in Latin America. There has been less coverage or preoccupation with the regular violence against working class people in Venezuela. But as I said, I think here the government should err on the side of extreme caution and avoid all confrontation.

Note that in the Argentina, Brazil and the US (and in Venezuela too; the recent burning alive of a lower-class man because he was a Chavista is an example of that) there is a lot of violence against minorities and working-class people. More often than not it goes undiscussed in the media. In the US, only recently as a result of the widespread use of smart phones with cameras the systematic killings of black people have shocked the nation. For violence to be controlled institutions have to be strong and capable of punishing the culprits. In the US, clearly institutions still fail, as the many policemen that shot African-American kids go free. Again, I do think the US is democratic, but for many black folks that couldn’t vote until a generation ago, and/or have been imprisoned and deprived of their political rights the idea of American democracy probably rings hollow. In other words, restrictions on democratic processes, which exist in both Argentina and Brazil (and in the US too), and the existence of violence (always condemnable) per se does not necessarily mean that the government is a dictatorship. Anti-democratic tendencies like those of Macri, Trump and Maduro (Temer in Brazil is the representative of a coup and beyond just having anti-democratic tendencies) should be discussed and condemned, as much as of the opposition to their governments when they exist (if you think Dems in the US have no anti-democratic tendencies, check the primaries, the super delegates and so on). And the opposition in Venezuela is also accountable for a fair share of violence and undemocratic practices.

Don’t get me wrong, there were lots of problems with Chávez (and still true with Maduro) and with the left of center governments in the region. The inability to break with the dependence on exports of commodities (and the price being paid now that prices have fallen), the lack of counter cyclical policies at crucial times, the absence of a coherent industrial policy, the integration with China on subordinate way and so on (read my post on Venezuela linked above). In the case of Venezuela, it’s worth quoting at some length this excerpt from Tarver and Fredrick’s history of the country:

the Chávez-Maduro tenure has also been termed a ‘petroleum dictatorship’… The enormous increase in national revenue allowed Chávez and Maduro to pay off Venezuela’s foreign debt and undertake a massive social works program… For most Venezuelans, the petroleum era did not bring with it additional jobs, increased wages, or an improvement in the standard of living. Instead, the oil boom brought about a decline in domestic industry, and increase in imports and inflation.

Seems like a familiar critique of Chavismo, doesn’t it? As it turns out, this is a misquote (oops, my bad). The book actually says the Gómez tenure (president in the first decades of the 20th century), public works instead of social works program, and agriculture instead of industry. The point is (as noted in my post linked above) that these problems are not new. In the case of Venezuela there are two excellent papers (in Portuguese) written by Celso Furtado, in 1957 (a report for ECLAC) and in 1974, showing the problems of development with abundance of foreign reserves (should be a paradox since the normal problem, the constraint, is lack of dollars), which are a must read for those interested in the problems of development.

As I said in my previous post too, this is a tragedy, and there are no good solutions. I would prefer the continuation of the democratic institutions, meaning Maduro’s government with an opposition with a significant role in parliament, and without violence of course. And it would be even better if it could be achieved without a return to neoliberal policies. But this seems increasingly unlikely. The fall of the Maduro government will not end violence, and will not bring back democracy. Unless you have a very Manichean view of the meaning of violence and democracy. But hey, Hayek thought that Pinochet was a paragon of democracy, so who knows what neoliberals think.

The wage share in Argentina

In his book, Estudios de Historia Económica Argentina, Eduardo Basualdo has several tables with the data for the share of wages in income. Sources seem to be different and not necessarily compatible (although I 'm not sure about that). He also published a paper in 2008 with additional data. The graph below adds the numbers shown here, which I think are also from Basualdo (the newspaper only cites CIFRA; I couldn't find another source in their website).

To the extent that one can trust numbers on functional income distribution, these numbers give a reasonable picture of what happened in Argentina since the first Peronist government back in 1946. It is clear that the military coup in 1976 was implemented to reduce the share of wages. The graph also puts in perspective the last progressive administration of the Kirchners, which brought wages up from very low levels, but not quite to the pre-1976 level. I would expect the decline with Macri, that seems to have started (as I predicted), will go considerably further.