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Showing posts from August, 2012

The Bain Model

Matt Taibbi wrote an incredibly important article on Bain Capital. Not so much because it explains what Romney did to get his fortune, which it does, but more importantly as a general explanation of the process of financialization. Bain is an equity firm. Taibbi basically tells you what equity firms do. In his words:
"A private equity firm like Bain typically seeks out floundering businesses with good cash flows. It then puts down a relatively small amount of its own money and runs to a big bank like Goldman Sachs or Citigroup for the rest of the financing. (Most leveraged buyouts are financed with 60 to 90 percent borrowed cash.) The takeover firm then uses that borrowed money to buy a controlling stake in the target company, either with or without its consent.

When Bain borrows all of that money from the bank, it's the target company that ends up on the hook for all of the debt.

Once all that debt is added, one of two things can happen. The company can fire workers and slas…

A reply to Wray - Part II

By Sergio Cesaratto (guest blogger)
“The EMU could easily have self-destructed even with no current account deficits anywhere.” (Wray here)
“Trade issues within the eurozone …will remain a point of economic and political stress even with a full resolution of the liquidity issues…” (Warren Mosler)  In part I, I reviewed the MMT view that full monetary sovereignty is the key to full employment policies in all countries, provided that those with current account (CA) troubles have safe access to alternative sources of foreign liquidity - what is not the case in reality. I also examined the MMT’s claim that the Eurozone (EZ) cannot suffer of internal balance of payment (BoP) troubles as long as fiscal transfers from a significant federal budget backed by a genuine European CB are provided - what again is not the case in reality. In this post we shall return on Wray’s denial of the BoP origin of the EZ crisis. I agree with Wray, Bell-Kelton and other MMTs that in a currency union local stat…

Krugman on the meaning of neoclassical economics

So what is neoclassical economics? According to Krugman it is basically maximization and equilibrium. In his words, neoclassical or marginalist analysis is:
"economics based on maximization-with-equilibrium. We imagine an economy consisting of rational, self-interested players, and suppose that economic outcomes reflect a situation in which each player is doing the best he, she, or it can given the actions of all the other players. If nobody has market power, this comes down to the textbook picture of perfectly competitive markets with all the marginal whatevers equal."This is clearly incorrect. First, classical authors, meaning those that followed the surplus approach (from Petty to Marx, including Quesnay, Smith and Ricardo) did assume that economic agents were rational and self-interested and they also believed that the economy could be represented by equilibrium outcomes. And they clearly were not neoclassical, meaning they did not believe that supply and demand determin…

A reply to Wray - Part I

By Sergio Cesaratto (Guest Blogger)

“The fact that individual countries no longer have their own currencies and central banks will put new constraints on their ability to run independent fiscal policies. … But more disturbing still is the notion that with a common currency the ‘balance or payments problem’ is eliminated and therefore that individual countries are relieved of the need to pay for their imports with exports. Quite the reverse: the existence or a common currency makes a country more directly dependent on its ability to sell exports and import substitutes than it was before…” Wynne Godley 1991 There are two aspects of the discussion that has taken place in the last weeks (here, here, here, here). The first mainly concerns my first post and regards whether monetary sovereignty is a condition both necessary and sufficient for any country to pursue development and full employment policies; the second concerns the Eurozone (EZ) crisis and was the subject of my second post. Wra…

Industrialization, Wages and the Terms of Trade

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The quote above is from Raúl Prebisch's classic paper "The Economic Development of Latin America and Its Principal Problems," the so-called Development Manifesto (available in Spanish here), published in Spanish and Portuguese in 1949, and the following year in English.

Note that his explanation for the tendency of terms of trade of commodities to fall over time (the so-called Prebisch-Singer hypothesis) was based on the fact that in the boom wages went up in the center, but not so much in the periphery, since industrial workers in the center were organized and could demand higher salaries, while that was not possible for the agricultural and mining workers in the periphery. So in the recession, while prices of commodities and wages fell in the periphery, they didn't in the center. Class conflict, and not just technological change, was at the heart of the asymmetries between the center and the periphery.

Hence, industrialization in the periphery, and the re-organiza…

The Economist is Cartalist

Well not really, but they do cite the Cartalist approach of Charles Goodhart and wonder about it and the meaning for US dollar hegemony. They contrast Cartalism (or Chartalism) with the marginalist approach of Menger, but do not cite Georg Knapp or Abba Lerner or Keynes (of the Treatise on Money) as precursors of Goodhart, or any MMT author for that matter, following the tradition that the acceptable critiques of the mainstream have to come from within. Interestingly the specific take of the piece, the relation of Cartalism and dollar hegemony, has been the theme of our posts (here, here and here), and at least one paper. What are these guys reading?

PS: The classic book by Knapp on Chartalism is available here.

Okun's Law is doing fine

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A comment on a previous post suggested that Okun's Law is not valid anymore. Not the first time this claim is made, by the way (see also previous discussion here). So let me be clear, there is as much reason to believe that Okun's Law is gone as you might have about the demise of the Law of Gravity.

The graph below shows an admitedly very crude econometric rendition of the Law using annual data from 1948 to 2011 (data available here). It says that if you grow approximately 1,91%, then the unemployment rate falls 1%, which is close to the 2 to 1 ratio to be expected.
Further, and more importantly, note that what Okun's Law says is that productivity is pro-cyclical. That is, unemployment changes less than output, so in a boom you hire less workers, since they are more productive and can increase output more than proportionally, while in the recession you fire less workers than you would need to produce given the fall in output, meaning that their productivity falls (usually…

Nick Rowe on Reswitching and the Capital Debates

Nick Rowe gives a shot to the capital debates, which is a nice development indeed. [Robert Vienneau has a lenghty reply here.] In spite of the importance of the topic, and the previous engaging of mainstream economists like Samuelson, Solow – to cite two prominent ones – the topic has all but vanished from modern mainstream economics, with a consequent loss of understanding.

Let me clarify a few things before we get to Nick’s post. As I argued in a previous post, classical authors (e.g. Smith, Ricardo and Marx) understood that they needed to determine the rate of profit independently from relative prices to avoid circular reasoning. The Labor Theory of Value (LTV) provided a solution. Prices were determined by labor incorporated (or commanded for Smith) and profits, and the surplus, were determined on that basis [Sraffa’s solution to the problems with the LTV build on Ricardo’s use of a commodity, corn, to measure the profit rate as a ratio of two physical quantities]. However, most n…

Full employment, why it is important

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In my intermediate macroeconomic classes at the University of Utah I always start by asking students what do they think is a more socially relevant problem an increase in inflation of 1% or the same 1% rise in the unemployment rate. Although the answers vary somewhat according to the macroeconomic circumstances, it is almost always true that the vast majority of my students think that inflation is the real problem.

When pressed on why do they think inflation is worse than unemployment they rarely suggest that inflation may hurt the poor more than the affluent, which would show a concern with income distribution, or seem to understand that moderate inflation might be good. Further, they have no idea that deflation is considerably worse than inflation, and that the reason for that is that deflation causes severe unemployment. The point is that they seem to think that unemployment does not hurt them more than inflation; after all they are getting a college education (which is not much o…

More on Sraffa and the theory of value and distribution

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Two posts by Alejandro Fiorito, at the Revista Circus blog, and Robert Vienneau follow up my previous post on Sraffa and the Labor Theory of Value (LTV). The former is on the debate between Garegnani and Samuelson, just published in a book edited by Heinz Kurz. Garegnani, who debated with Samuelson since the latter's seminal paper on the production function as a parable back in the early 1960s, basically argued against the notion that Sraffa's system can be seen as a special case of Walrasian General Equilibrium, which was ultimately Samuelson's position.

Vienneau discusses several issues. One that I think it's particularly relevant is Steedman's view that one might have a positive profit rate and negative aggregate surplus value. Serrano and Lucas (not that Lucas!) have written a paper on the subject which suggests that Steedman's counterintuitive results are basically irrelevant. At any rate, as noted by Robert, "Marxist political economy should remain …

Raúl Prebisch on the business cycle

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This paper analyses Raúl Prebisch's lesser-known contributions to economic theory, related to the business cycle and heavily informed by the Argentine experience. His views of the cycle emphasize the common nature of the cycle in the centre and the periphery as one unified phenomenon. While his rejection of orthodoxy is less than complete, some elements of what would become a more Keynesian  position are developed. In particular, there is a preoccupation with the management of the balance of payments and the need for capital controls as a macroeconomic management tool, well before Keynes  and White's plans led to the Bretton Woods agreement. In the process it is clear that Prebisch developed several ideas that are still relevant for understanding cyclical fluctuations in the periphery and that he became more concerned with the ability to take advantage of cyclical booms to maintain sustained economic growth.

Read the paper here.

Alternative Theories of Competition

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New book by Cyrus Bina, Patrick Mason and Jamee Moudud has just been published. A few friends from the New School and elsewhere, and at least one alumnus from the University of Utah. From the jacket:

"The history of policymaking has been dominated by two rival assumptions about markets. Those who have advocated Keynesian-type policies have generally based their arguments on the claim that markets are imperfectly competitive. On the other hand laissez faire advocates have argued the opposite by claiming that in fact free market policies will eliminate "market imperfections" and reinvigorate perfect competition.

The goal of this book is to enter into this important debate by raising critical questions about the nature of market competition in both the neoclassical and Kaleckian traditions

By drawing on the insights of the classical political economists, Schumpeter, Hayek, the Oxford Economists' Research Group (OERG) and others, the authors in this book challenge this…

Sraffa and Marxism or the Labor Theory of Value, what is it good for?

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An old, but not completely closed, debate revolves around whether Sraffa was a Marxist or instead he should be seen as Ricardian, hence the term Neo-Ricardian used derisively by Bob Rowthorn (subscription required) and other Marxists authors (and also by Frank Hahn, again subscription required). From a personal point of view there is little doubt that Sraffa identified with Marxism, and close friends like Antonio Gramsci and Maurice Dobb would agree. But the important question is whether his contributions in Production of Commodities by Means of Commodities (PCMC) should be seen as a development or a criticism of Marx's theoretical tradition.

For the most part the question revolves around the relation between Sraffa's prices and the labor theory of value. Several authors tend to believe that the latter theory is central for Marx's theory of exploitation. Recent interpretations such as the so-called New Interpretation (NI) and the Temporal Single System (TSS) would agree o…