Quote of the week: the administrative problems in achieving full employment

Copland-DouglasDouglas Copland was a Australian academic and economist, who advised a number of his country’s governments during his distinguished career. In this week’s quote, I again draw on the edited 1947 volume The New Economics: Keynes’ Influence on Theory and Public Policy. Here Copland discusses some of the practical administrative problems of the Keynesian policy of achieving full employment in a free democratic society. As he makes clear, it is unlikely to be easy. It requires cooperation between the state and the private sector, including certain controls on free enterprise, which the private sector may well resent or resist. Indeed this resistance, which could be overcome in times of national emergency such as war, is likely to be more challenging in peacetime. This proved to be the case as the post-war period progressed, and eventually the Keynesian social democratic consensus collapsed in the 1970s when it seemed to fail in its aim of securing full employment with moderate inflation, and many industrialised economies were beset by stagflation, with unemployment and inflation rising together. In the 1980s politics in the US and the UK in particular shifted to the right, with the rise of an ideology which argued for the retreat of the state and the restoration of greater freedom to the private sector. Continue reading

What’s causing accelerating inflation: pandemic or policy response?

Prominent Modern Monetary Theorist L. Randall Wray and Yeva Nersisyan have written a new working paper published by the Levy Economics Institute. In it they examine the possible causes of the current accelerating inflation in the US. They look at factors on the demand-side, in the form of the fiscal stimulus policy response to the pandemic. They also look at those on the supply-side which are more directly due to the impact of the pandemic itself, such as supply chain disruption, alongside the pricing power of large firms.

In the end, they mainly blame supply-side factors and conclude that a tightening of monetary policy in the form of rising interest rates is likely to be a crude and somewhat ineffective response to higher inflation. If it does work to reduce inflation, it will be accompanied by an economic slowdown or recession, rising unemployment, falling wages, rising debt distress, bankruptcy and even a new financial crisis. In Keynesian fashion the authors see these negative outcomes as hindering the adjustment of the economy. Tipping the economy into recession in order to reduce inflation would also undermine the current benefits of a tighter labour market which by increasing wages for the lowest paid can help to reduce income inequality. Continue reading

Free to trade efficiency?

Real-World Economics Review Blog

from Peter Radford

Fascinating.

The war in Europe is messing with some major preconceptions and exposing some as illusions that, perhaps, we would be better off without.

Take, for instance, The Economist magazine’s leader article entitled “Trading with the enemy.”  Here’s the key question the article poses:

“Is it prudent for open societies to conduct normal economic relations with autocratic ones, such as Russia and China, that abuse human rights, endanger security and grow more threatening the richer they get?”

You and I might answer in the negative with a certain ease, but for the Economist and its ilk the question is more nuanced.  After all aren’t freedom and free trade one and the same?  If you stop trading freely aren’t you surrendering your freedom?

The Economist goes on to present its case, which inevitably decries any diminution of free trade, and ends thus:

“Liberal governments need…

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Quote of the week: Paul Samuelson on the essential contribution of Keynes’ General Theory

paul samuelsonPaul Samuelson was the high priest of the post-war “neoclassical synthesis” in economics, which combined a particular interpretation of Keynesian macroeconomics with mainstream microeconomics. He was the author of two influential textbooks which were widely used by students on the US side of the Atlantic and, as time went on, on the UK side as well. Keynes’s disciples at Cambridge University, and many of their students, tended to be politically to the left of their American counterparts, and were critical of Samuelson’s approach to Keynesian economics. But fast forward to today, and the left Keynesians, or post-Keynesians, are sadly confined to a heterodoxy with limited influence on the dominant mainstream of the subject.

This week’s quote, by Samuelson, is another from the 1947 collection of essays The New Economics, published not long after Keynes’ death the previous year. It provides a fascinating snapshot of how some of the influential (mostly American-based at the time) voices in academia assessed Keynes’ contribution to economic theory and public policy. It includes essays by Keynes himself, as well as Joan Robinson, one of the founders of the post-Keynesian school at Cambridge. Continue reading

Quote of the week: Keynes and under-employment equilibrium

keynesYou never know what you are going to find in your local charity bookshop. Mine stocks a fair number of rare and collectable items so I try and keep a look out for anything interesting and relevant. I recently happened upon a slightly scruffy first edition of a 1947 volume edited by Seymour Harris, who was professor of economics at Harvard. I have to admit that I hadn’t heard of him before, but the book contains a range of essays by his contemporaries, including reproduced contributions by Keynes himself, who died in 1946. They include Goodwin, Harrod, Leontief, Meade, Joan Robinson, Samuelson, Schumpeter, Paul Sweezy and Tobin among others. The majority were based in the US at the time. Not all the contributors were convinced by Keynes’ ideas, but it makes for an interesting account of some leading economists on the Keynesian revolution some ten years after the publication of Keynes’ magnum opus, The General Theory of Employment, Interest and Money, and only a short while after his passing.

The volume, optimistically, “is dedicated by its editor to those economists who, following the leadership of Lord Keynes, are endeavoring to make of economics a useful tool for the diagnosis and treatment of economic disease.” Continue reading

The long shadow of history: notes on industrialisation under the Russian Tsarist autocracy

The modern development of Russia and the former Soviet Union seems to have deep historical roots. The institutional structure and traditions of the state, which are pivotal to the emergence of capitalism, have in some ways changed little since the days of the Tsarist autocracy. This has shaped the evolution of the country’s political economy down to today.

“History doesn’t repeat itself, but it often rhymes”. Mark Twain’s oft-used quote can be applied to today’s Russian state, which in some ways has retained many distinctive elements despite the long march of an often turbulent history.

In a quest to improve my understanding of today’s war in Ukraine, and perhaps some of its deeper motivations, as well as the modern development of Russia and the USSR, I have dived into a number of volumes which have until recently been gathering dust on my bookshelves. I have found plenty to get stuck into with regard to development, industrial policy and the role of the state.

In this post, I want to share some arguments on the industrialisation of Russia under the Tsarist autocracy, which can be found in Linda Weiss and John Hobson’s 1995 book States and Economic Development. The relevance of this historical episode to subsequent events, even down to today, will become apparent. In sum, I found it to be a fascinating exploration, and one which rang many bells, so to speak! Continue reading

The ‘original sin’ of Keynes’ General Theory

raising_keynes_book_coverStephen Marglin is a professor of economics at Harvard, and his latest book is a weighty attempt to resurrect the more radical ideas of Keynes contained in The General Theory of Employment, Interest and Money for a twenty-first century audience. I have not yet got far with this 900-odd page tome, but I thought I would post the odd extract as I make progress.

I have to admit that I am not a fully convinced Keynesian, but there is still plenty in Keynes’ and his followers’ writing that remains extremely valuable. His aim of saving capitalism through judicious reforms and policies continues to inspire me. It will be interesting to see how Marglin’s book approaches the ideas of the great man, and the conclusions he draws. Continue reading

Peter Nolan on the importance of political economy in post-communist transition

Current events in Ukraine are inevitably shifting perspectives on the important and relevant issues in economics, politics, and where the two meet in political economy. I have been doing some reading on the economic history of Russia and the USSR, which has taken me to the issue of post-communist system reform. When already stagnant economies in the Eastern bloc collapsed around 1990, Western economists rushed in to advise on managing and enabling the transition to capitalism. The outcomes were decidedly mixed, and in some cases disastrous for living standards. The legacy of the reforms is surely still with us, and can be contrasted with the experience of China in moving from its own communist economy towards capitalism, which in contrast with the Eastern bloc enacted more gradual reforms, while maintaining political stability. It may now be facing difficulties, but its success in lifting hundreds of millions out of poverty to become an economic superpower within thirty years or so has been remarkable. Continue reading

Anwar Shaikh on the paths to development

Here is another short but useful paper by Anwar Shaikh, in which he explores the pathways to capitalist development. In doing so, he summarises many of the ideas contained in his magnum opus Capitalism: Competition, Conflict, Crises, which was published in 2016. He explores competition, growth, international trade, aggregate demand, unemployment, inflation and the limits to economic stimulus policies. His book contains all this in much greater detail and includes critiques of neoclassical, Keynesian and post-Keynesian alternatives alongside a wealth of empirical evidence.

Shaikh is critical of post-Keynesian ideas on wage-led versus profit-led growth, and argues in the paper that one of the ‘secrets’ to successful development is to enact policies which enable productivity to grow faster than real wages, so that the economy-wide wage share falls and the profit share rises, stimulating increased investment and accelerating growth in output and productivity. This may well be the case, but there are surely limits to a falling wage share, if this constrains growth in consumption and household income. In the debate over models of growth and development, this can be summarised as the difference between high wages and high savings models.

Historically, many economies have adopted the high savings model of growth, which represses wage growth relative to productivity, giving rise to high savings which are then channelled into investment, a process which is often coordinated by the state. This can lead to rapid growth, often referred to as a ‘growth miracle’, to the extent that the investment remains productive. But after a time, it tends to reach certain limits and then reforms which eliminate wage repression and enable faster growth in consumption and household income become necessary, which can be a difficult transition to make if there are wealthy and powerful vested interests which depend on the maintenance of the high savings model. Perhaps the best example of this today is China, which probably maintained the highest savings rate in history, at up to 50 percent of national income. Since 1978, it has managed the transition away from its command economy towards capitalism with an extraordinary degree of success, lifting hundreds of millions of its population out of poverty. But now it is struggling to rebalance away from its very high level of investment, a substantial proportion of which is unproductive, and to boost the share of consumption and household income in GDP. Japan has been through a similar process, with its post war growth miracle followed by two decades of stagnation as it struggled to rebalance its economy.

Shaikh’s paper is certainly interesting, but both it and his wonderful book do not address these issues: that there are limits to profit-led or high savings pathways to growth and development.