Saturday, March 30, 2013

The Bad Deal

By James K. Galbraith

Political news travels slowly, and in my casual observation progressive Europeans have held on to the myth of Barack Obama as a good man much longer than most progressive Americans did. How could a young black American from Chicago and Harvard be otherwise?

Over here reality has been evident for a while, thanks to the President's pattern of giving way to banks, lobbies, Republicans and right-wing extremists. Whether your prime interest is housing, health care, peace, justice, jobs or climate change, if you are an activist in America you have known for a long time that this President is not your friend.

Still, even on these shores disillusion often took a mildly forgiving form. The President was a “disappointment.” He was weak. He had “bad negotiating skills.” He had a tendency to “deal with hostage-takers,” to “surrender.” All of this fed the image of a man with a noble spirit, a good heart, the best intentions, but trapped by limited ability and the relentless and reckless determination of his foes.
Obama is no progressive

Read the rest here.

Thursday, March 28, 2013

Brazilian Keynesian Association Conference


Call for Papers

The Brazilian Keynesian Association (AKB) is organizing its 6th International Conference which will be held in the 14-16 August 2013, in Vitoria, Brazil, at the Federal University of Espirito Santo. The Conference will have two special sessions: ‘The future of the Keynesianism: in honour of Prof Mario Possas’ and ‘Inflation targeting and the criticism on the New Macroeconomic Consensus’, with participation of Philip Arestis, Gilberto Tadeu Lima, among other ones, as special guests. There will be a mini-course on ‘Keynes, Kalecki and Schumpeter: a necessary bridge?”, with Mario Possas. We would like to invite you to submit papers to our Conference. The submissions shall be broadly related to the following topics:
International Economics and Finance.
Financial System and Financing of the Economy.
Macroeconomics and Economic Policies.
Macroeconomic Regime Alternatives.
Economic Growth and Income Distribution.
Industrial Organization and the Behaviour of the Mega-Corporations.
Modern History.
i. Submission dates: until May 20, 2013 (deadline),
ii. The papers can be written in English, Spanish or Portuguese.
iv. The author should send the file with the paper (with his/her name and affiliation) to AKB email:;
v. Each author cannot submit more than 2 (two) papers;
vi. The papers must have the following characteristics: the name of the author and his/her affiliation; they must be written in Microsoft Office Word; the maximum number of pages is 25, abstract included, the space between lines is simple and the font and the size of letters have to be, respectively, Times New Roman and 12 pt;
vii. The cost for transportation is at the expense of participants;
viii. The papers of the conference will be available in both the AKB website and in the CD congress (Proceedings of the VI Conference of AKB).

The Scientific Committee is André Modenesi (UFRJ), Alain Herscovici (UFES) and Giuliano Contento de Oliveira (UNICAMP). Additional details about the Conference can will appear in the AKB website: Or just send an email to us:

The costs of man made catastrophes

Graph below shows some evidence on the increasing costs of man made catastrophes. Note that some of the weather ones are also associated to global warming and, thus, are man made too (h/t The Economist).
Although the data is for a relatively short period, the increase is clear and significant. This is another reason why State spending to prevent these kind of disasters is called for.

Michael Pettis on the Chinese Growth Model

I have been slow to respond some of the comments in previous posts, and have not been able to post on some topics I wanted. One topic that I left out, but is worth mentioning, is about an interesting post on the Chinese Growth Model that Michael Pettis had a while ago. He compares the Chinese model to the Hamiltonean American System. He suggests that the three keys to the 'model' are: protection, domestic investment (public?) and national finance.

Note that this suggests an active role for the State, which is often not recognized in conventional accounts of US development. Nate Cline has dealt with some of those issues in his PhD dissertation (first and second essays in particular). He says: "that the developmental orientation of the state emerges as fundamental in U.S. history. Most importantly, the federal government’s role in shaping and establishing financial markets and a common money of account allowed the U.S. to escape external constraints on growth related to the capital account." Note that this is more a post-bellum phenomenon than one might think, even if industrialization in the North was already firm in the ante-bellum period.

Pettis limits his argument on Trade to infant industry protection. I have a preference for a discussion of managed trade, rather than 'free' trade (see here). Also, he seems relatively critical of Chinese public investment, suggesting that there is significant misallocation of resources. He also seems to think that financial markets are not efficient. And that's why he tends to be skeptical about the sustainability of the process of growth in China.

I tend to be less concerned with strength of the financial sector, which is fundamentally based on debt in domestic currency, and, hence, relatively free from default risk. I also think that public investment and the expansion of wages (in domestic currency; they are low by international standards) are central for domestic demand expansion, and have been behind the absorption of rural surplus labor into the industrial/services sectors in the urban areas. As a result, a certain amount of 'inefficiency' is more than tolerable. My concerns are much more related to the role of foreign capital, as noted by Peter Nolan (see here).

Monday, March 25, 2013

IS-LM is bad economics no matter what Krugman says

"There is nothing in the post-General Theory writings of Keynes that suggests him considering Hicks’s IS-LM anywhere near a faithful rendering of his thought. In Keynes’s canonical statement of the essence of his theory in the 1937 QJE-article there is nothing to even suggest that Keynes would have thought the existence of a Keynes-Hicks-IS-LM-theory anything but pure nonsense. So of course there can’t be any “vindication for the whole enterprise of Keynes/Hicks macroeconomic theory” – simply because “Keynes/Hicks” never existed..." (see rest here)

Sunday, March 24, 2013

Investment in infrastructure is a no brainer

NYTimes comic strip that gets economics right, which is more than you can say about most pundits and a good chunk of the profession.

Saturday, March 23, 2013

Dude seriously, it's the accelerator

Once again I get to discuss on whether investment depends on 'animal spirits', Schumpeterian entrepreneurialism or other confidence fairies. The evidence, as I noted here before, is quite overwhelming in favor of a simple and logical empirical regularity, namely: the accelerator. Below the last results from the Fair Model.
KK is the capital stock, RBA is the bond rate, and Y is income. Note that the coefficient on bond interests is insignificant, both statistically and in economic terms. What drives the change in the capital stock are the contemporaneous and lagged changes in the levels of income (demand). This is not only in the data, but is also quite logical. It says that firms increase their capital stock when demand increases (note that firms have always some spare capacity, so they are looking for permanent increases in demand). If there is no increasing demand there is no need to invest.

Not a surprising result, unless you for some other reason need the Superman theory of investment, in which the firm, the entrepreneur, the job creator is the hero that will save humanity from its mediocrity [have you been reading Ayn Rand again?].

PS: Ray Fair model uses the old Cowles Commission approach to macroeconometrics, which is much better than the new Dynamic Stochastic General Equilibrium (DSGE) models, that rely more heavily on calibration rather than estimation. He discusses the issue here.

Friday, March 22, 2013

Natural Resource Nationalism and Fiscal Revenues

One of the relevant points made by Amico and Fiorito for the case of Argentina, that apply to many countries in the region, is the increase in fiscal revenue that was associated to the higher national participation in the gains from exports of primary goods. This has been, in part, associated to the left of center governments and the so-called Natural Resource Nationalism. The table below shows the evidence.

It can be seen that, with the exception of Mexico and Venezuela, where State revenue from oil was already high, in all other countries there was a significant increase in State revenues. Governments have appropriated primary export earnings and turned them into fiscal resources by taking a share of operating earnings, either through public enterprises (which included nationalization in some cases) or through equity holdings, more stringent requirements on the payments of royalties, and by levying taxes on export earnings.

Read more on the fiscal situation in Latin America in ECLAC's report here. For more on Natural Resource Nationalism read the following paper by Carlos Medeiros (h/t Revista Circus).

Thursday, March 21, 2013

The mysterious case of the optimism about the relation between depreciation and growth

By Fabián Amico and Alejandro Fiorito* (Guest Bloggers)

The current debate about economic growth in Argentina, has accepted as dogma that the fast rate of economic growth between 2003 and 2011 had as its primary cause the devaluation in 2002, and the maintenance of a Sustainable and Stable Competitive Real Exchange Rate (SSCRER). Several economists attribute the current deceleration of economic activity to the real exchange rate appreciation.

The most analyzed economic variable is the real wage in dollars: between 2009 and 2011 the official exchange rate was devalued in 12.6%, while nominal wages in the private sector increased by 68%. In other words, the dollar value of wages increased almost 50%. In 2012 this was partially reversed.

How would a more competitive (devalued) real exchange rate stimulate growth? First and foremost it would lead to higher exports and lower imports, and then it would stimulate investment, and would generate more output and employment. The implicit assumption is that all the other components of demand would not change with the devaluation. But that is highly unlikely.

For at least 60 years it has well known that in Argentina devaluation have been contractionary. All available empirical evidence suggests that the sensibility of external trade (exports and imports alike) to variations of the exchange rate is extremely low. Yet, the inflationary and regressive on income distribution (associated to lower real wages) is considerably stronger, and, as a result, the global effect of a depreciation is contractionary. Worse even when devaluation is accompanied by fiscal austerity. The reduction of the level of economic activity has a depressing effect on investment compounding the negative effect.

Some economists suggest that the way in which devaluation generates an increasing demand for labor domestically – for a given level of activity – is related to the reduction in the relative price of the labor ‘factor’ with respect to capital. In other words, if a persistent reduction in the relative price of wages to capital goods (in dollars) were to take place, then the level of employment would increase irrespective of the rate of growth of the economy.

The devaluation of the exchange rate is, in this case, analogous to the neoclassical logic according to which a downwardly flexible real wage would eliminate the unemployment (and why wouldn’t one continue to devalue until full employment is reached?). But, in general, there is more rigid (technically) relation between capital and labor; ergo, even if relative prices change, the employment to output relation may not change significantly.

Surely, a SSCRER might have a positive role – together with other policies – in the maintenance of the external sustainability of the long term growth strategy to the extent that it contributes to export diversification and facilitates import substitution. Yet, this is a different proposition than suggesting a simple positive relation between real devaluation and growth: it really implies an exchange rate policy that is nuanced enough to maintain competitiveness, while not reducing real wages, which are the real locomotive pushing Argentinean economic growth. In sum, a ‘horizontal’ devaluation (without any type of differentiation in types of exchange rates or compensations for losers) produces an improvement in the profitability of exporters, a small effect on the volume of exports, and a contraction in the level of economic activity.

It is fairly clear that Argentina has a structural tendency to external disequilibrium between imports and exports, associated to the over dependency on primary exports, the low diversification of exports, and the composition of imports (which are entirely determined by domestic investment, and not by the real exchange rate). Domestic growth leads to increasing investment and this requires higher demand for imports of capital and intermediary goods, while exports grow at a lower pace. In other words, the propensity to import of the economy is incompatible with the countries’ export platform.

The counterpart to these arguments is that, contrary to what many defend, real exchange appreciation is expansionary, since is the other side of the coin associated with higher real wages. Note that in 2008 several economists already argued that the real appreciation was a matter of concern and that growth would stall immediately. Several argued that the time of ‘Chinese’ growth rates was over. Yet, after the 2009 crisis, in a context in which the real exchange rate had already achieved the late 1990s levels, the economy grew at record levels (9.2% in 2010, and 8.9% in 2011), while the industrial output grew even more (9.8% in 2010, and 11% in 2011). Something similar happened in Brazil and the result was, in both countries, the result of expansionary fiscal policy.

Clearly, other than the increase in real wages, it was the increasingly expansionary fiscal policy that explains the Argentinean recovery since 2003. This was for the most part unacknowledged since the government had a significant fiscal surplus since 2003, suggesting incorrectly that fiscal policy was contractionary. However, the most important component in the fiscal surplus was the increase in the tax revenues levied on exports. The government was able to use the revenues of the taxes on exports to pay the obligations on the external debt re-structured in 2005, increasing significantly its fiscal space. At the same time, the main categories of primary spending (public investment, social transfers, and wages) grew at a fast pace.

Nonetheless, there are deeper reasons for looking down on the role of fiscal policy. There is an almost complete consensus that expansionary policies in the context of an economy with an external restriction are by definition unsustainable. Instead of this ‘populist’ policies, the argument goes, it is suggested that a SCRER would be a more ‘serious’ alternative. However, the Argentinean economy, even if the main restriction to growth is given by its capacity to import, grows – as it did in the past, and as most medium and large countries do – pushed by the expansion of domestic demand. It is a structural feature, and not a policy option.

Another aspect – more circumstantial – that led to the misplaced optimism on the effectiveness of a nominal devaluation to become a real one, was the very low wage resistance exhibited by the working class back in 2002 (in the context high unemployment and labor flexibility). In the past, nobody would have accepted that proposition, since a maxi-devaluation would easily translate into a virulent wage-exchange rate spiral, with unpredictable results. And in this respect, it is possible that now, with lower unemployment, Argentina is back to its traditional situation.

The last aspect that favored the optimist views about the relation between the SSCRER and growth is the uncritical acceptance that the import substitution strategies, in general, and the processes of industrialization led by the State, in particular, were exhausted and disreputable. In this context, exchange rate policy looked like a suitable alternative in a world in which the State should have limited intervention in the economy and the process of development. Put simply, exchange rate policy (horizontal) is market friendly. Sadly, the effects of exchange rate policy are not the ones suggested by this optimistic new macroeconomic developmental consensus.

In sum, the feasible development strategies for Argentina (and for Latin America) do not simply change with the whims of fashion. The attempt to promote development by getting the prices right (the exchange rate in this case), is a vain utopia, that might have undesired consequences. The more it takes to return to the old wisdom and realism of the old Structuralists, the longer it will take to begin the practical reconstruction of a viable development strategy. This would necessarily require the intervention of the State in the difficult tasks of inducing selective import substitution, diversification of exports, modernization of infrastructure, and policies that promote technological change, within the context of high and sustained growth levels. It is not possible to leave all of these tasks to be performed by the change of one single variable.

* Researcher at CEFID-AR and Professor at UNLU, respectively.

PS: Originally published in Spanish in El Economista here, and also here. A similar view was discussed here before.

Galbraith on the Great Depression and the 'Great Recession'

A new interview with Jamie Galbraith (and also Leo Panitch), on the possibilities of a New 'New Deal' (part II here). Not much of chance, by the way. Part of the story is that the New Deal was fundamental in institution building, and these very institutions saved us from a crisis similar to the Depression, creating less of a perceived need for continuous reform.

In Jamie's words:
"So an entire system was built that had never previously existed and gave us an economy with a very strong presence of the federal government. And ultimately, as the New Deal progressed, that was extended to very large social insurance programs, which also had never previously existed, Social Security on a continental scale being the lead thing in the 1930s. And then added to that in the 1960s we had the work of the New Frontier, and especially of the Great Society, which extended this especially into health care, where we got Medicare, we got Medicaid, we got a major public presence in what became an increasingly important part of the economy, particularly as the older population grew relative to the rest. So that was the situation that we faced in 2008--a very different climate of expectations and a much stronger frame of public institutions to deal with the problems, and capable of dealing with them often in ways which were practically automatic, in the sense that tax revenues dropped, public spending went up, and people's incomes were not going to collapse the way they did in between 1930 and 1933. So all of that was very much to the benefit of the world in which we live today.
The problem that we have, I think, is that it also deprived us of a sense of urgency and a sense of the possibility of need for major reforms. So we in effect fooled ourselves into believing that the economy would recover in full, returning us to the pre-2008 levels of prosperity, even pre-2000 levels of prosperity, without or with very minor or temporary interventions. We did in fact face a system-threatening--in many ways system-destroying crisis, but we faced it without the sense that it was such. And so we did much less, and what we did in the last five years was designed to be temporary. It was in anticipation of a return to normal which hasn't occurred. And so we have many people who are now becoming to realize a bit late that their expectations are going to be very badly disappointed.
And now we have a rather difficult moment in which we, I think, recognize that we didn't do what we should have done, and yet we obviously do not have the political--we're not in a moment where the political mobilization exists or the climate of crisis exists that permits us actually to move in the right direction--quite the contrary, where it looks as though we're moving distinctly in the wrong direction and will continue to do so for the indefinite future."
In other words, we can expect the slow recovery to continue, and even if we avoid the worst in terms of dismantling of the New Deal institutions (something the GOP continues to push), there is very little, if any, chance of a New New Deal.

Wednesday, March 20, 2013

A Shackled Revolution? The Bubble Act and Financial Regulation in 18th Century England

New Working Paper by Bill McColloch, which refutes anti-Keynesian (crowding out) views on the Industrial Revolution (IR). From the abstract:

"Revisionist estimates of growth rates during the British industrial revolution, though largely successful in presenting a more modest picture of Britain’s ‘take-off’ prior to the 1830s, have also posed fresh analytical difficulties for champions of the new economic history. If 18th-century Britain was witness to a diffuse explosion of ‘useful knowledge,’ why did aggregate growth rates or industrial output growth rates not more closely shadow the pace of technological change? In effort to explain this paradox, Peter Temin and Hans-Joachim Voth have claimed that a few key institutional restrictions on financial markets – namely the Bubble Act, and tightening of usury laws in 1714 – served to amplify the "crowding out" impact of government borrowing. Against this vision, the present paper contends that the adverse impact of financial regulation and state borrowing in 18th century Britain has been greatly overstated. To this end, the paper first briefly outlines the historical context in which the Bubble Act emerged, before turning to survey the existing diversity of perspectives on the Act’s lasting impact. It is then argued that there is little evidence to support the view that the Bubble Act significantly restricted firms’ access to capital. Following this, it is suggested that the “crowding out” model, theoretical shortcomings aside, is largely inapplicable to 18th century Britain. The savings-constrained vision of British capital markets significantly downplays the extent to which the Bank of England, though founded as an institution to manage the public debt, provided the entire financial system with liquidity in the 18th century."

The paper by Temin and Voth is here. Their recently published book is here.

Crafts and Harley's re-interpretation of the IR in Britain, alluded to in the text, is available here (subscription required). The classic book on the British IR that Crafts and Harley try to supersede is by Deane and Cole (here). A discussion of the two views by Temin is available here.

On whether the British government had a role in financing the IR, it is worth remembering Pressnell's (subscription required) words, for whom:
"Amongst the half-truths of economic history is the generalization that British Governments did not finance the Industrial Revolution. That public financial aid was not a regular and conscious process cannot be doubted; equally, it is indisputable that Government was not distinguished during the eighteenth and early nineteenth centuries by the provision of financial facilities commensurate with a period of economic expansion. In practice, however, a considerable volume of public money swelled the funds of private bankers, and in this indirect fashion helped to fructify private enterprise."
Pressnell suggests that country bankers were often tax collectors, and closely related to industrial activities. The incredible growth of public debt, to 260% of GDP by the end of the Napoleonic Wars, and the increase in government revenue to pay for debt service, implied a signiifcant increase in liquidity which is associated to the financing of the IR.

PS: Newton (pictured above) lost his pants in the South Sea Bubble, and also was famous for getting the exchange rate between gold and silver wrong (he was the Master of the Mint), leading to hoarding of silver, and the beggining of an effective Gold Standard in Britain.

Tuesday, March 19, 2013

Thomas Tooke and the Gibson Paradox

The Gibson Paradox is the name that Keynes suggested for a particular empirical regularity, namely: the positive correlation between the rate of interest and the price level. He had read about in a series of articles in the Banker's Magazine by A. H. Gibson, hence the name. Keynes suggested in his Treatise on Money that the Gibson Paradox was "one of the most completely established empirical facts in the whole field of quantitative economics." The graph below is from Gibson's 1926 piece.
However, the correlation was first noted by Thomas Tooke (for more see Pivetti's entry in the New Palgrave; subscription required), the leader of the Banking School, in the 19th century, and author of the massive and underappreciated History of Prices ( Vols. 1, 2, 3, 4, 5 and 6 available on-line).

In that book, and contrary to Ricardo and the Bullionist authors (the precursors of the Currency School), he argued that inflation during the Napoleonic Wars (1793-1814) was not caused by money printing by the Bank of England (bank notes were inconvertible from 1797 to 1821), but the result of bad crops and higher prices of agricultural goods, import restrictions associated to the blockade and higher import prices, and exchange rate depreciation that added to the costs of imported goods. The last cause he cites is associated to what Keynes called the Gibson Paradox (p. 347):
"A higher rate of interest, in consequence of the absorption by the war loans of a considerable proportion of the savings of individuals; such higher rate of interest constituting an increased cost of production."
In other words, the rate of interest enters the costs of production [some heterodox authors, like Lance Taylor, have referred to this as the Cavallo-Patman effect]. Note that there is no particular paradox in the effect, which according to Lawrence Klein [yes the same that won the Sveriges Riksbank Prize, aka the Nobel] is still doing fine (and yes also needs subscription; sorry).

The reason that the correlation seemed like a paradox to Keynes is because he thought along marginalist lines and assumed that a higher rate of interest would lead to lower investment, and hence reduce demand pressures on prices. He expected a negative correlation between the two variables. Wicksell noted that if the economy was hit by a real shock (to the marginal productivity of capital, for example) then you would have a bank rate of interest lower than the new and higher natural rate of interest (implying higher remuneration for the more productive capital), and the excess investment associated to this situation would lead to higher prices. Eventually, banks would note that the bank rate was too low, and would raise it, leading to an increase in the rate of interest together with higher prices (a positive correlation). Of course Wicksell and the natural rate cannot survive the capital critique. For more on Wicksell go here.

IMF's New View on Capital Controls

By Kevin P. Gallagher and Jose Antonio Ocampo

"Weeks before the spring meetings of the International Monetary Fund (IMF) in Washington next month, GDAE Senior Researcher Kevin P. Gallagher and Colombia University economist Jose Antonio Ocampo offer a critical analysis of the IMF's new view on capital account liberalization and the management of capital flows. The article, “The IMF’s New View on Capital Controls,” appears in India's Economic and Political Weekly (see here).

In the 1970s the International Monetary Fund became an advocate of capital account liberalization, and in 1997 it tried to change its Articles of Agreement to include capital account convertibility among its mandates. In contrast, the IMF embraced in December 2012 a new "institutional view" on this issue. While it remains wedded to eventual financial liberalization, it now acknowledges that free movement of capital rests on a weak intellectual foundation. Gallagher and Ocampo claim that this is a step in the right direction, but that the new institutional view still suffers from a number of shortcomings that will need to be addressed in national capitals and in other international fora.

Although a significant step forward, the new institutional view is still out of step with country experience and economic thinking in many respects. In particular, it continues to insist on eventual capital market liberalization despite the lack of evidence supporting it, is too narrow concerning the sanctioned use of capital account regulations on inflows and outflows, and does not deal with the implications for multilateral aspects of regulating cross-border finance."

Monday, March 18, 2013

South-South Trade

The Human Development Report (see here p. 46), which was the topic of a recent post, has a great graph on the huge expansion of South-South trade, when compared to North-South and North-North trade, in the last decade.
As one can see, the share of North-South trade in total world trade has expanded at a relatively slow pace, while the share of South-South trade has exploded. The obvious counterpart is the collapse of North-North trade.

I had a teacher that used to say that if someone asked you a question about globalization, and you didn't know the answer, just say China, and you'll be right a third of the times. So let's say China explains what is going on in South-South trade. [China entered the World Trade Organization (WTO) in 2001].

Troika Kleptocracy

From the Guardian (see here):

"The imposition of a levy on savers in Cypriot banks marks a new turn in the European crisis. Savings of over €100,000 will be subject to a 10% tax, and those under €100,000 one of 6.7%, although it's reported these levels may change. The raid has been instructed by the "Troika" – the European commission, the IMF and the European Central Bank – as part of a characteristic "take it or leave it" ultimatum to the Cypriot government. The parliament in Nicosia is being pressed to ratify the deal with the threat that without it there will be no bailout funds and the ECB will withdraw all liquidity support to the stricken banks.

The Troika and its supporters have justified the levy by arguing that the state could not support the debt burden of a bank bailout. But this simply means the debt burden has been transferred from the banks, where it properly belongs, to households, who had no part in their lending decisions.

But it is foolish of the Troika to assume that its confiscation of Cypriot savings will have no international implications. Savers all across Europe will look on in horror, and are bound to wonder whether it could happen in their own countries. It is entirely possible they will respond by shifting their savings into state or postal savings banks at the very least, even if outright bank runs are avoided. If this happens on sufficient scale, it could further undermine the fragile banking system in a number of countries.

To prevent Troika raids, deposits need to be put into protective custody to preserve both savings and the domestic banking sector. For anti-austerity governments, these funds could then be used to support state-led investment and reverse the European depression."

Read the full piece here.

Sunday, March 17, 2013

Human Development Index: now and then

The new Human Development Report is out. It compares the 2012 Human Development Index (HDI) with the initial one, from 1990. Norway at the top, and Congo at the bottom of the list. As it turns out, only two countries, Zimbabwe and Lesotho, have seen their index scores fall. The chart below shows several countries (h/t The Economist).
The additional red dot, is the Inequality adjusted HDI (IHDI). Note also that in the case of Western European countries (Norway, Germany, Sweden, France, Italy, Britain) the IHDI is in between the 1990 and the 2012 HDI. So adjusted to inequality the HDI now is better than in 1990. That is not the case for the US. For the methodology for including inequality in the HDI go here.

The largest improvements in the index are Afghnistan (ravaged by a 10 year war with Russia when it started to be measured; and with significant transfers from the US now), China, Iran, India, and Egypt. Left of center countries in Latin America did reasonably well in the last 10 years.

The report suggests that: "the state of affairs in 2013 may appear as a tale of two worlds: a resurgent South—most visibly countries such as China and India, where there is much human development progress, growth appears to remain robust and the prospects for poverty reduction are encouraging—and a North in crisis—where austerity policies and the absence of economic growth are imposing hardship on millions of unemployed people and people deprived of benefits as social compacts come under intense pressure." Further, it argues that the number one driver of improvement in the Global South is a: "strong, proactive and responsible state [that] develops policies for both public and private sectors", since "governments can nurture industries that would not otherwise emerge."

PS: The HDI was developed by Amartya Sen, who also got the Sveriges Riksbank Prize. His work on the capabilities approach is based on social welfare theory and, while critical of the idea of rationality, in some aspects it remains founded in mainstream analysis. For a discussion of his critique of the mainstream and its relation to the one based on the surplus approach see the references provided by Robert Vienneau here. I remain skeptical about the compatibility of Sen's analysis with the old and forgotten classical tradition.

Saturday, March 16, 2013

Growing Indebtedness

I have posted here on growing indebtedness and financialization. The table below comes from Duménil and Lévy's recent book The Crisis of Neoliberalism.
As they note (p. 104) in regard to the table, one can see: "the rise of the debts of all US sectors as a percentage of GDP. This growth remained moderate after World War II, from 126 percent in 1952 to 155 percent in 1980, and exploded during the neoliberal decades, up to 353 percent in 2008." Yet, between 1952 and 1980 public sector debt fell from 68 to 37, and the moderate increase was all in private debt. Further, note the explosion of the financial sector debt increasing six-fold in the three decades after 1980. Over the whole period, the financial sector debt as a share of GDP grew by almost 40 times. In their words again: "the indebtedness of the financial sector is a new and spectacular phenomenon, typical of the neoliberal decades."

Friday, March 15, 2013

The dollar has NOT depreciated since the 1970s?

Mike Norman had an intriguing graph a while ago (see here) showing that if one uses the broad, rather than the major currencies, index for the US trade weighted exchange rate, then the dollar did not depreciate (which I prefer to go down, since if you define the exchange rate as the domestic price of foreign currency, as most countries do, up is actually a depreciation). I decided to explore the issue. I reproduce the graph below, putting both indexes together.
Note that these are nominal exchange rates. The broad index, as noted by Mike, actually only depreciates in the 2000s, and overall has not depreciated.

The difference between the two rates are the countries that are included in the respective indexes. In the broad index there are 26 countries (one is not a country really, the Euro-area), while the major currencies index includes only 7 currencies, which are traded widely outside of their home country, namely: the euro, Canadian dollar, Japanese yen, British pound, Swiss franc, Australian dollar, and Swedish krona. The broad index includes developing countries like Argentina, Brazil, Chile, China, India, Mexico, Russia, South Korea and Venezuela. An explanation of how the indexes are built can be found here. The weights used now for calculating the indexes are here.

Note that rates of inflation in developing countries, particularly in the 1970s and 1980s, when the two exchange rates diverge widely, were considerably higher than the rates of inflation (which were at historical high levels, but much lower) in developed countries and the US. So what happens when we look at the real indexes, broad and major currencies?
As it can be seen, the real indexes are quite similar, and by all measures the dollar has depreciated in real terms from the early 1970s, with two big swings associated to the Reagan and Clinton (asset bubble driven) booms. The point is that in countries with higher inflation than the US depreciated their currencies in nominal terms significantly (in part that explains their higher inflation rates), and in nominal terms the US currency appreciated, but once inflation is taken into consideration the index looks very much like the major currencies one, with an overall depreciation of about 20% or so in real terms.

Note that this does NOT threaten the international position of the dollar, and the US does not need to depreciate its currency to solve a current account problem. And in fact if you look at the last crisis, which started in the US, you still had an appreciation associated to a run to the dollar. For more on that see this paper.

Thursday, March 14, 2013

Conflict, Inflation and Income Distribution

Fears of inflation have been misplaced, since there is little evidence that without wage resistance, which depends on the bargaining position of workers, there could be systematic inflation pressures. Last time that workers tried to push back and increase wages was in the 1970s, in which labor’s stronger position, and employers’ resistance to workers’ demands, resulted in high levels of industrial conflict.

The graph below shows the number of strikes, using LABORSTA data, and inflation, from the FRED database, and shows that the decrease in inflation has been correlated with lower levels of work stoppages.
That’s is why higher commodity prices in the 1970s, including the oil shocks, led to high inflation back then, but has had a marginal impact this time around. This also suggests that the low inflationary pressures in recent times – Bernanke’s Great Moderation – have less to do with Central Bank ‘credible’ policies than with the attack on unions and workers’ rights. It also suggests that there is little risk of inflation related to the expansionary monetary policies of the Fed.

In that sense, it is not the central bank, but the evolution of another institution that is crucial to understand the recent macroeconomic environment that we live in, namely: unions. The next graph shows the correlation of the number of strikes with the unionization rate in the United States since 1974. Again there seems to be a fairly direct relation between the decline in the unionization rate and the reduction in the degree of conflict in society as measured by strikes. The unionization rate has fallen from more than 30% in the 1960s, to around 11% now. And the attacks on unions, by Republican governors, and the push for Right to Work Legislation, which is basically a law that restricts the ability to form unions, are still very much with us.
The price for the stability gained on the back of unions is that inequality has been increasing at a fast pace. With decreasing bargaining power workers’ have been unable to press on for higher wages and these have stagnated. The result is that the share of wages in Gross Domestic Income (GDI) has fallen from around 54% in the early 1970s to close to 44% now. A 10% decrease in the share that workers take home, as seen in the figure below. The counter part of the decrease in the share of workers’ is the increase in the so-called Net Operating Surplus, which includes profits, interest, rents and other payments to capital. Wealth inequality is even worse (see this video here).

Income inequality is a problem not just from a fairness point of view. For one thing inequality is part of the reason why workers and their families have been driven towards increasing levels of indebtedness over the years, and which are in part responsible for the higher levels of volatility that the economy has to face. More importantly inequality is central to understand why the recoveries from the last recessions have been relatively slow. Lower levels of income have translated into lower levels of consumption, and a slower recovery.
So if income distribution is to become an important issue of the next few years, and I do hope it does, we need not only to discuss tax issues, like higher income tax rates for the wealthy, and an elimination of the payroll tax earnings cap, or increasing the minimum wage, but also to promote a renewed effort to protect workers’ rights and unions. Unions and workers’ right should be as high in the Democratic agenda, as gender and gay rights, immigration reform and environmental issues, if they want to promote a more civilized society.

PS: Originally published at Triple Crisis here, but because I sent the wrong file, it was incomplete.

Sraffa and the Marshallian system

(Sraffa circa 1976)

G. L. S. Shackle argues in The Years of High Theory that ‘there began in the mid-1920s an immense creative spasm, lasting for fourteen years until the Second World War, and yielding six or seven major innovations of theory, which together have completely altered the orientation and character of economics’ (Shackle, 1967, p. 5). However, by 1967, the two most important developments of this period—Keynes’s principle of effective demand and Sraffa’s criticism of the marginalist theory of value—were rapidly fading from the main corpus of mainstream theory.

The relative ease with which neoclassical economics reasserted its main conclusions is, in fact, explained by Shackle’s account of those years. First, Sraffa’s critique of the Marshallian theory of value is seen only as a step in the development of the theories of imperfect competition by Joan Robinson and Edward Chamberlin. Second, Keynes’s General Theory is seen as stating that unemployment results from the existence of uncertainty and irrational expectations (Shackle, 1967, p. 129). Both developments can be interpreted as asserting that market imperfections render neoclassical theory, although internally coherent, irrelevant for the analysis of the real world.

Also Shackle’s failure in 1967 — well after the publication of Production of Commodities — to acknowledge the importance of the revival of classical political economy to the debates of the 1930s represents a serious inadequacy of his interpretation of ‘the years of high theory’.

Before getting into Sraffa's critique of Marshall, it is worth noticing that Sraffa came to economics via monetary economics, like Ricardo and Keynes. His dissertation for the Law Degree, L’Inflazione Monetaria in Italia Durante e Dopo la Guerra (subscription required), dealt with postwar inflation and the return to the Gold Standard, the same topic of Keynes’s Tract on Monetary Reform. According to Eatwell and Panico (subscription required), in the analysis of the asymmetric effects of inflation and deflation Sraffa reveals the heterodox character of his position, more akin with the works of the classical authors and Marx than the conventional marginalist analysis. The notion that social conflicts and monetary factors determine the normal real wage was part of Sraffa’s analysis, although several elements of his analysis were still conventional, e.g. the acceptance of the Quantity Theory and of the Purchasing Power Parity theory.

Sraffa’s criticism of the Marshallian theory of supply represents an analogous situation, in the sense that some elements of the conventional marginalist views were still present. Marshall’s or Sraffa’s dilemma (which appears in Sraffa's 1926 paper) refers to the incompatibility between increasing returns and perfect competition. It is a long period problem. Sraffa’s critique can be summarized in the following way. First, rising costs derive from diminishing returns to substitution, and, therefore, in the general case where there are no fixed factors, increasing costs do not seem to exist. Secondly, increasing returns are incompatible with perfect competition. In the long period, when the firm cannot experience marginal costs arising from the existence of some fixed input, there can be no diminishing returns. Replication is always possible, except for the case of indivisibilities. In addition, Sraffa showed that increasing returns to scale are inconsistent with the notion of perfect competition.

In the case of increasing returns, the average cost is decreasing, implying that the marginal cost is below average variable cost, and, hence, there is no infinite, non-zero solution for the profit maximization problem. In other words, there is a tendency for the firm to expand to infinite size. Sraffa’s argument proves the failure of perfectly competitive assumptions to determine any equilibrium of the individual firm. Two alternatives are opened by Sraffa’s critique of Marshallian theory. If it is not legitimate to treat average cost as either increasing or decreasing within the framework of perfect competition, we are left with the result that the only satisfactory assumption is that of constant returns. On the other hand, ‘everyday experience shows that a very large number of undertakings work under conditions of individual diminishing costs’ (Sraffa, 1926, p. 543), which suggests that we should instead abandon the notion of perfect competition.

Sraffa considered the imperfect competition approach to be the only logical way to develop the theory of value along Marshallian lines. However, he showed no inclination to pursue this solution, and he appears to have already been working toward the revival of the classical approach. The origins of this project can be traced back to his early draft of the opening propositions of the Production of Commodities, which he asked Keynes to read in 1928 (Sraffa, 1960, p. vi). The reasons for not pursuing imperfect competition were never quite explained by Sraffa, but are fairly reasonable to infer (note that in Cambridge it was two of his students, Richard Kahn and Joan Robinson, that developed the imperfect competition theory).

Note that in order to obtain partial equilibrium, which is what the Marshallian model presumes, one must assume that prices in a particular industry are not affected by and do not affect the prices in other industries. Hence, externalities have to be internal to the industry, since otherwise production in one sector would affect the prices in other industries [perfect competition in partial equilibrium, the U-shaped cost curves and the equilibrium at the minimum with marginal cost equal marginal revenue, require also that externalities are external to the firm, since if they weren't the firm would became a monopolist; of course externalities that are internal to an industry and external to firms are an empty set]. That seems to be a dead end. Sraffa was already interested in the determination of long term prices. By this time, the summer of 1927 when he was preparing his ‘Lectures on Advanced Value Theory’ that he gave from 1928 until 1930, it was already clear to him that he needed to start from classical preocupation of determining relative prices and one of the distributive variables (the rate of profits or wages) strictly in material terms, that is, the quantities of labor and commodities needed to produce commodities.

For further on Sraffa's critique of Marshall see Gary Mongiovi's paper here (subscription required). For a general critique of Shackle's stance in the history of 'the years of high theory' read this one. For the implications of Sraffa's 1960 book for economics go to this old post (yes on the capital debates!).

Wednesday, March 13, 2013

Human Drivers of Environmental Change

Within the social sciences there is a growing consensus that human social processes, in a dialectical complex interrelationship with the environment, are the primary drivers of destructive ecological change. A broadly shared framework of idiosyncratic ideas and understandings has been formulated to assess the degree to which the genus, and the species, of spatial practices in, the capitalist world-system has ensued prodigious modifications of the global ecosystem. Palpable cognitive perceptions, along with a priori assumptions, of the causes and outcomes concerning the bio-synthetical facets of social organization have been articulated—amplifying intelligible explanations and empirical testing of what perceived biophysical characteristics contribute to environmental transformations.

Competing paradigms regarding human-environment interactions have been constructed. Despite their intellectual fragmentation, these perspectives are materialist in essence, since they elucidate the degree to which the historically specific mode of production, capitalism, depending on its scale in a macro-comparative context, produces world-systemic biospheric transmutations. There is a presupposition that with endless accumulation of capital for the production and realization of surplus value (profits) by way of material inputs, extracted from the physical world, with increasing returns to scale, sets in motion a concomitant process of ecological degradation that cannot be decoupled-the income effect of ‘Jevons Paradox.' The effect, it is purported, depends on the particular geographical dimensions of spatial productive practice, like peripheral industrialization and resource extraction with concomitant core consumption and innovation, producing anthropogenic methane emissions, resting on an acceptance of a so-called fundamental 4th law of thermodynamics.

It is requisite to note, however, that there is no distinct 4th law of thermodynamics that the entire physics profession has missed for 100 years, and has somehow been rediscovered, e.g. by Nicholas Georgescu-Roegen, and unfortunately has since been suppressed. The inherent assumptions concerning the totality of the capitalist mode of production and concomitant environmental degradation are unexamined; yet, they influence the following prevailing theories in environmental sociology:
· Ecological modernization theory, which assumes that the genus of capitalist accumulation spawns an environmental Kuznets curve as an evolutionary universal for any country undergoing economic development
· Treadmill of destruction theory, which assumes increasing levels of pollution due to the aggrandizement of military operations,
· Neo-Malthusian structural ecology theory, which assumes natural supply constraints in the face of expanding capital accumulation,
· Ecological exchange theory, which assumes an environmental load displacement as core countries externalize their pollution costs to the periphery via transnational production.
Parametric specifications, regardless of theoretical induction, and explicit clarifications of the environmental research question are primary. As Tom Murphy on “Elusive Entropy” points out (see here):
An unfortunate conflation of the concepts of entropy and disorder has resulted in widespread misunderstanding of what thermodynamic entropy actually means. And if you want to invoke the gravitas of the Second Law of Thermodynamics, you’d better make darned sure you’re talking about thermodynamic entropy—whose connection to order is not as strong as you might be led to believe.
[…] The resulting duplicate use of the term “entropy” in both thermodynamic and informational contexts has created an unfortunate degree of confusion. While they share some properties and mathematical relationships, only one is bound to obey the Second Law of Thermodynamics (can you guess which one?). But this does not stop folks from invoking entropy as a trump card in arguments—usually unchallenged.
Environmental sociology is prone to developing superior understandings into the degree to which human social processes affect the natural world, which, in turn, shape human social processes. Yet, to escape habitual modes of thought and expression and establish un-darkened analytical articulation, it is pertinent that such prevailing paradigms undergo refinement, to enhance their generalizability to the dynamics of capitalist development and its complex interaction with the natural world; in my view, they do not pay sufficient attention to the role of effective demand and the relationship to distribution under the capitalist mode of production (see Sraffian Environmentalism).

Monday, March 11, 2013

ECB anti-inflation policy effective in Germany?

Roberto Frenkel published an op-ed in an Argentine newspaper (here in Spanish) in which he says that while anti-inflation policy by the ECB in Spain was ineffective, but "the same anti inflation policy of the European Central Bank was effective in Germany. There it had an important component of cooperation. The Bundesbank participates in the negotiation of wage increases with the unions." The idea that the ECB has been effective in Germany is peculiar, to say the least.

One of the most criticized elements of German policy, at least by heterodox authors like Jörg Bibow for example, is the wage restraint and fiscal austerity. As he says (p. 20):
"With domestic demand persistently 'sick,' thanks to unconditional austerity and wage restraint, exports were Germany’s lifeline and sole—albeit cyclical—engine of growth. Protracted stagnation in Germany meant a correspondingly easier 'one-size-fits-all' ECB stance for Euroland, far too easy for the periphery, where bubbles were nourished as a result."
In fact, as the picture below (h/t Franklin Serrano) shows, real wages in Germany have not expanded with productivity and have been stagnant in the euro era, in fact falling a little bit.

Note also that Germany, in spite of its relative success, has grown over the whole euro period less than the US. A peculiar notion of successful anti-inflationary policy. Frenkel seems to suggest that Argentina may still not need to resort to the sort of stabilization (which he calls heroic) based on a nominal exchange rate anchor, but can do with normal fiscal and monetary restraint. In his view, inflation is always and in every place a matter of excess demand.

It misses the point that fiscal austerity in Germany and in Europe has had the role of keeping the working class demands in line. In other words, the very same real wage stagnation that you see above. I guess in Argentina the 'heterodox' thing to do now, if you believe Frenkel, is the old IMF/Monetarist solution, big devaluation cum fiscal and monetary contraction!

Saturday, March 9, 2013

Gotta love empirical evidence supporting

The proposition that data has a liberal bias [ht/, of course to Matias for the notion, and to Chris Hayes (Up with Chris Hayes) for the image. Link to research paper here]. In this graph, the blue line is conservatism as measured by the AEI House of Representatives Conservative Rating, and, drum roll please, the red line is actual, self-described, conservative level of, gasp, conservative voters. Clearly way more liberal, and increasingly so, than the Cipolla-idiots they elect.

How a Post-Keynesian Economist Became a Poster Boy for Controversy

Friday, March 8, 2013

Reasonable liberals and conservatives, unreasonable economics

The ambiguously liberal/conservative duo, Joe Scarborough and Jeff Sachs, self-denominated reasonable (what Krugman refers to as 'serious' people), suggest that we need austerity in their WAPO op-ed. Forget for a second the inconsistencies of Scarborough, the conservative in the duo. What I find incredible is that Sachs continues to push the fiction that he is a liberal in the American sense of the word, meaning progressive or lefty, rather than a right wing neoliberal.

Let's not forget that Jeff Sachs is Dr. Shock Therapy,* a doctrine that suggested that budget deficits should be cut to control inflation, and that deregulated markets would promote growth and development, and that he applied in Bolivia, Poland and Russia, among other countries. The collapse and failure in these countries foreshadowed the failures of the so-called Washington Consensus. Forget also the institutional problems Sachs had regarding his advice in Russia [note that he did not have the same legal problems that led his collegue "Andrei Shleifer, whose misbehavior cost Harvard something like $25 million in damages, plus another $10 million or $15 million in legal fees," according to David Warsh].

The really incredible thing is that they try to argue, on the basis, of their reasonable principles, that we need austerity. They put Dick Cheney's and the right wing supply-siders that sometimes say that deficits do not matter, in their view because the supply side effects of higher productivity (entrepreneurship) brought by lower taxes would produce growth and higher revenue, together with Krugman and other Keynesians that suggest with full support of the evidence that spending does have positive effects on the level of activity. Note that in the second case Keynesians, and even further Functional Finance people (following Abba Lerner) would not suggest that deficits do not matter. What they suggest is that the way you spend and tax matters. So deficits could be bad or good, depending on what causes them. Higher deficits caused by tax cuts for the wealthy and to support wars of choice abroad, are not the same that deficits to reconstruct infrastructure and promote full employment.

But the incredible thing is that they (Scarborough and Sachs) try to claim that Keynes would have been against fiscal expansion now. Yes, Keynes was indeed for some fiscal restraint, but that was during the war, when deficits were above 20%, and not in the middle of the recovery.

For more on Sachs long and strange career read the following article by Doug Henwood at the Left Business Observer.

* He actually gave the Tanner Lecture at the University of Utah on Poland's shock therapy. I was not there in 1994, I should add. By the way, at that time he actually still thought that shock therapy was a success story. Oh well.

Esping-Anderson's Welfare-State Typology, Social Stratification, and Unintended Consequences

Debates on the welfare state have centered on the degrees to which certain policy measures ensue reductions in poverty and inequality. Contrary to popular belief, however, welfare state institutions have empirically shown to be less than ideal. Using Esping-Anderson’s Welfare-Type Typology, we examine the degree to which welfare states have shaped social stratification, with special attention to the role of gender as a social location affecting social welfare outcomes. We also assess what other social forces are crucial, particularly regarding the nature of gender relations.

The ‘liberal’ welfare-state is constituted by a high degree of ‘commodification,' in which basic access to material necessities are determined by the extent to which an individual participates in the labor market and is rewarded by labor-market outcomes.  The ideology is that a high degree of state interference in the market economy, such that various human needs, like access to health care, are socialized, not only causes price distortions that lead to economic downturns, but undermines the effectiveness of the economy to achieve allocational equity and efficiency. The favored means of providing state-supported services to the body-politic are by way of means-tested entitlements.

The empirical evidence suggests that irrespective of policy intention, classicism is induced.  Social stratification is marked by the manifestation of a desperate minority forced to rely on minimal forms of public assistance, which inadvertently undermines their bargaining power in the labor market, making inequality, and thus poverty, a self-fulfilling prophesy (Korpi & Palme, 1998; Orloff 1993). This is specifically exemplified by countries like the United States, a liberal welfare-state, which offers meager assistance for women to escape the confines of patriarchy within the household (Stier & Lewin-Epstien, 2001). The net effect is a ‘two-tier’ welfare system, in which social assistance programs serve a predominantly female clientele (Orloff, 1993, 1998).

The social-democratic ‘encompassing’ welfare-regime is marked by universal social insurance schemes to the economically active population. The philosophical underpinning is that rights of citizenship preclude basic access to state provided assistance programs, to ensure a modicum of security and protection from the uncertainty and insecurity that stem from the vagaries of the capitalist marketplace. According to empirical evidence social democracies, like that of Sweden, ensure poverty traps are greatly eviscerated (Korpi & Palme, 1998).

It is prudent, however, not to let the optimism cloud one’s judgement. Social democracies, like that of Sweden, despite curbing poverty, in other matters enhance social stratification. Given the likelihood of women to not be continuously employed over the course of the life cycle, due to the effects of motherhood and the discriminatory effects of patriarchy within the household, this has implications for the types of jobs women are likely of receiving (Orloff, 1993, Rubin & Lewin-Epstein, 2001).  In Sweden, for example, women are relegated to employments in the public-sector, by which they receive less earnings and have less organized forms of collective bargaining with the state than men in the private sector; “this has the gendered the debate over public versus private provision of welfare services” (Orloff, 1993).

The corporatist model of the welfare state is centered on the tenet that the state should maintain a high level of occupational segmentation and socioeconomic differentiation. The eligibility for welfare-services is dependent on the specific category of employment in the private sector. To some degree, poverty is alleviated to those who have the opportunity to be employed in an industry deemed 'worthy' of social protection. The outcome, however, is a reproduction of social inequality along socioeconomic distinctions among different categories of citizens (Korpi & Palme, 1998).

Furthermore, the under the corporatist model the state supports a traditional division of labor between the genders, both normatively and institutionally. The state expects a reproduction of the so-called ‘traditional’ family, with the male breadwinner the sole provider for all family members. The state may intervene when the family succumbs to economic precariousness, but the overwhelming perceivance is that women should be relegated to the responsibilities of house-holding, fostering social outcomes that make women dependents on the family, and thus on males, for sustenance (Rubin & Lewin-Epstein, 2001).

Concerning social forces, other than the welfare-state itself, that shape social stratification, it is pertinent to take note of the empirical evidence that women, especially mothers, suffer reduced earnings when they seek gainful employment (Budig & England, 2001). The implication is that women, especially mothers, will have less bargaining power within household to escape the confines of patriarchy. In this sense, not only is social stratification reproduced in the public sphere, but is also maximized in the private sphere. In the household women become socially dependent on their spouses, which, in turn, induces women who are financially dependent on their spouses to succumb to unequal domestic responsibilities.

By way of conclusion, it is necessary to emphasize that although the intended effect of welfare-state institutions is inherently egalitarian, the inconsistencies make such optimism a bit suspect. It is important to be contextual, institutionally specific, and historically contingent in making assessments on whether welfare-states achieve desired goals, and it is requisite that one pay close attention to how entrenched cultural characteristics and social perceptions adversely shape the character of social organization.


Esping-Anderson, G. 1999. Social Foundation of Post-industrial Society. Oxford: University Press.

Orloff, A. 1996. "Gender in the Welfare State." Annual Review of Sociology 22:51-78.

Orloff, A. 1993. “Gender and the social rights of citizenship: The comparative analysis of gender relations and welfare states.” American Sociological Review 58: 303-328.

Stier, H., Lewin-Epstein, N. & Braun, M. 2001. “Welfare Regimes, Family-Supportive Policies, and Women's Employment Along the Life-Course.” American Journal of Sociology 106: 1731-1760.

Thursday, March 7, 2013

Neoliberal Theory of Society

Neoliberalism has been one of the most discussed topics of the 21st century. In many respects, the concept has been used as a ubiquitous catchphrase conveying a sense fundamental transformation of various dimensions of social life. It is espoused that given the intensification of integration, through the proliferation of capital mobility and the aggrandizement of transnational corporations (TNC’s), countries are forced into ‘prisoner’s dilemma’ type situations in which the capacity for progressive reform along Keynesian lines is limited, if nonexistent. The assumption is that the capacity is strained to  sustain welfare-state institutions. This culturally hegemonic social construction is nothing but an ideological mask; the foregone conclusion is a self-fulfilling mythology. An excellent paper that expounds this is Simon Clarke's 'The Neoliberal Theory of Society" (see here).

In general, neoliberals contend that financial liberalization and privatization guarantee the most efficient utilization of capital by freeing up the market mechanism for long term sustainable growth, bringing convergence in development across countries.  Through the Washington Consensus and the institutionalization of neoliberal economic doctrine via the co-ordination of the World Bank, IMF and the US treasury department, measures across the globe, however, has resulted in the majority of the world’s population being denied the human right of commanding the productive resources necessary for sustaining adequate standards of living. Social outcomes like distributive justice, gender equity, basic access to socially acceptable housing, nutritious food, education, freedom from poverty and discrimination, and social inclusion have been far from reached. 

Neoliberalism propels governments to adopt policies aimed at maintaining credibility in financial markets for the attraction and retainment of short-term capital. The recipe for disaster is fiscal restraint, tight monetary policy, and the protection of high interest rates to prevent inflationary pressures from undermining the value of real return on financial assets. Macroeconomic policy is supposed to be designed in such a way that the interests of those who own financial assets (wealthy households) are prioritized over those who are forced to sell their labor power for sustenance.  As a result, the trigger threat of capital fight significantly limits the space for attention to social welfare to be embedded. 

Interestingly, given already present gender inequalities in labour markets and unequal power relationships within the household, neoliberalism forces women to assume greater responsibilities in cushioning families from economic insecurity, which has had the unintended consequence of pushing them into the informal sector of employment, maximizing susceptibility to egregious labor rights violations and physical abuse.

In response to the widespread social dislocation caused by neoliberal dogma, the Post-Washington consensus has initiated a new outlook under the rubric of ‘New Institutional Economics' (NIE).  NIE  proposes the wider role of government to guarantee the conditions for markets to in fact work as they supposedly should through the promotion of market-friendly civil societies and the encouraging of a democratic political culture. The Post-Washington consensus, like the Washington consensus, however, still promotes highly regressive macroeconomic policy. The only real difference is the facilitation of appropriate assessments, and the proliferation of that pathetic euphemism 'social capital', rather than forced upon structural adjustments, such that the institutions that do support free trade, liberalization, and deregulation are implanted such that disproportionate effects on the poor do not egregiously materialize. In the final instance, however, this is just window-washing. 

For an excellent paper by Ben Fine (see here).

Property rights and the Industrial Revolution

I have discussed here a few times (herehere and here, for example; last one by Cesaratto) the role of institutions in the process of economic development. Within the mainstream the dominant view is that property rights are the essential institution for promoting growth. I only now came across the excellent paper by Julian Hoppit.* He says:
"Such views of the interrelated importance of property and the rule of law have led to major interpretations of the interplay of Britain’s economic, social and political histories, including that secure property rights were a vital foundation for the first industrial revolution. Yet property was often heavily taxed, frequently expropriated and, exceptionally, eradicated through redefinition. Such vulnerabilities did not diminish after the Glorious Revolution, they increased—mainly because parliament now met annually, had greater sovereign power than earlier monarchs and legislated prolifically regarding property. After 1688, Britain’s economic precocity rested less on the enhanced ‘security’ of property in any general sense of the word, much more on respect for parliament’s authority and its willingness to allow property to be alienated, most usually by particular interests claiming to act for the public or wider good. At times this required the reversal of commitments made only a generation earlier, raising doubts about central government’s credibility. Taken together, these uncertainties over property rights were sufficient for some to question whether property had a sound theoretical basis at all.
The scale of that expropriation was such, and the consequences so profound, as to undermine an important thesis that property rights became more secure after the Glorious Revolution, developed in a notable essay by Douglass North and Barry Weingast and now conventional amongst some ‘new institutional economists’."
Hoppit looks at the extensive expropriations in financial markets, after the South Sea Bubble, in heritable jurisdictions (offices granted by the Crown), and in the property of slaves. Very little is left of the new institutional argument.

* Julian Hoppit in "Compulsion, Compensation and Property Rights in Britain, 1688-1833," Past and Present, No. 210, Feb. 2011 (here; subscription required).

Public vs private debt

I was teaching about deficits and debt this last week. If you know me and follow this blog, you'd know that I always emphasize the impor...