Showing posts from April, 2014

Palley on the flimflam defense of mainstream economics

By Thomas Palley

The teaching of economics has recently been in the news. One reason is the activities of Manchester University undergraduates who have formed the Post-Crash Economics Society to protest the monopoly of mainstream neoclassical economics in university lecture halls. A second reason is criticism of the neoclassical reasoning in Thomas Piketty’s runaway best seller Capital in the Twenty-First Century.

This criticism and calls for including heterodox economic theory in the curriculum have prompted a defense of mainstream economics from Princeton University’s Paul Krugman and Oxford University’s Simon Wren-Lewis. Both hail from the mainstream’s liberal wing, which muddies the issue because it is easy to conflate the liberal wing with the critics. In fact, the two are significantly different and their defense of mainstream economics is pure flimflam.

Read more here.

Robin Hahnel: The Invisible Foot - A Tribute to E. K. Hunt

A paper by Robin Hahnel, published by the Review of Radical Political Economics, pays tribute to the work and intellectual legacy of E.K. Hunt, Emeritus Professor of Economics at the University of Utah.

From The Abstract:
This article pays homage to E. K. Hunt who was a founding member of URPE who helped build chapters on several campuses in western states. Much of the author’s own research work over the past forty years was an attempt to strengthen criticisms Hunt voiced long ago about markets and blind spots in mainstream economic theory. The article reviews work inspired by Hunt regarding externalities, endogenous preferences, the Coase theorem, and an alternative to the market system known as participatory planning. Read here (subscription required)

Labor market institutions and the political economy of power

From Moudud and Ilkkaracan new special issue of ROKE on labor market institutions and the political economy of power:
The drive for labor market flexibility has become something of an intellectual and political crusade in the past several decades. As part of the conventional ‘best practice’ view of economic policy, labor market flexibility can be considered to be at the heart of what Thomas Friedman calls the Golden Straitjacket into which all countries need to fit themselves in order to be successful [...] in the same vein as Margaret Thatcher's ‘There Is No Alternative’ (or TINA).
This collection of papers makes a unique contribution towards a theoretical conceptualization of labor markets and their complex interactions with macroeconomic phenomena (unemployment and productivity), institutions (workplace organization, regulatory frameworks, labor or employer organizations) and the political economy of power. By bringing these papers together, the special issue aims to provide…

Innovations in Economic Education

The Review of Keynesian Economics has a call for papers for a Special Issue on Innovations in Economic Education. See below.

Guest Editors: Geoffrey E. Schneider, Bucknell University and Daniel A. Underwood, Peninsula College and University of Washington

The Review of Keynesian Economics is seeking papers of various types related to Innovations in Economic Education that help advance student understanding of the economic process, the forces shaping macroeconomic and microeconomic performance, and appropriate policy options to increase economic welfare. Papers can be short (1500-3000 word) descriptions of classroom exercises or the application of particular pedagogies (e.g., collaborative learning, service learning, active learning, web based interactive exercises) to teach heterodox economics. Submissions can also be longer, in-depth articles (up to 7500 words) which explore a particular pedagogical issue, assess student learning outcomes, or address other teaching issues related t…

Dean Baker: Bond Bubbles? Silly Season at the Fed

By Dean Baker
Throughout this [so-called] 'recovery' there have been a number of economists and policy types expressing concern about a “bond bubble.” This is the idea that bonds are overpriced and could take a sudden tumble giving financial markets and the economy the same sort of hits we saw from the collapse of the housing and stock bubbles. This is seriously misguided thinking from any conceivable perspective. At the most basic level the concern is misplaced because there is nowhere near as much money at stake. Former Fed economist Andrew Flowers put the amount of money at stake in the bond market as $40 trillion in a recent FiveThirtyEight column. This compares to a stock market valued at around $28 trillion and housing market at a bit over $20 trillion. While that may make the bond market seem more important, the $40 trillion number is hugely misleading. The $40 trillion figure refers to total debt, much of which is short-term. This is important because short…

Krugman and the neoclassical theory of distribution: will he recant on the natural rate of interest

In the previous post I noted that Krugman suggests incoherently that: "saying that capital gets its marginal product in no way says that the people who own that capital deserve what they get." The point is exactly that if you receive according to productivity, it cannot be blamed on exploitation or other social factors. Capital gets higher profits because it is productive, and unskilled labor does not for the reverse reason.

If we do not mince words about the meaning of deserve, 'to be worthy' in my dictionary, by the way, it is evident that a theory that says that remuneration is accrued according to productive capacity, and again we take productive to mean, using the same dictionary, doing or achieving a lot: working hard and getting good results, then you have that those that work hard are worthy of their remuneration. But does Krugman believe in the notion that productivity determines pay you, enlightened reader, might ask.

From the 2014 3rd edition of Krugman&#…

Krugman on Palley's Gattopardo Economics

So Krugman has weighed in on Tom's review of Piketty's Capital, which is all the rage now. Krugman's defense of Piketty is based on denying that neoclassical economics is a theory of distribution, on the one hand, and on the other suggesting that using mainstream models to discuss inequality might be a strategy, that is a politically calculated plan of action, that would put the discussion of inequality at the center of the political agenda. This without necessarily, he argues, stop discussing the methodological issues on how to do economics.

On the first topic, he is obviously disscusing the issue that is central to the capital debates (and central to Piketty's book) which was discussed by Tom, and also by Jamie Galbraith, and Lars Syll and in my own post on the topic, that linked to Jamie's review. According to Krugman:
There are a few economists on the left who seem to believe that: 1. You need to believe in the existence of a perfectly well-defined aggregate mea…

A Call for Change in Europe by the Progressive Economy Foundation

The Scientific Board of the Progressive Economy Foundation of the European Parliament, chaired by Joe Stiglitz and Jean-Paul Fitoussi, and signed by Jamie Galbraith, Ilene Grabel, and Stephany Griffith-Jones among others, has just published a statement called "A Call for Change" that should have an effect on the terms of policy discourse in Europe.You may find the full statement here, in five languages here.

The accidental controversialist: Palley on Piketty’s “Capital"

By Thomas Palley

Thomas Piketty’s Capital in the Twenty-First Century is a six hundred and eighty-five page tome that definitively characterizes the empirical pattern of income and wealth inequality in capitalist economies over the past two hundred and fifty years, and especially over the last one hundred. It also documents the grotesque rise of inequality over the past forty years and ends with a call for restoration of high marginal income tax rates and a global wealth tax.

His book has tapped a nerve and become a phenomenon. In laying a solid blow against inequality, Piketty has also become an accidental controversialist. That is because his book has potential to unintentionally trigger debate over so-called “free market” capitalism. The big question is will that happen?

 Read more here.

Classical Theory and Policy Analysis

A new research area [R] ‘Classical Theory and Policy Analysis’ (coordinators: Enrico Sergio Levrero and Franklin Serrano) is now part of the European Association for Evolutionary Political Economy (EAEPE, see here). In collaboration with the “Centro di Ricerche e Documentazione Piero Sraffa” it will promote activities to reconstruct economic theory and policy analysis along the lines of the classical or surplus approach. In particular, it will promote research on the determinants of distribution and capital accumulation, economic policy proposals alternative to those advanced on the basis of the dominant neoclassical theories, and studies on the method of analysis adopted within the classical theory and its relation with Institutionalism. It will also participate to the organisation of the Eaepe Summer School held at Roma Tre University and to the Summer School of Heterodox Economics held at Poznan University of Economics (partners: Review of Keynesian Economics and Forum for Social …

The American Middle Class Is No Longer the World’s 'Richest'

While the American rentier class is outpacing global peers, a New York Times analysis shows that across the lower- and middle-income tiers, citizens of other advanced countries have received considerably larger income raises over the last three decades. Mind you, while the report suggests that the majority of Americans made more than their European counterparts thirty years ago, it must be noted noted that their ancestral cousins have long enjoyed the extensive benefits & security of a much stronger well-established welfare-state (though significantly diminished from recent neoliberalization, before & after the crisis of the Euro).
The numbers, based on surveys conducted over the past 35 years, offer some of the most detailed publicly available comparisons for different income groups in different countries over time. They suggest that most American families are paying a steep price for high and rising income inequality. Although economic growth in the United States con…

Iren Levina: A Puzzling Rise in Financial Profits and the Role of Capital Gain-Like Revenues

New PERI working paper by my friend & colleague Iren Levina - From the abstract:
The paper provides an explanation for the puzzling decoupling between the rate of growth of financial profits and GDP in the 2000s. Drawing on the insights from Keynes, Minsky, and Hilferding, the paper identifies a peculiar type of profit – capital gain-like revenues that take the form of profits from underwriting, mergers and acquisitions, securitization, and trade in financial assets. These capital gain-like revenues come from the redistribution of monetary assets and lack a counterpart in current GDP. They can be thought of as wealth transfers. Based on an empirical analysis of revenues of U.S. bank holding companies, these capital gain-like revenues are shown to have contributed significantly to the decoupling between the rate of growth of financial profits and GDP. The paper identifies characteristics of these revenues that explain the puzzles around this decoupling – its very possi…

On the Argentine crisis again

This week the Supreme Court heard the case of the Vulture Funds against Argentina. I wrote a while ago about that here. The paper on the more recent crisis and devaluation is available here.

McKinnon and Wolf on global imbalances and Chinese liberalization

This is a bit old. It was published earlier this month in the Financial Times, as a response to Wolf's column. McKinnon is a well-known exchange rate specialist, and one of the few that has, correctly in my judgment, not been overly concerned with the international role of the dollar for the last three decades. His concern with Chinese liberalization of financial markets is that it would lead to inflows, since interest rates in the developed world are too low, and instead of balancing the trade surpluses, it would lead to more accumulation of reserves. The implicit notion is that if rates of interest were higher abroad, and Chinese funds flowed abroad it would be okay to liberalize, one supposes.

Note that this is also what Martin Wolf suggested in the original column (subscription required). In his words: "In the long run China’s capital account will presumably become largely open and in time, no doubt, China’s savers will own large parts of the world." In other words,…

Kirsten Ford, a young Old Institutionalist

Kirsten Ford (1976-2014)
I first met Kirsten in the mathematics leveling class for the incoming PhD students. I think it was in 2007, but it might have been the year before. She felt she needed to take more math courses, and did so at Westminster College, where she had obtained her Bachelor's degree. She had come to economics out of a concern with social justice, and her early views were shaped in Dick Chapman's classes on Keynes' General Theory and Chace Stiehl's discussion of classical political economy authors, both PhDs from Utah's graduate program, which influenced her choice for her graduate studies.

At that time I taught two regular courses in the graduate program, the second required macro class, which basically reviewed heterodox approaches and growth theory (both conventional and heterodox views), and the second history of economic thought course, which went from the Marginalist Revolution to the post-capital debates developments (the change in the notio…

Big government, functional finance and debt sustainability

Teaching the fiscal policy classes of my intermediate macro course. One of the few things that is still not well understood and discussed in manuals is functional finance. Froyen's manual, which is otherwise an old textbook similar to Dornbusch and Fischer or Gordon or any 1970s manual (meaning with short run ISLM and Phillips curve first, and then growth), includes in the policy discussion Partisan Theory and Public Choice, but not Functional Finance or any heterodox approach.

Partisan Theory, developed by Douglas Hibbs, builds on an old idea by Kalecki that political and ideological elements would affect the business cycle. Left of center governments would lead to higher government spending and lower unemployment, and conservative governments would be concerned with inflation, and tend to promote fiscal adjustment. Public choice, more dramatically, suggested that politicians would be guided by selfish desire for re-election, which would lead to a permanent bias for deficits, an…

Galbraith and Deaton Leontief Prize lecture

Jamie Galbraith and Angus Deaton Leontief Prize lectures at the Global Development And Environment Institute (GDAE) last week. Deaton starts at minute 49 or so, and Jamie at around 1:27.

Is Venezuala's SICAD II Resolving Exchange Rate Problems?

By Mark Weisbrot
All economies have major structural and policy problems, but some problems are more important and urgent than others at particular times. In Venezuela, the most important economic problem is in the exchange rate system. A fixed exchange rate system with periodic devaluations tends to be more crisis-prone than other exchange rate regimes, especially in a country like Venezuela where inflation has historically been higher than that of its trading partners. This is particularly important right now because opposition leaders who have called for the overthrow of the government have pointed to 57 percent inflation and widespread shortages of consumer goods as justification for (often violent) street protests over the past two months. Although the protests have failed to attract the working and poorer people who are most hurt by the shortages, they are still a major complaint – as is inflation – for most Venezuelans. Read rest here

The Association for Heterodox Economics thinks INET is marginalizing heterodox economics

The Association for Heterodox Economics has released a report, Pluralism, Heterodoxy, and the Prospects for a new Economics Curriculum: Assessing the potential of INET, What’s the Use of Economics, and the CORE project, which is very damning for INET. They say: "Our main concern is that the positive potential of INET is steadily being closed down. What began as recognition of fundamental problems that require fundamental change is becoming a more modest set of alterations. A sense of failure is, for all intents and purposes, being translated into a context of relative success requiring more limited changes – though these are still being seen as significant. Part of the reason that they are seen as significant is that changes from within mainstream economics do not have to be major in order to appear radical. It is our contention that heterodox economics is being marginalised in this process of ‘change’ and that this is to the detriment of the positive potential for transforming …

You get what you pay for; but not when it comes to business degrees

Veblen famously doubted whether Law Schools had a place in Universities, and as I noted not too long ago he was not altogether happy with what we would now call Business or Management Schools. He said in The Higher Learning in America:
"A college of commerce is designed to serve an emulative purpose only -- individual gain regardless of, or at the cost of, the community at large -- and it is, therefore, peculiarly incompatible with the collective cultural purpose of the university. It belongs in the corporation of learning no more than a department of athletics. Both alike give training that is of no use to the community,except, perhaps, as a sentimental excitement. Neither business proficiency nor proficiency in athletic contests need be decried, of course. They have their value, to the businessmen and to the athletes, respectively, chiefly as a means of livelihood at the cost of the rest of the community, and it is to be presumed that they are worth while to those who go in fo…

On the blogs

Palley and the case for asset based reserve requirements

Revised paper by Tom Palley available here. From the abstract:

This paper critiques the Federal Reserve’s quantitative easing (QE) exit strategy which aims to deactivate excess liquidity via higher interest rates on reserves. That is equivalent to giving banks a tax cut at the public’s expense. It also risks domestic and international financial market turmoil. The paper proposes an alternative exit strategy based on ABRR which avoids the adverse fiscal and financial market impacts of higher interest rates. ABRR also increase the number of monetary policy instruments which can permanently improve policy. This is especially beneficial for euro zone countries. Furthermore, ABRR yield fiscal benefits via increased seignorage and can shrink a financial sector that is too large.

Read more here. Jane D'Arista has also made the case of ABRR, for example here.

US Economy Adds 192,000 Jobs in March; Long-Term Unemployment Rate Unchanged

In two recent posts (here and here), it was noted that educational credentials have had next to zero significant causal influence on structural unemployment, and that stagnation is primarily due to lack of adequate effective demand and appropriate fiscal policy. According to CEPR,
[with] population growth implying labor force growth in the neighborhood of 90,000, the economy is cutting into the backlog of unemployed workers at the rate of 90,000 a month. With the economy still down close to 7 million jobs from trend levels, this would imply that we would reach full employment some time in 2020.  Read rest here

Long-Term Unemployment High, Regardless of Education

By Heidi Shierholz
Job opportunities have been so weak for so long that jobless workers continue to get stuck in unemployment for unprecedented lengths of time. Currently 3.7 million unemployed workers have been searching for a job for more than six months, more than three times the number of long-term unemployed there were in 2007, before the recession began. We often hear the claim that long-term unemployment in this recovery is due to unemployed workers not having the education or skills for the jobs that are available. A look at the data, however, shows that this is not what’s driving today’s long-term unemployment crisis.  Read rest here
And for another post on the issue, see here

The Wall-Street/Silicon-Valley/Beltway complex

Eisenhower once warned us of the dangers of the Military-Industrial Complex. A bit more sardonically, globalization champion, and Columbia Professor, Jagdish Bhagwati coined the Wall Street-Treasury Complex, often referred to with the addition of the IMF (International Monetary Fund) at the end. When it comes to inequality in the US maybe we should talk about a Wall-Street/Silicon-Valley/Beltway complex or at least that is what the data presented by Galbraith and Hale here suggests.

Looking at inequality between economic sectors the paper suggests that between 1990 and 2012, three sectors are crucial, information technology, finance and the public sector. They argue that there are few main trends in the data:
One is the rise of professional, scientific and technical services in the information-technology boom through 2000. Another is the waning of the public sector, both federal and local, from 1990 to 2000 and then its recovery as a significant contributor to inequality in the early…

John Eatwell on the theoretical lessons from the crisis

It's from 2012, but still very much relevant. Short and to the point about the limitations of the mainstream to understand the crisis. I would put less emphasis on the Sonnenschein–Mantel–Debreu theorem, and more on the Sraffa-Garegnani critique of General Equilibrium, but that's a detail. He is correct in pointing out to Keynes' Principle of Effective Demand (PED), and to the insidious role of finance.

Lars P. Syll: Piketty and the Cambridge capital controversy

By Lars P. Syll Piketty wants to provide a theory relevant to growth, which requires physical capital as its input. And yet he deploys an empirical measure that is unrelated to productive physical capital and whose dollar value depends, in part, on the return on capital. Where does the rate of return come from? Piketty never says. He merely asserts that the return on capital has usually averaged a certain value, say 5 percent on land in the nineteenth century, and higher in the twentieth.  The basic neoclassical theory holds that the rate of return on capital depends on its (marginal) productivity. In that case, we must be thinking of physical capital—and this (again) appears to be Piketty’s view. But the effort to build a theory of physical capital with a technological rate-of-return collapsed long ago, under a withering challenge from critics based in Cambridge, England in the 1950s and 1960s, notably Joan Robinson, Piero Sraffa, and Luigi Pasinetti. Read rest here.

Mark Weisbrot: Will Venezuela's New Floating Exchange Rate Curb Inflation?

Since Venezuela exports petroleum and petroleum byproducts and imports most of what it needs, the exchange rate is crucial for economic stability. Food scarcity and inflation has been cited among the reasons why there is ongoing protests in Venezuela. Hoping to quell some of this protest, last week the Bank of Venezuela introduced another exchange system, Sicad II, hoping to take control of inflation and scarcity of essential goods.To discuss all this and more is our guest, Mark Weisbrot, who recently returned from Venezuela. Mark Weisbrot is an economist and codirector of the Center for Economic and Policy Research in Washington, D.C.

Was Marx right? Nice of you to ask, but...

The New York Times asked five economists whether Marx's economics was right, even if his politics was all wrong. By the way, the latter would be unquestionably true as a result of the collapse of the Soviet bloc. I am no Marx scholar, but I'll try to give my two cents on this debate. At any rate, it seems I read more of Marx's works than most of the commentators in the Times.

It is a bit disingenuous to suggest that Marxist economics, or classical political economy for that matter, since Marx was building on the work of the surplus approach authors, stands or falls with the Soviet Union [for a discussion of the causes of the Soviet collapse go here]. In fact, Marx has very little to say about communism, and many of the 10 policy proposals in the Communist Manifesto are now well-established consensual views in civilized societies, like the idea of a "heavy progressive or graduated income tax" ... or the provision of "free education for all children in publi…

The use of history for political purposes: on the New Deal and the last recession

It is increasingly common to hear stories of how government intervention led the economy astray during the Great Depression, and how FDR’s New Deal actually delayed a recovery that was on its way, e.g. the popular book my Amity Shlaes The Forgotten Man. This view is at odds with the conventional notion in the accepted historiography of the period and with old Keynesian views as exposed by Galbraith (1954), but not with the mainstream of the economic profession. It is important to note that not only old Monetarists like Friedman and Schwartz (1963) or Meltzer (2003), but also New Keynesians like Romer (1992) suggest that the recovery was essentially caused by monetary policy and that the fiscal policies associated with the New Deal were essentially of secondary importance for the recovery.

Read the post here.

Gerald Epstein: Too-Big-To-Fail Advantage Remains Intact For Big Banks

Gerald Epstein:
Yeah, well, I think there are some noteworthy things. First of all, just to explain what this means, what it means is that these largest banks, like Bank of America, Goldman Sachs, JPMorgan, and so forth get an advantage when they borrow money in the financial markets, because the people who lend them money believe that if they get into trouble, the government will bail them out, that the taxpayers will bail them out. And this has been known since at least 1984, when Continental Illinois Bank almost went under and the government bailed them out, and then the government said, well, we're going to bail out the 11 biggest banks that are too big to fail, and we're going to bail them out in the future. And, of course, that's exactly what happened in the financial crisis of 2007-2008. So when investors lend money to these big banks, we've thought for a long time that they expect that they're going to get bailed out if they get into trouble, s…