On Mirowski and neoliberalism

New post on Substack that argues that Mirowski is right that neoliberalism cannot be reduced to textbook neoclassical economics, since it is a broader political and institutional project (see the old debate here). But I defend that, on a theoretical, the reverse point is correct. Neoliberalism also cannot be separated from marginalist economics, that is in a sense broader than neoliberalism. All neoliberals must be in some sense neoclassical, I argue.

The more detailed reasons are in the Substack post. The gist is that the public policy rhetoric of neoliberalism invokes Adam Smith's laissez-faire and classical liberalism, but its analytical core comes from neoclassical ideas about the theory of value and the notion of markets as superior coordinating mechanisms. The key distinction is therefore that classical liberalism provides neoliberalism with political legitimacy, while neoclassical economics provides its theoretical foundation. Mirowski helps clarify neoliberalism as a movement, but the post argues that his account underplays the common marginalist ground uniting its different strands.

Inflation, real wages, and the election results

Almost everybody these days accepts at face value that the result of the election was heavily determined by negative perceptions about Bidenomics, and that, in turn, resulted from inflation. Inflation was high (it wasn't, at least not that much), and people were pissed off. This is not just Larry Summers, who had argued (incorrectly in my view) that inflation was caused the large fiscal packages of an excessive generous government.

In the heterodox camp, many have suggested that more should have been done to control greedy corporations, that caused inflation by hiking their mark ups. In this view, price controls might have been helpful (often some examples of other countries, like Spain are used). While some of these would have been good, they depend on the previous existence of national mechanisms to, for example, control the price of energy (even easier if one has a national oil company),  of a national Value Added Tax on food that could be reduced to alleviate cost pressures. As I noted in the INET video, the best policy would have been to try to increase wages above inflation, and perhaps the best national tool was the minimum wage, but Biden and the Dems in Congress failed to pass an increase (Trump and the GOP are against the existence of a minimum wage, let alone a higher one).

At any rate, as I noted before, real wages at the bottom of the income distribution did go up, going back at least to the Clinton era, as it can be seen below.

However, that about the relative position of the workers at the bottom, nor about the fact that during the Pandemic period (and at the beginning Trump was still the president) real wages for the non managerial workers basically stagnated (even fell a little bit from the peak).

And, as noted before, this does overlook the fact that real wages for an extended period, going back to the 1970s, has more or less stagnated (individuals, obviously, might be doing better, as they get promotions and so on; but people know that their parents could have a better life with a working class salary back in the 1970s).

The key is not inflation, but that real wages have not been growing enough to provide a sense that people's lives are improving. If the left clings to the demonization of inflation, the ultimate lesson would be that fiscal policy was the problem (not the greedy corporations, but the inefficient government; both stories are incorrect, see why on my Catalyst piece). And we will make it so much more difficult for the next Democratic administration and the progressives within that coalition. Many on the left took the wrong lesson from the 1970s, that inflation was a problem, and that balanced budgets were necessary to win elections. That certainly was reinforced by the Clinton administration. To conclude that inflation and excessive spending was the problem with Bidenomics will make things worse.

In terms of feasible strategies that would have positive economic effects, and generate immediate electoral advantages, Dems should concentrate on higher minimum wages as a catalyst for better labor market conditions (the effects spread to other wages, and it is a simple slogan that people readily understand, and Trump would have been forced to remain silent or come out against it).

The Gift of Sanctions

Jamie Galbraith presented, at the EPS session at the ASSA Meetings in San Antonio, the paper published by INET. As he said there: "Despite the shock and the costs, the sanctions imposed on the Russian economy were in the nature of a gift." A type of invisible hand effect, by which the unintended effect of the policy that should supposedly benefit US allies (Ukraine) has the unintended effect of helping its alleged enemies (Russia).

From the abstract:

This essay analyzes a few prominent Western assessments, both official and private, of the effect of sanctions on the Russian economy and war effort. It seeks to understand the main goals of sanctions, alongside bases of fact and causal inference that underpin the consensus view that sanctions have been highly effective so far. Such understanding may then help to clarify the relationship between claims made by economist-observers outside Russia and those emerging from sources inside Russia – notably from economists associated with the Russian Academy of Sciences (RAS) – which draw sharply different inferences from the same facts. We conclude that when applied to a large, resource-rich, technically proficient economy, after a period of shock and adjustments, sanctions are isomorphic to a strict policy of trade protection, industrial policy, and capital controls. These are policies that the Russian government could not plausibly have implemented, even in 2022, on its own initiative.

Download paper here.

 

Unmasking Inflation: Why the Conventional Wisdom is Failing Us

Interview I gave for INET in January. From their website:

Matías Vernengo navigates the complex topic of inflation, discussing its implications on workers, and the economic policies that can potentially mitigate these effects. He explains the inflation of the 1970s and compares it to the more recent inflationary scenario provoked by global events. Vernengo evaluates the mainstream explanations - demand-pull and cost-push theories - and presents an alternative, heterodox explanation that views inflation as a result of distributive conflict and corporate power. While he acknowledges the role of corporations, he emphasizes that it’s the effects of inflation, primarily on workers’ real wages, that require addressing. He argues that the best policy would be to compensate workers for these effects. Vernengo’s analysis covers not just the American context, but also examines inflation in peripheral economies like Argentina and Turkey, identifying a link to exchange rates. He also critiques the “one-size-fits-all” theory approach to understanding inflation, underscoring the need for a heterodox economics perspective that could offer more nuanced insights and potential solutions.

The Political Economy of the COVID-19 Crisis in Latin America

Following my talk on the same topic, on the same venue, now someone that might know a bit more about what's going on, particularly in Brazil. Professor Mazat will talk this Friday, and I highly recommend it. To register go here. Btw, Numa is Professor of Development Economics in the Institute of Economics at Federal University of Rio de Janeiro, my alma matter.

The Economic Consequences of Covid-19 in Latin America

For more information go to their website.

Is there a new "new economics"?

INET has posted a piece by Eric Beinhocker on what he calls the “new economics” [sic]. That used to be Keynesian economics, back in the 1960s. Now it’s a mesh of New Institutionalism, Behavioral Economics, and Complexity Analysis. He argues that:

“New economics does not accept the orthodox theory that has dominated economics for the past several decades that humans are perfectly rational, markets are perfectly efficient, institutions are optimally designed and economies are self-correcting equilibrium systems that invariably find a state that maximises social welfare."

This new “new economics” should be more realistic than mainstream economics. And the author does explain that it’s not new, and that it builds on heterodox traditions. Again, in his words:

"It should also be emphasised that new economics is not necessarily new. Rather it builds on well-established heterodox traditions in economics such as behavioural economics, institutional economics, evolutionary economics, and studies of economic history, as well as newer streams such as complex systems studies, network theory, and experimental economics. Over the past several decades a number of Nobel prizes have been given to researchers working in what today might be called the new economics tradition, including Friedrich von Hayek, Herbert Simon, Douglass North, James Heckman, Amartya Sen, Daniel Kahneman, Thomas Schelling and Elinor Ostrom."*

The problem is that not even one of the authors cited above is heterodox (yes, not even Sen, what you guys expected North or Simon?). For the most part, all these authors and traditions accept mainstream marginalist theories as logically consistent, but incomplete and somewhat unrealistic. The problem with neoclassical economics, in this view, is that it’s not realistic. The heterodoxy is supposedly the result of more realistic and relevant theories. Fundamentally regarding individual behavior. Because the new “new economics” has a methodological individualist vein, or so it seems (see the chart Beinhocker provides for the differences with the mainstream, in the macro part, you won’t find a critique of the natural rate hypothesis, it’s all about heterogeneous agents, and some sort of path-dependency; the latter is closer to being relevant; on that go here). Note that in the policy discussion one of the key macro stories is the Geanokoplos et al. model on the possibilities of bubbles (and he does believe in the relevance of conventional overlapping generations and Arrow-Debreu model, of course).

Don’t get me wrong. I’m all for external critiques of mainstream economics. And I think there are important lessons from some of these fields. But they are all about imperfections. In my view, economics has to be rebuilt on the foundations of old economics. The old economics of the classical authors and Marx, that understood that distribution reflects social conflict, in particular, class conflict, and the old “new economics” of Keynes, that understood that causality implied that demand determines supply (and not vice versa as in Say’s Law). Sure you might add complexity, and heterogeneous agents, and institutions (perhaps more than property rights?), and that helps too. But complexity, heterogeneous agents and other 'imperfections' are there, as I noted in my debate with Colander et al. as a way of making the mainstream more reasonable, and not to bring down a theory with insurmountable logical problems. My two cents.

* As promised I'll discuss Hayek when I have the time to write a response to Mirowski. And yes, many authors that believe they have abandoned marginalism still use it. Keynes himself was not completely able to get rid of the old ideas. As he said: "The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds."

Kevin Gallagher on Emerging Markets and Re-regulation of Cross-Border Finance

"Since the revival of global capital markets in the 1960s, cross-border capital flows have increased by orders of magnitude, so much so that international asset positions now outstrip global economic output. Most cross-border capital flows occur among industrialized nations, but emerging markets are increasing participants in the globalization of capital flows..."

James Galbraith on Effective Governance To Spur Innovation

The United States’ deep political polarization is blinding the nation from seeing what it takes to create an effective innovation economy.

Fred Block on Polanyi and Market Fundamentalism

Sociologist Fred Block being interviewed on his most recent book The Power of Market Fundamentalism: Karl Polanyi's Critique.

The Association for Heterodox Economics thinks INET is marginalizing heterodox economics

The Association for Heterodox Economics has released a report, Pluralism, Heterodoxy, and the Prospects for a new Economics Curriculum: Assessing the potential of INET, What’s the Use of Economics, and the CORE project, which is very damning for INET. They say:

"Our main concern is that the positive potential of INET is steadily being closed down. What began as recognition of fundamental problems that require fundamental change is becoming a more modest set of alterations. A sense of failure is, for all intents and purposes, being translated into a context of relative success requiring more limited changes – though these are still being seen as significant. Part of the reason that they are seen as significant is that changes from within mainstream economics do not have to be major in order to appear radical. It is our contention that heterodox economics is being marginalised in this process of ‘change’ and that this is to the detriment of the positive potential for transforming the discipline."

 Worth reading. But can say I'm too surprised though. See my previous post on INET's project of rethinking economics.

INET PhD student workshop in Foz do Iguaçu - Brazil

Foz do Iguaçu, Brazil
December 8-10, 2013

The Institute for New Economic Thinking will offer a PhD student workshop in Foz do Iguaçu, Brazil. The event will take place on December 8-10, 2013, right before the 41st Brazilian Economics Meeting, the largest annual convening of the Brazilian economics academy. The workshop is being organized in cooperation with ANPEC, the Brazilian Association of Graduate Programs in Economics, and will consist of lectures by selected senior scholars as well as paper presentations by young scholars.

Lectures

The Institute will offer the mini course Growth in Developing Countries, taught by Nelson Barbosa from Universidade Federal do Rio de Janeiro, and Lance Taylor from the New School for Social Research. The course will analyze the growth experience of developing countries from a structuralist perspective. A detailed course description will be posted here soon.

More info here (h/t Laura Carvalho).

Why the crisis didn't discredit mainstream (neoclassical) economics?

There are probably many answers to the question. I suggested before that the best way to look at it is from a sociological standpoint. The same people hold the same positions at the key 'respectable' universities, go to the same 'relevant' meetings, and award the same 'important' prizes. And research does build on previous research. Let alone that the economics profession, like the others, is there to protect and reproduce the status quo.

At any rate, in his new book Philip Mirowski, from Notre Dame, and a member of Institute for New Economic Thinking (INET; which has funded I should say several heterodox authors) dedicates, in part, his first chapter to the topic. He says about the INET meetings, which were supposed to display some of the changes in the profession after the crisis:

"[...] the first INET meeting at Cambridge University in 2010 bore some small promise—for instance, when protestors disrupted the IMF platitudes of Dominique Strauss-Kahn in Kings great hall, or when Lord Adair Turner bravely suggested we needed a much smaller financial sector. But the sequel turned out to be a profoundly more unnerving and chilly affair, and not just due to the caliginous climate. The nightmare scenario began with a parade of figures whom one could not in good conscience admit to anyone’s definition of “New Economic Thinking”: Ken Rogoff, Larry Summers, Barry Eichengreen, Niall Ferguson and Gordon Brown ... The range of economic positions proved much less varied than at the first meeting, and couldn't help notice that the agenda seemed more pitched toward capturing the attention of journalists and bloggers [oh my, I'm included in this one], and those more interested in getting to see more star power up close than sampling complex thinking outside the box. It bespoke an unhealthy obsession with Guaranteed Legitimacy and Righteous Sound Thinking."

I always thought naïve to think that the crisis would lead to the demise of neoclassical economics. In fact, in the US it was the Great Depression and the development of a certain type of Keynesianism (the Neoclassical Synthesis one) that led to the domination of neoclassical economics (before that the profession was more eclectic and if anything dominated, in the US, by institutionalists). But I had some hopes for INET to open dialogue with less crazy (sold out?) within the mainstream. The fact that Mirowski calls the second meeting a nightmare scenario does not bode well for the future of the profession.

Free Lunch with Paul Davidson at the University of Chicago

If you are near by, do not miss Paul Davidson's talk in Friedman's backyard. The talk is October 17, from 12:00pm to 1:00pm at the Rosenwald Hall, Room 015, University of Chicago (1101 E. 58th Street).

And yes they will provide a FREE LUNCH, brought to you buy the Association of Sarcastic Economists (no, just INET).

Heterodox Central Bankers on Debt Deleveraging

Arturo O'Connell is an advisor to the president of the Central Bank of Argentina. He has not given a talk at the last conference, but here is his recent talk "The Challenge of Deleveraging and Overhangs of Debt" at the Institute of New Economic Thinking (INET).