The End of Endless Growth?

In my assigned role as the (anti) Thomas Robert Bannister (Malthus), I thought I would return to the blog after a far-too-long hiatus with this post to share recent work. Note that this work is the other main area of research beyond my dissertation interest of the role of energy revolutions in economic history. I'll return to that one given recent posts here, but for now:

This work asks many questions, the fundamental one being do we really need to radically change behaviours to attain zero growth, or, what do we really mean by zero growth?

The conditional answer is that our world can achieve zero total growth (in the expected lifetimes of some of us) while still having per-capita GDP growth. The key, wearing my anti-Malthus hat, is population-conditional. To introduce the topic, here is a figure from my model that shows GDP levels peak at about 2080. I think that is a very radical outcome, with many implications. It is based on several forecasts, including the current UN low population forecast.

The only other forecast I'll mention for now is that the per-capita real GDP increases through the forecast period. The second-largest caveat is the large forecast error bands; I'll simply note that at least I show them. Most climate models (of which this is a member) eschew error estimates. I can do so because I use empirical forecasting methods.

So, peak GDP levels in 2080 with continuing real per-capita output growth (forever). A surprising result certainly to me. The largest caveat in this method is the population curve you believe we are on. I'll discuss that in a future post. For now, just enjoy that a (credible?) model exists that allows the zero-gowth crowd and the lift-the-poor crowd to coexist on the same model path.

I will monitor questions. This will be my EEA talk; just a heads-up for those who wish to stockpile (potatoes and other) ammunition.

Lars P. Syll On How to Get Away With Scientific Fraud With Economics Textbooks

By Lars P. Syll

As is well-known, Keynes used to criticize the more traditional economics for making the fallacy of composition, which basically consists of the false belief that the whole is nothing but the sum of its parts. Keynes argued that in the society and in the economy this was not the case, and that a fortiori an adequate analysis of society and economy couldn’t proceed by just adding up the acts and decisions of individuals. The whole is more than a sum of parts. This fact shows up already when orthodox – neoclassical – economics tries to argue for the existence of The Law of Demand – when the price of a commodity falls, the demand for it will increase – on the aggregate. Although it may be said that one succeeds in establishing The Law for single individuals it soon turned out – in the Sonnenschein-Mantel-Debreu theorem firmly established already in 1976 – that it wasn’t possible to extend The Law of Demand to apply on the market level, unless one made ridiculously unrealistic assumptions such as individuals all having homothetic preferences – which actually implies that all individuals have identical preferences.

This could only be conceivable if there was in essence only one actor – the (in)famous representative actor. So, yes, it was possible to generalize The Law of Demand – as long as we assumed that on the aggregate level there was only one commodity and one actor. What generalization! Does this sound reasonable? Of course not. This is pure nonsense!

Read rest here.

James Galbraith Lectures Peter Schiff About Fiat Money

A part of the video was previously posted here.

Marie Duggan on Steven Kates and the role of History of Economic Thought

Marie has reviewed Kates' recent book on the role of history of economic thought in what he correctly sees as a crisis in the profession. She tells us:

Steven Kates warns us that if the history of economic thought (HET) leaves the field of economics, economics will lose a good bit of its theoretical heart (p. 27). He makes this argument against two opposing straw men. The first is those who define an economist as someone who can apply sophisticated econometric techniques to data. The other is the view among HET practitioners that since HET has been shunted aside within economics by mathematics, the wise make allies with historians. He views this latter as dangerous to economics as a discipline: “The core issue is whether the subject area of the history of economic thought adds to the study of economics. The question is not whether there are a thousand other uses of HET” (p. 67). 

This book acts as a wake-up call that practitioners in HET may have an honorable role to play in reversing the decline of theory in our profession. That’s a big task, and Kates certainly has the fighting spirit.

Read the whole review here.

More on The Sociology of Development - Reposted by Hampton Institute

More on The Sociology of Development: Towards A Re-articulation of Dependency Theory see here. For the original post see here.

Crooks, Liars, Idiots, and Plutocrats: Again on the effects of the Debt Ceiling Limit

A modified and updated version of the previous post has been published in the last number of Dollars & Sense Magazine here. The main addition is a discussion of the 'solution' to the last crisis, and a very brief discussion of the brewing storm for early next year.

The Default Prevention Act of 2013, included in the continuing resolution, reinstated government funding at pre-shutdown levels through January 15, 2014, and authorized suspension of the debt limit through February 7, 2014, at which point we would be basically in the same situation we were in October. Under the agreement reached to end the shutdown and to avoid breaching the debt-ceiling limit, the House of Representatives and the Senate agreed to hold negotiations to reach an accord by December 13 on a plan for fiscal policy for the next ten years.

This is not very different from the previous debt-ceiling crisis in 2011, when the so-called “Super Committee” was charged with finding $1.5 trillion in savings over a ten-year period, but eventually failed to reach an agreement. That triggered, in early 2013, the infamous “sequestration,” cuts of discretionary spending totaling around $1.2 trillion over the same period. Note that, as for the Super Committee and the previous Bowles-Simpson National Commission on Fiscal Responsibility and Reform, the terms of any accord by the members of the Budget Panel led by Senator Patty Murray (D-WA) and Representative Paul Ryan (R-WI) (who were members of the Super Committee) would imply further “fiscal adjustment.” The main disagreements are that Democrats would like to see targeted spending cuts, and to increase revenue by closing tax loopholes for corporations and wealthy individuals, while Republicans would not want any tax increases, and demand cuts to entitlement spending. The attempt at bipartisanship did not go all that well last time, and chances are that it will fail again.

Note all of this is functional and is being used to maintain austerity policies in the US.

Paul Davidson and the good old days for workers

Letter from Paul published in The Economist edition of November 2nd.

* SIR – “Labour pains” (November 2nd) pointed out that the share of wages in national income has fallen after being nearly constant for decades after the second world war. During the post-war decades the middle class prospered because of the full-employment policies started by Franklin Roosevelt and continued by both Democratic and Republican presidents and Conservative and Labour governments in Britain.

In this period the growth of union power, enshrined in legislation and policies, pursued the sharing of monopoly rents and profits of corporations with their workers. By the 1970s, however, the seeds were sown for the beginning of the end of middle-class prosperity. The anti-union policies of Ronald Reagan and Margaret Thatcher made it socially and politically popular to see unions as the villains in the economy. This was quickly supplemented by firms outsourcing to foreign countries where an hour’s worth of labour was paid a much lower real wage.

But now, a new threat is growing that will further hollow out the middle class and make even more significant differences in the distribution between the top 1-2% and the rest of society. This threat is automation. You correctly indicate that policymakers should think about broadening capital ownership as a way of boosting income to workers and restoring a prosperous middle class.

For a creative approach to restoring middle-class prosperity, I recommend the work of Professor Robert Ashford in the forthcoming issue of the Journal of Post Keynesian Economics called “Beyond Austerity and Stimulus: Democratising Capital Acquisition With the Earnings of Capital As a Means of Sustainable Growth”. Professor Ashford proposes a capital-ownership broadening policy that big companies adopt to produce enhanced earnings for their employees, customers, and other poor and middle class people; enhanced corporate profit and growth; reduced need for welfare dependence; and enhanced sovereign creditworthiness.

Paul Davidson
Editor
Journal of Post Keynesian Economics
Boynton, Florida

You can see this letter and others here.

Lars P. Syll: Krugman dismisses heterodox economics students

By Lars P. Syll

Paul Krugman today rides out — like his brother in arms, Simon Wren-Lewis — to defend mainstream economics. According to Krugman, yours truly and others of that ilk are wrong in blaming mainstream economics for not being relevant and not being able to foresee the crisis. To Krugman there is nothing wrong with “standard theory” and “economics textbooks.” If only policy makers and economists stick to “standard economic analysis” everything would be just fine. I’ll be dipped! If there’s anything the last five years have shown us, it is that economists have gone astray in their shed of tools. Krugman’s “standard theory” — neoclassical economics – has contributed to causing todays’s economic crisis rather than to solving it. [...] So now all you young economics students that want to see a real change in economics and the way it’s taught — now you know where you have Krugman & Co. If you really want something other than the same old neoclassical catechism, if you really don’t want to be force-fed with neoclassical mumbo jumbo, you have to look elsewhere.

Read the rest here.

The deep causes of the Great Divergence: or why China fell behind

In the last post, I suggested that Kenneth Chase's explanation of why China invented, but did not pursue the development of gunpowder and guns to its ultimate consequences, could be seen as the very deep cause of the so-called Big Divergence, i.e. of the rise to dominance by Western Europe. Chase explains the lack of interest in the development of firearms in China as the result of geographical conditions and how they affected warfare. He argues that two types of warfare developed after the invention of firearms.

"Where there were technologically advanced agrarianate societies that were not threatened by steppe or desert nomads, we find the combination of firearms and pikemen, with an emphasis upon infantry (western Europe, Japan). Where there were technologically advanced agrarianate societies that were threatened by steppe or desert nomads, we find the combination of firearms and wagons, with an emphasis upon cavalry (eastern Europe, the Middle East, India, north China)."

From a geographical point of view Chase divides Eurasia in three regions. The Arid Zone, which includes those areas that supported pastoral nomads, the Inner Zone including the areas that were directly threatened by pastoral nomads, principally eastern Europe, the Middle East, India, and China, and the Outer Zone that was not directly threatened by pastoral nomads, principally Western Europe and Japan, as shown in his map below.

In a sense, this is a more sophisticated geographical argument than the one put forward by Jared Diamond in Guns, Germs and Steel, since it is capable of explaining why Western Europe and not China (or India, or the Ottomans) dominated the world, while Diamond (in a book that uses old political economy arguments, in particular the notion of surplus, something typical of many historians as argued here before) can only explain why Europeans conquered the people outside Eurasia (that had less luck in the choice of animals and plants to domesticate, and less chance to spread them in an East-West axis with similar climate) really. Note that Cipolla long ago had noted that the main advantage of Westerners when they arrived in the East (Vasco da Gama in 1498) was basically military.

The only thing missing in most of these non-economists discussions of the causes of Western European dominance is the role of demand expansion in technological progress and economic growth in general. But many historians do have an implicit demand-led growth or Keynesian story too, I should add. By the way, on the Keynesian view of many historians it might be worthwhile reading the last section of Garegnani and Palumbo's entry on the Elgar Companion to Classical Economics available here.

PS: This also suggests that on some level, particularly military and naval technology, the West was already ahead of the Oriental Empires considerably before Pomeranz and the revisionists time frame (i.e. around 1800).  However, the argument does not hinge on Eurocentric views about the superiority of culture, as in many neo-Weberian arguments (e.g. David Landes).

The Fiscal-Military State and Western Hegemony

An often neglected, at least in economics, argument for the rise of the West (leaving the debate of when the Big Divergence took place, if around 1800 or before, for another post), is its fiscal advantage when compared to the Oriental Empires (Mughal, Ottoman, Safavid and Qing). Patrick O'Brien, the prominent author of the idea of Western fiscal exceptionalism, suggests that the smaller and more urbanized polities of the West found it easier to tax their populations than the Eastern empires with more extensive territories, larger populations and less urbanized economies, even if the latter were in many respects more advanced than the former. The figure below shows that to some extent the Dutch dominance, and then the English ascension, go hand in hand with and increase of tax revenue as a share of GDP.

The figure shows only the Ottoman empire, at the bottom of the graph, as a comparison to the Western economies, but it gives a sense of the stark differences after the mid-17th century. In a sense, O'Brien's argument can be seen as a variation of Charles Tilly's famous argument that "War made the State, and the State made war." Inter-State wars gave a military edge to Europe, which was solidified in the higher revenues which led to larger and more organized navies in particular. In this respect, the work by Jan Glete on the effects of a permanent navy on State formation deserves also careful reading.

However, the reasons for the militaristic nature of the Western economies is not well developed in the Fiscal-Military State literature. Kenneth Chase's book on the history of firearms provides an interesting answer.

He argues that early firearms were not very effective when used against cavalry because of their overall lack of mobility, poor rates of fire, and limited accuracy. As a result, their effectiveness was restricted to infantry and siege warfare, and were not used in regions threatened by nomads (which include all the Oriental Empires), in which cavalry warfare was dominant. That is why the Chinese invented guns, but failed to keep up with Western developments. The same could be said about sailing techniques, and the combination of guns and sails, to use the terms of Cipolla's classic book.

Dean and Cole vs. Crafts on the Industrial Revolution

My understanding of the debate on how fast, or revolutionary if you prefer (Rondo Cameron suggested it shouldn't be called a Revolution), was the Industrial Revolution is that a lot hinges on how much weight one puts on the cotton sector, in which most of the increase in productivity and growth took place in the early stages. Dean and Cole (review here) presented the traditional notion of a relatively fast growing economy, while Crafts and Harley argued for a gradualist transformation in which only a few sectors grew fast (cotton, iron and transportation) and the transformations were slow at best. The graph below by Wrigley shows nicely the difference in both views.

Note that Wrigley assumes that the estimates for GNP and GNP per head for the early 1830s are accurate, hence the differences in rates of growth imply diverse initial levels. Wrigley does not challenge the consensus view that is increasingly dominated by Crafts and Harley's numbers, but the graph below, also from his book, provides surprising evidence for a very large expansion of income.

Note that energy consumption per capita in England increases at a very fast pace all through the 18th century. It is well known that, particularly in periods of transformation of the structure of production, energy consumption per capita is closely correlated with income growth.

PS: Total factor productivity (TFP) is the measure used by Crafts and others to conclude that productivity was slow to grow in the period. On the problems with TFP go here.

More on The Sociology of Development: Towards A Re-articulation of Dependency Theory

The sociology of development as a field of study, a structure of knowledge, providing an interpretive grid through which to render impoverished regions of the world intelligible has its roots after the completion of Second World War with the crystallization of ‘Modernization theory', which constituted an ideation that societies are understood to move from social positions of tradition to modernity polar ends of an evolutionary continuum. At some point, incremental changes give way to a qualitative jump into modernity, marked by the essence of industrialism. In this sense, the Third world is perceived to be below the threshold of modernity, with a preponderance of traditional-like features such as an extended kinship social structure and, due to the lack of progress towards political differentiations, similar to that of Western forms of democratization, strict hierarchical sources of authority, altogether negating the possibilities to move beyond disintegrated autarkic primary economic activities (Parsons, 1964).

The development of a high extent of differentiation: the development of free resources which are not committed to any fixed, ascriptive groups; the development of wide non-traditional, “national,” or even super-national group identifications; and the concomitant development, in all major institutional spheres, of specialized roles and of special wider regulative or allocative mechanisms and organization, such as market mechanisms in economic life, voting and party activities in politics, and diverse bureaucratic organizations and mechanisms in most institutional spheres (Eisenstadt (1973: 23).

According to Rostow (1960), all societies can be placed along a linear continuum from undeveloped to developed along a ‘stages of economic growth’ path, derived from an extensive study of Western economic development. In ‘traditional society’, the first stage, it is deemed that economic output is limited because of inaccessibility to innovative technology. At the second stage, ‘the preconditions for take-off, modern science, attributed to “Western Europe of the late seventeenth and early eighteenth centuries” (Rostow, 1960, p. 6) ensues new innovations in production in agriculture and industry, fostering widespread education, entrepreneurship, and institutions capable of mobilizing industrial capital; capitalistic investments increase, especially in transport, communication and raw materials. Nevertheless, despite the development of some modern manufacturing, traditional social structures and production techniques remain:

In many cases, for example, the traditional society persisted side by side with modern economic activities, conducted for limited economic purposes by a colonial or quasi-colonial power (Rostow, 1960, p.7)

Rostow’s third stage is ‘the Take-off’, in which traditional barriers to economic growth, like the effect of a dual economy, are overcome. At this point, capital investment increases rapidly and new industries expand exponentially, as does an ‘entrepreneurial class’—economic growth becomes a normal condition” (Rostow, 1960, p. 36). At the fourth stage, ‘the Drive to Maturity’, technology becomes more complex and what produced is now less a matter of economic necessity, and more a question of consumer choice. This leads to the final fifth stage of high consumption, in which economic sectors specialize in the manufacturing of highly sought after consumer durables and basic life needs are mutually satisfied. In a play on Marx, Rostow’s analysis suggests that the West, which “is more developed industrially only shows, to the less developed, the image of its own future’ (Marx, 1954, p. 19). The assumption is that capitalism is a historically progressive system, which is transmitted from the privileged economically advanced countries to the rest of the world by a continual process of destruction and replacement of pre-capitalist social structures (Palma, 1978).

The problem with modernization theory is that it is quite ahistorical, with respect to the global capitalist exploitation. 'Modernization’ theory can, and has been, be interpreted as a ‘blame the victim’ approach to problems affecting the ‘Third World’. Rostow ignores the external influences like colonialism that contributed to social in the Third World. Rostow’s, and for most of ‘modernization’ theory, the unit of analysis is the nation-state of the ‘Third World’, emphasizing internal dynamics, sectors and sub-sectors, combined with the causal role of technology. As such, conclusions drawn from this approach are that all nations, regardless of the history of imperialism, colonialism, etc., should be able to modernize with emulation of more developed economies and their diffusing of highly advanced technology.

Paul Baran and Paul Sweezy, in Monopoly Capital (1960), building on the path-breaking work of Michel Kalecki and Joseph Steindl, assess the degree to which monopoly, as measured by the market concentration ratio of large capitalist firms (corporations) in economically advanced countries, ensues an inverse of Marx’s famous hypothesis that the ‘laws of motion’ of capitalist development in produces a ‘tendency for the surplus to fall. Rather, the economic surplus, defined as the gap, at any given level of economic activity—effective demand in Keynesian terminology—, between what is produced and the socially necessary costs of producing it, under monopoly capitalism has a tendency to rise (Baran & Sweezy,1966, pp. 9, 52-57).

Since aggregate levels of effective demand for total output determine the level of economic activity, crises of capital accumulation are inevitable if the monopoly sector cannot sustain its power via sufficient investment opportunities to absorb its accumulating share of the total surplus produced. Rather than let this insufficiency put downward pressures on potential profits as a whole, various stabilizing factors are set in motion, which include classical Keynesian government deficit spending, research & development (although risky without reliable forecasts potential spillover effects), waste (as evidenced by a sales effort, i.e. consumerism), or imperialism—the last of which provides the foundations for the dependency theoretical approach to economic development.

In this sense, for an understanding of the fundamental division between economically advanced countries and impoverished ones, it is requisite to place attention to the extent to which foreign investment acts as an outlet for investment-seeking surplus generation. Unlike Lenin’s theory of imperialism, foreign investment is a method of extracting wealth, not a channel through which surplus is directed, ensuing underdevelopment (Baran & Sweezy, pp. 104-105). Underdevelopment is a thus process by which monopoly capital in economically advanced nations exploit economically weaker countries by exporting capital to the extent that profits produced (from the production of cheaper consumer goods or raw materials via lower wages in these countries, for example) are repatriated. It is the process by which the expropriation of “foreign sources of supply and foreign markets, ena[ble] [the agents of] monopoly capital to buy and sell on specially privileged terms” (Baran & Sweezy 1966, p. 201), ensuring, caeteris paribus, their positions of power in the world are sustained. The result is that economically weaker countries suffer the retardation of the requisite forces to spawn autonomous and dynamic process of self-governance of the conditions that constitute independent social/political/economic coordination, planning and control.

The argument is that (Baran & Sweezy, pp. 9,178-179) monopoly capitalism is tantamount to the degree to which large capitalist firms in economically advanced countries have as their counterpart the “exploitation of much of the rest of the world” and, as a result, constitute international relations as a “hierarchical system with one or more leading metropolises, completely dependent colonies [even if not name, certainly in practice] at the bottom, and many degrees of superordinate and subordination in between […] [t]hese features are of crucial importance to the functioning of both the system as a whole and its individual components […] (Baran & Sweezy, 1966, pp. 178-179). As such, “we cannot hope to formulate adequate development theory and policy for the majority of the world’s population who suffer from [impoverishment] without first learning how their past economic and social history gave rise to their present underdevelopment” (Frank, [1966] 1969). Underdevelopment is neither an original nor traditional social position. Hence, it cannot be assumed that the contemporary position of the Third World can be understood as solely a reflections of its internal historically specific social, political, economic, and organizational characteristics. The process by which monopoly capital in economic advanced countries extract surplus from less-developed countries through capital exports limits the latter’s ability to achieve the status of the former. Thus, 'modernization theory' is utterly unsatisfactory, for such an approach

[…] in all its variations, ignores the historical and structural reality of the underdeveloped countries. This reality is the product of the very same historical process and systemic structure as is the development of the now developed countries’ (Frank 1969, p. 47).

To suggest that social, political, and economic advancement of the underdeveloped world can be generated by the diffusion of what is deemed modernizing institutions, values, etc. is fundamentally erroneous. If development fails to occur, it is not because within the Third World there are mere obstacles to diffusion because of innate poverty arising from some form Gerschenkronian ‘backwardness’, but due to the net outflow of vital resources, whether natural, monetary, human, technological etc. The implication is that underdevelopment is not because of the “the survival of archaic institutions”, or some inability to contract some ‘modern man’ (Inkles, 1969) syndrome; on the contrary, it is generated by the same capitalist development that led to the domination by economic advanced countries, that is, “the development of capitalism itself” (Frank, [1966] 1969). Capitalism, hence, is an operation that cements a peripheral latifundium system, via the constant forces of ‘primitive-accumulation', what Myrdal (1957) defined as international ‘backwash’ effects, that reproduces a cleavage between ‘town and country’, centre and periphery, on a tremendously enlarged basis (cf. Bukharin & Lenin, 1929).

Viewed from this standpoint, dependency theory is a manifestation of what David Harvey (1978, 2007) defines as ‘accumulation by dispossession’ by virtue of which dialectical forces of motion and contradiction generate vast disparities of wealth and power on a worldwide scale. The world economy is reproduced as a world-system (Wallerstein, 1979) of ‘unequal exchange’ (Emmanuel, 1972; Amin 1974, 1976), in which ‘underdevelopment’ ensues peripheral internal long-run stagnation (Bornschier & Chase-Dunn, 1985, pp. 39-40). The terms of trade for the periphery fall precipitously – this is the Prebisch-Singer hypothesis (Prebisch 1950). As Samir Amin (1976, p. 292) notes, “whereas at the center growth means development, making the economy more integral, in the periphery growth does not mean more development, for it dis-articulates the economy. Since the imbalance of international trade defines the mechanisms by which capital is drained from former colonized countries, there is no way for peripheral countries in the world economy to ‘catch up’ in Rostowian fashion (p. 383).

Nevertheless, the social facts that constitute the particular social conditions for the constant negation of a ‘just price’ in international trade ‘admits of varying interpretation’ (Frank, 1977). Case in point is the extent to which the periphery is in fact ‘peripheralized’. To suggest that the capitalist world economy simply, by definition, produces a centre-periphery polarity (Frank, 1967; Wallerstein, 1974), is to pay insufficient attention to understanding the extent to which economic development in the periphery is a convoluted association of varying social processes, rather than the mere result of a state’s homogenized world-systemic position (Gellert, 2010).

According to Cardoso and Faletto ([1967] 1970), for instance, development in the periphery, while controlling for socioeconomic income differentials, is likely if foreign capital penetration creates spillover effects. That is, partial economic growth is viable through what Peter Evans (1995) describes as the practice of an ‘embedded autonomy’-an apparent solidified social network between the state and civil society (which consists of economic elites from the centre) that creates the capacity for the state, as such, to engage in domestic Keynesian aggregate demand management. Whether this is manifested is the extent to which a peripheral country does not suffer the inability to borrow in its own currency, in which a country, most likely a developing one, supplements its domestic unit account of fiduciary reserve assets with a foreign currency. This is the exemplification of a country foregoing its national ‘monetary sovereignty’ (Mundell, 1961).

The essence of national 'monetary sovereignty' is the cartelist (or chartelist) (Goodhart, 1998) conception that emphasizes state power to establish a particular unit of account, a national currency, which allows economic calculations to take place (Ingham, 2004). In this sense, money is a means for accounting for and settling of financial debts, the most important of which are tax debts, which, in turn, regulate the level of aggregate demand, and thus determination of national income through the use of fiscal policy; it represents a [store of financial value] [...] [of which] general purchasing power is held [...] (Keynes, 1930, p. 3).

In the United States, for example, and in contrast to James O’Connor ([1973] 2002) and Erik Olin Wright’s (1979) fiscal sociological model for analyzing the intricacies of public finance, which narrowly centers on a hypothetical natural limit to fiscal policy (Wright 1979, p.157), the federal government, through open-market operations, sells government bonds, Treasury securities, which are either bought or foregone by the Federal Reserve (Fed). If the Fed commits to a policy of purchasing Treasury securities, the interest rate by which the Federal government is liable on Treasury securities held by the Fed is lowered. Symmetrically, if the Fed sells Treasury securities, the Federal Government’s interest burden, which is paid through taxes denominated in dollars, is raised. By providing a guarantee for State debt, the Fed delivers the capability for the federal government to use fiscal policy to regulate aggregate demand. Thus, the extent to which fiscal policy is an option is determined by the burden of the federal government's interest payments on Treasury securities to the Fed (cf. Lerner, 1943; Domar, 1944).

From this perspective, 'underdevelopment', or 'dependency', is the powerlessness a peripheral country to establish its own unit of account and thus is forced to variably peg its national currency to a foreign reference currency. What ensues is the inability to use monetary policy—central bank purchasing and selling of government bonds denominated in the domestic currency for purposes of controlling the money supply, and thus the cost of credit—, and fiscal policy, via deficit spending, for domestic economic needs. Since the central bank is forced to maintain a certain level reserves of the foreign reference currency such that the price of the domestic currency, in terms of the reference currency, does not change, this produces a negative money-multiplier that sets in motion an inherent deflationary bias, which, if not counteracted by capital inflows to spur aggregate demand, can lead to abrupt contraction of the monetary base, stinting any supposed progress towards economic sustainability (cf. Fields & Vernengo, 2012, 2013).

Thus, if any form of government spending is to be engaged, an 'underdeveloped' country has to issue bonds that are not denominated in its own currency. This amounts to the attraction of external commercial loans with the faith of the country's financial markets by foreign investors used as collateral. As such, country risk is most likely going to exist. If confidence is lost in the strength of the country's financial markets, leading to a spread over bonds like US treasury securities, if the foreign reference currency is the dollar, for example, interest rates on domestic foreign currency denominated bonds are likely to rise, making government spending very costly, which removes any form of domestic capacity to spur public investment as an effective countercyclical policy in the face of economic downturns. This has been essentially the case of Argentina before the 2001–2002 crisis, and of the European periphery since the intensification of the Greek crisis in 2011.

Balance of payments constraints can be quite unsupportable, spawning self-fulfilling financial collapses. Moreover, they altogether constitute an ideological mask that normalizes the advance of global cosmopolitan money-capitalist power to dictate the terms of domestic democratic politics (Ingham, 2008). As such, the extent to which a country is 'peripheralized', is the degree to which its creditworthiness is essentially evaluated in terms of the degree to which the state takes steps toward lowering the social wage for the benefit of multinational corporations from the centre (or core).

***This is a work in progress and I would like to thank Matias Vernengo, Brett Clark, & Al Campbell for their assistance.***

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Lars Syll on Loanable Funds Theory

By Lars Syll

The classical theory of the rate of interest [the loanable funds theory] seems to suppose that, if the demand curve for capital shifts or if the curve relating the rate of interest to the amounts saved out of a given income shifts or if both these curves shift, the new rate of interest will be given by the point of intersection of the new positions of the two curves. But this is a nonsense theory. For the assumption that income is constant is inconsistent with the assumption that these two curves can shift independently of one another. If either of them shift, then, in general, income will change; with the result that the whole schematism based on the assumption of a given income breaks down … In truth, the classical theory has not been alive to the relevance of changes in the level of income or to the possibility of the level of income being actually a function of the rate of the investment.

There are always (at least) two parts in an economic transaction. Savers and investors have different liquidity preferences and face different choices — and their interactions usually only take place intermediated by financial institutions. This, importantly, also means that there is no “direct and immediate” automatic interest mechanism at work in modern monetary economies. What this ultimately boils done to is — iter — that what happens at the microeconomic level — both in and out of equilibrium — is not always compatible with the macroeconomic outcome. The fallacy of composition has many faces — loanable funds is one of them.

Read the rest here.

Economic History blog dedicates space to the Great Depression

Echoes is an Economic History blog worth visiting. Here Philip Scranton's take on the early phase of the recovery and how FDR and the often forgotten Hugh Johnson wanted a wage-led recovery.

As in earlier economic recoveries, in 1933, U.S. production began increasing more quickly than workers could find jobs. A 50 percent increase in industrial output from March to July generated just 14 percent more factory employment. With orders rising, manufacturers commonly extended current employees’ weekly hours instead of rehiring those who had been laid off.

Hugh "Iron Pants" Johnson, director of the National Recovery Administration, focused on closing this gap as President Franklin D. Roosevelt's first 100 days in office came to an end in June. The purpose of the National Industrial Recovery Act was simple: "Wages are to be increased and hours of work curtailed in order to distribute more widely the available employment," according to the Economist.

"The Administration has made no secret of its belief that if the slump is to be overcome, employment and wages must rise much faster in the initial stages of the recovery than output and prices."

Read thing whole thing here.

Central Banking in Historical Perspective

The whole talk here. I posted before about it, but there was no link to the talk back then. And yes do NOT read Hayek. It's a waste of time.

Academics back students in protests against economics dogma

From The Guardian:

A prominent group of academic economists have backed student protests against neo-classical economics teaching, increasing the pressure on top universities to reform courses that critics argue are dominated by free market theories that ignore the impact of financial crises.

The academics from some of the UK's most prestigious institutions, including Cambridge and Leeds universities, said students were being short-changed by their courses, and they accused higher education funding bodies of being a barrier to reforms.

In a startling attack on the agencies that provide teaching and research grants, they said an "intellectual monoculture" is reinforced by a system of state funding based on journal rankings "that are heavily biased in favour of orthodoxy and against intellectual diversity".

Read rest here.