Gary Dymski on the financial crisis and the crisis in economics

In the new issue of the Review of Keynesian Economics (ROKE) you can read Gary's paper (here). From the abstract:

A crisis that started as a textbook case of how financial and asset markets can spin out of control without adequate public oversight has transmuted in 5 years into a crisis of irresponsible sovereigns, such that restoring prosperity requires that governments re-establish control over their own excessive spending. How did this happen? This paper explains the recovery of position by pro-market, restricted-government proponents in economics on the basis of political divides and segmented lines of communication within the academic economics profession. These political divides involve a double invisibilization of power within economics: an invisibilization both of the political purposes served by a profession whose leading models deny the relevance of social and political power, and of the ideational barriers to entry into ‘mainstream’ departments. The argument is motivated and illustrated by the cases of the subprime and the eurozone crises.

For those heterodox economists interested in what to do, Gary suggests a pluralistic approach within the various heterodox perspectives.

Mexico: Twenty Years of NAFTA Regret

By Mark Weisbrot

It was 20 years ago that the North American Free Trade Agreement between the US, Canada, and Mexico was implemented. In Washington, the date coincided with an outbreak of the bacteria cryptosporidium in the city's water supply, with residents having to boil their water before drinking it. The joke in town was, "See what happens, NAFTA takes effect and you can't drink the water here."But what about Mexico? Didn’t Mexico at least benefit from the agreement? Well if we look at the past 20 years, it’s not a pretty picture. The most basic measure of economic progress, especially for a developing country like Mexico, is the growth of income (or GDP) per person. Out of 20 Latin American countries (South and Central America plus Mexico), Mexico ranks 18, with growth of less than 1 percent annually since 1994. It is of course possible to argue that Mexico would have done even worse without NAFTA, but then the question would be, why?

Read the rest here.

EPI: Raising the Federal Minimum Wage Would Lift Wages for Millions and Provide a Modest Economic Boost

At a briefing at the Economic Policy Institute on Tuesday, January 14, 2014, Jason Furman (Chairman of the White House Council of Economic Advisers), Sen. Tom Harkin (D-Iowa), Rep. George Miller (D-Calif.) and Lawrence Mishel of the EPI  discussed the economic case for raising the federal minimum wage and the path forward to enact the Fair Minimum Wage Act of 2013.

EPI research shows (see here) the Harkin-Miller bill would give a raise to 27.8 million workers, who would receive about $35 billion in additional wages. A $10.10 minimum wage would increase GDP by $22 billion, creating roughly 85,000 new jobs.

Mind you, raising the federal minimum wage to $10.10 is meager...should be at at least $20.00, which would provide more than just a 'modest boost' to the US economy.

George Stigler and the labor theory of value

George Stigler, author of the famous The Theory of Price, winner of the Sveriges Riksbank Prize (aka the Nobel) and Friedman's best friend at Chicago, suggested  long ago that: "the professional study of economics makes one politically conservative." His reasons for that particular view are extensive, but one factor was associated with the decline of the dominance of the labor theory of value and the rise of the supply and demand (marginalist) approach, that he embraced. In his words:

"It could be argued that there is one powerful factor making for conservatism: the inability of a very radical young economist to get a desirable university post. It is indeed true that a believer in the labor theory of value could not get a professorship at a major American university, although the reason would be that the professors could not bring themselves to believe that he was both honest and intelligent, and I hope they are not improper in their demand that a professor be at least tolerably honest and presumptively intelligent."

Funny thing is that the following year a little monograph was published that demonstrated that the basic propositions of the labor theory of value could be retained. By using the device of the standard commodity, Sraffa reveals that the profit rate can be determined as a physical ratio independently from relative prices, and that the rate of profit is determined by the objective conditions of production and the need of reproducing the system (for more on the standard commodity go here).

Also, the capital debates led to the conclusion (admitted by Samuelson) that the neoclassical (marginalist) theory was unable to show that relative scarcity determined relative prices and income distribution. In other words, while it is possible to hold a version of the labor theory of value, at least the Smithian labor commanded (in terms of the standard commodity, as suggested by Sraffa), it is not possible to say that supply and demand explain value and distribution.

So Stigler got it all backwards. We are left with the alternative that radical young economists have a hard time finding desirable university posts for purely ideological reasons. Actually lack of honesty and/or intelligence might be an asset rather than a handicap in the economic profession.

The Privatization of Public Education in America

By Ann Robertson and Bill Leumer

Obama’s contribution to the privatization campaign has centered for the most part on education. But before we can evaluate its impact, it is necessary to consider the different forms privatization can take in relation to schools, since it can occupy different positions on a wide spectrum of possibilities. At one end of the spectrum lie completely privatized schools that provide their own financing and govern themselves. But many schools are more like hybrids, a mixture of private and public. Charter schools, whose numbers are growing rapidly, are funded with public money (that previously would have gone to public schools) but are privately operated. Often they are run by for-profit or non-profit national companies, as opposed to simply a group of teachers who want to break away from traditional schools and experiment with an alternative curriculum. Similarly, essentially public universities or K-12 schools might make use of online courses produced by private, for-profit companies, and, of course, private companies produce textbooks. Another hybrid example is where public universities have aggressively raised tuition fees at public universities so that funding shifts from the public coffers to the students themselves as private citizens. At the University of California at Berkeley students now contribute more for their education than the state does. In the 1960s the state paid for the vast majority of their expenses. Still another example is where a publicly funded and operated school imports the corporate culture from the private sector. For example, many public universities are abandoning their former practice of promoting faculty into administrative positions, paying them only slightly more than before and, instead, are drawing on administrators from the private sector and paying them exorbitant salaries while paying part-time faculty less than a living wage. Some presidents of public universities now make over $1 million a year. Under such circumstances democratic institutions of shared governance are dismantled while power tends to be concentrated at the top, thereby destroying any spirit of collegiality.

Read rest here.

Two Transitions in Brazil: Dilemmas of a Neoliberal Democracy

By Alfredo Saad Filho

The mass movements starting in June 2013 were the largest and most significant protests in Brazil in a generation, and they have shaken up the country's political system. Their explosive growth, size and extraordinary reach caught everyone – the left, the right, and the government – by surprise. This article examines these movements in light of the achievements and shortcomings of the democratic transition, in the mid-1980s, and the experience of the federal administrations led by the Workers’ Party since 2003.

Read the rest here.

PS: If you read in Portuguese, an alternative explanation of the protests, by Marcos Nobre, is available here.

Honduras Since the Coup: Economic and Social Outcomes

By Jake Johnston and Stephan Lefebvre of CEPR. From the abstract:

This paper presents a broad overview of economic and social trends in Honduras since 2006, including the years following the military coup of June 2009. It finds that economic inequality in Honduras has increased dramatically since 2010, while poverty has worsened, unemployment has increased and underemployment has risen sharply, with many more workers receiving less than the minimum wage. While some of the decline was initially due to the global recession that began in 2008, much of it is a result of policy choices, including a decrease in social spending.

Read rest here.

Money as debt: a documentary

This short documentary provides an interesting description of monetary economics, more attuned to endogenous money and Chartal views of money than the mainstream of the profession.

Sluggish labor market recovery continues

The economy added just 74,000 jobs in December, and the unemployment rate fell to 6.7%, according to the Bureau of Labor Statistics (BLS).  In other words, the labor market situation is still pretty bad. Yes the unemployment rate declined during 2013, but in part it resulted from the fact that the labor force participation rate declined by 0.8% point over the year, that is less people trying to find work.

 The figure shows how the current recovery looks weak, in particular when compared to the 1990s one, and why it has been insufficient to deal with a more profound crisis (as can also be seen in the figure when compared to the milder collapse of the dot-com bubble).

Ideology, Sociology of Knowledge, and the Historic Moment of Production

By Dr. Victor E. Kappeler

In the 1920s, the concept of ideology passed through another transformation in its quest for meaning. Karl Mannheim (1893-1947), a Hungarian-born sociologist, took on the project of developing a “sociology of knowledge.” He directly engaged the subject of ideology as articulated by Marx in hopes of developing an objective, yet interpretative, social science approach to the study of ideas. In his quest to understand “the social and activist roots of thinking” (1936: 4), he hoped to develop a theory of ideology that would guide political action and practice. He resituated de Tracy’s “science of ideas” from the domain of the natural sciences to that of sociology. As an advocate of the social science approach to understanding, he advanced a structuralist view of ideology. He theorized a distinction between “particular” and “total” ideologies. Under this framework, particular ideologies were characterized by distortion and fabrications—the intentional misrepresentation of ideas by individuals. Total ideology was thought of as the whole structure of the mind, a product of the social-historical epoch of a class or group derived from material conditions. Mannheim’s total ideology sought to engulf not only ideas and their origin but also analytic methods into the concept of ideology. In this scheme the scientist’s science and the Marxist critique of ideology were considered products of the epoch.

Mannheim’s schema of distinctions, however, became intellectually problematic because it eroded into an extreme relativism. If all ideologies were created from the same historical and social forces and all forms of analyzing ideology are subject to these same forces, then how can one make an analytic judgment? Evaluation becomes impossible. A side affect of this relativist way of thinking about ideology was the eradication of the aspect of domination made explicit in the Marxist critique of ideology. While Mannheim developed yet another duality to address the relativism issue, it was never satisfactorily resolved.

The following points can summarize the brief history of the meaning of ideology:

• Ideology was initially thought of as the scientific study of ideas. It was thought that ideas could be subjected to the same forms of analysis that predominated in the natural sciences.

• While ideology had political consequences it did not initially carry negative connotations until it was used as a label to silence political critics.

• Ideology had an oppositional character because it stood as an alternative philosophy of understanding and way of explaining social and historical change.

• Ideology took on its critical connotation when it was used as a term of opposition to develop a theory rather than a philosophy of historical change.

• Selective reading of critical theory obscured ideology’s dialectical nature, overemphasized its materialistic basis, and focused on the concept as an intentional distort of reality.

• Reformulation of ideology under the “sociology of knowledge” crystallized its distortion aspect and attempted to engulf the critical theory as an unexceptional case. The domination feature of ideology illuminated by critical theory was replaced by a privileged disciplinary view of the concept. Ideology masqueraded as a self-critical and apolitical “science of ideas.”

The negative connotation of ideology is used to characterize thoughts and positions that oppose prevailing views. The negative use of the term implies that ideology is something less than factual or scientific—an intentionally created illusion based on distortion. Contemporary construction of ideology implies that there is some alternative basis from which we can speak; some factual world distinct from the interplay of the material and mental. Yet, the presentation of selected facts, the differential weight given to some facts, and the values generated from what we perceive facts all flow from highly selective choices about how we see and represent reality— in other words from ideology. Regardless of our values, when most people speak they are speaking from and sustaining a particular ideological order. 

Originally posted here.

New Book By Baker & Bernstein: Getting Back to Full Employment - A Better Bargain for Working People

By Dean Baker and Jared Bernstein

From the Introduction:

A strong labor market with full employment need not be a rare economic anomaly that returns roughly twice for every one appearance of Halley’s Comet. Full employment can be a regular feature of the policy landscape, with tremendous benefits for rising living standards, poverty reduction, the federal budget, and equitable economic growth. In this book we present the benefits and importance of full employment in ways that are particularly germane to the economy today, and we offer policies to begin moving to full employment now. Full employment can be defined as the level of employment at which additional demand in the economy will not create more employment. All workers who seek a job have one, they are working for as many hours as they want to or can, and they are receiving a wage that is broadly consistent with their productivity.

Full PDF here.

Oskar Lange theory of interest and the ISLM

By Roberto Lampa (Guest blogger)

In two previous posts, dated 2011 and 2013, Matías Vernengo clarified that the ISLM model can accommodate changes that incorporate the criticisms of several heterodox groups. In particular, he stresses that the ISLM can accommodate an investment function in which the level of activity (rather than the rate of interest) is central, so that the accelerator can be incorporated. More importantly, he also states the ISLM does not imply a natural rate of unemployment, thus allowing for relevant discussion of policy issues.

Both these aspects can be found in Oskar Lange's 1938 contribution to the neoclassical synthesis, in which he assumes that investment (mostly) depends on consumption, which in turn is permanently distorted by the “irrational” distribution of income, typical of any capitalist economy. More precisely, Lange outlines the mutual dependence of investment and consumption as a sort of ‘indirect’ relationship.

Firstly, he states that, as in traditional theory, in his model an increase in the propensity to save induces a decrease in the rate of interest. However, his reasoning runs along more unconventional lines than the (Neo)-Classical interaction of both supply (of) and demand (for) capital curves:

"…an increase in the propensity to save [implies that] expenditure on consumption is now lower. This causes (…) a lower quantity of investment (…). Total income decreases (…). The consequence is a fall in the rate of interest." (pp. 17-18)

In other words, in Lange's view the immediate effects of an increase in the propensity to save are a decrease in consumption, investment and total income. Therefore, as recognized by Keynes himself:

"The analysis which I gave in my General Theory of Employment is the same as the ‘general theory’ explained by Dr. Lange on p.18 of his article, except that my analysis is not based (as I think his is in this passage) on the assumption that the quantity of money is constant." (Keynes J.M., 1973a, p.232n)

Following this train of thinking, we deduce that it’s only afterwards that the decreased level of the rate of interest will stimulate investment, consumption and total income. The final result of an increase in the propensity to save will then depend on the ‘specific weight’ of each of these two effects.

Not coincidentally, Lange explicitly assumes in equation (3) – by drawing on Karl Marx's realization crisis – that consumption directly affects investment, as an excessive growth in saving (i.e. an excessive contraction of consumption, investment and total income) cannot be counter-balanced by the subsequent decrease in the rate of interest, as it destroys any incentive to invest, "at least in a capitalist economy where investment is done for profit" (Lange, 1938, p.23). He thus firmly rejects the (Neo)-Classical assumption that any abstinence from consumption implies automatically an increase in investment: according to him, such a direct relationship holds only until a certain limit (i.e. the optimum propensity to consume), beyond which the collapse of the demand for investment goods will drastically diminish investment itself. Therefore, the real issue becomes if and how it is possible to determine (and to maintain) such an optimum propensity to consume, given a market economy. Lange's opinion is definitely non-optimistic:

"In a society where the propensity to save is determined by the individuals, there are no forces at work that keep it automatically at its optimum, and it is well possible, as the under-consumption theorists maintain, that there is a tendency to exceed it." ( p.32)

In other words, the result of Lange's analysis converges with (and radicalizes, as well) Keynes' pivotal idea, that is, the tendency towards a chronic under-consumption crisis.

Recently, I have published a detailed analysis of this rather obscure work in the Cambridge Journal of Economics. I explore in depth Lange's theory of interest and its tortuous relationship with both Keynes’ General Theory (1936) and Hicks' synthesis (1937), developing two graphical models that show the non-linearity of Lange's investment function as well as the consequences of his equilibrium solution. Through an unedited manuscript, I also reconstruct Lange's beliefs about the chronic sub-optimality of the capitalist economy and his scientific endorsement of the socialist economy.

Full paper is available here.

P.S. It is worth noting that Keynes himself was prompted to reflect that Lange's article "follows very closely and accurately my line of thought" (Keynes, 1973a) notwithstanding the analytical differences. Lange was, after all, standing on the same "side of the gulf," as he clearly rejected the notion that capitalism could be a "self-adjusting system" (Keynes, 1973b).

Beyond Gemeinschaft and Gesellschaft: The Foundations for Ethical Political Humanist Social Science

A piece that I wrote for The Hampton Institution: A Working-Class Think Tank has been posted.

Here is a snapshot:

It is pertinent to recognize that social reality is not an aura of perceived characteristics, of which there lays no unifying substance that could account for coherence. There is an evident danger in oversimplifying things. The attempt of this paper is to promote an approach to social science that engages issues concerning social ontology; that is, epistemic positions in regards to the means by which to uncover underlying interconnecting structures that constitute the manifestation of certain types of social reality. In this sense, the very notion of society itself amounts to an immensely complex entity - the broad functioning of which cannot be captured by obscure models of positivistic simplification.

Pragmatism does not tell us about the existence of anything. By not grasping the essence of human behavior that exhibits interconnections, we as human beings are left mystified about the world in which we live in. As such, "the attempt to define some underlying reality beneath the ever-changing surface of human phenomena, to delineate the common psychobiological structure of man, to specify the common blueprint of the human animal." (Wolf, 1974 [1964]: 33) We must abandon our Hegelian selves; social scientists have a responsibility to illuminate the intersections of the latent and visible content of human endeavor such that intelligible conclusions of human social life can be holistically developed.

Read rest here