“The enforcement of fiscal austerity qualifies as the single most important public policy consequence of the abandonment of economics in favour of fakeconomics. Acceptance of austerity by the public in almost every major advanced country is even more perversely impressive than the austerity itself. Anyone born after 1960 must find it hard to believe that once, long ago it seems, the belief in balanced budgets did not drive public finances, nor did governments agonize over and quake in breathless anticipation of the “verdict of financial markets” on their policy decisions.
The overthrow of rigor and common sense in what we once called the economics profession did not cause this seismic shift in the ideology of public policy. We can trace the chronology of causality quite clearly, especially in Britain and the US. The cause lies in the secular decline in trade union influence and the parallel rise in the power of capital. Aneurin (“Nye”) Bevan, tireless Welsh campaigner for the rights of working people, stated the danger succinctly. Unless the working majority organizes to prevent it, “it is an axiom, enforced by the experience of the ages, that they who rule industrially will rule politically.” In the twenty-first century we can replace “industrially” with “financially.”
John F. Weeks (2014), Economics of the 1%
An interview with Nobel prize-winning economist Joseph Stiglitz on the rise of inequality, particularly in the US, but also in many other rich countries. This has been reflected in stagnant or falling wages for lower and middle income earners, and soaring incomes and wealth at the very top of society.
Stiglitz debunks ‘trickle-down economics‘ and calls for relatively radical changes in the way capitalism in the US and elsewhere is structured. He is an economist of the centre-left, and in recent years has become increasingly critical of the mainstream economics which he himself has contributed towards during his career. He sees as vital changes in the power structure of society in order to reduce inequality and increase economic efficiency. The two can go together and this is refreshing to hear.
“You no longer have to whisper it, it’s called socialism.” With these words, UK shadow finance minister John McDonnell reconfirmed the Labour Party’s commitment to transforming British society, should they win the next election. On current polling evidence, this seems unlikely.
For those of us more inclined towards the social democratic wing of Labour, this rhetoric is a little dismaying. I am not convinced that the hard left has widespread appeal beyond the party’s core membership. An appeal to ‘middle England’, alongside the working class and those nearer the top of society who see the importance of progressive politics, is vital should they actually want to win the next election and obtain the power required to put policies into action. Continue reading
After years of frugality, German consumers are finally spending again, at a rate not seen since the dotcom boom of the 1990s. According to the FT, private consumption is growing at about 2% per annum, driven by high levels of employment, rising wages, and low inflation and interest rates. This is welcome, and not only for German growth. If sustained, it could help rebalance the economies of both Germany and Europe.
Germany is the largest economy in Europe, and a number of economists have argued that its large current account surplus, far from being a virtue reflecting a culturally frugal population, is the flip side of the large current account deficits in the Eurozone periphery which led to the crisis in 2010. In short, in order for countries in the periphery like Spain to recover and rebalance while sustaining growth and reducing unemployment, Germany’s economy also needs to rebalance. The latter should involve higher wages, consumption and investment and lower net exports driven by higher imports.
The sum of all the current account surpluses and deficits in the global economy must by definition sum to zero, even if in practice measurement errors mean that they don’t quite. Given this fact, it is no good preaching to Spain to reduce its current account deficit in the absence of its trading partners reducing their surpluses. Continue reading
“Absent a great rebalancing [away from neoliberalism], shared prosperity will become a relic of the past and the Great Recession will likely evolve into the Great Stagnation. If that happens, it is easy to imagine a Weimar-style political scenario in which prolonged mass unemployment and economic hardship release the genie of intolerance and hate.
For these reasons a great rebalancing is essential and urgent, but escaping the pull of neoliberalism will not be easy. There exist major political obstacles associated with vested interests and the capture of political parties. Orthodox economists dominate thinking about economics and economic policy, and market fundamentalism has a deep hold on the public’s imagination. In part, this hold is because of its rhetoric about freedom and individualism, which resonates especially strongly with US cultural images and values. But it is also because extremes are attractive, offering simple but false certainties.
In contrast, economic perspectives that recognize the need for balance also require judgement, and the exercise of judgement is difficult and challenging, being the ultimate expression of individual responsibility. Ironically, neoliberalism, which touts individualism, avoids that responsibility by its embrace of the extreme. That makes it both dangerous and difficult to dislodge, but, to borrow from Mrs Thatcher, if we want shared prosperity, there is no alternative.”
Thomas Palley (words from his 2012 book From Financial Crisis to Stagnation: The Destruction of Shared Prosperity and the Role of Economics)
“Capital is a particular form of social wealth driven by the profit motive. With this incentive comes a corresponding drive for expansion, for the conversion of capital into more capital, of profit into more profit. Each individual capital operates under this imperative, colliding with others trying to do the same, sometimes succeeding, sometimes just surviving, and sometimes failing altogether. This is real competition, antagonistic by nature and turbulent in operation. It is as different form so-called perfect competition as war is from ballet.
…Real competition is the central regulating mechanism under capitalism. Competition within an industry forces individual producers to set prices with an eye on the market, just as it forces them continually to try to cut costs so that they can cut prices and expand market share. Cost-cutting can take place through wage reduction, increases in the length or intensity of the working day, and through technical change. The latter becomes the central means over the long run [my emphasis].
…The notion of competition as a form of warfare has important implications. Tactics, strategy, and resulting prospects for growth are central concerns of the competitive firm…In the battle of real competition, the mobility of capital is the movement from one terrain to another, the development and adoption of technology is the arms race, and the struggle for profit growth and market share is the battle itself.”
Anwar Shaikh (2016), Capitalism: Competition, Conflict, Crises, p.259-260
I am an admirer of the work of New School economics Professor Anwar Shaikh. Here is a wide-ranging discussion with him that covers free trade and its impact on the US over the past 30 years, as well as how both the creative and destructive power of markets should be channelled through appropriate policy.
With regards to trade, Shaikh argues against Ricardo’s theory of comparative cost advantage in favour of Adam Smith’s earlier theory of absolute cost advantage. For Smith, and Shaikh, international trade takes place between businesses rather than nations, which means that there are winners and losers as trade expands. There is also a necessity for interventionist trade and industrial policies to promote development among the poorest nations, if they want to ‘catch up’ with their richer cousins.
Shaikh is pessimistic about the prospects for significant progressive change in American society and more widely, which he sees as a problem of political mobilisation and will, rather than a purely economic one. Having said that, this interview was recorded before the rise of Bernie Sanders, which certainly offered hope to many, at least for a while.
Larry Elliott’s economics opinion piece from today’s Guardian discusses the issue of the UK’s large current account deficit and how to reduce it. He refers to a paper by Roger Bootle and John Mills, two authors spanning the political divide (the paper is free to download here). Bootle is a free-market Keynesian economist who runs his own consultancy, Capital Economics, and generally favours light regulation and low taxes, but also attaches importance to the Keynesian emphasis on aggregate demand. Mills studied economics at Oxford, is a successful businessman and a major Labour party donor. On the issue of the UK’s exchange rate, they seem to agree.
The pound fell sharply following the result of the UK’s referendum on EU membership. Economic theory teaches that a lower exchange rate, by reducing the price of a country’s exports and increasing that of its imports, all else equal, should boost sales of the former and reduce those of the latter. In the UK’s case, this should reduce the current account deficit. At 7%, the latter is at the highest level since records began. The financial markets don’t seem to mind financing it for now, but there are a number of reasons why it makes sense to maintain the current lower level of the pound. Continue reading
“The many supporters of neoclassical economics present it as “value free” in the sense that it encapsulates eternal truths of economic behaviour and natural law that are as independent of human perception and will as the law of gravity. The truth is that economics has always been a highly political discipline, and twenty-first century mainstream theory no less so than economics in the past. Recognizing that neoclassical theory is heavily laden with ideology does not invalidate its insights, but it does require a serious attempt to distinguish that part of the theory that is scientific and that which is essentially propaganda. One example demonstrates the distinction: the hypothesis that there exists a rate of unemployment in the aggregate for which the rate of change of the price level would be zero (and that this relationship is stable) is a scientific proposition in that it can be derived theoretically and empirically verified or rejected. Calling such a rate of unemployment “natural” and associating it with full employment is propaganda, placing theory in the service of ideology.”
John Weeks (2012), The Irreconcilable Inconsistencies of Neoclassical Macroeconomics
While I reckon that humanity remains part of nature in the end, despite our ability to modify (and often damage) the natural world, I think that Weeks makes a helpful distinction here. He uses an example of so-called “natural” concepts in economics, such as the natural rate of unemployment, interest, output etc. Paying attention to the language used in arguments as creating a particular symbolism and a presupposed ideology can be important to an effective critique.
“Many of the central propositions of economic analysis can be derived without any reference to hyperrationality, optimization, perfect competition, perfect information, representative agents, or so-called rational expectations. These include the laws of demand and supply, the determination of wage and profit rates, technological change, relative prices, interest rates, bond and equity prices, exchange rates, terms and balance of trade, growth, unemployment, inflation, and long booms culminating in recurrent general crises…
…I propose that we reject the claim that perfect competition was ever appropriate and refuse the notion that observed outcomes should be attributed to historically arisen imperfections. The economic dynamics of capitalism arise from competition itself. There was never any Garden of Eden, and our current condition does not stem from its loss.”
Anwar Shaikh (2016), Capitalism – Competition, Conflict, Crises
These passages come from the opening paragraphs of the conclusion to Shaikh’s magisterial work. Drawing on the classical political economists such as Smith and Ricardo, as well as Marx, Keynes and many others, he sets out to construct a comprehensive approach to the economics of capitalism which goes beyond theories of perfection and imperfection. This is very appealing to me. Continue reading