Summer reading – the neglect of the history of economic thought

PluralistEconAs a second year undergraduate more than 20 years ago, I took a compulsory course in the history of economic thought. I found its eclectic coverage of thinkers from Cantillon to Baran interesting, but even then, it seemed somewhat remote from much of the rest of the course, with the focus of the latter on standard micro, macro and econometrics.

Browsing my old university website today, I was pleased to see that there is still an HET course available on the economics degree, though it is now merely an option. Still, I think it is fair to say that given the technically demanding nature of modern economic theory, or at least the way it is taught to undergraduates and graduates, HET has been neglected, and that an approach to economic theory which is more pluralistic, more controversial and places it in its historical, political and social context is too often lacking.

In this spirit, here is an extract from the introduction to my current reading, Pluralistic Economics and its History, a collection published last year and edited by Ajit Sinha and Alex M. Thomas (p.1-2):

“Over the last four decades or so, the teaching of history of economics has been slowly purged from the curricula of economics at both the graduate and undergraduate levels. The apparent reason for it offered by the orthodoxy is that economics is a science that concerns itself with understanding what exists rather than with navel-gazing at its own achievements and failures. This attitude rests on a naive assumption that science is a linear march towards ‘true’ understanding and thus what is discarded by it in its forward march is necessarily ‘untrue’ and, therefore, there is no reason to saddle the study of its subject matter with those ideas that have proven to be ‘false’. It, however, fails to recognize that there are shifts in paradigms even in pure sciences and thus one cannot read the history of science as a linear march towards ‘truth’…

Furthermore, it is simply incorrect to think that pure sciences or mathematics do not care about their histories. Who among us has not learnt Euclidean geometry even though contemporary mathematics and physics almost entirely deal with non-Euclidean geometry? Or for that matter, who can graduate in physics without studying Newtonian physics, even though contemporary physics is almost entirely quantum physics? The reason for it is that the mathematicians and the physicists do not allow their history to be lost – they ensure that it is taught at an early age either at the school or early college level. So, why has orthodoxy in economics been so keen on removing all traces of its own history?…We raise this issue only to point out that the removal of the history of economics from the curriculum of economics may be (or perhaps it is most likely) due to the fear that its own history may turn out to harbour its greatest challenge. In any case, as we all know, we learn more from our failures than from our successes. Thus it makes common sense to teach our students the history of their discipline with all its ‘mistakes’ and twists and turns so that they have a much richer understanding of it. In the wake of the Great Recession of 2007-8, which has exposed the limitations and weaknesses of the current orthodoxy, it is incumbent on us to go back to the history of our discipline to find ideas and inspirations to build something new.”

Michael Hudson on Wall Street

JisforJunkEconHere is another extract from Michael Hudson’s iconoclastic ‘dictionary’ J is for Junk Economics. This time he takes aim at Wall Street (p.243), though the following could be applied to some other major financial centres.

Wall Street: Replacing government as the economic planning center on behalf of the FIRE [Finance, Insurance and Real Estate] sector, Wall Street is the major source and sponsor of financial overhead. Its business plan is to load corporations, households, real estate, natural resources and government with enough debt so that all profit, all wages above basic and subsistence needs, and all rents will be paid to banks and bondholders as interest.

Financial short-termism is a distinguishing feature of junk economics. Corporate income is used for stock buybacks and higher dividend payouts instead of for new capital investment. Political contributions support politicians who vote to harden pro-creditor bankruptcy laws and sponsor regulatory capture to block prosecution of financial fraud. The resulting debt deflation slows economic growth, as debt service absorbs a rising proportion of personal and corporate income.

Wall Street’s business plan is thus inherently self-destructive. A financial crisis can be averted only by an exponential creation of new credit to fuel more asset-price inflation, enabling debts to be paid by borrowing the interest against collateral whose price is being pushed up by easier bank loans. To defend subsidizing the rising debt overhead and bailouts of banks and bondholders, Wall Street has become the major political campaign contributor, and also the major sponsor of junk economics that blames the victims (debtors, labor, immigrants and foreigners) instead of the debt creation and tax favoritism that increase the rentier wealth of the One Percent.”

Debunking the distributional status quo

HodgsonHetEcon“In neoclassical theory, wages and profits are related to the marginal revenue products of labour and capital respectively. Going further, John Bates Clark and others suggested that the aggregate production function upheld a normative justification of the appropriation of profits by capitalists. These distributive shares of labour and capital were controlled by a ‘natural law’. Hence production functions were used in attempts to explain or justify the distribution of income between rival social classes under capitalism…

[T]he liberal economist John Atkinson Hobson…noted that with production functions, all (positive) factor inputs help to determine the output. In marginal analysis, other factors are held constant as one factor varies. But with positive values throughout, the variable factor still acts in combination with flows of other factors. Contrary to Hobson’s critics, this did not amount to a confusion of total with marginal productivity. Hobson simply pointed out that a marginal product is not produced by the varying factor alone. Identifying the marginal product of a variation in the services of one factor cannot suppress the causal impact of the other factors on output, even though their rate of flow is held constant. All the inputs act causally at every point: they are interdependent. Consequently, one cannot conclude that shares of output are attributable to separate factors.

Yet leading economists make this mistake. For example, in a text on price theory, Milton Friedman relayed the idea that ‘marginal productivity theory shows that each man gets what he produces’ (as long as there is sufficient market competition). He did not consider that the notion of one factor ‘getting what it produces’ is problematic. Production functions involve a combination of capital goods and labour as joint and interdependent inputs. Hence the very notion of one factor ‘getting what it produces’ is mistaken, even within the assumed terms of a standard production function. Furthermore, because of this interdependence of factors, justifications in Lockean terms of property rights over outputs fail: all input facts are ‘mixed’ with the output. Clark’s normative theory thus collapses, even if his production function survives.”

Geoffrey M. Hodgson (2019), Is There a Future for Heterodox Economics? p.21-2, 23-4.

A disintegrating Europe? Why the region needs a more ambitious industrial policy

threads_eu_600x423The pandemic crisis has spurred EU institutions into proposing a sizeable economic response. In May the European Commission “unveiled the Next Generation EU recovery plan that aims to address the damage caused by the pandemic and invest in a green, digital, social and more resilient EU”. It is a shame that it took this historical turn to galvanise such ambition. Despite all this, EU member states are some way from agreement over the size and distribution of the Covid-19 recovery package. But ambition is needed, now more than ever, to respond in a way that promotes a renewed, sustainable and socially cohesive prosperity across the continent. Continue reading

Michael Hudson: Adam Smith was no ‘free market’ economist

hudson-200x300Here are some further enlightening extracts from Michael Hudson’s iconoclastic J is for Junk Economics, this time on Adam Smith (p.28) and the school of Classical Political Economy. Hudson has an extraordinary knowledge of economic history, as can be gathered from viewing any of his interviews on YouTube, or reading his books.

Smith is often falsely regarded as being an advocate of the free market, justifying a libertarian focus on deregulation and minimal levels of taxation. Hudson shows that Smith’s (and the Classical’s) thinking was a bit more complicated: Continue reading

Covid-19 and creative destruction – Marx, Schumpeter and the role of the state

The impact of the uncertainty generated by Covid-19 and the subsequent lockdown in countries across the world has been devastating for economies and societies. There is more to come. The world economy was already struggling somewhat in 2019, with slowdowns in the US and China, the two largest economies. In fact, what was at best sluggish growth in output and productivity in many countries had been a feature of the decade or so which followed the financial crisis of 2008. The onset of the pandemic has hit already weak or fragile economies hard.

Keynes famously argued that the ‘animal spirits’, or waves of optimism and pessimism among businessmen potentially looking to invest, were a major factor in the determinant of growth and employment, and hence economic prosperity. Uncertainty about the future could lead to spending on new industrial capacity and jobs being postponed, driving the economy into stagnation or recession. It was the job of government, he said, to ‘socialise’ investment. In other words, through judicious policy choices, it should try to maintain optimistic expectations among businessmen and make sure that there were sufficient investment opportunities to keep spending, and therefore employment, at a socially optimum level. Continue reading

Economies do not move in straight lines

chaotic cycleRichard Goodwin was an American economist, a self-described ‘wayward Marxist’ who taught at Harvard and Cambridge as well as at Siena. One of his best-known papers was a mathematical model of Marx’s description in Capital of the macroeconomic relationship between wages, growth and unemployment, which generates an endogenous growth cycle: that is, it shows how economies can grow over time with fluctuations of output, employment and the other variables in the model generated from within the system, rather than being dependent on external or exogenous ‘shocks’.

Goodwin’s growth cycle model famously draws on the Lotka-Volterra predator-prey model from biology. This describes the dynamics of two interrelated animal populations: the predator and the prey. Starting from, say, a relatively large initial level of the predator population, this could cause the numbers of prey to fall as they are consumed. As the numbers of prey diminish, there is less food for the predator population, whose numbers also then begin to diminish. Falling numbers of the predator population then allow the prey numbers to recover so that they begin to provide a more plentiful food supply for the predators, whose numbers then begin to rise once again. This generates two interdependent fluctuating population cycles, which are not reliant on external or exogenous factors or shocks. Continue reading

Can Vietnam escape the middle income trap?

samsungvietnamelectronics1A recent article by Trinh Nguyen of the Carnegie Endowment for International Peace (which can be accessed for free here) describes Vietnam’s recent development success story, its lessons for other late-developers and its prospects for the near future. According to the author, this success has been based on a rapid growth in manufacturing exports, much of it from foreign invested firms. This is in turn down to a liberal approach to international trade and investment, incentives for foreign firms to invest, including the provision of “industrial parks, infrastructure building, and tax breaks”, and more widespread “improvements in its electric system, national highways, and air and sea ports”. Continue reading