ROKE: Why we are launching a new journal

By Thomas I. Palley, Louis-Phillipe Rochon and Matías Vernengo

It is widely recognized that economic crises can trigger enormous change, with regard to both economic theory and the politics of governance. Today, the global economy is struggling with the fall-out from the financial crash of 2008 and the Great Recession of 2007–2009. The economic crisis that these events have generated, combined with the failure of the mainstream economics profession, has again put the question of change on the table. Reasonable people do not expect economists to predict the daily movements of the stock market, but they do expect them to anticipate and explain major imminent economic developments. On that score, the profession failed catastrophically, revealing fundamental theoretical inadequacies.

This intellectual failure has prompted us to launch the Review of Keynesian Economics (ROKE), the first issue of which is fully available here. At a time of journal proliferation, some may wonder about the need for another journal. We would respond there is a proliferation of journals, but that proliferation is essentially within one intellectual paradigm. As such, it obscures the fact that the range of theoretical inquiry is actually very narrow. A journal devoted to Keynesian economics is therefore needed, both to correct this narrowness and because events have once again confirmed the profound relevance of Keynesian theory. As noted by Robert Solow, a member of the board of ROKE, our project is “counter-cultural, and god knows the current culture needs to be countered.”

Read the rest here.

Jamie Galbraith on the debt limit crisis

Or I should say on why the debt-limit is a manufactured crisis. Also, great to see how much journalists do not understand the basics of macroeconomics. They really push back on the 'need' to cut entitlements.

Phillips curve? What curve?

The Phillips curve is one of those 'regularities' that is more likely to exist in an economist mind than in reality. Figure below (from Ritschl and Straumann, 2010*) shows the 'trade-off' between inflation and unemployment in Europe in the 1920s and 1930.

They say quite candidly:

"the seemingly obvious connection between deflation and unemployment is less than easy to find in the data. ... Yet while there was ample variation in both unemployment and inflation during the interwar period, no systematic pattern seems to emerge in the data, even if the 1920s and the 1930s are looked at separately. The picture emerging from Figure [above] is rather that the natural rate of unemployment moved quite independently of inflation, irrespective of whether or not a country was on gold" (italics added).

Seemingly obvious, but inexistent in the data. In doubt economists choose the obvious and avoid reality. The other possibility that they do not seem to consider is that there is no natural rate at all, and no systematic relation between inflation and unemployment. Consider the data for the United States below (CPI change and unemployment data from Fred).

Note that there is also no clear correlation, unless you start assuming that it is unstable, and the curve is jumping, or that a supposed natural rate is jumping around too. Occam's Razor would suggest that if you have a theory that does not postulate any systematic relation between prices and quantities** it should be simpler and, hence, preferable.

* Ritschl, Albrecht and Straumann, Tobias (2010), "Business cycles and economic policy, 1914-1945." In Broadberry, Stephen and O'Rourke, Kevin H. , (eds.) Cambridge economic history of modern Europe. Cambridge University Press: Cambridge, UK , pp. 156-180.

** Note that classical-Keynesian theory implies that prices are determined by the technical conditions of production and exogenously determined distribution while unemployment derives from effective demand. Also, unemployment might have an indirect effect on inflation, through the effects of unemployment on the bargaining power of workers and, thus, on income distribution.

Urbanization and deindustrialization

A while ago I had posted about the deindustrialization process in the US (see here). I now checked the rates of urbanization in a few cities which were associated to the industrialization process in the US, like Detroit and Pittsburgh (Census data).

The graph compares those cities with two more conventional metropolis, New York (right axis) and San Francisco, and also to San José, where which is close to the so-called Silicon Valley is located, since 1960. Detroit grew spectacularly fast in the first 40 years of the 20th century, and so did, to a lesser extent Pittsburgh. Motor City and Steel City represented the rise of metal-mechanical industry, and they grew faster than other cities in the country.

By the 1960s Detroit population had peacked, and Pittsburgh was already in decline. Note that the late 1960s is when the process of deindustrialization associated to a slower growth in industry (so industrial jobs are increasing) than in services started to take place. In the 1970s the population of New York and San Francisco also decreased, and it seemed that deindustrialization and suburbanization meant that cities were a thing of the past (the Death and Life of Jane Jacobs you can call it), destined for the dustbin of history.

But note that in the 1980s population growth picked up in New York and San Francisco while it continued to collapse in the Rust Belt. San José also was growing very fast. This suggests that in the period in which the absolute number of manufacturing jobs are decreasing, not all cities are faring badly, if you are in the business of information technology or finance you are fine. And yes, San José is bigger than San Francisco now.

The third crisis in economics

Jamie Galbraith's presidential address to the Association for Evolutionary Economics, entitled "The Third Crisis in Economics." The audio is now up on the UTIP site here.

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.

A free lunch

The inaugural issue of the Review of Keynesian Economics (ROKE) is available in full here.

Death and taxes

Well really about taxes (which are apparently less certain than death, Ben Franklin notwithstanding). The Atlantic has a nice post, with a link to a KPMG report on taxes around the globe. Figure below shows the effective tax rates (income and payroll taxes) for an income of US$ 100,000 (similar for the 300,000 level).

Note that at the top, besides Western European countries (with greece in 2nd place),  there are some developing countries like India and Brazil. All three big Latin American countries, Argentina, Brazil and Mexico, are way above the United States. KPMG says that "effective rates are derived by taking total taxes over gross income prior to any deductions." The US is in the middle of the pack.

The Trillion Dollar Coin and Popular Monetarism

The trillions dollar coin solution for the debt ceiling limit has generated some funny news. The Republican National Congressional Committee twitted the picture above, suggesting that the coin would have to have its weight in platinum to be worth a trillion, and would be so huge as to sink the Titanic. Even Jon Stewart, who is in political matters incredibly perceptive (forget funny), bought into the monetarist madness. He thinks: "We don’t need some trillion-dollar coin gimmick. We need a way to get the world to take the U.S. dollar seriously again."

I'll spare you the obvious explanations of why all of these common sense views are incorrect (for that go here or here), but it is important to note (as I did before) that there is a persistence in popular culture of monetarist interpretations of history. The funny thing is that at least the so-called progressives that are against minting the coin are clearly okay with the debt ceiling being raised, and hence the expansion of public debt, which could in part be monetized. Which means that somehow printing paper is okay, but minting coins is a sin. Go figure.

And yes mint the coin already!

In Lew of Geithner and more

Yep the chances for a fiscal expansion, already a difficult proposition with a GOP dominated House and a reluctant and fiscal conservative Obama, are now even more unlikely with the eminent nomination of Jack Lew as the new Treasury Secretary in lieu of Geithner, even though some tend to think he is too liberal (see here). Yet ass noted by Mike Norman: "Lew is an avowed deficit hawk and has been very vocal about reducing the government's deficit and supporting the president's push for a "Grand Bargain." This means that Lew will almost certainly be pushing for more austerity."

Meanwhile Olivier Blanchard at the IMF has admitted that the IMF was wrong on austerity. In a recent paper he says:

We find that, in advanced economies, stronger planned fiscal consolidation has been associated with lower growth than expected, with the relation being particularly strong, both statistically and economically, early in the crisis. A natural interpretation is that fiscal multipliers were substantially higher than implicitly assumed by forecasters.

This is a case in which I could say "I've told you so." By the way, by fiscal consolidation, Blanchard means austerity.

Lies, damned lies and The Economist

The World in 2013 by The Economist has been out for a while. Got it at the airport this weekend and read a few pieces. Really bad. Nothing new. One piece caught my attention though. On the fiscal cliff and the elections this terrible article says:

"Mr Obama will maintain that his victory, along with continued Democratic control of the Senate, constitute a mandate for his version of deficit reduction. But in fact the elections produced mixed results: Mr Obama narrowly won the popular vote and the Republicans retained their majority in the House of Representatives."

First, facts; yes the GOP won the House, but Democratic House candidates won more of the popular vote than their Republican counterparts. Redistricting or Gerrymandering is what explains this failure of democracy. Dems probably need more than 55% of the popular vote to win the majority in the House.

Note also that with a much thinner victory in 2004, Bush actually claimed he had a mandate, and proceeded to try to privatize Social Security, which was eventually a failure (because even the GOP base doesn't want that). Bush won with a margin of 2.4% of the votes (the second one; the first one was 5 to 4), while Obama won re-election with a 3.8% advantage. Obama had 51% of the vote while Clinton in 1996 had only 49.2% (Perot took votes from the GOP, and the margin of votes over Dole and Perot was just 0.1%; yes 0.1 not 1%!). And some people suggest that if not for the Lewinsky affair Clinton would have privatized Social Security.

So if anything this election produced a clear result, not mixed, for Obama and in favor of maintaining social spending and the Keynesian policies stimulating the recovery, with higher taxation on the rich at the top of the agenda. The deficit, as several polls have shown, was not an issue. The only bad thing about the fiscal cliff deal was the increase in payroll taxes. But The Economist has a different view.

The second, and by no means less important, lie spread by The Economist is that: 

"a long-term fix to America’s big deficits, [requires changes to the] rickety tax code and ballooning spending on 'entitlements', meaning the federal government’s health-care and pension schemes."

If you believe this Social Security is spending should be ballooning.  Hardly the case. See the graph below, with the mains spending categories as a share of GDP (data here).

Note that the only that is really increasing throughout the whole period is health spending (blue line). Welfare spending has gone up during the crisis, and interest spending down, and they should reverse in a few years when the recovery is complete (welfare spending is already way down from its peak). Social Security spending too increased a bit, but not much (and is actually in surplus now) since the crisis, and the reason is that people that can't find jobs and can retire tend to do it. Defense spending has expanded considerably after the two wars, and is the only kind of spending that was not caused by the recession.

On health spending note, however, that the countries that spend less, and have as good health outcomes as the US or even better, are those with a public health option. At any rate, note that this notion that the US has an entitlement problem is bogus, as much as Obama's narrow victory and need for a compromise. If anything he fell short of his promises and should had delivered a long term solution for health spending, i.e. the public option.

New Issue of ROKE out soon

A new issue of ROKE will soon be available (see contents here). A teaser here. It's the paper by co-editor Tom Palley. From the abstract:

"This paper compares Cambridge and neo-Kaleckian growth theory. Both are members of the post-Keynesian approach to growth and distribution, but the Cambridge model is a hybrid of Keynesian and classical features whereas the neo-Kaleckian model is Keynesian. The Cambridge approach assumes full capacity utilization, while the neo-Kaleckian approach assumes variable capacity utilization. The two theories rely on fundamentally dif- ferent theories of income distribution. The Cambridge model has a class structure of saving that generates Pasinetti’s (1962) theorem regarding irrelevance of worker saving for steady-state growth and distribution. That class structure can be included in the neo- Kaleckian model, generating a variant of the Pasinetti result whereby steady-state capacity utilization is independent of worker saving. Fiscal policy has similar growth effects in the two models, albeit via very different mechanisms. Both models suffer from lack of attention to the labor market."

The rest of the issue has papers by Dutt, Fazzari, Michl, Setterfield, Stockhammer, and Ryoo. More papers will be available as samples at Elgar's site soon. Enjoy!

PS: See the FB site here.

Wage share in the US (1959-2011)

Figure above shows the compensation of employees as a share of personal income.

As you can see the negative trend starts in the late 1970s early 1980s, with the Volcker hike in interest rates and the Reagan revolution, meaning reductions in marginal taxes for the wealthy.