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

Joan Robinson on economics and the study of society

Joan Robinson (1973)

Apart from her voluminous academic writings, the Cambridge Keynesian economist Joan Robinson wrote several popular books. Freedom and Necessity – An Introduction to the Study of Society was published in 1970. Although some of it dates somewhat, there is plenty of interest and contemporary relevance that remains. Here are a few such extracts:

(From the preface) “It seems to me that an economic interpretation of history is an indispensable element in the study of society, but it is only one element. In layers below it lie geography, biology and psychology, and in layers above it the investigation of social and political relationships and the history of culture, law and religion.”

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The Chinese economy: development, finance and reform

800px-Chinese_draakEven before the Covid-19 outbreak, the Chinese economy was slowing, after more than three decades of rapid economic expansion. Thirty years of recorded growth at around ten per cent per annum is unprecedented in human history. This has enabled hundreds of millions of people to be lifted out of poverty, and the material transformation of a poor country to one that is classified by the World Bank as upper-middle-income.

Despite all this, there is a broad consensus, including among Chinese government officials, that the country’s development model needs to change if it is to continue its transformation and become a rich country. Many economists argue that this will involve a rebalancing of the economy, in order to continue to grow and develop in a way that is more sustainable both for China itself, and for the rest of the world, given that as the world’s second largest economy behind the US, internal changes now have a major impact globally. Continue reading

Paul Ormerod: History shows us that slavery is an economic catastrophe as well as a moral one

An interesting and topical article by Paul Ormerod, which argues that slavery has historically been as much an economic problem as a moral one. Slave-based societies have no incentive to invest in labour-saving technologies, given the low cost of the workforce. The widespread adoption of improved technologies is necessary for sustained rises in productivity and living standards.

I would also add that there is a potential problem of insufficient demand due to the absence of wages. Of course, low wages and poor working conditions can also be a problem for a capitalist society, if growth is constrained by inadequate demand in the form of consumption out of wages. Decent pay and working conditions also help to promote well-being. But despite their flaws, only capitalist economies have enabled sustained rises in living standards for the masses. Ormerod concludes:

“Slavery is of course morally repugnant, a stain on the histories of civilised societies. But it is also economically detrimental to the societies it ostensibly appears to benefit. The fact is that no society based on slavery has ever come anywhere near to delivering decent living standards for the average person.

The only system which has is capitalism. Britain and other areas of north west Europe started to become rich through a system based on the rule of law, the ability of individuals to profit from innovation and not be expropriated, and the freedom of labour to negotiate contracts.

Morality undoubtedly played a part in Britain’s leading role in abolishing slavery. But by the early nineteenth century, it had become an anachronism. Resources employed in slavery could be put to much more productive use under capitalism.”

Michael Hudson on the End of History and Fukuyama’s about-face

hudson-200x300Another extract in this occasional series from Michael Hudson’s J is for Junk Economics (p.88-9), a book which aims “to revive a more reality-based analysis and policy-making…[by reconstructing] economics as a discipline, starting with its vocabulary and basic concepts.” This time he considers the phrase famously coined by political scientist Francis Fukuyama in the early 1990s, and how events superseded Fukuyama’s ideas, forcing a change of heart.

End of History: A term reflecting neoliberal hopes that the West’s political evolution will stop once economies are privatized and public regulation of banking and production are dismantled. Writing in the wake of the collapse of the Soviet Union, Francis Fukuyama’s The End of History and the Last Man (1992) coined the term “liberal democracy” to describe a globalized world run by the private sector, implicitly under American hegemony after its victory in today’s clash of civilizations.

It is as if the consolidation of feudal lordship is to be restored as “the end of history,” rolling back the Enlightenment’s centuries of reform. As Margaret Thatcher said in 1985: “There is no alternative” [TINA]. To her and her neoliberal colleagues, one essayist has written “everything else is utopianism, unreason and regression. The virtue of debate and conflicting perspectives are discredited because history is ruled by necessity.”

Fukuyama’s view that history will stop at this point is the opposite of the growing role of democratic government that most 20th century economists had expected to see. Evidently he himself had second thoughts when what he had celebrated as “liberal democracy” turned out to be a financial oligarchy appropriating power for themselves. In 1995, Russia’s economic planning passed into the hands of the “Seven Bankers,” with US advisors overseeing the privatization of post-Soviet land and real estate, natural resources and infrastructure. Russian “liberalism” simply meant an insider kleptocracy spree.

Seeing a similar dynamic in the United States, Fukuyama acknowledged (in a February 1, 2012 interview with Der Spiegel) that his paean to neoliberalism was premature: “Obama had a big opportunity right at the middle of the crisis. That was around the time Newsweek carried the title: ‘We Are All Socialists Now.” Obama’s team could have nationalized the banks and then sold them off piecemeal. But their whole view of what is possible and desirable is still very much shaped by the needs of these big banks.” That mode of “liberal democracy” seems unlikely to be the end of history, unless we are speaking of a permanent Dark Age in which forward momentum simply stops.”

Social justice and economic performance: beyond the trade-offs?

workersThe subtitle of this blog refers to two of its key concerns when it comes to the application of our ‘dismal science’: economic progress and social justice. The third is individual liberty. It was John Maynard Keynes who in 1926 coined these three as part of the “political problem of mankind” (although he referred to efficiency rather than progress), and noted how difficult they are to reconcile.

A fourth, modern, concern might be sustainability, though this can be incorporated into them in the sense that without them, the economy and society cannot be sustained in the long run. This would include environmental concerns. Theories of sustainable development look at the interaction between the economy, society and environment and try to forge a path in which, being dependent on each other, they are balanced and, literally, sustainable and sustained!

A broad conception of economic progress would necessarily see it as sustainable. If, for example, a particular pattern of economic growth destroys the nature on which it depends, then it will be undermined. At the same time, modern economic growth, which is still part of what most economists consider to be ‘progress’, is a process of transformation, not least of nature, and of society. The task is to ensure that progress can be sustained and this may require that we adopt richer measures of development. For me this needs to include social justice and well-being.

This post explores some themes relevant to the achievement of social justice and economic progress in both developed and developing economies. Some economists consider there to be a trade-off between the two, but plenty of progressive thinkers reject this pessimistic outlook. Indeed they are, together, probably two of the essential ingredients of political stability and a sustainable democracy. Continue reading

The saving glut of the rich

800px-A1_Houston_Office_Oil_Traders_on_MondayRobert Armstrong, US finance editor at the Financial Times, penned a helpful opinion piece in Tuesday’s paper, in which he tries to account for the disconnect between financial markets and the real economy in recent years, the Covid-19 correction notwithstanding. As he says:

“Until last Friday, it looked as if stock markets had lost all track of reality. In the world, we saw spiralling unemployment and political disarray. In the markets, especially the huge American market, exuberance.”

And:

“The market, however, is already acting like it is the fourth of July. The S&P 500 has risen to within 5 per cent of its all-time high.”

This is despite the fact that

“Covid-19 has put working- and middle-class people under immense strain, while the asset-owning classes have felt relatively little pain.”

which is a potential source of political unrest and, in the end, political and economic change.

He accounts for this by positing a self-reinforcing cycle between rising inequality and rising financial markets, in the US in particular, drawing on a recent working paper by Atif Mian, Ludwig Straub and Amir Sufi. It is quite a long and technical paper, so rather than go through it, I will quote from Armstrong’s article, in which he summarises the key points: Continue reading