Lucas Teixeira on Inflation

The talk here. Recording is not the best, and the Power Point cannot be seen. It is available here for those interested.

Paper is here. From the abstract:

In the overlapping global emergencies of the pandemic, climate change and geopolitical confrontations, supply shocks have become frequent and inflation has returned. This raises the question how sector-specific shocks are related to overall price stability. This paper simulates price shocks in an input-output model to identify sectors which present systemic vulnerabilities for monetary stability in the US. We call these prices systemically significant. We find that in our simulations the pre-pandemic average price volatilities and the price shocks in the COVID-19 and Ukraine war inflation yield an almost identical set of systemically significant prices. The sectors with systemically significant prices fall into three groups: energy, basic production inputs other than energy, basic necessities, and commercial and financial infrastructure. Specifically, they are “Petroleum and coal products”, “Oil and gas extraction”, “Utilities”, “Chemical products”, “Farms”, “Food and beverage and tobacco products”, “Housing”, and “Wholesale trade”. We argue that in times of overlapping emergencies, economic stabilization needs to go beyond monetary policy and requires institutions and policies that can target these systemically significant sectors.

Capitalism Alone Against Itself: Liberal Democratic versus Political Capitalism

I finished Branko Milanovic's thought provoking Capitalism Alone this summer. But I haven't had much time to write on the blog, as you might have noticed. This is certainly not a review, and I would definitely suggest that you go and buy the book as soon as you can and read it. It is a serious discussion of the future of capitalism, that word that, as Heilbroner often reminded us, was at the center of the discipline, but seldom discussed openly by economists. He cited, if memory doesn't fail me that it didn't appear in Mankiw's Principles textbook, at least back then in the 1990s, when it was published. I always note that Allan Meltzer wrote a little book titled Why Capitalism? were he makes no explicit effort in defining it, even though a definition can be gleaned from it.*

The definition most economists use leans more on Max Weber than Karl Marx, or the materialist tradition of the surplus approach upon which he built on. Branko is a pluralistic economist, well read and influenced by several authors, not all of them conventional. The discussion of the definition of capitalism is complex, and he separates, in its modern version two archetypes of capitalism, that are in a mortal battle for global hegemonic power, namely: Liberal Meritocratic Capitalism, represented by the West, and particularly by the United States (perhaps more credibly now after the election), and Political Capitalism, represented by the rise of the rest, with China at the head.

When assessing whether China is capitalistic Branko does use the conventional Weberian definition (p. 87), but that seems to be a pragmatic approach to provide the basis for his argument that China (and Vietnam, Malaysia and Singapore too, p. 91) does conform to the Weberian notion of political capitalism, a term used by Weber to discuss ancient forms of capitalism. But there is a concern with how elites maintain control by non coercive forces in Liberal Capitalism, and about the need to create an indigenous capitalist class in Political Capitalism. Both point out to alternative issue of class conflict, of course, and how surplus is extracted from workers, and points to an alternative view of capitalism. There is, in somewhat Marxist tradition a preoccupation with the role of the bourgeoisie, and an nod to Wallerstein that suggested that there are no capitalists without state support, something I would like to have seen more in the book (p. 116).

In fact, the secondary role of the state, to some extent, the absence of a more thorough discussion of the developmental state in the case of the Chinese experience, is one of the problems with the book. Another would be an emphasis with issues of corruption, which seem to me to be of secondary importance, even if the problem might have increased with financial deregulation, and the rise of tax havens. The emphasis of the book is on the changes associated to the increasing mobility of labor and capital and the problems it poses for both systems. Branko thinks that the welfare state is vulnerable with free labor mobility (p.156), undermining the democratic process in liberal capitalism, and that capital mobility, which he sees more through the lens of Global Value Chains, rather than portfolio flows, and that would lead to higher growth in poorer countries, reducing the need for labor mobility. The book also debunks a few myths, like the notion that robots are coming for your job, or the idea that a Universal Basic Income (UBI) would be a panacea for the economic problems caused by globalization and technological change.

* Invariably it is based on notions of the profit motive (some form of rationalization) as required by markets, and private property, or Weber (plus North, if you prefer). For an alternative discussion see this old post on a view based on the surplus approach, including a critique of the Weberian naturalization of capitalism as something that existed in the past and that explains the golden ages of antiquity.

What makes capitalism capitalism?

So I had a debate (the sort of debate you can have with 140 characters) in Twitter a few days ago with Unlearning Economics and Jonathan Finegold, among others (links are to blogs not to the twitt feeds). The main question was the definition of capitalism. It is a peculiar feature of modern economics that very few mainstream authors would actually discuss the issue directly, even if there has been a revival of some related issues associated to the relevance of institutions (vis-à-vis geography and culture) in the rise of the West. Robert Heilbronner used to say that the best kept secret in economics is that it was is about the study of capitalism.

I'm not going to get too much into the topic here, but it is worth a brief summary. As discussed before (here) in the blog, the surplus approach suggests that economics is the study of the material reproduction of societies. The existence of a surplus allows for specialization and progress, and the ways in which the surplus is produced and distributed is central for the understanding of reproduction. Broadly speaking, what Marx referred to as a mode of production is comprised of two elements, the material conditions of production or the forces of production, which include the means of production that incorporate a certain technology, and the social relations of production, which include the organization of production and the customs, laws and rules that guarantee the property of the means of production.

For Marx the manifestation of the capitalistic character of the manufacturing process is that the workers do not own the means of production and must sell their labor power. The reason being that an essential condition for capitalists to be able to buy labor power is that workers do not own means of production and are forced to sell in the market their labor force (see Capital, Volume I, Part II, chapter 6). The essence of the capitalist system is that workers sell their labor force, and are in this particular way exploited. That's the specific way in which capitalists obtain a surplus beyond what is necessary for social reproduction.

On the notion of the mode of production Marx perceptively tells us (Vol. I, Book I, Part I, ch. 1) that:

"The mode of production in which the product takes the form of a commodity, or is produced directly for exchange, is the most general and most embryonic form of bourgeois production. It therefore makes its appearance at an early date in history, though not in the same predominating and characteristic manner as now-a-days. 

Even Adam Smith and Ricardo, the best representatives of the school, ... treat this mode of production as one eternally fixed by Nature for every state of society ..."

That's exactly what Max Weber (and many modern authors too, by the way) does. He often refers to capitalism when discussing the middle ages in Western Europe, or ancient China, or the Roman Empire (see for example his General Economic History). This naturalization of capitalism is also typical of mainstream authors, that tend to confuse the existence of markets, or the profit motive, with capitalism.

Production for exchange in the market existed for sure before modern times, and so did exploitation. But the difference with previous modes of production is not simply the more developed material conditions of production associated with the factory system and machinery. It is the specific social arrangement that allows capitalists to control the means of production and extract a surplus from workers that must sell labor power in the market, and are liable of being exploited (more or less according to their bargaining power) that sets capitalism apart. So it is the way in which labor is exploited, one in which workers sell labor power in the market, that makes capitalism capitalism, so to speak [this has interesting implications in the Dobb and Sweezy debates on the transition from feudalism to capitalism, for example, that I'll leave for another post].

Note that while this definition of capitalism is clearly Marxist it builds up on the surplus approach, and is one of (not the only one either) the main contributions of Marx to the surplus tradition (he was critical of the bourgeois elements of classical economics, but built on the analytical structure of the school). In fact, Turgot and Smith both describe the evolution of societies in terms of stages related to the mode of production. It is the economic character of production that governs other aspects of social relations. The four stages were hunting, pasturage, agriculture and commerce. Bill McColloch suggests (see here) quite convincingly that Marx builds on the work of Steaurt.

Also, note that the notion that the profit motive is the differentia specifica of capitalism is tied to the typical methodological individualistic stance of the mainstream. It is hard to say, however, that individuals (merchants, for example) in previous modes of production (say in the ancient mode of production, which was based on slavery) had no desire for profits. If they did, however, what's different about capitalism? That's also why all the alternative theories of history (to the surplus approach) tend to fetichize the role of the entrepreneur (see Landes's last book for the epitome of that approach, which was also displayed in the History Channel's The Men Who Built America). It's the return of Carlyle's hero-worship and the Great Men theory of history.