from Dean Baker
It was very frustrating to read Noam Scheiber’s profile of Jaz Brisack, the person who led the first successful union organizing drive at a Starbucks. Brisack does sound like a very impressive person and it is good to see her getting the attention her efforts warrant. However, Scheiber ruins the story by […]Neoliberals do not like a free market, but they want you to think they do — Real-World Economics Review Blog
For those of you interested in the current performance and prospects of the UK economy, here is an interesting and wide-ranging interview with Duncan Weldon, a former economist at the Trades Union Congress, and a former economics editor for the BBC’s flagship programme Newsnight. He now writes the Value Added newsletter. During the interview he discusses the UK’s poor performance in recent years, and how this has been impacted by government policies, as well as the international environment, including our evolving relationship with the European Union. He ends on a (sort of) optimistic note, in that the fact that UK productivity is some 20 percent behind that of countries such as France and the US means there is plenty of room for living standards to ‘catch up’ with those of more successful economies.
In the spirit of my current series on the ideas of maverick economist Andrew Smithers, this week’s quote comes from his new book The Economics of the Stock Market, which is an attempt to create a model of the financial sector of a capitalist economy and explore its interaction with the real economy of companies, households, investment, savings, growth and so on. This kind of approach has tended to be neglected by the mainstream neoclassical consensus, but it does form a major part of the ideas of many heterodox or non-mainstream economists, particularly post-Keynesians such as Steve Keen, Hyman Minsky and Wynne Godley.
Smithers is very much an independent, eclectic and iconoclastic thinker, and does not readily fit into any particular school of economics. He is unafraid to criticise widely accepted theories and policies, and is very much driven to improve the way economics is done, in order to increase its explanatory power, as well as the potential of economic policy to improve the functioning of the economy itself.
One of his key points in the book is to emphasise the existence of what he calls the ‘corporate veil’, or the recognition that corporations behave differently from households, as they face different incentives. The ‘representative agent’ of the neoclassical model is thus a misleading starting point. Companies do not behave as if run by their shareholder owners (households), so that a model of the private sector needs to contain two distinct sectors at the very least, namely corporations and households, and study their behaviour and interactions.
“The major weakness of the previous consensus is seen by may to lie in the failure to incorporate finance into its economic models. Half the US economy’s output is produced by companies whose behaviour is determined by the fact that their shares are quoted on the stock market. Once this is accepted, the economic model that follows is very different from the neoclassical consensus. Unlike the latter its assumptions are testable and prove robust when tested and it radically changes our understanding of how the economy operates and leads thereby to different policies, largely because it shows that corporations behave differently from households and quoted companies differently from unquoted ones. The failure of the current consensus is shown by its dependence on assumptions which either are untestable or, if not, fail when tested. The determination to stick to accepted assumptions and ignore the evidence that they are invalid shows that neoclassical economists have much in common with Hobbits who ‘liked to have books filled with things that they already knew, set out fair and square with no contradictions’.
Andrew Smithers (2022), The Economics of the Stock Market, Oxford University Press, p.1.
This is the second in my series exploring some of the ideas covered in the work of economist Andrew Smithers, particularly his wide-ranging book The Road to Recovery. In this post I want to consider his explanation for Japan’s relatively poor economic performance in recent decades, and his suggested solutions. His ideas overlap with those of other economists I have covered in this blog, such as Michael Pettis and Richard Koo, but much of the detail remains distinct, so they are worth writing about in a new post.
Japan’s economy has not had a good thirty years. After its post-war economic ‘miracle’, which saw it emerge from devastation to catch up rapidly with the world’s richest economies, its growth rate has largely stagnated since the 1990s. Successive governments have responded by periodically employing fiscal and monetary expansion (intended to boost demand), as well as reforms to business (intended to boost supply), seemingly without any great benefit. Of course, things might have been even worse without these reforms. It is also important to factor in the country’s ageing population, a population that has been shrinking overall since the mid-2000s. When this is taken into account, growth in GDP per head in recent years has actually been comparable to other rich economies, though this is nothing to shout about, as the US and Europe have not exactly distinguished themselves lately either. Continue reading
This interesting post by Professor Ting Xu from the Developing Economics blog reflects on the realities of development as a process of Schumpeterian creative destruction, and the institutions which can promote this process, with an emphasis on the relationship between the market and the developmental state. Historically, successful developmental institutions have tended to be different to those considered in mainstream economics discussions. The post also discusses how these ideas apply to the experience of China and its policy aim of escaping poverty.
In this video Nobel Memorial Prize winner Joseph Stiglitz describes what in his view are the flaws in the dominant model of globalisation and the policies which have promoted it in recent decades. He argues that markets are generally neither efficient nor stable and that free trade and free capital movements have contributed to rising inequality in many countries. If globalisation is to result in a more widely-shared prosperity, then a new social contract is needed.
Stiglitz works broadly in the neoclassical tradition in economics, which is often strongly criticised by heterodoxy, but he remains very much a progressive thinker and committed to reforms which aim to benefit the many across the globe, not least the poorest and most vulnerable in society.
“One of the central failings of mainstream economics is that it tends to adopt simplifying assumptions in order to make theorising and calculations ‘tractable’. This of course is a necessary part of any theorising. A one-to-one scale map is not much use. But the problem occurs when economists then fail to reintroduce all those real-world complications that have been abstracted from, when delivering policy conclusions and advice. Thus, conclusions and advice are delivered that are based on unrealistic assumptions. The reason is usually because…reality is just too complicated to fully restore into the workings. So what should be done? First, any restrictive assumptions should be made explicit. Second, the resulting conclusions and policy advice should be caveated as most likely not being directly applicable to the real world. And third, where some sort of policy agenda does nevertheless need to be followed, the above weaknesses should be borne in mind. Thus, we should hedge out bets by promoting a rich ecosystem of alternative corporate forms, rather than assuming that the textbook model of shareholder-ownership will maximise returns to society. Similarly, when theory demonstrates that one course of action is optimal, since winners can compensate losers with everyone thereby being better off, the resulting policy shouldn’t be adopted on those grounds alone, unless there is convincing evidence that the winners will indeed actually compensate the losers.”
Jonathan Michie (2017), Advanced Introduction to Globalisation, Cheltenham: Edward Elgar, p.12.
Following last week’s introduction to the work of economist Andrew Smithers, this is the first post in a new series, which discusses some of the main themes he has addressed. Here, I want to consider the argument in his book The Road to Recovery that countries outside what he calls the ‘Keynesian trio’ of the US, the UK and Japan need to take more responsibility for encouraging global growth via demand management, particularly fiscal policy. The book was published in 2013 in the wake of the sluggish recovery from the financial crisis in many nations. In today’s environment of supply shocks and sharply rising inflation, one might wonder whether the economic context that Smithers considers remains relevant today. I think that it is, and it is also important to learn from history. When inflation does subside, the tools of economic management will still be part of the story.
The ‘Keynesian trio’
Smithers argues that the US, the UK and Japan can be described as the ‘Keynesian trio’, since during the financial crisis, all three employed expansionary fiscal policies to boost aggregate demand and economic growth. Of course, Japan had been doing so on and off since its own financial crisis and economic slowdown in the 1990s, such that its national debt as a share of GDP is now more than 250%! Economist Richard Koo has argued that the country had been suffering from a Balance Sheet Recession, in which firms desire to pay down debt rather than invest, in spite of the low cost of borrowing, and that only government deficits have been able to absorb and spend the excess of net private saving and prevent an even worse economic performance. One might say that when it came to the financial crisis of 2008, Japan was ‘used to’ running large deficits and did not hesitate to do so. Continue reading
Many economists still think that “evidence” is only of one kind, i.e. statistical/econometric analysis. Whilst this is important, it is not enough on its own. One reason for its privileged position may be that it is typically contrasted with “anecdotal evidence”, which is unreliable. But the truth is richer than that. It is true that […]Evidence-based economics — the fundamentals — LARS P. SYLL
Last week, US Treasury Secretary Janet Yellen told the US Congress that “We now are entering a period of transition from one of historic recovery to one that can be marked by stable and steady growth. Making this shift is a central piece of the President’s plan to get inflation under control without sacrificing the […]The scissors of slump — Michael Roberts Blog