Monday, March 31, 2014

Palley's Keynesian critique of Keen and an alternative theoretical framework

New Paper by Tom Palley titled: "Effective demand, endogenous money, and debt: a Keynesian critique of Keen and an alternative theoretical framework."From the abstract:
This paper presents a Keynesian critique of Steve Keen’s treatment of the endogenous money – credit – aggregate demand (AD) nexus. It argues his analytic intuition is correct but is developed in the wrong direction. Keen’s fundamental relation describing determination of AD in an endogenous credit money economy suffers from two flaws. First, it neglects the core Keynesian problematic of leakages from and injections into the circular flow of income. Second, it falls into the theoretical morass regarding the black box of velocity of money via its adoption of a form of Fisher equation to determine AD. The paper contrasts Keen’s treatment with a Keynesian structural framework. 
Read it here.

20 years of the Tequila Crisis

In December it will be the 20th anniversary of the Tequila Crisis, which inaugurated a series of external crisis in developing and transition economies, in Asia, Russia, Brazil, Turkey and Argentina. Here a short note (in Spanish) for a Mexican on-line magazine (Paradigmas).

Saturday, March 29, 2014

Don’t Cry for Argentina--Not Yet!

In the new issue of Dollars & Sense my short article on the Argentine crisis. Subscription required. Previous post on the same topic here, here and here.

Friday, March 28, 2014

Galbraith on Piketty's Capital

I'm still reading the book, so I will not say much at this point. The history of ideas at the beginning of the book is just embarrassingly bad, and suggests that mainstream economists do not have the faintest idea about the history of their own discipline. Just a short example would suffice to show what I mean. Piketty says: “Marx totally neglected the possibility of durable technological progress and steadily increasing productivity.” Note that the book is named Capital, and Piketty is quite critical of Marx. So you would expect some reasonable understanding of what is in the other Capital. If you open chapter XV of Marx's Capital, on Machinery and Modern Industry he tells you:
"Like every other increase in the productiveness of labour, machinery is intended to cheapen commodities, and, by shortening that portion of the working day, in which the labourer works for himself, to lengthen the other portion that he gives, without an equivalent, to the capitalist. In short, it is a means for producing surplus value."
So machinery and increasing productivity are essential for the production of surplus value and the explanation of profits. It is evident that if Piketty read Marx, he didn't understand much. And that is true of almost any citation that involves history of economic ideas (so Roncaglia, previous post, is right, Piketty should take a course in the history of economic thought).

Also, Piketty is in many passages clearly contradictory, taking positions that are not compatible with other assumptions made just before. These contradictions derive basically from his adherence to neoclassical theory, and his desire to transcend it, and say something relevant about inequality. In neoclassical theory inequality results from technical change, and different levels of skills, since workers and capital receive according to their productivity. Political factors should NOT play an important role. Other than the data on inequality, in the collecting of which he has been central together Emmanuel Saez, even if it is far from true that he is the only follower of Kuznets, there is little merit in this book it seems.

Jamie Galbraith provided a good review in Dissent (see here). An important point that Jamie makes is that Piketty botches the argument on the capital debates (again, given the title of the book, it is a bit ironic). Jamie notes: "Piketty devotes just three pages to the 'Cambridge-Cambridge' controversies, but they are important because they are wildly misleading..." and Piketty doesn't get that: "as the rate of interest falls, there is no systematic tendency to adopt a more 'capital-intensive' technology, as the neoclassical model supposed." The implications of the capital debates (for more on that go here) for understanding inequality are associated that once intensity and remuneration are not connected in the way neoclassical theory suggests the bare bones of the social conflicts that are behind income and wealth inequality are exposed.

An appreciation of the limitations of the neoclassical view of capital would lead, according to Galbraith, to a broader understanding of the policies needed to overcome inequality, beyond the tax on wealth proposed by Piketty, and a better understanding of how in a previous era -- of the New Deal and the Welfare State -- it was possible to reduce equally staggering inequities.

Roncaglia on Whether History of Economic Thought should be Included in Undergraduate Curricula

It's seems like a no-brainer, but is less and less common in the US at least. Here a paper on the topic by Alessandro Roncaglia (h/t Renata Lins). From the abstract:
"Mainstream views concerning the uselessness or usefulness of HET are illustrated. These rely on a hidden assumption: a ‘cumulative view’ according to which the provisional point of arrival of contemporary economics incorporates all previous contributions in an improved way. Critiques of positivism led philosophy of science to recognise the existence of different approaches – in economics, as in other sciences. Conceptualisation, recognised by Schumpeter as the first stage in economic theorising, is the stage in which the different visions of the world underlying the different approaches, take shape – and are better recognised. In this, HET plays an essential role. As an illustration, the differences between the classical and marginalist conceptualisations of the economy are illustrated. Thus HET is essential in both undergraduate and graduate economic curricula, as a decisive help towards a better understanding and evaluation of formalised theories/models in the first case, and as an education to the philological method of research, essential in the first stage of theorising, in the case of graduate curricula."

Thursday, March 27, 2014

The New Old IMF

The 'new' IMF still demands devaluation and fiscal adjustment. Like the old. From their new agreement with Ukraine, according to the New York Times:
"The agreement, announced in Kiev, the Ukrainian capital, will hinge on the country taking steps to let the value of its currency float downward, to cut corruption and red tape, and, crucially, to reduce huge state subsidies for the consumption of natural gas."
This is consistent with what the IMF says in last in one of the last World Economic Outlook reports. The IMF suggests that the current risks for the global economy fall into five categories, namely (IMF, 2013a, p. 14): “(1) very low growth or stagnation in the euro area; (2) fiscal trouble in the United States or Japan; (3) less slack than expected in the advanced economies or a sudden burst of inflation; (4) risks related to unconventional monetary policy; and (5) lower potential output in key emerging market economies.” Note that even though it is suggested that stagnation in Europe is a problem, it is argued that (Ibid. p. 19): “fiscal plans for 2013 are broadly appropriate in the euro area.”

The concern with fiscal policy in the United States and Japan is that these countries (Ibid, p. 19): “need strong medium-term plans to arrest and reverse the increase in their public debt ratios,” and the Fund suggests the reform of entitlement programs as the way forward for fiscal adjustment, which would burden the old, the young and the poor more than any other social groups. The last three risks are all associated with the notion that there is a danger of rapid adjustment to full capacity and inflationary pressures resurging earlier than expected.

Moreover, there is a clear gap between the somewhat mixed message of the WEO reports in terms of what policy space allows in terms of fiscal policy and what the actual practice of the IMF has imposed on countries under agreements. Article IV consultations and Letters of Intent for the recent advanced countries that have Extended Fund Facility Arrangements with the IMF (e.g. Greece) demonstrate specific long-term structural changes that are terms of the loan. The Staff Report for the 2013 Article VI consultation for Greece suggests that (IMF, 2013b, p. 1): “Progress on fiscal adjustment has been exceptional by any standard, with the cyclically-adjusted primary balance having improved cumulatively by about 15 percent of GDP during 2010–12. Labor market reforms are helping to realign nominal wages and productivity; this internal devaluation has reduced the competitiveness gap by about half since 2010.” Fiscal adjustment and price and wage reductions are the basis of the solution, very much as in the past. If there is any change in the IMF policy advice it is difficult to find in its policies.

Tuesday, March 25, 2014

Two Cents on Birner's 'The Cambridge Controversies in Capital Theory'

I just finished perusing Jack Birner's "The Cambridge Controversies in Capital Theory" (see here). My brief take is that although the author provides a thorough and lucid analysis & exposé of the debates, I certainly do not agree with his assumption that the issues involved primarily dealt with a fundamental difference over research programmatic technique & methodology, with ideology being merely secondary, if not superfluous. This is quite untrue; ideology was at the very core! For more on this, I recommend G.C. Harcourt's "Some Cambridge Controversies in The Theory of Capital" (see here) and Andrés Lazzarini's "Revisiting the Cambridge Capital Theory Controversies: A Historical and Analytical Study" (see here).

Monday, March 24, 2014

Inflation, hyperinflation and Monetarist perceptions about the functioning of the economy

I dealt before with the persistence of Monetarist views, in particular regarding economic history (here and here). Interesting thing is that recently the Bank of England admitted that money is endogenous, and, hence, at least the simplistic notions that money causes prices are clearly in the defensive. Mind you, as I noted in my post, admitting money endogeneity does not mean they are heterodox by any means, since for them the system still has very much a tendency to full employment.

At any rate, a full discussion of the several views on inflation with a taxonomy is presented here.  The second session that provides a historical overview of inflation is posted below.

Inflationary Processes in Historical Perspective

Price Revolutions are often neglected by economists, but have been central for economic historians. The conventional wisdom among economists is that monetarist views are the dominant interpretation of those long term processes. This is particularly the case about the 16th Century Price Revolution, which is the one associated with the first clear expositions of the Quantity Theory of Money (Arestis and Howells, 2001-2). This is not the case, and in general historians stress the real causes of inflation based on neo-Malthusian models that emphasize demographical forces, in which money is endogenous.

Price Revolutions begin in periods of prosperity, and end in periods of crises. The classic demographic or real model is essentially based on a Malthusian insight, was developed by Michael M. Postan (1973) and used to explain the behavior of the later-medieval western European economy, and in particular the behavior of price movements. Postan had argued that population growth and a relatively static agrarian technology led unavoidably to diminishing returns. Diminishing returns, in turn, drove grain prices up during the long thirteenth century (1180-1350), at a rate estimated by Postan to be around 0.5 percent per year. Symmetrically, population decline during the fourteenth and fifteenth centuries, caused by terrible famines, epidemics and wars, led to a fall in grain prices. In Postan’s framework monetary changes played no role in late-medieval price movements or in any of the changes that the economy underwent during the late middle-ages for that matter.

Not surprisingly, some historians disagree with Postan neo-Malthusian model. Day (1978) argues that the economies of the late middle-ages remained hard money economies – despite the incredible development of credit instruments – and that monetary contraction should be seen as the essential cause of the fourteenth and fifteenth centuries’ deflation. The decrease in money supply resulted both from Europe’s limited monetary stocks, and the permanent outflow of bullion resulting from permanent balance of payments deficits with the East (Day, 1978, p. 79). Hackett Fisher (1996, p. 19) suggests, however, that even though money and population changes both play a role, “population appears to have been the primer mover.” In this sense, the turning point in the 1380 would have more to do with harvest failures and the plague than with money shortages.

Hackett Fisher (1996, p. 72) argues subsequently that the prime mover in the following Price Revolution was the “revival of population growth, which placed heavy pressure on material resources.” Monetarist inclined authors emphasize the silver and copper mining boom in Central Europe in the 1460s – before the discovery and inflow of American bullion – as a major factor ending the European bullion famine (e.g. Munro, 2003). Hence, monetary factors would be central to explain the sixteen century inflation.

The Price Revolution of the sixteen century is well known among economists, and Earl Hamilton’s (1934) is the classic interpretation, putting emphasis on the effects on prices of American gold and silver inflows. When the price revolution became evident several explanations were developed. Jean Bodin and the authors of the Salamanca School – Martin de Azpilcueta and Tomás de Mercado more prominently - are usually credited with formulating the first clear version of the Quantity Theory of Money (QTM).[1]

Wrigley and Schofield (1981) develop a neo-Malthusian model along Postan lines. The main problem with the conventional monetarist view is that prices started to go up considerably before the American bullion arrived in Europe. Historical causality indicates that prices increased first and then the money supply followed suit. In fact, Hackett Fisher (1996, p. 84) suggests that the great inflation created such demand for monetary medium that even “old mines were reopened at heavy expense.” Arestis and Howells (2001-2) emphasize the role of endogenous money in the realist neo-Malthusian tradition. In the neo-Malthusian view bad harvests, famine, disease and war – in particular the Thirty Years War (1618-48) – led to a reversion of demographical trends and led to the end of the second price revolution.

The price revolution of the eighteen century started in the 1730s. The flow of the recently discovered Brazilian gold in Minas Gerais to London via Lisbon is seen by bullionists as the initial cause of rising price trends (Vilar, 1960).[2] It is in this period that David Hume (1752) produces his famous defense of the quantity theory of money, and the specie flow mechanism, according to which inflation resulted from increases in gold inflows related to trade surpluses.[3] On the other hand, population trends – a decline in age at marriage and a subsequent increase in the fertility ratios – suggests that demographical forces were also at play. However, the eighteen century price revolution is ultimately famous for the debates that it provoked in England in the late eighteen century and early nineteen century, known as the Bullionist debates.

David Ricardo is usually described as the main bullionist (defenders of the 1810 Bullion report) author and a champion of the view that inflation was caused by the overissue of bank notes by the Bank of England during the suspension period (1797-1821) – in which bank notes were not convertible to gold. Green (1992) notes that the classical authors – Ricardo included – believed in some variation of the labor theory of value and, hence, concluded that the price of commodities depended on technical conditions of production (labor embodied or commanded) for a given wage level (subsistence).[4] Hence, the price of gold – the numeraire – would also be determined by the technical conditions of production in that sector.

However, if the relative price of gold is determined in that way, the prices of all other commodities in terms of gold cannot be determined by the quantity of gold. Prices in terms of the standard (gold) must be determined by the costs of production of gold, so that causality is reversed and the quantity of money is endogenously determined. Green (1992, p. 56) refers to this classical view of endogenous money as the Law of Monetary Circulation. According to the Law of Monetary Circulation, even though in the long run money supply is endogenously determined, in the short run – when market prices deviate from normal prices – exogenous changes in the money supply may affect prices.

The idea that Ricardo does not defend the Quantity Theory in the long run contradicts the popular vision that assumes that there is a stream of monetary thought that begins with Hume, Ricardo, and the Currency School (e.g. Torrens) and culminates with modern monetarism (Hicks, 1967, pp. 155-173).[5] The anti-Quantity Theory current, in this view, starts with Thornton and the Banking School (e.g. Tooke) and culminates in Keynesian economics.

The main opponent of the bullionist view of the eighteen century inflation was the economist and price historian Thomas Tooke – the leader of the Banking School.[6] According to Tooke (1844, p. 123) “the prices of commodities do not depend upon the quantity of money indicated by the amount of bank notes, nor upon the amount of the whole of the circulating medium; but … on the contrary, the amount of the circulating medium is the consequence of prices.” Prices increased, still according to Tooke, as a result of bad harvests, the depreciation of the external value of the currency that increased the price of imported goods, and higher interest rates, which led to higher financial costs. Reversal of these trends in the post-Napoleonic War period, hence, explains the deflationary forces in action, and the end of the price revolution.

The last price revolution starts with the end of the Great Depression (1873-1896), the year of William Jennings Bryan Populist bid for the presidency in the US, based on his attack on the Gold Standard, and his defense of a bimetallic monetary system. While conventional views would emphasize the role of the discovery of new sources of bullion in South Africa, alternative views would emphasize the importance of distributive conflicts in the inflationary process. Adherence to the Gold Standard, and the so-called crime of 1873 – the demonetization of silver (Goodwin, 1978, pp. 16-7) – meant that money was scarce, and led to deflationary forces, which in turn hurt debtors (mid-western and southern farmers) and benefited eastern industrialists and bankers (the Robber Barons). The agrarian revolt and the rise of populist and progressive movements – that led to the regulation of monopolies, the passing of an income tax, the creation of a central bank, and a series of other reforms – turned the tide and generated inflationary pressures. The importance of these events is that for the first occasion in modern times it became clear that inflation could result from disputes over the proverbial pie. Distributive conflict would become central for several explanations of inflation in the twentieth century.

Distributive conflict may very well have had a role on the inflationary surge in the US, but it was ultimately an American phenomena. Hackett Fisher (1996, p. 186) argues that the twentieth century price revolution has structural causes related to rising living standards, a public health revolution that led to rising population, and institutional changes that led to what Heilbronner referred to as “floors without ceilings.” The rise of corporations, and the development of a more regulated economy, with increasing participation of governments, led to an upward bias in prices. Thus, Joan Robinson (1971) famously argued that “the general price level has become a political problem.”

Distributive conflict and political disruption were particularly important in the discussion of inflation in the 1960s. Conventional wisdom presumes that the inflationary pressures were brought about by the expansionary fiscal policies in the U.S., and the propagation of these inflationary pressures through the international system (Laidler and Parkin, 1975). The increasingly expansionary fiscal policies of the 1960s – resulting both from the Vietnam War and the Great Society experiment of the Kennedy-Johnson administrations – led to growing balance of payments deficits. The U.S. deficits were initially considered instrumental for the working of the international monetary system that was desperately in need of dollars to obtain the essential imports of capital goods needed for reconstruction. However, by the late 1960s the accumulation of idle dollar balances started to put pressure on the money supply of the rest of world, leading to inflation. That is, according to the monetarist logic, inflation was caused by the U.S. fiscal and monetary policies, and transmitted to the world as a result of the system of fixed parities.

An alternative explanation for the inflationary pressures of the 1960s is possible though. This alternative explanation, compatible with the post-Keynesian view, would minimize the effects of the U.S. expansionary fiscal policy and the fixed exchange rate regime. The Golden Age accumulation regime implied a commitment to full employment and the creation of a safety net for unemployed workers. Additionally, the imposition of capital controls and the cheap money policies – which led to low real rates of interest – implied a favorable environment for workers. Parties with strong ties with the labor movement were in power in several Western countries, and this was tolerated, to a great extent, since it was considered a form of reducing the dangers of the Soviet menace. Further, full employment tended to increase the bargaining power of the working class.

In this environment, workers pressures for higher nominal wages were usually accommodated. For a given real rate of interest, and a fixed nominal exchange rate, the only effect of rising wages would be higher prices. In sum, inflation was the result of wage pressures – cost-push – rather than the expansionary fiscal and monetary policies – demand-pull – (Coutts, Tarling and Wilkinson, 1976). Note, however, that for a good part of the Golden Age, wages increased at the same pace that productivity, and hence, had a negligible inflationary impact. Hence, the inflationary process of the 1960s and 1970s seems to be related to the increases in taxes (passed to prices), competitive depreciations (more prominently after 1973), and supply side shocks, notably the two oil shocks of the 1970s. Stabilization and the end of this last price revolution would not be related then to fiscal consolidation, but to the fall in the prices of commodities, and the weakening of the labor movement (Kaldor, 1976; Eisner, 1989).

It is worth noticing in this birdseye view of inflation in historical perspective that the quantitativist tradition faces an important conundrum. If exogenous increases in money supply are the ultimate cause of inflation, then a diabolous ex machina is the culprit for increasing the money supply (Hackett Fisher, 1996 p. 83). Corrupt and incompetent politicians are the main suspects. This explanation of the ulterior causes of inflation is one that emphasizes the role of individuals at the expense of the structural constraints faced by them. Alternative theories are less dependent on methodological individualist premises, and on the moral and intellectual qualities of politicians to explain inflationary processes.

Last but not least, our brief description of the historical record of money and inflation cannot leave hyperinflationary processes out. The most famous episode of hyperinflation is the post-World War I German case. Historians, says Ferguson (1995a, p 19), have essentially followed two interpretations of the German hyperinflation. The first was offered in the 1930s by the Italian economist Constantino Bresciani-Turroni (1931),[7] who blamed poor monetary and fiscal policy and argued that the inflation had predominantly negative consequences (Camara and Vernengo, 2001). Recent scholarship among historians, however, Ferguson admits has emphasized alternative views of inflation (e.g. Kindleberger, 1985).

The view according to which deficit spending was the main cause of German inflation was named the English or allied view by Bresciani-Turroni (1931, p. 46) in his classic The Economics of Inflation.[8] The allied view, which was forcefully defended by Bresciani-Turroni, corresponds to what today would be called monetarist, and was later formalized by Cagan. In this view, the burden imposed by the internal war debt, the payment of pensions to war veterans, widows and orphans, the reconstruction of the few devastated regions, and the process of war demobilization were too heavy for the young Weimar Republic and the leftist Social Democrat government to carry. In addition, the incapacity to raise fiscal revenues implied that the increasing fiscal spending had to be financed by the Reichsbank.

According to Bresciani, the empirical evidence for his views is provided by the monetary reform of November 1923, which for him represents the moment when the German government found the necessary energy to stop the monetary issues (ibid., p. 399). One of the crucial characteristics of the monetarist interpretation of inflation is that the rise in money supply precedes the rise in the price level. Also, given the dominance of purchasing power parity as the explanation of exchange rate determination in that period, the rise in the domestic price level precedes and causes the depreciation of the deutsche mark. There is a chain of causality that runs from the exogenous money supply to the price level and then to the exchange rate.

For Bresciani-Turroni, the solution to the inflationary problem was simply to cut the fiscal deficit. Once the principles of sound finance were re-established, the price level would be stabilized. The German government was to blame then. Still, as noted by Merkin (1982, p. 25) among the defenders of the quantity theory of money there was a certain degree of acceptance that in reality the rise in the price level preceded the increase in the quantity of money, and, hence, expectations of future money supply increases played a role.

For some authors the rise in wage costs bring about inflation quite independently from the rise in money supply, at least in the short run. Schumpeter was among the authors that argued that “the conviction of the practical man that wage increases drive up the price level is not so wrong as one might believe” (Merkin, 1982, pp. 25–6). Wicksell (1925, p. 202) also criticizes the quantity theory, in particular the proposition that “the velocity of circulation of money at any given time is approximately constant.” Further, Wicksell is one of the first authors to introduce the idea of endogenous money in marginalist analysis. For him (ibid., p. 201) “it … stands to reason that a general rise in the market prices of both goods and services itself creates the purchasing power required for meeting the higher prices.”

Wicksell’s contributions and also those of Schumpeter and Bortkiewicz stand in a category of their own (Merkin, 1982; Laidler and Stadler, 1998). They all see velocity of circulation as an important element of hyperinflation, and they all introduce endogenous money. However, they also still believe that hyperinflation is the result of excess demand. In particular, Schumpeter and Wicksell credited excess demand to a low market rate of interest, while Bortkiewicz emphasized the acceleration of consumption caused by expectations of further monetary expansion.

The German officials that had to deal with the day-to-day problems of running an economy under hyperinflationary conditions saw the problem, not surprisingly, from a different perspective. The most notorious defender of the so-called balance of payments theory was Karl Helfferich. This view was named the German view by Bresciani-Turroni (1931, p. 47).

The disruption of the war led the German government to regulate the foreign exchange “by way of a direct control of all foreign payments and credits”, (Helfferich, 1927, p. 259). However, “as the collapse of the German nation shows, the force of circumstances proved more powerful than any policy of exchange control” (ibid., p. 262). That is, trade deficits led to depreciation despite the control of the German authorities. As correctly noted by Howard Ellis (1934, p. 224), “the balance theory takes as its point of departure the decline of German exports.” Helfferich argued that the permanent unfavorable trade balance, caused by the war and the impositions of Versailles, led to depreciation. This was the root of German problems. For him contrary to the widely held conception, not inflation but the depreciation of the mark was the beginning of this chain of cause and effect. Inflation is not the cause of the increase of prices and of the depreciation of the mark, but the depreciation of the mark is the cause of the increase of prices and of the paper mark issues (Bresciani-Turroni, 1931, p. 45).

In other words, causality runs from the exchange rate to the price level. That means that the rise in the price level cannot be related to the increase in the money supply. Graham (1930) defended Helfferich’s position in what was to become, up to the publication of Bresciani’s book in English, the most influential view of the German hyperinflation. Graham (1930, p. 172) argues that “the proximate … chain of causation, up to August 1920 at least, and perhaps at other times, ran from exchange rates to prices to volume of circulating medium rather than in the reverse direction”. According to the balance of payments view it is not possible to stabilize the economy without stabilizing the exchange rate. This was only possible if foreign reserves were available. The renegotiation of reparations in 1922 and the loans obtained through the Dawes Plan in 1924 allowed the stable foreign value of the rentemark to be maintained.[9]

It is clear that some notion of passive or endogenous money is present in the work of the defenders of the balance of payments theory. Yet, Joan Robinson (1938, p. 74) noted that there was no explanation of the role of wages in the inflationary process. In her words, “neither exchange depreciation nor a budget deficit can account for inflation by itself. But if the rise in money wages is brought into the story, the part which each plays can be clearly seen.” As correctly pointed out by Joan Robinson, there is an inverse relation between the real wage and the exchange rate, so that depreciation leads to a decline in the real wage. If workers resist the fall in the real wage, because tradables are an important component of the wage basket for example, then domestic costs will increase, and so will prices. That is, distributive conflict is an essential part of the hyperinflation story. Joan Robinson’s reformulation of the German view provided a sound basis for alternative explanations of hyperinflation.

Quantitativists and the Balance of Payments school are the two main groups with opposing views on the German hyperinflation. Cagan developed the typical monetarist view on the basis of the quantitativist or monetarist analysis. On the other hand, the Balance of Payments school argues that reparations and depreciation are the cause of hyperinflation. Joan Robinson introduces the notion of wage/foreign-exchange spirals and distributive conflict. Her contribution can be named post-Keynesian. Variations of these two views remain the canonical interpretation of hyperinflationary processes.

[1] On the Salamanca School see Grice-Hutchinson (1952), and Popescu (1997).

[2] The Methuen Treaty established that Portugal would export wine and import manufactured goods – textile products fundamentally – from England at very low tariffs. The treaty – later used by Ricardo in his attack on the Corn Laws – implied that Portugal became dependent of British goods, which were ultimately imported with the inflows of Brazilian gold. The discovery of gold meant complete submission to British hegemony for Portugal.

[3] Hume, one should note, considered John Locke the source of his defense of what we now term the Quantity Theory and the ultimate authority of the issue (Green, 1992, p. 31). Sir James Steuart represented, on the other hand, the main opponent of the quantity theory in the eighteen century. Steuart believed that changes in the supply of money would ultimately affect the velocity of circulation rather than the price level.

[4] Marx (1859, p. 173) criticizes Ricardo for his contradiction of his theory of value and his monetary theory. That would be the case, since, according to Marx, Ricardo adopts the view that the value of gold is determined by the quantity in circulation in conformity with the quantity theory, rather than being determined by embodied labor. In contrast to Marx’s claim, Ricardo (1817, pp. 85-6) argues that “the same general rule which regulates the value of raw produce and manufactured commodities, is applicable to metals; their vale depending … on the total value of labor necessary to obtain the metal, and bring it to the market.” For a discussion of Marx’s views on money see Foley (1986).

[5] On Ricardo’s often misrepresented views on inflation and foreign exchanges see Marcuzzo and Rosselli (1986). For a conventional view see Fetter (1965).

[6] The Banking School is sometimes seen as a precursor of post-Keynesian analysis of endogenous money (Wray, 1990). The endogeneity of money is implicit in the Law of Reflux – the Banking School version of the Law of Monetary Circulation. Reflux implies that commercial banks cannot create credit above the level demanded by economic agents, since excess credit would be used by those economic agents to repay pending debts, thus canceling the rise of the means of payment.

[7] Bresciani’s book carried a foreword from Lionel Robbins describing Hitler as "the foster-child of the inflation." Hitler’s rise to power occurred only ten years after the hyperinflationary crisis, and if an economic problem should be mentioned as part of the complex causes of his rise to power the depression and the ensuing unemployment should take the prize. In other words, although the monetarist view of hyperinflation developed by Bresciani is still dominant, other aspects of his analysis are now considered inaccurate. In particular his view according to which the fall of the Weimar Republic and the rise of the Nazi regime can be attributed to hyperinflation. On the latter see Holtfrerich (1986) and Feldman (1993).

[8] Keynes shared the Allied view of inflation (Keynes, 1923). However, Ferguson (1995b, p. 445) claims that his views on German reparations – which emphasized the ability to pay as a principle to be followed by the Allies – bestowed credibility to German officials that “were deliberately exacerbating inflation to undermine reparations.” Ferguson (1995b) and Macmillan (2001, p. 192) seem to indicate that Keynes’ calculations of the burden of the transfer problem were too high, and that hyperinflation can be ultimate explained by the malice of German officials. The diabolous ex machina of all quantitativist stories shows his face. It seems, however, more reasonable to believe that the constraints imposed by reparations were a serious cause of hyperinflation, and that a more benign Treaty would have lessened the profundity of the crisis.

[9] The rentemark was introduced in November 15 1923, and had its parity fixed at 4.2 million marks per dollar. Until the monetary reform of October 1924 the rentemark circulated together with the old paper mark. The idea of maintaining two currencies circulating simultaneously was exposed by Helfferich, but the actual plan suffered some modifications. See Holtfrerich (1986), and Burdeking and Burkett (1996).

Sunday, March 23, 2014

More on wages and employment

So my last post has led to a few comments on the relation between changes in real wages and employment. As my students are probably tired to hear real wages tend to be pro-cyclical, a well established empirical regularity. This poses a problem, not only for mainstream accounts of the labor market (and hence for the conventional views on the minimum wage), but also for Keynes' own views.

Keynes was forced to deal with those issues early on, as a result of the empirical research by Dunlop and Tarshis, and his answer in his famous 1939 paper (often published together with the General Theory, GT) "Relative Movements of Real Wages and Output." He said then:
"The only solution was offered by Dr Kalecki in the brilliant article which has been published in Econometrica. Dr Kalecki here employs a highly original technique of analysis into the distributional problem between the factors of production in conditions of imperfect competition, which may prove to be an important piece of pioneer work."
In other words, he suggests that some sort of constant returns, or increasing returns to scale, and, hence a mildly positively sloped labor demand curve could possibly explain the empirical regularity. Note also that Keynes had already in chapter 2 of the GT argued that the labor supply curve made no sense (two reasons one fundamental, and the other non-fundamental; see here). He says:
"the contention that the unemployment which characterises a depression is due to a refusal by labour to accept a reduction of money-wages is not clearly supported by the facts... A fall in real wages due to a rise in prices, with money-wages unaltered, does not, as a rule, cause the supply of available labour on offer at the current wage to fall below the amount actually employed prior to the rise of prices."
However, even if one gets rid of the labor supply curve, and determines employment in the market for goods, as a function of demand, as Keynes does, as it is clear from his reply to Dunlop and Tarshis the real problem with the conventional marginalist story (and Keynes' own) is on the acceptance of the marginal productivity of labor (MPL) as the source for labor demand.

One possible neoclassical response would be to suggest that real (supply side) shocks, which change the MPL upwards and downwards, is the main cause of fluctuations in output and employment. So Real Business Cycles (RBC) is the solution. In this case, pro-cylcial real wages can be explained by the mainstream. The main critique coming from other mainstream authors about this possibility, is that, since the real wages are only mildly pro-cyclical, a shock to the MPL would lead to small changes in the real wage only if labor supply is very elastic. In other words, workers labor supply would have to be very sensitive to changes in real wages, and, yet, the empirical evidence is that the number of hours worked does not change much with variations of the real wage.

Besides, there is the question of whether one can really assume that business cycles are explained by real shocks. Note that Lucas, who has for the most accepted the RBC interpretation of the working of the economy, still argues that the Great Depression is most likely explained by a demand shock (for him a monetary contraction a la Friedman).

That is why the capital debates, which undermine the rationale for the marginalist labor demand curve, is relevant for solving the pro-cyclicality of real wages conundrum. The capital controversies suggest that there is no reason to expect that firms buy more of a relatively cheap 'factor of production,' implying an inverse relation between remuneration and intensity of use. Once this notion is rejected, the problem of pro-cyclicality is easy to explain.

Classical (not neoclassical, but the old classical political economists and Marx) presumed that the real wage was determined by the relative bargaining power of workers and capitalists, and it is expected that in a boom, with low unemployment, workers would have the upper hand, and would be able to demand higher wages. So there is no need to resort to real shocks to explain this empirical regularity.

Thursday, March 20, 2014

Education as Pedagogy of Possibility: Shedding Dogma through Reciprocal Learning

A piece on education that I co-wrote with Colin Jenkins has been posted by The Hampton Institute. From the introduction:
Like a snake that sheds its skin periodically throughout its lifecycle, the human mind must develop and shed itself of intellectual skin. Its evolution is characterized by cyclical bouts of learning, reflecting and reconsidering; however, unlike the snake, which is genetically inclined to molting, the mind may not mature and regenerate without being subjected to antagonistic curiosity. This may only be accomplished through frequent and consistent mental cultivation, whereas knowledge is acquired, ideas are processed, and intellectual fruit is born. This process is cyclical in its need for reflection, but most importantly, it is evolutionary in its wanting to refine itself; and it is this constant pursuit of knowledge and validation that drives the mind to absorb substantial information and constant pursuit of knowledge and validation that drives the mind to absorb substantial information and secrete insignificant data. Human intellectualism is inherently anti-dogmatic in its need for constant reflection. This is not to say that substantive beliefs can't stand the test of time, but only that they cannot do so without being incessantly validated along the way. In spite of this, and throughout the course of history, humans have shown a tendency to submit to the crude nature of indoctrination in order to appease their subconscious desire for simplicity. And herein lies the fundamental paradox of the human race: intellectualism is naturally fluid, yet human nature is innately simplistic. We are all blessed with a mind that is essentially limitless, yet we are at the same time limited by our instinctive nature to simplify matters of complexity. And without adequate motivation, the means to confront complex issues become nothing more than a tragedy of unrealized potential. The process of learning, whether in a formal setting or through private exploration of curiosities, is a key motivator and major catalyst in the development of intellectualism.
Read rest here.

Wednesday, March 19, 2014

What do mainstream economists think about the minimum wage?

A third think it's bad, while slightly less than a quarter think it's fine. Or so it seems according to David Colander. In the update of his 1987 analysis of "The Making of an Economist" (original one with Arjo Klamer; subscription required) David asked graduate students what did they think about several economic issues (a short version here; the book here). I have some doubts about David's new overall conclusion about the state of the profession, in particular his views on how the profession has changed (see for example my debate here), but there are several interesting points raised by the replies given by the graduate students of 6 mainstream programs. One is related to their views about the minimum wage.

The table (from the book) shows the views then (1987) and now (2005), by publication dates, on whether the minimum wage increases unemployment among young unskilled workers. The evidence seems to suggest overall there is not much of a change, with 34% back then and 33% now agreeing with the conventional neoclassical proposition. But a small change suggests that more economists believe that the minimum wage does NOT lead to unemployment now, from 18% to 23%. In Chicago the percentage of graduate students holding a conventional view fell from 70% to 56%. Only Harvard seems to go in the opposite direction. MIT shows the biggest increase among those that disagree with the conventional view (from 11% to 30%).

There are several problems with the conventional mainstream (marginalist) story about the effects of minimum wages. The capital debates actually are relevant here too. There is no reason to believe that firms will hire more workers when the price of labor falls, exactly for the same reasons that hold for capital. The principle of substitution does not necessarily work, and there is no relation between the intensity of the use of a factor of production (labor) and its remuneration (real wage). Put in simple terms, there is no reason to hire workers, even if their wages are lower, if there is no demand for your products.

But the reasons for the change in views, small as they are, are not related to the logical flaws of the mainstream model. I don't even think it is solely the increasing evidence since the publication of Card and Krueger's analysis (here; discussed here too), about the absence of a negative effect of minimum wage increases on employment, that has been the driving force in these changing views. My guess is that income inequality has played a role in the willingness of mainstream students to reject the conclusions of the theory they are taught. But in order to really know why, we would need another survey.

Chang & Grabel on The End of The Neoliberal Approach To Development

The following is an extract from Ha-Joon Chang and Ilene Grabel's new book Reclaiming Development: An Alternative Economic Policy Manual :
We should take note of what we see as the beginning of the end of the neoliberal approach to development. The process of discrediting that development model begins in the aftermath of the east Asian financial crisis of 1997–98. At the time there appeared to be nothing new in the nature of the east Asian crisis or in the crisis response. But, in fact, the east Asian crisis marked the gradual beginning of the end of the neoliberal consensus in the development community. The severe constraints on policy space that followed the east Asian crisis created momentum behind a new vision – that developing countries had to put in place new strategies and institutions to prevent a repeat of the events of the late 1990s. Policymakers in a number of Asian countries and in other successful developing countries sought to insulate themselves from the hardships and humiliations suffered by east Asian policymakers at the hands of the IMF. Indeed, as a consequence of the crisis, the IMF suffered a loss of purpose, standing and relevance. In the early 2000s, demand for the institution's resources was at a historic low. In 2005, just six countries had standby arrangements with the fund, the lowest number since 1975. From 2003 to 2007, the fund's loan portfolio shrank dramatically: from $105bn (£63bn) to less than $10bn. The fund's loan portfolio contracted even further after the loans associated with the east Asian crisis were repaid, as those countries that could afford to do so deliberately turned away from the institution. This trend radically curtailed the geography of the IMF's influence. In this context, the IMF began to soften its traditional opposition to policies that regulate the international movement of capital (ie policies called "capital controls"). At the same time, the World Bank also began to show signs of grudging change in its traditional opposition to industrial policy.
Read the rest here.

Note: Chang & Grabel's book has an introduction written by Robert Hunter Wade. Although I could not transcribe parts of his intro into this post, let it be known that much of Wade's position with respect to the topic at hand is illustrated here.

Monday, March 17, 2014

The ‘Better Off Budget’: An EPI Analysis of The Congressional Progressive Caucus Proposal

By Joshua Smith
The Congressional Progressive Caucus (CPC) has unveiled its fiscal year 2015 (FY2015) budget, titled the “Better Off Budget.” It builds on recent CPC budget alternatives in prioritizing near-term job creation, financing public investments, strengthening the middle and working classes, raising adequate revenue to meet budgetary needs while restoring fairness to the tax code, protecting social insurance programs, and ensuring fiscal sustainability. The Better Off Budget aims to improve the economic well-being of the working and middle classes by focusing on ending the ongoing jobs crisis, and it provides substantial upfront economic stimulus for that purpose. This paper details the budget baseline assumptions, policy changes, and budgetary modeling used in developing and scoring the Better Off Budget, and it analyzes the budget’s cumulative fiscal and economic impacts, notably its near-term impacts on economic recovery and employment.
Read rest here.

For Dean Baker's critique of Obama's platform, see here 

Dean Baker on Obama's High Unemployment Budget

By Dean Baker
President Barack Obama’s proposed federal budget for 2015, which he sent to Congress on March 4, pushes the debate in a positive direction in several areas. For that, he should be given credit. However, on the most important issue, a budget that would get us back to full employment, his proposals fall way short. Let’s start with the positives. President Obama proposes a four-year infrastructure program that would cost just over $300 billion. This comes to $75 billion a year, or roughly 0.4 percent of GDP. This idea could go far toward improving and upgrading our infrastructure and is much needed for this purpose. It would also provide a boost to the economy. Assuming the typical multiplier of 1.5 times the amount spent for the expected stimulus, the program would create more than 800,000 jobs. A second item on Obama’s agenda is universal pre-kindergarten. This idea would provide a boost to many children from low- and moderate-income families, whose lack of early education can stunt their prospects for social mobility, according to several important studies. It would also make it much easier for their parents to work, since arranging for quality child care is often difficult and expensive. The price tag for this proposal is surprisingly low: only $76 billion over the next decade. That amount comes to 0.18 percent of projected spending over the period. The relatively small price tag for this program would be more widely known if reporters covered the budget in a way that was intended to inform their audience by contextualizing numbers in terms of overall spending.
Read rest here.

For an analysis by the Economic Policy Institute on the budget proposed by the Congressional Progressive Caucus, see here

Saturday, March 15, 2014

Krugman and the Fear of Wages

Although Krugman is a New Keynesian, who, by definition, oftentimes implicitly assumes a natural rate, he is quite on point:
Four years ago, some of us watched with a mixture of incredulity and horror as elite discussion of economic policy went completely off the rails. Over the course of just a few months, influential people all over the Western world convinced themselves and each other that budget deficits were an existential threat, trumping any and all concern about mass unemployment. The result was a turn to fiscal austerity that deepened and prolonged the economic crisis, inflicting immense suffering.
Read rest here.

Sunkel and Conceição Tavares on Prebisch and Furtado at ECLAC

Short excerpt from the Furtado biopic "O Longo Amanhecer." Osvaldo Sunkel and Maria da Conceição Tavares on the early contributions of Prebisch and Furtado. In Spanish and Portuguese, but with subtitles in English.

Friday, March 14, 2014

Psychologists and the Surplus Approach

I noted before about the fact that historians, like McNeill use the notion of the surplus to explain how primitive societies developed economically. Their lack of modern training in economics is a blessing and they end up using at least some elements of the old classical political economy authors. This is true of physiologist and popular writer Jared Diamond (see here and here). The figure below is from the book Sex at Dawn by two psychologists,  Christopher Ryan and Cacilda Jethá.

While the book is mostly about how behavior, in particular sexual behavior but violence and war too, changed with the development of agriculture, they also introduce the role of the surplus in economic development. Note that the food surplus is what allows for social hierarchy and specialization, which is what Adam Smith would have called the division of labor. And don't forget the division of labor is the basis of the wealth of nations. They also note other mechanisms associated to the development of agriculture that play an important economic role, like increased population growth (demand) and trade networks.

It is clear that while the preoccupation with the reproduction of the economy, which was central for the authors of the surplus approach, has disappeared from mainstream economics, is still very much alive in other branches of the social sciences.

Bank of England on Endogenous Money

This paper by McLeay, Radia and Thomas from the Bank of England has been making the rounds in heterodox circles. In particular because it admits that the conventional story about money creation is simply wrong. For them:
"rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks."
Yes, finally the monetary version of Say's law is seen as incorrect. And for a change they do cite heterodox authors contributions. In a footnote they say:
"There is a long literature that does recognise the ‘endogenous’ nature of money creation in practice. See, for example, Moore (1988), Howells (1995) and Palley (1996)."
Interestingly they do get the reflux principle of the old Banking School (of Thomas Tooke and others). They say:
"There are two main possibilities for what could happen to newly created deposits. First, as suggested by Tobin, the money may quickly be destroyed if the households or companies receiving the money after the loan is spent wish to use it to repay their own outstanding bank loans. This is sometimes referred to as the ‘reflux theory’."
In this context, they refer to the contributions of Nicholas Kaldor, one of the fiercest critics of Monetarism and exogenous money views. Finally, they also note that the central bank determines essentially the rate of interest, and that there is no money multiplier per se. In their words:
"While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality. Rather than controlling the quantity of reserves, central banks today typically implement monetary policy by setting the price of reserves — that is, interest rates."
Mind you, it is weird that they think it is useful for teaching, and also it's not just 'today', but since their inception that central banks controlled the rate of interest. When they did try to control money supply in the late 1970s, central banks were unable to do so, and Goodhart's law that suggests that as soon as the central bank tries to control a particular quantitative target the very measure becomes unreliable.

Note, however, that endogenous money, while relevant and part of the usual set of ideas used by heterodox economists can be perfectly accommodated in a mainstream neoclassical framework, like the New Keynesian three equation model or the old Wicksellian model. And that is the way in which this paper by the Bank of England should be interpreted. Still nice that they do cite Kaldor and Moore, the quintessential endogenous money authors, and Howells and Palley of the younger post-Keynesian school.

PS: On a different note, this paper by the European Central Bank (ECB) cites my work with Esteban Pérez on the European crisis as one of the few that suggests that capital flows (after the convergence of interest rates) that allowed for spending in peripheral countries in part explains the current account imbalances in the region.

Inequality for All: comparing the Great Depression and the Great Recession

A short clip from Robert Reich's Inequality for All. Overall is fine. Mind you Reich uses the supply side fiction that education (skills) generates jobs, rather than demand. A very conventional neoclassical labor market story with an implicit Say's law argument. And he calls Alan Simpson, of the infamous Bowles-Simpson's National Commission on Fiscal Responsibility and Reform (which favors cutting entitlement spending, besides higher taxes), a lefty. But still a progressive guy with good intentions, and lots of relevant data and information.

Thursday, March 13, 2014

Monthly Review: The Baran–Sweezy Letters Project

The correspondence of Paul Baran and Paul Sweezy in the 1950s and early ‘60s is one of the great, unknown legacies of Marxian political economy in the United States. Over the past year and a half, I have been transcribing all of these letters with the goal of having the collection published by Monthly Review press, both as a hardcopy book of selected letters, as well as an unabridged e-book. In commemoration of my father, Paul A. Baran, on the fiftieth anniversary of his death on March 26, 1964, we decided to refer publicly for the first time to the Baran–Sweezy Letters Project and to publish a few important and representative letters.
Read rest here.

Tuesday, March 11, 2014

Commodity dependence in comparative perspective

Last weekend at the Eastern Economic Association Meetings in Boston Bilge Erten presented her work, together with José Antonio Ocampo, on the commodities super-cycle (see here). The figure below (click to enlarge) was on her power point (not in the paper) and is from UNCTAD's State of Commodity's Dependence 2012.

Note that much of Sub-Saharan Africa has levels of commodity exports as a share of total exports of between 80 and 100%. South America is not too far. China has only 8%, even if one can arguably suggest that some of the manufactured goods exported by China, which are highly standardized, are commodified. That would also explain why Mexico and some Central American economies depend less on commodities, i.e. the export of manufactured goods from 'maquilas.' South Korea is also low at 12%. A few Asian countries do better than most of Africa and Latin America in this respect. That is, they would be less vulnerable to changes in commodity prices.

Josh Bivens: Nowhere Close: The Long March from Here to Full Employment

By Josh Bivens
The last official business cycle peak occurred in December 2007. After that, the economy entered 18 months of virtual freefall—with job losses averaging more than 750,000 per month for the worst six-month stretch. The official end of the recession was June 2009—and some have recently declared full recovery has been reached in the 54 months since, as 2013 per capita GDP finally exceed its pre-recession levels. However, for the very large majority of Americans who rely on paid employment for the vast majority of their income, recovery likely still feels very far off. And they’re right—by any reasonable definition the United States is far from having reached a full recovery. That’s because simply clawing back to the per capita income level that prevailed before the start of the Great Recession is far too low a bar to clear to declare mission accomplished on recovery. The reason for this is simple: Joblessness (and the sapping of bargaining power that accompanies its rise even for still-employed workers) rises whenever a gap develops between the economy’s underlying productive potential and aggregate demand for goods and services. The intuition here is simple: A given number of customers’ demands can be satisfied with fewer people as each incumbent worker becomes more productive, and each new potential worker (new graduates, for example) seeking to enter the workforce will only be employed if there is extra consumer demand for what he or she produces. So, demand has to rise in line with the economy’s productive potential in order to keep joblessness from rising.
Read rest here

Heidi Shierholz: Still No Jobs for More Than 60 Percent of Job Seekers

By Heidi Shierholz
The Job Openings and Labor Turnover Survey (JOLTS) data released this morning by the Bureau of Labor Statistics showed that job openings increased by 60,000 in January, bringing the total number of job openings to 4.0 million. In January, the number of job seekers was 10.2 million (unemployment data are from the Current Population Survey). Thus, there were 10.2 million job seekers and only 4.0 million job openings, meaning that more than 60 percent of job seekers were not going to find a job in January no matter what they did. In a labor market with strong job opportunities, there would be roughly as many job openings as job seekers. We are not in a strong labor market. Furthermore, the 10.2 million unemployed workers understates how many job openings will be needed when a robust jobs recovery finally begins, due to the existence of 5.7 million would-be workers who are currently not in the labor market, but who would be if job opportunities were strong. Many of these “missing workers” will become job seekers when we enter a robust jobs recovery, so job openings will be needed for them, too.
Read rest here.

On Argentina's secular decline: why The Economist is wrong

The Economist had a few weeks ago an issue on Argentina (here; subscription required), which I wanted to address, but had no time before today. The argument implies that the current Argentine woes (discussed here before) are part of a pattern which is associated to the long decline in income per capita from the late 19th century and early 20th century until now.

The Economist suggests that:
"In 1914 Argentina stood out as the country of the future. Its economy had grown faster than America’s over the previous four decades. Its GDP per head was higher than Germany’s, France’s or Italy’s. It boasted wonderfully fertile agricultural land, a sunny climate, a new democracy (universal male suffrage was introduced in 1912), an educated population and the world’s most erotic dance. Immigrants tangoed in from everywhere. For the young and ambitious, the choice between Argentina and California was a hard one."
In a sense that's true. According to Maddison's data in 1913 Argentina per capita GDP (in 1990s dollars) was 3,797 while France and Germany had respectively 3,485 and 3,648 (data available here). However, the reasons for the decline in the 20th century are based on simplistic notions, typical of the so-called New Institutionalism of North and more recently Acemoglu and Robinson (for a critique go here). In their words:
"Building institutions is a dull, slow business. Argentine leaders prefer the quick fix—of charismatic leaders, miracle tariffs and currency pegs, rather than, say, a thorough reform of the country’s schools."
They blame corruption and populism (mind you currency pegs were actually typical of liberal governments, both the ones that adopted the Gold Standard, an international institution, back when the economy was fine according to The Economist, and during the 1990s during the Neoliberal experiment, that The Economist fully supported; but I'm glad that now they admit that currency pegs might be sometimes dangerous. The Economist is not for the Gold Standard anymore, it seems. Any day now they will abandon their beliefs on free trade).

On a different note they also suggest that commodity production might be a problematic path to development (yes, The Economist again has a positive take on Prebisch-Singer; see before here). They say:
"Commodities, Argentina’s great strength in 1914, became a curse. A century ago the country was an early adopter of new technology—refrigeration of meat exports was the killer app of its day—but it never tried to add value to its food (even today, its cooking is based on taking the world’s best meat and burning it). The Peróns built a closed economy that protected its inefficient industries; Chile’s generals opened up in the 1970s and pulled ahead. Argentina’s protectionism has undermined Mercosur, the local trade pact. Ms Fernández’s government does not just impose tariffs on imports; it taxes farm exports."
In other words, Pinochet was great (Chile is developed it seems; again according to Maddison's data the Chilean GDP per capita in 1990 dollars in 2008 was 13,185 while the Argentine was 10,995. Not much of a difference; back in 1913 Chile's was 2,968 and like Argentina's high for Latin America's standards. In other words, while France and Germany had in 2008 22,223 and 20,801 respectively in 2008, both Chile and Argentina had fallen behind), and redistribution towards the poor (read Perón and the Kirchners) is bad. That's why the lesson is "that good government matters."

Don't get me wrong, the State matters, and a developmental state matters a lot. However, when and how you connect with global markets also matters. While France and Germany might have had a slightly smaller GDP per capita in 1913 than Argentina, they were quite ahead in the second Industrial Revolution, with firms that were leaders in steel production, in the chemical and pharmaceutical sectors, and with a developed network of firms and universities producing first rate scientists and technological innovations. Meanwhile, Argentina (but also Chile) produced mostly commodities (and only adopted imported technology) and the vast majority of their exports were concentrated in one or two commodities exported to a limited number of countries. Hence, only someone with the limited understanding of The Economist would have thought that Argentina and Chile were in 1913 as developed as France and Germany.

The lesson is more complex than The Economist's 'the state matters' (interestingly enough if markets did matter, which is their traditional motto, specialization in commodities due to comparative advantage should pose no problems). The state matters, but so does your colonial past (being an exploitation colony rather than a settlement one is a problem), what you export matters, and the access to international capital markets also matters (France and Germany got a Marshall Plan to reconstruct, since the US was afraid of Uncle Joe, but in Argentina we weren't that lucky). The parable of Argentina is a rich one, from which many should learn, but The Economist still has no clue.

PS: Don't get me wrong, building schools is nice, and Argentina actually produced three Nobel prizes in sciences (the last one in the 1980s), but schools alone do NOT produce development.

PS': Also, why is Messi a symbol of Argentina's secular decline?

Friday, March 7, 2014

Tokunaga & Epstein - Endogenous Finance of a Dollar-Based World-System: A Minskian Approach

Junji Tokunaga & Gerald Epstein 

From the Abstract:
Global financing patterns have been at the center of debates on the global financial crisis in recent years. The global imbalance view, a prominent hypothesis, attributes the financial crisis to excess saving over investment in emerging market countries which have run current account surplus since the end of the 1990s. The excess saving flowed into advanced countries running current account deficits, particularly the U.S., thus depressing long-term interest rates and fuelling a credit boom there in the 2000s. According to this view, the financial crisis was triggered by an external and exogenous shock that resulted from excess saving in emerging market countries, not the shadow banking system in advanced countries which was the epicenter of the financial crisis. Instead, we argue that a key cause of the global financial crisis was the dynamic expansion of balance sheets at large complex financial institutions (LCFIs)(Borio and Disyatat [2011] and Shin [2012]), driven by the endogenously elastic finance of global dollar funding in the global shadow banking system. The endogenously elastic finance of the global dollar contributed to the buildup of global financial fragility that led to the global financial crisis. Importantly, the supreme position of U.S. dollar as debt- financing currency, underpinned by the dominant role of the dollar in the development of new financial innovations and instruments, and was a driving force in this endogenously dynamic and ultimately destructive process.
Read rest here 

Wednesday, March 5, 2014

Resource Curse - Natural Gas is What Detonated the Ukraine Crisis

Very few, if none at all, in the West are willing to address what really triggered the latest geopolitical ‘crisis’ in the Ukraine.

From Global Research Canada
Defending Moscow’s December 18, 2013 agreement to provide Ukraine with an aid package estimated at about $15 billion, and cheaper natural gas through discounts and “gas debt forgiveness” estimated as able to save Ukraine $7 bn in one year, Vladimir Putin said the decision to invest $15 bn in ‘brotherly slavic’ Ukraine, and grant the gas discount was “pragmatic and based on economic facts”. At the time, the “investment” in Ukraine was already conditional – not only on the political issue of Ukrainian loyalty to Moscow – but on Ukraine complying with previous longstanding, often revoked, modified or extended commitments to repay gas debts dating from as far back as the early 1990s.  In December, Russia’s Finance minister Anton Siluanov said payment of the “aid or investment” funds to Ukraine, in tranches of about $2 bn each, would need Ukraine making a serious response to end-2013 estimates, by Russia, of the minimum “monetized gas debt” Ukraine has to pay. Siluanov’s ministry said this was about $2.7 bn, itself a large downward revision on other published figures from Russian sources, extending well above $5 bn. His ministry also published statements suggesting that Ukraine’s non-payment of gas taken and consumed by the country, since 2010, ran at a yearly average as high as $2 – $2.25 bn. To be sure, events starting in February as the “Maidan movement” drew massive public support in the capital and western Ukraine to overthrowing the government-in-place. This was a repeat of Egypt’s anti-Morsi flash mob street revolution, followed by the Saudi-financed military coup against elected president Morsi. In Ukraine, however, the street magic stopped in the east, and especially in Crimea where 75%-85% of votes cast in the 2010 election were for Viktor Yanukovych. To be sure, this blood-colored version of the Orange Revolution aimed at aligning Ukraine with the European Union may have scarpered further bail out payments by Moscow. Any upping of the ante, as enacted and supplied by NATO and John Kerry, could lead to Russia also making a total shutdown of gas supply to Ukraine – Kiev’s Independence Square flash mob could hope that Global Warming will shorten the winter, ease heating needs, and give Ukraine a head start for becoming a debt wracked European Union associated country – but this is far from a sure thing. The national gas debt will surely feature in the round of proposals for “Ukraine bailout” being developed by the IMF, European Commission, EU member states on a bilateral basis, the US and potentially other actors, including the ECB and the UN ECE (the UN’s European economic agency), as well as private banks and energy companies. One thing is sure and certain, much higher gas prices for Ukraine are inevitable, under any scenario.
Read rest here

Mark Weisbrot on Venezuela’s Struggle - Widely Misrepresented, Remains a Classic Conflict Between Right and Left

By Mark Weisbrot
The current protests in Venezuela are reminiscent of another historical moment when street protests were used by right-wing politicians as a tactic to overthrow the elected government. It was December of 2002, and I was struck by the images on U.S. television of what was reported as a “general strike,” with shops closed and streets empty. So I went there to see for myself, and it was one of the most Orwellian experiences of my life. Only in the richer neighborhoods, in eastern Caracas, was there evidence of a strike, by business owners (not workers). In the western and poorer parts of the city, everything was normal and people were doing their Christmas shopping – images unseen in the U.S. media. I wrote an article about it for the Washington Post, and received hundreds of emails from right-wing Venezuelans horrified that the Post had printed a factual and analytical account that breathed air outside of their bubble. They didn’t have to worry about it happening again. The spread of cell-phone videos and social media in the past decade has made it more difficult to misrepresent things that can be easily captured on camera. But Venezuela is still grossly distorted in the major media. The New York Times had to run a correction last week for an article that began with a statement about “The only television station that regularly broadcast voices critical of the government …” As it turns out, all of the private TV stations “regularly broadcast voices critical of the government.” And private media has more than 90 percent of the TV-viewing audience in Venezuela. A study by the Carter Center of the presidential election campaign period last April showed a 57 to 34 percent advantage in TV coverage for President Maduro over challenger Henrique Capriles in the April election, but that advantage is greatly reduced or eliminated when audience shares are taken into account. Although there are abuses of power and problems with the rule of law in Venezuela – as there are throughout the hemisphere– it is far from the authoritarian state that most consumers of western media are led to believe. Opposition leaders currently aim to topple the democratically elected government – their stated goal – by portraying it as a repressive dictatorship that is cracking down on peaceful protest. This is a standard "regime change" strategy, which often includes violent demonstrations in order to provoke state violence.
Read rest here.

Podcast with about the never ending crisis in Argentina

Podcast with about the never ending crisis in Argentina with Fabián Amico, and myself and interview by Carlos Pinkusfeld Bastos and Caio Be...