Wednesday, December 17, 2014

Tuesday, December 16, 2014

Business Schools, Liberal Arts Education and Heterodox Economics

So we're having a discussion about the new Management College at Bucknell. Traditionally resources are the main problem in the relation between business schools and economics departments. Often, as in the University of Utah, were I was before, there are issues related to the curriculum, in particular if the economics department is heterodox. In a liberal arts environment, the issues are not only associated to resources, but also to the teaching of what is assumed to be more practical knowledge or marketable skills in a milieu in which the main goal of education is to develop the essentials for civic life, where critical thinking and the ability of learning how to learn are at the center of the curriculum.

Is it possible? Or would the management goals undermine the liberal arts experience. Note that many think that liberal arts education is doomed anyway (an old topic by the way). The fear is that students cannot (given tuition costs) afford the luxury of an education for education's sake, but need 'practical knowledge,' that would be useful in the market (the market analogy was used freely in the faculty meeting). I have my doubts about how useful 'practical knowledge' is compared to a broad education that prepares citizens to think independently and critically about the world, but that's difficult to evaluate, I guess.

The experience of Cambridge and Oxford I think is relevant for the US liberal arts institutions, in particular the former which was central for heterodox economics until the 1970s or so. They did not have business schools until recently. In Cambridge the management program was in the engineering school and only in the 1990s it became independent as an institute, eventually becoming a school in this century (in Bucknell the major, became a school and now will turn into a college, but the idea is the same, it will get more independence to raise funds, hire faculty and establish its own curriculum).

The decline of heterodox economics at Cambridge, and its transformation into a second rate neoclassical department, which deserves thorough analysis (something I'm certainly not capable or planning to do), took place more or less at the same time that business became more relevant. The old Cambridge Keynesians retired (and passed away) in the 1970s and 1980s. Richard Kahn, Austin and Joan Robinson, Piero Sraffa, Nicholas Kaldor, and the neoclassical, but still Keynesian James Meade (by the way, the only one to get the Sveriges Riksbank prize in memory of Alfred Nobel) were the key figures. Harrod was at Oxford, but in a sense is a member of the same group, and perhaps the same applies to Hicks (the other neoclassical Keynesian winner of the Sveriges Riksbank prize), also from Oxford. Wynne Godley was the head of the Department of Applied Economics, brought from the Treasury by Kaldor, but even before he left in the 1990s, his team was defunded after Thatcher's conservative victory. A few token heterodox economists were left in the department, and a few still resist, but it is not a place were heterodox, critical thinking is taken seriously.

Note that I'm not suggesting that the rise of management and business are the cause of the demise of Cambridge Keynesianism. Both changes are very likely simply, and only in part, explained by the same general move, in British society and around the world, to embrace a market friendly ideology. While I'm, as I noted, skeptical about the value of 'practical' education, and cannot say for sure whether the liberal arts alternative is better, I've a fairly good idea about the value of heterodox economics.

The kind of economics that the old radical Keynesians taught at Cambridge is a better tool to understand the world than the neoclassical alternative that the department there embraced. Note that Godley was one of the few that actually forecasted the Thatcher recession (and probably got punished for that), as well as noting the limits of the dot.com boom and the housing bubble that led to the 2008 crisis (see here or here for his prescient views on the euro). Most of my heterodox teachers that were directly or indirectly influenced by the Cambridge Keynesians were not surprised by the crisis that left the mainstream of the profession puzzled. I would say that heterodox economics has practical value indeed. My feeling is that a liberal arts education is often more practical than practical knowledge.

Monday, December 15, 2014

New Book: The 2015 Hampton Reader, Selected Essays and Analyses from the Hampton Institute

A collection of essays and analyses from the The Hampton Institute - A Working Class Think Tank. Includes, articles by David Fields, and Hampton's most popular essays from 2013-14 in addition to exclusive content that can only be read here. From a follow-up to Sean Posey's timely analysis of Youngstown, Ohio as a microcosm of the post-industrial American "rustbelt" to Andrew Gavin Marshall's in-depth research on "the intellectuals and institutions of American imperialism," the 2015 Hampton Reader is sure to generate ideas, spark debate, and cultivate dialogue.

See here.

Thursday, December 11, 2014

Book Review of Foster & McChesney's "The Endless Crisis: How Monopoly-Finance Capital Produces Stagnation and Upheaval from the USA to China"

The Endless Crisis: How Monopoly-Finance Capital Produces Stagnation and Upheaval from the USA to China. John Bellamy Foster & Robert W. McChesney Hardcover: 224 pages. Publisher: Monthly Review Press (September 1, 2012). Language: English. ISBN-13: 978-1583673133

By David Fields

Over-accumulation stemming from the so-called golden age of global capitalism has ensued an era of underconsumption as exemplified by low profit rates and chronic excess capacity. As such, what has taken place is an historical transformation towards the process of financialization. With an inability to absorb effectively economic surpluses, concerning the promotion of rising wages along with productivity, NFCs, or non-financial corporations, are coerced to paying a larger share of their internal funds, specifically via debt leveraging (including consumers), to financial institutions. These financial institutions, which are increasingly concentrated in the hands of fewer and fewer people, have become some of the most powerful actors. Increasing concentration of control within the financial sector lends credence to Marx's (1894: 544-45) argument that what Foster & McChesney call the age of monopoly finance capital is one in which
[t]he credit system, which as its focus in the so-called national banks and the big money lenders and usurers surrounding them, constitutes enormous centralization, and gives this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner-and this gang knows nothing about production and has nothing to do with it.
Read rest here.

Monday, December 8, 2014

Sunday, December 7, 2014

The Chutzpah of The Economics Profession

New discussion paper by Marion Fourcade, Etienne Ollion, and Yann Algan

From the abstract
In this essay, we investigate the dominant position of economics within the network of the social sciences in the United States. We begin by documenting the relative insularity of economics, using bibliometric data. Next we analyze the tight management of the field from the top down, which gives economics its characteristic hierarchical structure. Economists also distinguish themselves from other social scientists through their much better material situation (many teach in business schools, have external consulting activities), their more individualist worldviews, and in the confidence they have in their discipline’s ability to fix the world’s problems. Taken together, these traits constitute what we call the superiority of economists, where economists’ objective supremacy is intimately linked with their subjective sense of authority and entitlement. While this superiority has certainly fueled economists’ practical involvement and their considerable influence over the economy, it has also exposed them more to conflicts of interests, political critique, even derision.
Read rest here.

And for an excellent piece on the imperialism of mainstream economics in the social sciences, see this paper by Ben Fine (subscription required).

Friday, December 5, 2014

Argentina and the Vulture Funds

A short piece that appeared in the last issue of Challenge. From the conclusion:
"a rhetoric of debt forgiveness has been disseminated but indebted nations are still punished, and austerity measures are encouraged. Argentina’s fate in the hands of the vultures, like the countries in the periphery of Europe facing the austerity policies of the Troika (the European Central Bank, the European Union, and the International Monetary Fund), is just the most recent example of the limits of the globalization cum financialization process, and of the need to reform the international financial system. For now, the lesson of the Argentinean conflict with the vultures is that the American justice system asymmetrically favors the claims of creditors, and should be avoided at all costs."
Read here.

ILO's Global Wage Report: Nothing to be happy about

The GWR 2014/15 has been published and is available here. I'm sure I'll post more on it later. Here just one of the several things to take into account. Wages in advanced economies fell in 2008 and 2011, and have grown very little since the beginning of the crisis in 2008. Basically stagnated. Disaggregating by country you get the figures below.
The declines are in Japan, Italy, UK, Portugal, Ireland, Spain and Greece. Japan in eternal deflation, and the European periphery under Troika's adjustment programs. In Greece a collapse of about 24% since 2009. This is not only result of the austerity policies, but also of specific policies to reduce wages, like a 22% cut in the minimum wage for unskilled workers aged 25 and over and a 32% cut for those under 25, the weakening of collective bargaining, and the massive cuts in public wages and employment. Internal devaluation. But the recovery of the current account balance, I'd bet, is related to collapse of imports, not expanding exports (more on that later).

Thursday, December 4, 2014

The mystery of productivity: what mystery?

Another old one. Trying to catch up after the Thanksgiving break. Mainstream economists seem always puzzled by productivity. It is the source of growth and a mystery (Helpman has a book titled The Mystery of Economic Growth). They refer to trends in productivity as puzzles, in particular the slowdown after 1973.
 
Alan Blinder: reminds us that after the surge in productivity growth, that for a while at least was referred to as the New Economy, associated to information technologies, has collapsed to even lower levels than the 1973-1995 period. He is, as a good mainstream author, quite puzzled. In his words, "quite surprisingly and still somewhat mysteriously, productivity growth plummeted [after 1973]... We are all in the dark."

In Jeon and Vernengo (2008) we suggest that labor productivity is endogenous, explained essentially by the expansion of demand, and old idea, implicit in Adam Smith's vent for surplus, and part of a well established empirical regularity, the so-called Kaldor-Verdoorn Law. In other words, it is the weak recovery, caused by a contractionary fiscal stance, and the slow pace of private spending growth as employment increases, that explains the poor performance of productivity. In this sense, the causes are considerably simpler, connected to macro policy, rather than the long-term pessimism of Gordon and Summers, which now talk about secular stagnation (see also this book).

Perhaps the more interesting stuff in Blinder's piece is his discussion of what the 'serious people' in the mainstream consider the natural rate to be. He says:
"the 'central tendencies' in the Federal Open Market Committee’s latest published forecasts range from 5.2% to 5.5% for the 'full-employment' unemployment rate, and from 2% to 2.3% for the potential GDP trend."
Note that Blinder also thought that the speed limit was around 2% back in the late 1990s (here his debate with Bluestone and Harrison). And yes he is a Keynesian (a New Keynesian). With friends like this...

A periodization of Latin American development in the Robinsonian tradition

New Working Paper available here. From the abstract:
This paper analyzes Joan Robinson’s growth model, and then adapted in order to provide an exploratory taxonomy of Growth Eras. The Growth Eras or Ages were for Robinson a way to provide logical connections between output growth, capital accumulation, the degree of thriftiness, the real wage and illustrate a catalogue of growth possibilities. This modified taxonomy follows the spirit of Robinson’s work, but it takes different theoretical approaches, which imply that some of her classifications do not fit perfectly the ones here suggested. Latin America has moved from a Golden Age in the 1950s and 1960s, to a Leaden Age in the 1980s, having two traverse periods, one in which the process of growth and industrialization accelerated in the late 1960s and early 1970s, which is here referred to as a Galloping Platinum Age, and one in which a process of deindustrialization, and reprimarization and maquilization of the productive structure took place, starting in the 1990s, which could be referred to as a Creeping Platinum Age.

Wednesday, December 3, 2014

John Cochrane on Deflation

This is a bit old. Cochrane, the medieval dark lord of macroeconomics (Krugman suggests he has been an example of the Dark Age of Macroeconomics), has taken issue with the notion that deflation is a big problem. He suggests that: "Friedman long ago recognized slight deflation as the 'optimal' monetary policy, since people and businesses can hold lots of cash without worrying about it losing value." He explains that the reason for fears of deflation are associated to debt-deflation (the other two arguments are less relevant, namely: sticky wages and space for a higher inflation target).

He argues, however, that debt-deflation is not a problem. For him:
"Again, a sudden, unexpected 20% deflation is one thing, but a slow slide to 2% deflation is quite another. A 100% debt-to-GDP ratio is, after a year of unexpected 2% deflation, a 102% debt-to-GDP ratio. You’d have to go decades like this before deflation causes a debt crisis."
In his view, small amounts of deflation are not  enough to lead to a collapse of the economy. And he says the dreadful deflation spiral never happened, not even in Japan. So don't be afraid, deflation is actually kind of good.

He is talking about the general price level, and clearly we haven't have significant deflation in the Consumer Price Index (CPI) or other broad inflation index since the 1930s. Yet, as the graph below shows we did have significant asset price deflation in the US, with housing prices falling by 31% or so, not just 2%, right before the recession.
http://research.stlouisfed.org/fredgraph.jpg?hires=1&type=image/jpeg&chart_type=line&recession_bars=on&log_scales=&bgcolor=%23e1e9f0&graph_bgcolor=%23ffffff&fo=verdana&ts=12&tts=12&txtcolor=%23444444&show_legend=yes&show_axis_titles=yes&drp=0&cosd=2007-01-07&coed=2009-08-04&width=670&height=445&stacking=&range=Custom&mode=fred&id=SPCS20RSA&transformation=lin&nd=&ost=-99999&oet=99999&scale=left&line_color=%234572a7&line_style=solid&lw=2&mark_type=none&mw=1&mma=0&fml=a&fgst=lin&fq=Monthly&fam=avg&vintage_date=&revision_date=
In other words, there was significant collapse of prices that bankrupted several homeowners. The problem  was not just the negative effects of price adjustments on spending though. Cochrane supposes that all adjustments are on prices, since the economy has a tendency to move back to its natural output (unemployment) level. Crises (debt crises) are not just caused by the increase in the real value of debt (debt-deflation), they are more often than not the result of the collapse of the ability to pay, for countries when the value of their exports collapse (negative terms of trade shock), for individuals when they lose their jobs.

The problem is that with less prospects of growing demand (consumption, that was affected by stagnant wages and asset price deflation), and more so after the collapse of Lehman and the severe contraction in credit, firms fired about 9 million workers, reinforcing the negative quantitative effects of lower demand. The multiplier (which Cochrane thinks doesn't exist) works in both directions. So even small amounts of deflation, in an economy with quantity adjustments, might cause significant problems (and quantity adjustments are not the result of any wage rigidity, even if those exist, since no firm would hire an additional worker, not even at a lower nominal wage, if demand is not growing).

Think of Greece for example, where deflation (CPI deflation) is the result of contractionary policies that also led to the skyrocketing of unemployment, now at more than 25%.
The deflation is not particularly large, less than 2% actually. But the policies that cause the Great Depression levels of unemployment, and weaken the labor force, and lead to lower nominal wages, are the same that explain the deflation. In Greece deflation per se is not the problem. The lack of expansionary demand (fiscal) policy is. The problem is the obsession with low inflation, which leads to an overly contractionary policy stance. And that's what most authors that complain about deflation actually mean. For Cochrane Greece is fine, one would imagine, after all deflation is less than 2%. I suppose the natural rate of unemployment is probably 25% for him.

Tuesday, December 2, 2014

Quotes

 
"Of the tendencies that are harmful to sound economics, the most seductive and, in my opinion the most poisonous, is to focus on questions of distribution." Robert Lucas Jr. (see here, last paragraph).

"Political Economy you [Malthus] think is an enquiry into the nature and causes of wealth; I think it should rather be called an enquiry into the laws which determine the division of the produce of industry amongst the classes who concur in its formation." David Ricardo (see here).

Both cannot be right.