James Crotty on individuals and institutions in society

Crotty-InterviewJames Crotty is an economist at the University of Massachusetts Amherst, whose work ‘attempts to integrate the complementary analytical strengths of the Marxian and Keynesian traditions.’ This sort of approach to economics, or political economy, as many such heterodox thinkers prefer to call it, is right up my street. A collection of his papers was published last year.

Here is a very brief excerpt from one where he considers the relationship between individuals and social structures in economics and social theory more broadly. While mainstream economics tends to reduce the objects of study to the behaviour of the individual, some alternative theories place equal importance on emergent social structures such as the economy as a whole, the state, the political system etc.

In this line of thinking, such structures are dependent on but not reducible to the individuals. They ’emerge’ from the interactions of individuals. In the jargon, they are non-reductionist. Such an approach is much more fruitful when it comes to macroeconomic analysis.

“Sensible social theory must try to acknowledge and integrate the insights of both individualist and structuralist methodology. To be sure, social structures can be changed by groups of individuals. And Keynesians insist that individuals do have significant freedom of choice; they do not always make choices consistent with the orderly reproduction of society. But institutions also socialize individuals, and hierarchical societies do differentially socialize distinct classes of individuals and assign them to qualitatively different economic and social roles. In addition, institutional structures constrain agent choice and set bounds on expected economic outcomes. Moreover, institutions are economic agents themselves. Institutional decision-making requires a theory of choice of its own, one that incorporates the effects of particular organizational structures, strategies, and conventions. Marx’s famous dictum that “men make history, but they do not make it precisely as they choose” is methodologically on the right track…

…[B]oth microtheory and macrotheory must be institutionally specific and historically contingent.”

James Crotty (2017), Capitalism, Macroeconomics and Reality, Cheltenham: Edward Elgar, p.60-61.

Richard Koo – The Other Half of Macroeconomics and the Fate of Globalization

Richard Koo The Other HalfRichard Koo’s big idea is the theory of balance sheet recessions (BSR), and he has written a number of books that explain and apply it to our current economic problems. His latest was published earlier this year: The Other Half of Macroeconomics and the Fate of Globalization.

I do enjoy his work, as it is somewhat iconoclastic, and despite some repetition, both within and between the individual works, he is well worth reading. I have summarized his previous ideas here, so in this review I will concentrate mainly on what is new in this book.

The not so new

For readers unfamiliar with his previous work, Koo outlines his theory of BSRs; his critique of Quantitative Easing and the risks involved as it is unwound by central banks; and the source of the Eurozone crisis and solutions to it which avoid the creation of a fiscal union, which still lacks political legitimacy and support across the EU.

All of this is already covered in his books The Holy Grail of Macroeconomics and The Escape from Balance Sheet Recession and the QE Trap.

The new

Koo’s latest book elaborates and extends his theory of BSRs (what he calls ‘the other half of macroeconomics’) to longer term questions of economic development. He also addresses the current backlash against aspects of globalisation embodied in support for Donald Trump, Brexit and the like. Continue reading

Michael Hudson on the invisible hand

hudson-200x300Another extract in this occasional series from Michael Hudson’s J is for Junk Economics (p.128-129). It defines a well-known term in economics, co-opted by the right, often misleadingly, in order to provide support for ‘free’ markets:

Invisible Hand: The term dates back to Adam Smith’s Theory of Moral Sentiments (1759) postulating that the world is organized in a way that leads individuals to increase overall prosperity by seeking their own self-interest. But by the time he wrote The Wealth of Nations in 1776, he described hereditary land ownership, monopolies and kindred rent-seeking as being incompatible with such balance. He pointed to another kind of invisible hand (without naming it as such): insider dealing and conspiracy against the commonweal occurs when businessmen get together and conspire against the public good by seeking monopoly power. Today they get together to extract favors, privatization giveaways and special subsidies from government.

Special interests usually work most effectively when unseen, so we are brought back to the quip from the poet Baudelaire: “The devil wins at the point he convinces people that he doesn’t exist.” This is especially true of the financial reins of control. Financial wealth long was called “invisible,” in contrast to “visible” landed property. Operating on the principle that what is not seen will not be taxed or regulated, real estate interests have blocked government attempts to collect and publish statistics on property values. Britain has not conducted a land census since 1872. Landlords “reaping where they have not sown” have sought to make their rent-seeking invisible to economic statisticians. Mainstream orthodoxy averts its eyes from land, and also from monopolies, conflating them with “capital” in general, despite the fact that their income takes the form of (unearned) rent rather than profit as generally understood.

Having wrapped a cloak of invisibility around rent extraction as the favored vehicle for debt creation and what passes for investment, the Chicago School promotes “rational markets” theory, as if market prices (their version of Adam Smith’s theological Deism) reflect true intrinsic value at any moment of time – assuming no deception, parasitism or fraud such as characterize today’s largest economic spheres.”

Inequality in the OECD: causes and policy responses

Inequality has become a ‘big’ topic in recent years, of concern both to economists and the public at large. This is exemplified by the popularity of Thomas Piketty’s Capital in the Twenty-First Century, and many other works. I have written on some of these studies here.

They continue to be churned out: in the July issue of the heterodox Cambridge Journal of Economics, Pasquale Tridico of Roma Tre University analyses the determinants of income inequality in 25 OECD countries between 1990 and 2013. He finds that ‘financialisation’, increased labour market flexibility, the declining influence of trade unions and welfare state retrenchment have been key to its rise.

When other factors such as economic growth, technological change, globalization and unemployment are taken into account, the above four causes remain important, and, to the extent that they can be changed as a matter of policy, they can mitigate inequality without harming economic growth. They are therefore not the full story but, for example, the negative effects of rising unemployment on inequality can be reduced if there is a strong social safety net in place. Continue reading

The need for the mixed economy

“The mixed economy is a social institution, a human solution to human problems. Private capitalism and public coercion each predated modern prosperity. Governments were involved in the market long before the mixed economy. What made the difference was the marriage of large-scale profit-seeking activity, active democratic governance, and a deepened understanding of how markets work (and where they work poorly). As in any marriage, the exact terms of the relationship changed over time. In an evolving world, social institutions need to adapt if they are to continue to serve their basic functions. Money, for example, is still doing what it has always done: provide a common metric, store value, facilitate exchange. But it’s now paper or plastic rather than metal, and more likely to pass from computer to computer than hand to hand. Similarly, the mixed economy is defined not by the specific forms it has taken but by the specific functions it has served: to overcome the failures of the market and to translate economic growth into broad advances in human well-being – from better health and education to greater knowledge and opportunity.”

Jacob S. Hacker and Paul Pierson (2016), American Amnesia: How the War on Government led us to Forget What Made America Prosper, p.7

Mariana Mazzucato on the State behind trillion dollar Apple

mazzucato-book-coverApple recently became the first public company in history to be worth $1 trillion. It therefore seems like a good moment to consider how there is more to its success than the private initiative touted in much of the media.

Here are some enlightening extracts from Professor Mariana Mazzucato‘s 2013 book The Entrepreneurial State, which aims to debunk mainstream economic theory and history on the sources of innovation under capitalism: Continue reading

Wages and technological progress – a walk on the demand-side

What is the link, if any, between wages and technological progress in a capitalist economy? An article in this week’s The Economist magazine sheds some light on the issue. In particular, it considers the apparently lesser-studied effect that wages might have on productivity growth.

The reverse relationship, that productivity growth allows growth in wages, is studied more often. This has certain implications for economic policy. Boosting the supply-side determinants of innovation, such as education, and research and development, become important.

But what of the demand-side? The article mentioned above describes how some economic historians are engaged in a debate over the “high-wage hypothesis” put forward by Robert Allen, which he suggests helped drive industrialisation in Britain. Continue reading