Hyperinflation and inequality

I'm still reading The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century, which is fun, well-written and in my view less controversial than what most reviews have suggested. Yes, inequality tends to fall mostly by violent means during periods of crisis. Note, also, that Walter Scheidel uses in this book the concept of surplus, and as noted earlier here (or here and here) before is part of this broader group of social scientists that still use the concepts of the old and forgotten classical political economists. There are significant advantages to this approach (see here, for example).

Having said there is an issue that is a bit annoying in the book, which is it simplistic Monetarist view of hyperinflation. For example, he says about the two world wars and the inter-war period that:

“These gargantuan struggles were for the most part funded by borrowing, printing money, and collecting taxes. Borrowing variously translated to future taxation to service public debt, inflation to erode it, or default. Only the leading Western powers successfully managed inflation...
... the United Kingdom, the United States, and Canada were prepared to 'soak the rich,' whereas more autocratic systems such as Germany, Austria-Hungary, and Russia preferred to borrow or print money to sustain their war effort. The latter, however, later paid a high price through hyperinflation and revolution, shocks that likewise compressed inequality.”

There is no more detailed analysis, but one would infer from this that if the elites chose to print money to finance their war incurred fiscal deficits they ended up with hyperinflation. I have discussed hyperinflations before here (see also this one). Don't get me wrong, hyperinflations are destructive forces and certainly played a role in the Great Contraction (the inequality reducing forces that operated in this period, although I would put, as Scheidel seems to do also, more emphasis on the policy variables like New Deal kind of programs, taxation, land reform, etc). However, money supply was simply endogenous and had little impact on economies that were already in shambles. Inflation (hyper) resulted from the collapse of the economies and more often than not the pressing need for foreign currency that led to massive depreciation, and wage resistance.

You can read my paper on inflation and money here, if you're interested.

More on "Why Latin American Nations Fail"

Brief summary of the content of the book published in the newsletter of the World Economics Association.

Institutions are central to explaining the way in which, nations grow and develop. Traditionally the study of institutional economics focused on a very broad range of interests and made contributions in several different areas, including the structure of power relations, the beliefs systems, and also social norms of conduct. Contrarily the New Institutionalist turn in mainstream economics places the weight of its explanation on property rights.

Within the logical construct of neoclassical economic theory, the contribution of the New Institutional Economics is a necessity, basically because exchange and production in a market economy requires the prior definition of property rights (endowments and their distribution are part of the data jointly with technology and preferences that are needed to establish a market equilibrium). Because neoclassical theory is a-historical, the same framework derived from a priori reasoning must have universal validity and be applicable to any particular historical episode underscoring, in this way, the invariance of human behavior in space and over time. This dictates the New Institutionalist Economics´ approach to history which materializes in providing examples of hand-picked empirical evidence across different centuries, regions and countries and interpreting these as coherent with the deductive universal framework of neoclassical theory.

Acemoglu and Robinson’s influential book Why Nations Fail (2012) constitutes one of the most comprehensive and illustrative examples of this line of thought. Its authors argue that the economic failure or success of countries depends on whether these have inclusive or extractive political institutions. Inclusive political institutions are those that distribute power broadly, constrain arbitrary exercise, and make it harder to usurp power or set the basis for rent-seeking behavior. Inclusive political institutions require well defined and secure property rights. Extractive institutions have the opposite characteristics.

Why Latin American Nations Fail is in part a response to this New Institutionalist turn in mainstream economics focusing on the case of Latin America.

Read rest here.

Monitoring the evolution of Latin American economies using a flow-of-funds framework

New paper by Esteban Pérez. From the abstract:

Flow-of-funds accounting permit to monitor the financial sector in terms of flows and stocks and to analyze its relationship with the real sector. These show inter-sectoral financial flows, capture balance sheet positions and all financial transactions by instrument, type and economic sector. The construction of flow-of-funds accounts has been traditionally spearheaded by the central banks of developed nations including the Federal Reserve, the European Central Bank and the Bank of Japan. In spite of its usefulness, flow-of-funds accounting has not experienced a parallel development for developing countries including for those of Latin American, In order to start filling this gap we undertook the construction of a data base of flow-of-funds account matrices for six Latin American countries (Argentina, Brazil, Chile, Colombia, Mexico and Peru) that consider only flows for the period 1980-2015 using yearly and quarterly data when available. As a basis for comparison we also carried out the same exercise for four Asian countries (Malaysia, Philippines, South Korea, and Thailand). The construction of flow-of-funds account matrices follows the methodology proposed by Dawson (2004). In this paper we explain the methodology for the construction of flow-of-funds accounts and we exemplify their use for two source cases of study: the Mexican Crisis (1994-1995) and the Asian Crisis (1997-1998). Using similar sources of data, the same methodology and approach for the construction of all the flow-of-funds matrices allow comparisons among countries relating to the impact, manifestations of these crisis episodes and policy reactions to confront their effects. The use of homogeneous data and methodology also permits to trace contagion effects between countries.

Read full paper here.

The General Theory at 80: Reflections on the History and Enduring Relevance of Keynes’ Economics

New paper by Tom Palley. From the abstract:

This paper reflects on the history and enduring relevance of Keynes’ economics. Keynes unleashed a devastating critique of classical macroeconomics and introduced a new replacement schema that defines macroeconomics. The success of the Keynesian revolution triggered a counter-revolution that restored the classical tradition and now enforces a renewed classical monopoly. That monopoly has provided the intellectual foundations for neoliberalism which has produced economic and political conditions echoing the 1930s. Openness to Keynesian ideas seems to fluctuate with conditions, and current conditions are conducive to revival of the Keynesian revolution. However, a revival will have to overcome the renewed classical monopoly.

Read full paper here.

Why Latin American Nations Fail

Book has finally been published. I just got my copies. And yes it is a critique of New Institutionalist views and the title a play with Acemoglu and Robinson's book title. From the back cover.

"The question of development is a major topic in courses across the social sciences and history, particularly those focused on Latin America. Many scholars and instructors have tried to pinpoint, explain, and define the problem of underdevelopment in the region. With new ideas have come new strategies that by and large have failed to explain or reduce income disparity and relieve poverty in the region. Why Latin American Nations Fail brings together leading Latin Americanists from several disciplines to address the topic of how and why contemporary development strategies have failed to curb rampant poverty and underdevelopment throughout the region. Given the dramatic political turns in contemporary Latin America, this book offers a much-needed explanation and analysis of the factors that are key to making sense of development today."

You can get it here.

The Passage of Time, Capital, and Investment in Traditional and in Recent Neoclassical Value Theory

New paper by Fabio Petri published in Œconomia. From the abstract:

With the shift from traditional analyses where capital is a single value factor of variable ‘form’ to the neo-Walrasian versions, general equilibrium theory has encountered new problems pointed out by P. Garegnani (1976, 1990): impermanence problem, price-change problem, substitutability problem radically question the right to consider neo-Walrasian equilibria as approximating the actual path of real economies. The paper briefly summarizes these problems and then concentrates on a fourth problem, the savings-investment problem, arguing that neo-Walrasian general equilibrium theory assumes that investment is adjusted to full-employment savings but cannot justify this assumption. The attempt to justify it in intertemporal general equilibrium through the tâtonnement is subjected to a new criticism: it is shown that the tâtonnement assumes Says’ Law all along the adjustments, and determines investment in a way that would crumble if it were not assumed that consumers determine their demands for consumption goods on the basis of an assumption of full employment incomes, which is not justified outside equilibrium, and was not assumed in traditional analyses. This reinforces the absence of reasons to view neo-Walrasian equilibrium paths as sufficiently approaching actual paths. It is concluded that behind the reference to intertemporal equilibrium as the microfoundation of macro analyses there is a continuing faith in traditional neoclassical time-consuming adjustment mechanisms, based on the old and untenable conception of capital that the shift to neo-Walrasian equilibria intended to do without.

Full paper available here.

On the jobs report at the Rick Smith Show

A bit old now. On the dismal report from the the first week of October, and Trumponomics in general.

Anwar Shaikh at Bucknell

Anwar will give a lecture at Bucknell next week (Thursday, October 12 at 4pm, in Academic West 112). Open to the public, and if you are in central PA you should NOT miss it up. Above a talk he gave last year at SOAS based on his recent book of the same title available here.

Masters & Sindicalists: Growth, Investment and Productivity in Argentina, from Perón to Kirchner

New paper published in Ensaios FEE. In all fairness, this was the paper that should have been published in 2013 in the volume organized by Ricardo Bielschowky and available here. But the revisions took longer than expected. It is in Portuguese, however. Below the English abstract.

This paper analyzes the three phases of Argentine economic development since the end of the 19th century, namely: the commodity export model, the period of state-led industrialization and the neoliberal reforms initiated in the 1970s, and complemented in the 1990s. The main argument is that the commodity export model had run its course, given the geopolitical changes in the world, and that the abandonment of the industrialization project had less to do with its own limitations, and more to do with the political implications of the model. In particular, the higher wages needed for mass consumption led to recurrent balance of payments problems, and a political backlash that made it ultimately unsustainable. The limits of the abandonment of the neoliberal project during the last commodity boom are briefly discussed.

Marx Capital turns 150

Marx's capital (Volume 1) was published September 14, 1867, exactly 150 years ago. Below a few links to posts on Marx written over the years.

What makes capitalism capitalism? (on the definitions of capitalism as a mode of production)

Sraffa and Marxism or the Labor Theory of Value, what is it good for? (on the labor theory of value)

Was Marx right? Nice of you to ask, but... (on common misconceptions about Marx)

A Note on the Concept of Vulgar Economics (an important idea, often neglected)

Garegnani on Sraffa, Ricardo and Marx (on the relation of Marx with classical economics)

The last Marxist? Or shortchanging Hobsbawm (a critique of The Economist's obituary)

And this one on why Marx and Keynes are essential for a coherent heterodox alternative to the mainstream:

The meaning of heterodox economics, and why it matters

Seminar in Mexico

The 8th international seminar on Coordination of Fiscal, Monetary and Exchange Rate Policies in Developing Countries at the Universidad Nacional Autónoma de México, Facultad de Estudios Superiores Acatlán (UNAM-FES-Acatlán) will take place later this month. Ignácio Perrotini and I will give the opening talks the 26, and Ariel Dvoskin the following day. Many local economists will present too, like Flor Brown, Lilia Domínguez, Noemí Levy, Teresa López, and Luis Ángel Ortiz to name a few. Will post a link to the program soon.

ReOrient

A graph that shows, for a longer span, essentially the same information presented in Robert Allen's graph of manufacturing production, and discussed before here. It is evident that the rise of China (India is not quite yet visible, even if its share did increase) represents a certain rebalancing, which is inevitable as the income per capita grows in that country, even if it does not scape what mainstream economists refer to as the middle income trap. Source here, and the data is, as expected from Maddison.

Note that the first millennia, where Asia (China and India essentially) is much smaller in terms of the graph, which is a result of the paucity of data. In a sense, the graph shows the relatively brief rise, and now relative decline of Western GDP dominance, as Asia regains a space more proportional to its population share.

PS: On issues with GDP measures see here.

Sunday Reading: Economic Letters of Note

Rick Holt edited a superb book with John Kenneth Galbraith's letters from the 1930s until his death in 2006. He wrote to everybody, friend and foe, and displays his usual wit. Here I reproduce parts of his letter to Joan Robinson, that he wrote after having invited her to give the Ely Lecture (subscription required).

The letter is from January 12, 1972. It says:

Dear Joan:

Many thanks for your note. If the meetings were slightly less stuffy and neoclassical than usual, it was owing more to you than to anyone else...

The president of the Association, as I think I said once in New Orleans, has powers closely paralleling the President of Italy, but perhaps less. Indeed this is the way in which all establishments maintain themselves. One diffuses power through people who are reliably like of mind. But I hope to have some slight influence on the Journals, and I'm going to make a particularly determined effort to revise hiring practices in the profession... A good deal has been done in the past couple of years to put the problems of the black and Spanish-speaking minorities on the professional conscience. Discrimination against women remains in some degree the most blatant.

Would you... write me a little more complete observation and complaint... Sometimes the knowledge of an unsatisfied clientele produces some results.

Love, 

John Kenneth Galbraith

I was lucky to see Galbraith give a talk (subscription required) at the New School back in November 1998. Great book. Buy two copies!