The return of populism or Argentina on the verge of collapse

The Argentinean primary elections, which are very peculiar and take place all at once with all parties, were last Sunday. The primaries made some sense when the Peronist party was all divided and that allowed the main candidate to proceed, but with the move of Cristina Kirchner to the vice-presidential spot next to Alberto Fernández, and the unification of a good part of Peronism (in particular Sergio Massa), the primaries become essentially an anticipated election. And Peronism won resoundingly, with 47 percent of the votes, considerably more than the 32 percent the neoliberal Mauricio Macri obtained.

After the election there was a run on the peso, with a depreciation of almost 30 percent, and no significant intervention from the Central Bank. To add to the problems, Macri, the incumbent president, blamed the run on the voters.  In his view, they basically do not know how to vote, and by bringing back the spectrum of populism, and the implication was default, they scared the markets. It's all about confidence.

There are many problems with his arguments, and the policies he proposed the following they, after he apologized (after all he still needs the votes of those that do not know how to vote in October, when the actual election takes place). First and foremost, the fact that the problems faced by this government are the result of their own decisions to increase significantly the amount of debt in foreign currency. As I noted before here, it doubled in this government, after having being significantly reduced in the previous one (and after the renegotiation of debt with 93 percent of bondholders in 2005 and 2010; I must insist that default was in 2002, before Kirchner, in spite of what the Wall Street Journal said recently).

Yes, it is true that by the time Macri was elected in 2015 the country had an external problem. Meaning that the current account was moderately negative, and there were no inflows of capital in a world awash in capital, and reserves were low. But most countries were able to attract flows with moderately higher rates than the international ones. I expected the depreciation and higher inflation in the beginning of Macri's government to bring down real wages. And fiscal adjustment was to be expected too, in order to increase unemployment and reduce the bargaining power of unions.

But he had space, after that, for borrowing in international markets in domestic currency, at higher interest rates, and in domestic markets, and he could have in the process obtained significant amount of dollars (locals buying high paying bonds in domestic currency) to prop up the reserves. That would have led to growth, possible stabilization of prices (with some appreciation of the currency), and accumulation of reserves, reducing the external vulnerability of the economy. The fact that they borrowed in dollars, allowed the depreciation of the currency, losing control of inflation, increased the obligations in foreign currency to a level that an agreement with the IMF was necessary, and that adjustment forced the recession (besides the contractionary effect of the devaluation) was unexpected, to say the least. It is almost impossible to fathom why he would pursue policies that would make his reelection very difficult.

To things should be said in this context. One is that the agreement with the IMF supposedly was in place to allow to maintain the exchange rate in the forty something level, and with that, perhaps, at least not accelerate inflation and help with reelection. A politicization of the IMF that the international organism should have resisted. Also, many people able to buy dollars at forty something (now that they are at around sixty) won significantly. So those that bet on a depreciation (and promoted capital flight) won. And financial markets certainly did. This government has many friends in the markets. The other is that the agreement with the IMF ties the hands of the next government. And in my view that's no accident.

The measures he announced to counter the crisis (see this FT story), essentially "increases in the minimum wage, loans for small and medium-sized businesses, student grants, subsidies for poor families with children and a floor for income tax, as well as a freeze on petrol prices" (the later freeze was, apparently, now eliminated) will not have an economic, and most likely also not an electoral effect. FT is correct, it's too little too late. Not only the size of the measures is small, but also the inflationary and contractionary effects of this massive depreciation will dwarf any possible benefit of a moderate stimulus.

So Fernández is the virtual new president, and Cristina his vice-president. And the left of center is most likely back in power in Argentina. The notion that the left was done in the region has been exaggerated. As I noted more than three years ago here it was a stretch to think that most people wanted a return of neoliberal policies in the region. I noted that Brazil was divided, and I think still is, with significant resistance to Bolsonaro, and that Macri had only won by a very a narrow margin. Note that the return of the left in Argentina comes with significantly less degrees of freedom than in 2003. Not only there's an IMF agreement that would need to be renegotiated (and they must do it to avoid a default), but also the international scenario is much less favorable. But my take is that the new government will be able to avoid default, and restore some degree of coherence to economic management, allowing for lower inflation, and moderate rates of growth (on the low end, but at least growth) and reduction of unemployment and poverty. More on that in another post the near future.

Class conflict, Economic Development and the Brazilian Crisis

Last summer readings

The issue of class conflict and its relation to accumulation of capital was central for classical political economists of the surplus approach. That tradition has survived in political science mostly through the work of Marxist authors. And in many recent discussions of the Brazilian crisis, that started with the 2013 protests, the 2015 turn in economic policy, the 2016 mediatic/parliamentary coup against Dilma, and the 2018 unlawful jailing of Lula and fraudulent elections of Bolsonaro, the theme of class and the role of the bourgeoisie has been widely discussed.

The book by Armando Boito Jr. (pictured above) is, perhaps, the best of those that analyze the role of class alliances and the anti-PT (anti-Workers' Party) backlash that led to the Brazilian economic collapse. The main argument is that PT had built an alliance with what he calls, following Poulantzas, the internal bourgeoisie, in particular after the fall of Palocci and the rise of Mantega in the Finance Ministry, and that this alliance fell apart in the end of the first Dilma administration. This internal bourgeoisie included many of the industrialist connected with the construction sector, the agro-business and the metal-mechanic complex, and was dependent on the internal market, while the external bourgeoisie, more favorable to the neoliberal policies of Fernando Henrique Cardoso and his social democratic opposition party (PSDB), was connected to financial markets and the international economy.

The reasons for the collapse of PT's coalition are complex, but essentially tied to the change in economic policies in 2011, the now infamous New Economic Matrix, referred to as the FIESP Agenda, by Laura Carvalho, in her useful book Valsa Brasileira, that promoted lower interest rates, a more depreciated currency, and tax incentives, rather than vigorous public investment in infrastructure, as the main tool for economic expansion. This was then exacerbated after Dilma's narrow win in 2014, when in 2015 she did a volta face on election promises and started a fiscal adjustment program.

As we discussed here before, the protests in Brazil started earlier, in 2013, and they came essentially from the left, with complaints about public transportation costs in São Paulo. But by 2015 the protests were clearly of a different nature. They were less about economic conditions, and more about corruption and the middle class was prominent among the protesters hitting pots (paneleiros) against the Workers' Party administration. In Boito's story is the break up of the coalition, and the abandonment of the Workers' Party by the internal bourgeoisie that marks the beginning of the crisis. In part, it seems, by the failure of the economic agenda (the FIESP Agenda, here this name is more revealing, since it marks that it was connected with industrialist interests) would be central for this.

Note that the policy turn precedes the protests. Note also that the complete turn in the economic policy, with the prioritization of austerity follows the electoral victory in 2014, and the nomination of Joaquim Levy to the Finance Ministry in 2015, arguably hoping to conciliate with a very hostile opposition that was vowing not to accept the electoral results the following day after the election (the defeated candidate, Aécio Neves, said so in the Senate in so many words). In many ways, like Vivek Chibber argued more generally about the State-led developmental phase, it is the national bourgeoisie that becomes the main constraint on growth.

While for the most part I agree with this analysis, I am not completely convinced about the break between a National or Internal bourgeoisie that is more industrialist, and an International or Neoliberal branch of the elites that is more financial, which is at the center of Boito's argument. For one, the differences between the internal and a more international one, and the industrial and financial one are less clear than suggested. The subdivisions might be exaggerated. Boito is careful and notes that FIESP supported both the more monetarist groups around Palocci, and also the Neo-Developmentalist groups linked to Mantega. A finger in every pie, so to speak. And that's a general problem with similar discussions within Marxism, and the whole division of financial capital and industrial capital. At the end of the day, capital is fungible, and even though one might have particular groups concentrated in one or other sector, it is relatively easy to diversify and move from one to the other. Jessé de Souza's book, also pictured above, provides a more direct critique of the role of the elites as a block (I have my issues with some of his critiques of certain Brazilian social scientists, but that's probably something for another post.

Boito, also, perceptively notes the role of the middle class. He does not emphasize it, but notes that it was particularly important in the use of the juridical system as a political element to bring down the Workers' Party. The prosecutors and the judges of the Car Wash (Lava-Jato), now increasingly less credible with all the revelations of abuse of power in their investigations as shown by The Intercept, are members of what he calls the upper middle class. I should note here the role of the United States, which trained some of these bureaucrats, including Sérgio Moro, then judge, not Attorney General of the Bolsonaro administration. Not just an elite that was committed to maintaining a backward system, the Elite of Backwardness in a possible translation of Jessé de Souza's expression, but a middle class of backwardness.

I see a parallel, with many caveats of course, to what happened in Chile with Allende. In that case, it seems that the causes for the demise of the state-led accumulation regime, as much as the retraction of the Keynesian welfare state in the advanced countries during that period, was related to its political limitations and what has been termed the Revolt of the Elites, by Christopher Lasch. In the Chilean case, the ideas of the so-called Chicago Boys were initially rejected even by the Conservative Party, and there was a significant consensus in society about the need to expand the welfare state. For example, the nationalization of copper, which had started during the Christian Democratic government of Frey, was passed in Congress with support not just from left-of-centre parties but also with support from centrist parties. In some respects, the Chicago Boys, with their ideas about liberalization and privatization, acted as a Leninist revolutionary vanguard.

In part, this was possible because the success of the state-led industrialization had created a middle class and an incipient industrial bourgeoisie that was susceptible to the fears of a communist takeover and was willing to support a violent coup to repress class conflict. It was the reaction to the political changes of the state-led industrialization period that increasingly led to the incorporation of marginal sectors of society that created the conditions for the neoliberal turn. Fears that were stoked by the United States, which provided support for the coup. In similar fashion, the success of the Workers' Party (sure there were mistakes in economic policy, but overall the economy grew, and inequality was reduced), and the improvement of the conditions in the bottom created sufficient fears in the upper and middle classes to provide support for a coup. And again the US seems to have played a role, now using other methods, with lawfare at the center of the strategy.

PS: If you want to know more about Brazil just click on the label below, and organize by date. There are posts going back to the beginning of the crisis in 2013.

The IMF Program in Ecuador: A New Report by Mark Weisbrot

Thirty pieces of silver

As they discuss the new candidate for the International Monetary Fund (IMF), and it seems that the lead candidate for Lagarde's position is the former Dutch finance minister Jeroen Dijsselbloem, a pro-austerity member of the Labor Party (which I guess is at least nominally on the left), it is worth reading the new CEPR report on the possible effects of IMF programs in Latin America, more specifically the one in Ecuador, now that the country has been brought back into the fold of well-behaved nations (after expelling Assange from their London embassy, in the post-Correa period).

From the abstract:

This report examines Ecuador's March 2019 agreement with the International Monetary Fund (IMF) and finds that Ecuador is likely to have lower GDP per capita, higher unemployment, and increased macroeconomic instability under the program. Even the program itself, the authors note, projects Ecuador to have a recession this year and increased unemployment for each of the first three years of the program. But these projections are optimistic, the report concludes. [Full report here]

I'll have more on the IMF and Argentina soon. Also, something on Brazil, for those interested in the situation in Latin America.

Why do we need a theory of value?

The theory of value and distribution is at the heart of economics. To be clear, when I say that it is at the center, it means that discussions of almost any topic in economics, in one way or another, depend on a certain theoretical position about the theory of value and distribution. However, most economists have no clue about it, about the centrality of value. Not only they don't understand the original and now infamous labor theory of value (LTV), that dominated between Petty and Ricardo (and Adam Smith too, even though that tends to surprise and puzzle most economists),* but also they misunderstand the dominant marginalist paradigm. Some economists actually think that you don't need a theory of value at all, and some don't even understand that they use a conventional (some vulgar form of supply and demand) theory of value. Hence, the reason of this post is to try to help clarify some very basic issues related to the necessity of a theory of value for proper theorizing in economics.

In a sense, this topic was discussed here before, in my post on Sraffa, Marx and the LTV. But it is worth revisiting, and thinking in broader terms, beyond the LTV, to understand why a theory of relative prices is needed in general, to understand almost everything in economics.

Let me start with the authors of the surplus approach. In fact, a bit earlier with the economists that would eventually be known as Mercantilists (if you can talk about a school). If we are allowed to generalize and simplify, the latter believed that the wealth of nations depended essentially on maintaining trade surpluses, and accumulating precious metals. Profits were essentially the result of buying cheap and selling dear, or profits upon alienation, which indicates that, for Mercantilists, profits were generated in the exchange process.

Classical political economy authors, starting with William Petty, emphasize the determination of profits in the process of production, as a residual of output, once the conditions for the reproduction of the productive system were satisfied. So profits are not the result of selling high and buying low, something that could result from the mere fluctuation of market prices, but from the ability to produce beyond what was needed for the simple material reproduction of society. Note that to obtain profits, part of the residual, the surplus over and beyond reproduction requirements, one needs to know the prices of the means of production. That is, one needs to be able to account for the normal prices of the goods that went into the production of all commodities. And these prices would include a normal profit. Again, not the extra gain that might occur from a high market price. So the normal rate of profit is needed to determine prices, and prices are needed to determine the normal rate of profit. This was well understood by both Ricardo and Marx.

Value (the relative prices of commodities) and distribution (the normal rate of profit) are intertwined. Smith knew that the simple LTV (amounts of labor incorporated) was not correct other than in very rudimentary economic systems, with essentially no produced means of production. His solution was to adopt the idea of labor commanded (more on that on my post on Sraffa, and the one on the standard commodity). Ricardo solved this problem, in his corn essay, by assuming that the surplus and the means of production advanced to produce output where all in physical quantities of corn, hence profits could be determined independently from relative prices, as a physical quantity. And Marx adopted the simple labor theory of value in volume one of Capital. Both believed, for slightly different reasons, that their main arguments would hold even if the LTV was not precisely correct.

I am not concerned with the problems with the LVT in Ricardo and Marx (worth noticing that the mathematical solution was not known in their time, and was essentially developed in the late 19th and early 20th centuries) or Sraffa's solution. It is worth insisting that the LTV does have an analytical solution that is unique, and stable (see my post on the standard commodity for the former, which suggests a Smithian, i.e. labor commanded, version of the LTV is perfectly fine).** That's good, btw. It suggests that the classical political economy notion that there are prices that guarantee the reproduction, and, beyond the the expansion (or accumulation), of the economic system do exist.

Here I want to emphasize the importance of the LTV for the analysis of other aspects of the economy. Ricardo saw the problems of the Smithian adding up theory. That's the notion that prices were composed by the sum of natural wages, profits and rent and that prices would go up if one of its components went up.  In order to determine the rate of profit properly, Ricardo noted the explanation of value was essential. The rate of profit was central because in his view the processes of accumulation depended on the rate of profit. Hence, proper discussion of accumulation and growth depends on a proper theory of value and distribution. Btw, all classical authors assumed that real wages were exogenously determined by institutional and historical circumstances (so there was a role for history and institutions in their theory; also, for accumulation that was seen as too complex to be theorized in the same level of abstraction that value). But even if one is less keen than Ricardo on the role of profits in accumulation, it is undeniable that distribution affects accumulation, and, hence, a proper theory of value and distribution is needed.

Note also, that other things that depend on relative prices are crucially affected by the theory of value and distribution. Classical authors assumed that the process of competition, by which they meant only free entry and not the size or the number of firms in an industry, would lead to a uniform rate of profit. In that sense, the forces of competition were central in forging the structure of production, and, hence, the determination of technological change or to understand the patterns of trade specialization, which cannot be understood without the determination of relative prices. In fact, perhaps the most famous and the most controversial issues coming out of Ricardian economics dealt with international trade and the effects of technical change (the so-called machinery question), and are directly connected to the theory of value.

Even the most crucial macroeconomic problem, the question of output determination (and employment, for a given technique) is affected by the theory of value. Note that classical political economists assumed output as given for the determination of the surplus. And Ricardo accepted Say's Law as a way of determining output and employment (not Marx, btw, so it's NOT a requirement of the surplus approach). But as much as for accumulation understanding of distribution is central for the determination of the level of output, as it is explicit in the Kaleckian effective demand model. the classical long term prices are compatible with levels of output that do not guarantee full employment. And the parametric role of distribution in affecting the size of the multiplier is crucial for output and employment determination. So unemployment is possible in the long run, as a regularity of market economies.

In other words, for a coherent theory of output, accumulation, international trade, technological change and more (taxation, etc.) you need a theory of value and distribution. That is also the case in the mainstream. Marginalism developed in the last quarter of the 19th century, both as a result of the lack of analytical solution in that period for the problems of the LTV and as a reaction to radical revival of the theory (Marxism). The important distinction is that while classical political economy authors dealt only with objective factors, and considered demand as given when determined value and distribution, marginalism incorporated subjective preferences as central for the explanation of long term normal prices, and prices and quantities were determined simultaneously.

Beyond the problems with the marginalist solution for the existence of long term prices (see this on the capital debates) and their switch to the intertemporal approach, which basically only deals with short term prices, their theory is also central for almost everything in economics. In a sense, given that in marginalist analysis distribution is determined by supply and demand, and by the relative scarcity of factors of production, the theory of value and distribution is even more central for other parts of their theory than in the surplus approach. Here the theory of distribution does not affect indirectly the level of output and the process of accumulation. Here the level of employment and, for a given technology, output determination is the same as the theory of distribution. Real wages and the level of employment are determined in the labor market simultaneously. Everything derives from that.

Before getting to the reason why the theory of value and distribution, central for everything, is often ignored, let me note briefly the possibility of a third alternative to value and distribution, beyond the surplus approach and marginalism. That would be the markup theories of pricing. Note that theories of markup pricing essentially describe how firms determine prices. Most of these theories were developed as a result of the imperfect competition literature sparked by Sraffa's famous (1926) critique of Marshallian price theory (see an old post on that here).

First, as it would be known for the readers of this blog (at least the ones that have been reading for a long while), markup pricing is actually dealing with a different set of issues, and Franklin Serrano suggested here that they are different than the classical political economy normal long term prices (the Marxist prices of production or Sraffa's prices), and that Fred Lee and Marc Lavoie were right about that. He argued that some Sraffians (I won't name names), and I would add probably Fred too, thought that Sraffian prices were compatible with the full cost pricing tradition, and I could have included myself in this group.*** Note that what I mean by that is simply that the behavior of firms must be compatible in the real world with the logic of gravitation in classical analysis. In other words, if prices of production imply a normal profit over the full cost for a given technique, then firms somehow must be trying to do that.

But it is clear that the full cost pricing of a particular firm might not be the long run equilibrium price around which market prices gravitate, with free mobility, that is, with competition in the classical sense. In a way, the same circularity suggested above reapers, costs depend on prices (and that involves the profit related to the markup), and prices depend on costs. The firm's individual prices might not be the prices that are required for the reproduction of the economy as a whole. In that sense, markup theories must be grounded on some surplus approach understanding of value and distribution, and they are essentially theories about market prices, meaning short run behavior. In that sense, they run into the same problem than the intertemporal marginalist models, the Arrow-Debreu type, that became more popular after the capital debates, and that led to what Garegnani famously referred to as the change in the notion of equilibrium (that is the abandonment by the mainstream of the notion of long run equilibrium). Some heterodox groups see this as a positive development, but again it implies that they cannot say anything clear about distribution and relative prices, and that has implications for almost any other theory.

I might add here, which is more concerning for some heterodox groups, is that many of these theories are also compatible with marginalist interpretations of the theory of value and distribution. Many imperfect competition theories just suggest simple inverse relations between markups and the price elasticity of demand. This again fall into the type of situation I discussed recently regarding Karl Polanyi, of well-meaning critics of the marginalist mainstream, using marginalist or neoclassical concepts w/o knowing they are doing it (if it's conscious acceptance of the mainstream model, then it's something different).

One last thing in this regard, while markup theories must be grounded on some theory of value and distribution, and my take is that the surplus approach is where it would make sense, the opposite is not true. There is no need for a theory of the firm, of individual behavior, to understand long term prices. Classical political economists certainly discussed behavior, but that essentially entailed some notion related to class, to general social norms, not about what is going on in someone's brain. Even Smith that was certainly concerned with the issue of the role of self-interest in determining the equilibrium outcomes in the market, cannot be assumed to be a precursor of the rational maximizing agents of the mainstream, or of methodological individualism. The same could be said of utilitarian views and Ricardo, who was, to some degree, close to many utilitarians including Bentham. Here too, many heterodox economists think that an alternative theory of behavior is central for economics, and that is why many see behavioral economics as somewhat heterodox.

Finally, getting, even if briefly, to the point of why most economists remain oblivious to the relevance of value and distribution. I would suggest that this is a recent phenomenon. It is the result of what I have discussed here before, the return of vulgar economics (for example, here or here), and that the mainstream has abandoned the long run, and provides only a theory of short run prices. But at the same time the mainstream must revert to the old model in order to promote economic policy. Note that only in that model you can guarantee that markets provide efficient allocation of resources (w/o imperfections), and the price system signals the direction of adjustment. It is often missed by the heterodox groups that resist old classical political economy (often for incorrectly assuming that it is a precursor of marginalism) that their theory of value and their long term prices provide something completely different, an understanding of the conditions for the reproduction of society. That notion, btw, is alive and well in other social sciences (see here or here). Not in economics.

* It survived in the fringes and it was rediscovered by Marx and then much later Sraffa, who actually provided a coherent solution to some of its logical limitations. But after Ricardo, the LTV was never dominant again.

** On the gravitation of market prices towards normal prices see the work by Bellino and Serrano here.

*** My fondness for the subject in part derived from having worked for Wynne Godley at the Levy for two years, who was a disciple of P. S. W. Andrews one of the key authors of the Oxford Economists' Research Group (OERG) behind full cost pricing theories.

Forty Years of Balance of Payments Constrained Growth and Thirlwall's Law

From original draft by Thirlwall

Thirlwall's seminal paper on the balance of payments (BOP) constrained growth is forty years old. Paul Davidson once referred to the BOP constrained growth as a positive Post Keynesian contribution to economics. The Review of Keynesian Economics (ROKE) will publish soon a special issue with many well-known contributors to the literature, and with a paper by Thirlwall himself.

The idea built on the Kaldorian supermultiplier model (Kaldor mark II), and with a few simplifying assumptions, it showed that economic growth depends on the rate of growth of exports divided by the the income elasticity of demand for imports. A very similar idea, as Thirlwall knew, was developed by Raúl Prebisch and Latin American Structuralists. The model, contrary to the dominant mainstream growth model at the time (the Solow model), was demand-led, and allowed for significant divergence between center and periphery.

The 1970s were a period in which both macroeconomic research was biased towards short-term issues, with stabilization after the oil shocks and inflation acceleration becoming central, and also it was the decade in which heterodox groups were effectively segregated from the profession, publishing in alternative journals. These factors certainly affected the popularity of the model.

The most remarkable thing about the model, beyond its simplicity, is its incredible empirical relevance. So much so that is one of the few regularities that has been called a Law (like Okun's, for example). Financial flows might reduce under certain circumstances, the BOP constraint, but at the end of the day, capital flows must be paid with exports, and that implies that the constraint for developing countries is a strong limit to expansion. In advanced economies, income distribution and class conflict might play a more relevant role.

At any rate, it seems that under different circumstances, particularly regarding the sociology of the economics profession, this would have been a contribution meriting the Sveriges Riksbank Economics Prize in Memory of Alfred Nobel.

Will post more, with links to free papers soon.

PS: I haven't written much on Thirlwall's law, but here is a paper in response to a critique by Jaime Ros and a co-author, published by Investigación Económica, in Spanish.

Capital Flows to the Periphery: Still ‘push’, but with significantly lower risk spreads

Gabriel Aidar and Julia Braga (Guest Bloggers)

We have, in our new paper, gone back to the old pull-push debate on determinants of capital inflows to emerging markets, to look at the behavior of country risk premium spreads. Our Principal Component Analysis of the country-risk spread series of ten emerging economies from 1999 to 2019 revealed that 86% of the total volatility of the original series can be represented by only two components, suggesting the prevalence of common factors in determining country risk. This evidence, reinforced by the correlation of the first major component with global liquidity indicators, corroborates our hypothesis that the sovereign risk trend is driven by external factors, in line with the push literature. This is clearly shown in the graph below that shows the Evolution of the EMBI+ emerging market risk spreads against EMBI Brazil over time.

Our contribution strengthens the thesis, stressed by Medeiros (2008), about the subordination of economic cycles in developing economies to global financial cycles. This in effect imposes an (asymmetric) constraint for the management of domestic monetary policy. To avoid capital outflows and/or successive exchange rate devaluations, the domestic interest rate should not remain lower than the international reference interest rate added to its country risk premium (Serrano and Summa, 2015). This constraint has changed significantly in the 2000s.

In the recent expansionary cycle of global liquidity, many developing economies seems to have taken advantage of this window of opportunity to simultaneously grow more and reduce their external vulnerability. These two movements ended up having the combined effect of lowering the collective external fragility of the developing economies (Freitas et al., 2016; Serrano, 2013). As a result of this change, developing economies experienced a virtually unprecedented period of reduction of Balance of payments crises. As we show in the paper, and can also be clearly seen in the graph, these favorable developments led to a once for all structural break at the level of sovereign risk spreads, that have fallen significantly after 2002. This seems to be the reason why the risk spreads have not risen again to the levels prevailing in the 1990s. Although the risk spreads continued to respond to international financial indicators and have risen both during the 2008/2009 world financial crisis and also in 2014/15, when the FED threatened to raise the interest rate and began to phase down nonconventional monetary policies, developing economies are now in a much better position to deal with those changes. This is what we can read in current pattern of risk premium spreads that, although still vary in response to changes of the relevant international financial indicators, do it around a significantly lower average.

References:

Freitas, F., de Medeiros, C. A., and Serrano, F. 2016. Regimes de política econômica e o descolamento da tendência de crescimento dos países em desenvolvimento nos anos 2000, in “Dimensões estratégicas do desenvolvimento brasileiro. Continuidade e mudança no cenário global: desafios à inserção do Brasil”, 17–46

Medeiros, C. A. de. 2008. Financial dependency and growth cycles in Latin American countries, Journal of Post Keynesian Economics, vol. 31, no. 1, 79–99

Serrano, F. 2013. Continuity and Change in the International Economic Order: Towards a Sraffian Interpretation of the Changing Trend of Commodity Prices in the 2000s, pp. 195–222, in Sraffa and the Reconstruction of Economic Theory: Volume Two, UK, Springer

Serrano, F. and Summa, R. 2015. Mundell–Fleming without the LM curve: the exogenous interest rate in an open economy, Review of Keynesian Economics, vol. 3, no. 2, 248–68

Handbook of the History of Money and Currency

The Handbook (subscription required) has been edited by Stefano Battilossi, Youssef Cassis and Kazuhiko Yago. It has many interesting chapters. Barry Eichengreen writes on what determines that a currency is used as an international currency (or even as the predominant currency). While he follows conventional views in suggesting that role of money as a means of exchange and the importance of the country in international transactions, he does also explore the role of power (military power) behind the key currency. My take on that topic in this paper with David Fields here.

There is also a very readable paper on the history of central banks by Stefano Ugolini here. It follows the evolutionary approach of Roberds and Velde, and in my view also suffers from conventional views on monetary theory that emphasize the exchange role of currencies, rather than the unit of account function. As a result, it downplays the role of fiscal agent of the state, that in my view was key in the early experiences with public banks. I would emphasize the importance of the development of public debt for the subsequent evolution of public banks, and the relevance of early central banks in the management of the Fiscal-Military State. On this see this and this.

There are interesting papers on paper money experiences, by François Velde (here) or on deflation, by  Richard Burdekin (here), to cite a couple.  There is, also, our entry (with Esteban Pérez) on the history of Central Banking in Latin America (here).

Catching up and falling behind in historical perspective

The figure below, from a recent piece in the Wall Street Journal, shows the catching up of the South. Note that most occurs after the New Deal, and up to the 1980s. The piece emphasizes the reversal, with divergence since the last recession. This suggests that the New Deal and the period in which the segregationist policies were eliminated were a period of prosperity for the South.

The catching up story is one associated mostly to State action, since the New Deal in many ways was a sort of Marshall Plan for the South (think TVA), even though the WSJ piece emphasizes policies, like lower taxes, and the lack of unions. And there is a lot to discuss there.

But what surprised me by looking at the graph, and the story I think is more interesting, is the apparent relative decline of the West. The story, like that of Argentina, for example, is one of persistent decline over the whole 20th century. And that's obviously not what you would imagine about the West, that went from a backwater, essentially rich in natural resources (e.g. Gold Rush), to a  prosperous region with the most dynamic innovation hubs in the US (Silicon Valley).

So the continuous decline of income per capita in the West is NOT a story of persistent decline. In many ways it is exactly the opposite of that. You start with very low levels of population and income, and an accident, associated to the existence of high value natural resources leads to an economic boom. Gold, oil and other minerals in the case of the West, and in some parts high agricultural productivity. Income per capita shoots fast up, and by the time of the graph you have that it is way above the US average. Which explains the heavy inflow of immigrants, which in turn explains, as the population in the West as a share of total US population increases, the decline in income per capita.

But that process goes hand in hand with the development of sophisticated manufacturing in the West, from aeronautics and aviation to computer and information industries. In this case, the story of lower income per capita with respect to the country is not a history of decline, and the early history, in spite of the high income per capita suggests a relatively unsophisticated economy. That's an important analogy when you think of cases like Argentina.

Argentina, Financial Times and the next default

It's been a while since I wrote about Argentina. In all fairness, because it is difficult given all the mistakes of the last few years since Macri's victory. I discussed the prospects of what to expect back then. Since then I posted here and here on the supposed improvement in 2017, and the beginning of the still unfolding crisis in 2018. And this could simply be an "I told you so post," since I did warn about most things that would happen. But there are important and interesting news about Argentina, now that there is at least some clarity about who will run against Macri this year.

Cristina Kirchner finally announced she's running for the vice-presidency, and that her husband's chief of staff (when Néstor was president), Alberto Fernández, will be at the top of the ticket. Some have suggested that this is a great move that will allow to unify Peronism, which might lead to victory in the election later this year. As a response, the editorial board of the Financial Times (FT) published a piece in which it suggests that given the low popularity of Macri's austerity measures backed by the International Monetary Fund (IMF) policies, that a return of Peronism, would be possible, but a huge mistake for Argentina.

There are many problems in FT's analysis. FT's piece suggests that "Mr. Macri's austerity programme is broadly on track to deliver long term gains for Argentina." There is a fundamental misconception in their argument. Argentina's problems are not fiscal, caused by excessive government spending, but external caused by excessive borrowing in foreign currency. Mr. Macri took over in 2015 with foreign debt at around 70 billion dollars, and proceeded to more than double it to approximately 160 billion dollars, as shown in the figure below (elaborated by Juan Matías De Lucchi, for a paper we co-authored in Spanish and that should be published soon). Foreign denominated debt is now higher than it was before the 2002 default, if smaller as a share of GDP (red line).

Note that while Macri inherited a situation of high inflation, significant fiscal deficits (those are in domestic currency), and an external constraint, mostly associated to an energetic external deficit (that one in foreign currency), the external debt situation was deemed sustainable by everybody back then. Note that inflation was ultimately the result of a sequence of small devaluations, and significant wage resistance during the years of Kirchnerism, and that the external constraint resulted from an inability to diversify exports, and particularly of reducing import necessities in the energy sector. The fiscal situation was not problematic, and there was no problem with financing domestic spending, and no serious inflationary pressures coming from the Central Bank financing the Treasury.

The Macri government established those propositions. His team, stacked with very 'serious' mainstream economists like Federico Sturzenegger, who argued that increase in the domestic energy price bills would have no inflationary impact, believed that inflation could be solved in a simple way by stopping the financing of the Treasury. Inflation was in Monetarist fashion a question of too much money. They also believed, to some extent, that a devaluation would solve external problems if it happened. But they expected a surge in foreign investment that would lead to growth and also put pressure for the appreciation of the peso. Of course, the outcome of their liberalization of the foreign exchange market, and their Monetarist experiment led to higher inflation and depreciation.* Fiscal adjustment and the firing of many government workers led to a recession, and higher unemployment. That was the macroeconomic package of the government, even before the IMF.**

Note that there was no need at that point to borrow in international markets in foreign currency. The current account deficit was manageable, foreign debt obligations were relatively low, and the capital flight caused by the liberalization of the foreign exchange market could had been stopped, to some extent, with a hike in the interest rate. Of course they should have been more careful about the liberalization of the external accounts, but that was probably too much to ask from this government of financial operators with deep ties to Wall Street and international financial markets (and a president with accounts in tax havens, documented in the Panama papers).

Macri's government renegotiated the debt with the vultures, the final step for Argentina to re-enter financial markets, under conditions that were excessively generous, one might add. And note that the external debt had already been significantly reduced by the successful renegotiation of the Kirchners with 93 percent of debt holders (and the Macristas talked about a heavy inheritance!). Minor increases in the rate of interest in the US, which in most places led to minor depreciations, coped with interest rates that at times were negative in real terms, led to massive flight. But the government continued to borrow in foreign currency, when almost every country in the periphery has been able to borrow in domestic currency.

That of course was no mistake. This government has promoted a massive increase in foreign debt to finance large amounts of capital flight. The IMF has essentially validated this model, by allowing the government to use the loan to contain the exchange rate. This government has created conditions for a huge amount of dollars to be purchased by essentially their friends in financial markets. It is a financial racket. This is obviously not sustainable, and a relative safe position has been turned into a possible default soon. Not surprisingly the specter of Peronism haunts Argentina.

* On some level the government wanted higher inflation, in order to reduce real wages, something I noted back in 2015. They also wanted a recession, to help reduce the bargaining power of workers.

** As I often say, our elites don't need the IMF, they carry the orthodox gene in their economic DNA.

Exchange rates and income distribution in a surplus approach perspective

Old paper, presented two years ago in México, and to be published soon by the university press there. In Spanish. For those interested. The model is the same (with minor changes) one used to discuss inflation, in an old paper, eventually published here in a book on Post Keynesian economics edited by Forstater and Wray. Link here.

Forget the Natural Rate, says the Head of the Minneapolis Fed

Low rates are here to stay

The head of the Minneapolis Fed agrees with something that I discussed several times here (or here for the use of alternative unemployment measures like U6) in the blog, that the unemployment level (U3) is not a good measure of the slack in the labor market. Neel Kashkari says:

No one knows how many more Americans want to work. But if the job market continues to improve with only modest wage growth and below-target inflation, it can be safely assumed that maximum employment isn’t here yet and there is no present need to raise interest rates.

So we're NOT at full employment (neutral or natural rate in their parlance) even with 3.6%. Note that a few years back they thought it was closer to 6%. Reality has an heterodox bias.

On Karl Polanyi and the labor theory of value

The other great transformation

I have discussed Polanyi on the blog before, but not in great detail (see this video posted a few years back from Fred Block for a more in depth discussion). However, writing about Bob Heilbroner's views of economics, and in particular the labor theory of value, reminded me why I have reservations about Polanyi, something that often surprises my friends, since I often cite some of his ideas, and I did put his book on the Top 10 list.

Polanyi has been, indeed, one of the most influential social scientists of the 20th century, even if economists never read him. His notion that markets are embedded in society has been used by political scientists and sociologists to understand the rise of neoliberalism, and the policies of austerity that have had incredible social costs (e.g. Mark Blyth's book Great Transformations). In part, the increasing formalization of economics made his work less popular among economists, proving that Boulding was right when he said that math brought rigor to economics, but it also brought rigor mortis.

The main thesis that free market capitalism leads to unstable political situations, and that this, in turn, would lead to coalitions that restraint and regulate markets, seems to have been vindicated, even if he did not get much recognition when the book was originally published. However, in spite of being a central an relevant author, many of his conclusions suffer from accepting an incorrect view of classical political economy, and ultimately his support for the mainstream (marginalist) theory of value.

He clearly believed, as did many, if not most, economists before the re-edition of Ricardo's works by Sraffa and his later rehabilitation of a version of the Labor Theory of Value (LTV), that classical authors were confused, and were essentially precursors of the neoclassical mainstream. He tells us:

"Apart from some special theories like that of rent, taxation, and foreign trade, where deep insights were gained, the theory consisted of the hopeless attempt to arrive at categorical conclusions about loosely defined terms purporting to explain the behavior of prices, the formation of incomes, the process of production, the influence of costs on prices, the level of profits, wages, and interest, most of which remained as obscure as before."

And there should be no doubt that to a great extent the mistakes of classical authors, in Polanyi's view, were associated with the LTV. He says just before the above passage that:

"Although Adam Smith had followed Locke’s false start on the labor origins of value, his sense of realism saved him from being consistent. Hence he had confused views on the elements of price, while justly insisting that no society can flourish, the members of which, in their great majority, are poor and miserable." [Italics added]

And it is also clear that he adhered to some vulgar version of the marginalist supply and demand story for value. Again in his words, from the his classic book, The Great Transformation:

"Economic value ensures the usefulness of the goods produced; it must exist prior to the decision to produce them; it is a seal set on the division of labor. Its source is human wants and scarcity." [Italics added]

In other words, relative value depends on demand (human wants) and their limited supply (scarcity). Given his background, and the mainstream authors he quotes, Polanyi basically believed in some version of marginalism, perhaps with Austrian undertones.

His bias in favor of neoclassical economics is also evident in his insistence that the beginning of capitalism* can be associated with the organization of the three markets that correspond to the factors of production, namely: labor, land and money (capital), and the implicit notion that the production is a linear process that goes from the factors to final output, in contrast with the classical view of a circular process, in which commodities where produced by means of commodities.

Polanyi was certainly sympathetic to Marx, but he clearly missed a lot, given the marginalist foundations of his analysis. He associated classical political economics with a naturalistic philosophy that tried to explain human behavior in terms of natural causes, and that imposed an extraneous logic to social relations. In view:

"naturalism haunted the science of man, and the reintegration of society into the human world became the persistently sought aim of the evolution of social thought. Marxian economics—in this line of argument—was an essentially unsuccessful attempt to achieve that aim, a failure due to Marx's too close adherence to Ricardo and the traditions of liberal economics."

So Marx wasn't a minor Ricardian, as Samuelson later famously put it (perhaps he was a major one for Polanyi), but his problem was the adherence to the Ricardian LTV.

I should note that Polanyi tends to think and judge classical and neoclassical economics from the point of view their economic policy prescriptions, and the idea of laissez faire, or what is referred to as liberalism in Europe. That is probably also the reason why Veblen coined the term neoclassical, which also gives the incorrect impression of continuity between both schools.

There is a lot that is valuable in Polanyi's analysis, but the problem is that he accepts the notion that prices are determined by supply and demand, and that implies that markets produce efficient outcomes in the marginalist sense of efficient allocation of resources (on the problems of the marginalist theory of value see this post on the capital debates). He does not seem to grasp that the classical notion of competition and long term equilibrium prices did not require optimality in the allocation of resources. Even if Polanyi is critical of the idea that in reality a pure market economy is stable, and even if he insists that free market policies led to a backlash from the losers that required a safety net to reduce the negative impact of market outcomes on society, it is still true that markets are about efficient allocation of resources in his view.

For classical political economists markets were an institutional framework for the reproduction of the material conditions of society, and for the process of accumulation. In the classical framework, equilibrium prices are not the ones that show the relative scarcity of goods and services on the basis of preferences, and limited resources. Normal (natural in Smith and Ricardo, production in Marx) prices are the ones needed to reproduce society. The overall state of preferences were taken as given, something determined by broad institutional and historical circumstances and not something to be formalized.

This matters exactly because the classical long term prices require that one distributive variable be determined beforehand. In other words, with real wages set at the subsistence level, something that was seen as historically and institutionally established in their time, the technical conditions of production (amounts of labor needed to produce, in the simplest version) were sufficient to determine normal prices. This view is actually perfectly compatible with Polanyi's notion of the embeddedness of markets, the idea that labor markets are social constructs and that rules, regulations and other institutional features are central for the creation of markets. In a sense, markets do not just appear out of thin air, in self-organizing fashion.

In other words, what Polanyi documents with this discussion of the expansion of the franchise in Britain in 1832, and the new Poor Laws established in 1834, is not the creation of the labor market as described by neoclassical theory (and that's exactly and incorrectly what he suggests). The institutional changes describe the full and final move from one set of regulations, still resulting from the more paternalistic system that came from pre-capitalist times, to a more punitive system for the working class. What was planned was not laissez faire in the labor market, but less protections to reduce the workers bargaining power. Workers resisted, but only much later, when their voice had a stronger political outlet (mostly with the rise of Labour), they could push back and regain some degree of bargaining power. Polanyi was partially correct, in saying that: "While laissez-faire economy was the product of deliberate State action, subsequent restrictions on laissez-faire started in a spontaneous way." However, it required taking over, to some degree, the State to bring about the Welfare State. Laissez-faire was planned, for sure, but planning was too.

Classical political economy actually allows one to understand that, since in the surplus approach there is no labor market that is regulated by supply and demand and determines both the real wage and the quantity of employment. Polanyi would have been under much stronger foundation if he understood the role of institutional and historical factors in classical political economy.** The reason that there was a backlash about laissez faire policies is that markets do not produce efficient allocation of resources, something Smith, Ricardo and Marx understood. Keynes' tried to explain why the neoclassical labor market theory was incorrect too. And here too Polanyi, writing just eight years after the publication of the General Theory, has nothing to say about it.

But as much as Polanyi neglected and misinterpreted the works of classical political economy, the same is true of heterodox groups that have brought back the ideas of the surplus approach. And heterodox economists should pay more attention to Polanyi's work and the idea of the embeddedness of markets on a broader social framework.

* To be precise he suggests approvingly that “the Reform Bill of 1832 and the Poor Law Amendment of 1834 were commonly regarded as the starting point of modern capitalism.” In other words, the labor market is at the center of his view of capitalism. Compare this with a Marxist discussion of modes of production that also puts labor relations at the center.

** Polanyi incorrectly suggests that Smith accepts the wage-fund doctrine, a precursor of supply and demand theories, which certainly was developed much later, with Stuart Mill, a transition author, that had already departed from Ricardian economics.

The New School for Social Research at 100: A view from the Econ. Dept.

From a late 1990s catalogue; Lance Taylor (center), and also in no particular order

and from what I can remember (Ellen Houston, Adalmir Marquetti, myself (with goaty

on the left side), Margaret Duncan, Josh Bivens and Carlos Bastos (Orozco Room)

The New School for Social Research was founded 100 years ago by a group of academics dissatisfied with the direction of American high education. Economics was central to the early history of the New School, and my brief, very incomplete, and certainly idiosyncratic historical account emphasizes the Economics Department of what used to be called the Graduate Faculty.

Thorstein Veblen, one of the founders, had written his famous Higher Learning in America, which in a sense is the original critique of the corporate university. The idea was to put learning at the center, and avoid the conventional trappings of universities, with no degrees provided to students. The foundations of the critical perspectives provided at the New School came from institutionalists (like Veblen), pragmatists, represented by another prominent founder, namely John Dewey, and revisionism in history, with Charles Beard as its main voice at the new institution. Many came from Columbia University and were dissatisfied with both institutions of higher education and the direction the country had taken, in particular with World War I. These were mostly anti-war, progressive social scientists.

Perhaps the key person at the inception of the New School was Alvin Johnson, a somewhat difficult to classify economist (Gonçalo Fonseca at the HET website suggests that he might be seen as Austrian), that has been almost completely forgotten. Johnson was the editor of the massive Encyclopaedia of the Social Sciences, later substituted by the International Encyclopedia of the Social Sciences (last edition under Sandy Darity, and I have two entries on Export Promotion and James Mill), which put him in contact with several economists around the world, many in Germany.

A group of scholars that he met as the editor of the encyclopedia was the basis for the so-called University in Exile, which eventually was the basis for the Graduate Faculty, the division that now still is called the New School for Social Research (while the whole is just The New School, if I do understand the naming changes at my alma mater). The most important and cohesive group of economists that arrived at the New School in 1933, and the following years, escaping persecution in Nazi Germany, were the ones related to the Kiel School, including Gerhard Colm (on Colm I co-authored this paper with Luca Fiorito), Adolph Lowe, Jacob Marschak, and Hans Neisser. In that group, Lowe, the mentor to Robert Heilbroner, was to be the more consequential for the New School.

The New School was not orthodox in its economic teaching, but the 1930s were a period of flux in the profession at any rate. The Keynesian Revolution was in course, and Keynes was acquainted with Johnson and the New School, as it can be seen in the letter he gave to H. G. Bab (see below; click to amplify). In that sense, while it is true that the place was somewhat unorthodox, given its origins and the historical period in question, that should not be exaggerated. Note that Marschak went on to be the head of the Cowles Commission, and a leading mainstream economist. While at the New School he supervised Franco Modigliani's doctoral thesis, which was the basis for his famous neoclassical synthesis paper of an ISLM model with rigid wages and for his Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.

The New School, more enjoyable and compatible people than at Columbia, for sure (click to enlarge)

I say this because there is a tendency to think of the New School as being always heterodox, and taking that term to have more or less a contemporary meaning (for what I mean about that go here; for a great and more in depth discussion see this post by Ingrid Kvangraven and Carolina Alves). Many others taught at the New School in this period, perhaps, worth mentioning is the case of Abba Lerner, the main author of the functional finance school (something that is at the core of Modern Money Theory, but is more restrictive and specific than MMT).

The Kiel School was what one could term eclectic. They certainly had roots on elements of the German Historical School, and readings of marginalist and non-marginalist authors, including Marxists. Gonçalo puts Tugan-Baranovsky as one of the influences on the Kiel School. Tugan, a "semi-critic of Marx" according to Schumpeter, argued that a disproportion between the investment and consumption goods sectors would lead to recurrent industrial crises, and that notion of structural imbalances was central for Kiel authors. Leontief was also connected to the Kiel School.

While many in the Kiel School were open to and used marginalist concepts, as in the case of institutionalists, not all were neoclassical, and Lowe's views arguably were the most clearly connected to the works of the old classical political economists. Ed Nell, in the appendix to Lowe's book The Path of Economic Growth compares it with Leontief, Von Neumann, and Sraffa, as being classically inspired. One can think of Ed's Transformational Growth research program as building on that tradition.

But it would be a stretch to suggest that Bob Heilbroner, Lowe's main disciple at the New School, and the next key person in the history of the Economics Department at the Graduate Faculty, was a follower of classical political economy. A cursory reading of his classic, The Worldly Philosophers, shows that his reading of Smith is perfectly compatible modern mainstream readings, which imply that Smith was a precursor of supply and demand theories. The chapter on Smith discusses the law of markets, but the labor theory of value only makes an appearance in the chapter on Marx, and to suggest that it was a deviation from Smith and Ricardo. The degree to which Heilbroner conflates classical and marginalist or neoclassical theory is clear in that he argues that the Walrasian circular-flow in Schumpeter's theory resembles Ricardo's stationary state. And in the discussion of Schumpeter's notion of profit he suggests, regarding the labor theory of value, that "everyone knew to be wrong and therefore did not have to be reckoned with."*

Further, his views on economic growth, as evidenced in his book on the economics history of the Unites States, were essentially that growth was supply-side constrained and dependent on technological innovation, in ways that seem to be closer to his Harvard undergraduate teacher, Joseph Schumpeter, than classical political economy authors (Smith had arguably a demand driven view of growth, while Ricardo most certainly didn't, and Marx is open to many different views; I'll keep that to another post). I emphasize this to show that even if he was unorthodox in many ways Bob was not necessarily what we would term heterodox in the modern sense of the word (even if taken loosely as not being neoclassical).** In my view, no clear heterodox bias existed up to the 1960s, in a department that had basically been under the shadow of three economists, Johnson, Lowe and Heilbroner. Note that this somewhat eclectic persistence of different approaches was more or less common in many departments at that time.

But the Johnson-Lowe-Heilbroner nexus provided the basis for the changes that shaped the department with the arrival of Ed Nell in the late 1960s. Ed had worked with Hicks at Oxford, and he was from early on critical of methodological individualism, something that is clear from his critique of the concept of the rational economic man. More importantly he was concerned with growth, and that led to a discussion of the theories of value and distribution (perhaps influenced by Hicks' Capital and Growth, which remains an important book), and was influenced by Sraffa's revival of classical political economy. It was after Ed arrived that a series of new hires, among them Stephen Hymer, Anwar Shaikh, and David Gordon, changed the department. Note that the late 1960s and early 1970s too is the period in which the economics profession segregates the heterodox groups, makes it harder for radicals to get tenure in conventional and prestigious departments (e.g. Sam Bowles at Harvard), and publishing requires the foundation of new journals (e.g Journal of Post Keynesian Economics, and the Cambridge Journal of Economics).

In my view, it is no coincidence that this is also when the change in the notion of equilibrium, as discussed by Garegnani, takes place (some discussion of that here). The point is that the capital debates had shown the limits of marginalist (neoclassical) economics, and the profession embraced what I have referred to as vulgar economics after that. The hiring of heterodox economists, critical of the mainstream in this period, and the sociology of academia, locked in heterodox hegemony at the Econ. Dept. of the Graduate Faculty.

Many other heterodox economists taught at the New School's Econ. Dept. from that point onwards. I might note Paul Sweezy, which if I'm not wrong was instrumental in making Bob Pollin choose the New School for his PhD, was among the teachers in the 1970s. And also many Sraffians like Piero Garegnani, John Eatwell, taught on a recurring basis, while many were visitors for shorter periods. Again, somewhat idiosyncratically, in my view it is the arrival of Lance Taylor in 1993 and a few years later of Duncan Foley that consolidated the persistence of the heterodoxy, and the type of heterodox department (with a mix of structural Keynesianism and Marxism), that the New School has today.

Perhaps, it is important to emphasize how limited this story is. There is a missing story about the role of David Gordon, who was also a key player in the department for many decades, and of Anwar Shaikh, that I always saw as somewhat of an influential outsider (maybe I'm wrong), even by the New School standards. And also the many other wonderful and creative heterodox economists that passed through the New School over the years. There is a question about the gender imbalances at the New School, and within heterodoxy itself, that I do not address. I'll explicitly avoid saying any additional names, since in this way I cannot be accused of forgetting someone (I'm leaving out a ton, including the many alumni that went on to remarkable careers). Hopefully this provides a window on how the New School became heterodox and why it remains so.

* It should be noted that Bob's book was published in 1953, a few years before the labor theory of value was rehabilitated by Sraffa's Production of Commodities.

** On a personal note, I remember talking to Bob on an interval of a conference organized by Ed Nell on functional finance, in 1997, I think, in which he argued that the Maastricht limits (3 per cent for deficits, and 60 per cent for debt) were reasonable measures to constrain the size of government. He was a liberal in an older sense of the word, perhaps.

Top blogs

Naked Keynesianism has been featured in the Top 100 Economics Blogs of 2019. I haven't been very active, and appreciate to be included in the company of much more interesting blogs. See all here.

Bernie and AOC are Functional Finance (and Socialists) but not necessarily MMT

Might not be MMT, but it isn't Socialism

So there has been a lot written on Modern Money Theory lately. There is this piece by The Economist, Jerry Epstein's paper, and Lance Taylor's one, more on the Democratic Socialist ideas than MMT per se (here). There was also this op-ed by Robert Shiller in the NYTimes, and the two posts by Tom Palley, that I reposted here on the blog. Finally, Christine Lagarde also commented on MMT during the World Bank/IMF Spring Meetings.

I can and I will not comment again on my views on this. As I said before, I'm a fellow traveller in the sense that I do agree with MMTeers on functional finance (even though Randy Wray, at the Easterns, presenting Stephany Kelton's slides suggested that functional finance was a late addition to MMT,  coming from Matt Forstater and Stephany in the 1990s; my take on that here, where I say that Ed Nell is the likely source), endogenous money, and with minor disagreements on the origins of modern money (by which I mean early transitions to capitalism) on some version of Chartalism. I also, noticed that I depart on certain tendencies to believe that capital mobility and flexible exchange rates make MMT applicable to developing countries, and about taxation (on the latter, I was criticized, and received both emails and tweets suggesting I misrepresented MMTeers views on taxes).

Here is where I think the dual nature of MMT as a theoretical school derived from Minsky and some strands of Post Keynesian economics* and a political movement connected to progressive parts of the Democratic Party becomes relevant. The thing is that MMT has been now associated with Democratic Socialism, with Bernie Sanders and Alexandria Ocasio-Cortéz (AOC). Stephany after all was and is Bernie's advisor, and he has embraced certain proposals beyond what I would call a pop-functional finance stance on fiscal policy. For example, his job guarantee proposal** (again I hope he wins, and I do hope Stephany plays an important role in a Bernie administration; one can hope).

However, it's worth noticing two things that are relevant in this more political context. First, Warren Mosler has posted his presentation at the New School (Mosler's slide pictured above) in which he defends the elimination of personal and corporate income taxes, and sales taxes (here). Mosler is in many ways the more public face of the non-academic face of MMT. Note that Warren plays a crucial role in the political movement associated with MMT. Also, Randy noted in this piece that he was "'a bit disappointed' that Ocasio-Cortez connected tax hikes to the Green New Deal." And no, please, I do not need to be lectured on how causality goes from spending to taxes (as much as from investment to savings; same effective demand logic). The point is that even if taxes are not necessarily to fund spending, taxes do allow for important changes in the economy.

And the way one taxes is as important for functional finance as the way one spends. Sure the limits what can be done are political. In that respect I should say that functional finance suggests that the limits to fiscal policy, beyond the productive capacity (which might be endogenous and demand driven, and hence difficult to reach unless the economy is growing really fast), are essentially political. But exactly for that reason how one taxes, and is a central political question.

Taxes on the wealthy are central for social democratic (Democratic Socialism) policies. At any rate, this establishes in my view were I depart from MMT, which would be on the willingness to tax the rich. I'm not for eliminating income taxes (I'm happy to reduce sales taxes on some things, but increasing on others), and I would be in favor of a wealth tax too. And I'm happy that a higher tax on the well to do is discussed and tied to a popular cause like the Green New Deal (I was for that back in 2012). It should not be a surprise then that MMT finds support in Wall Street, since they would certainly like no personal or corporate income tax.

* I assume that is correct; Randy said in that roundtable mentioned above that they were kicked out of post-Keynesianism, and they didn't leave. I assume that explains the renaming MMT, which I never quite understood. See this old post in which I was surprised about the new label, which I associated back then to endogenous money.

** Here I should note that while I'm not against a job guarantee (JG), I have nothing against regular fiscal spending, like, for example, infrastructure spending to get the economy going. Again, on the panel, when I asked Randy, suggesting that Wynne (Godley) had asked the same in the past (according to my recollections), he said that conventional fiscal policy (what he calls pump priming) was inflationary, and the JG would be better. I'm even less afraid than MMTeers on demand inflation, it seems.

Interview on Central Bank's exchange rate policy in Argentina

My interview with Nicolás Fiorentino and Cecilia Camarano from Led.fm yesterday (in Spanish) on the Argentinian situation and the new central bank policy.

I basically suggest that the new policy to control exchange rates using the IMF loans (with IMF authorization) might control the exchange rate, but will finance essentially capital flight, and tries to interfere with the elections later this year.

Structural Change in China and India: External Sustainability and the Middle-Income Trap

Shouldn't listen to the IMF anyway

New working paper co-authored with Suranjana Nabar-Bhaduri, and published by the Political Economy Research Institute (PERI) from UMass-Amherst. From the abstract:

This paper focuses on the different development strategies of China and India, particularly regarding the role of manufacturing and services for long-run productivity growth, external competitiveness and financial fragility. The findings appear to support the argument that productivity improvements in manufacturing drive productivity improvements in other sectors. They also substantiate previous findings that the Indian services-led growth trajectory has had limited success in transferring surplus labor from agriculture to other sectors. Furthermore, the trajectories have affected the export performances of the two countries with the Indian trade balance and current account revealing persistent deficits, compared to China's surpluses. The paper also argues that the way in which India has sought to sustain these deficits entails elements of financial fragility, and that the Chinese struggles with the internationalization of the renminbi also imply a possibility of financial instability.

Download paper here.

Review of Keynesian Economics on the economics of negative interest rates

We are delighted to announce the publication of Volume 7, Issue 2 of the Review of Keynesian Economics. We invite you to visit the website where you can read all the article abstracts and download two free articles.

Over the last several years economic recovery has led to some monetary tightening in the United States, but it is likely that a future recession will restore the issue of negative interest rates to the fore of policy debate. That is also true for Europe where there has been a weaker recovery in the euro zone and the European Central Bank still has a zero interest rate. In many ways, as participants in this symposium suggest, negative interest rate policy (NIRP) is a throwback to pre-Keynesian ideas according to which interest rates can adjust private spending to a level compatible with full employment.

This issue of ROKE presents a symposium on negative interest rates. The papers provide the elements for a critical analysis of the theory and practice of NIRP, with the aim of enriching the Keynesian literature on alternative monetary policy. We hope you enjoy them.

Thomas Palley, Esteban Pérez Caldentey & Matías Vernengo
Co-Editors

Some unpleasant Keynesian arithmetic

By Thomas I. Palley (Guest Blogger)

The last decade has witnessed a significant revival of belief in the efficacy of fiscal policy and mainstream economics is now reverting to the standard positions of mid-1970s Keynesianism. On the coattails of that revival, increased attention is being given to the doctrine of Modern Money Theory (MMT) which makes exaggerated claims about the economic costs and capability of money-financed fiscal policy. MMT proponents are now asserting society can enjoy a range of large government spending programs for free via money financed deficits, which has made it very popular with progressive policy advocates. This paper examines MMT’s assertion and rejects the claim that the US can enjoy a massive permanent free program spree that does not cause inflation. As has long been known by Keynesians, in a static economy money financed deficits can be used to finance programs when the economy is away from the full employment – inflation boundary. However, that window will be temporary to the extent that those deficits drive the economy to full employment. Since the programs are permanent they have to be paid for with taxes or they will generate inflation. That is the economic logic behind the unpleasant Keynesian arithmetic.

Read rest here.

What’s Wrong With Modern Money Theory (MMT): A Critical Primer

By Thomas I. Palley (guest blogger)

Recently, there has been a burst of interest in modern money theory (MMT). The essential claim of MMT is sovereign currency issuing governments do not need taxes or bonds to finance government spending and are financially unconstrained. MMT rests on a triad of arguments concerning: (i) the macroeconomics of money financed budget deficits, (ii) the employer of last resort or job guarantee program, and (iii) the history of money. This primer analyzes that triad and shows each element involves suspect economic arguments. That leads MMT to underestimate the economic costs and exaggerate the capabilities of money financed fiscal policy. MMT’s analytic shortcomings render it poor economics. However, its simplistic printing press economics is proving a popular political polemic, countering the equally simplistic and wrong-headed household economics of neoliberal austerity polemic.

Read rest here.