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

Ha-Joon Chang: facts, even numbers, are in the end not objective

Chang EconomicsUsersGuideThis is the last in the recent series of excerpts taken from Ha-Joon Chang’s Economics: The User’s Guide. Chang is an economist at Cambridge University (his personal non-academic website can be found here) and specialises in development economics. He has also written a number of popular books, some of which aim to debunk many of the myths of mainstream economic discourse.

The User’s Guide is one such, aimed at the lay reader rather than academics, and engages in a pluralist introductory approach to economics. I have therefore chosen a number of quotes over the past few months which stood out for me and which I felt were worth sharing. Here is Chang on p.453-5:

“Johann Wolfgang von Goethe, the German writer (Faust) and scientist (Theory of Colours), once said that ‘everything factual is already a theory’. This is something to bear in mind when looking at economic ‘facts’.

Many would assume that numbers are straightforward and objective, but each of them is constructed on the basis of a theory. I might not go as far as Benjamin Disraeli, the former British Prime Minister, who quipped that ‘there are lies, damned lies, and statistics’, but numbers in economics are invariably the results of attempts to measure concepts whose definitions are often extremely contentious or at least debatable.

This is not just an academic quibble. The way we construct economic indicators has huge consequences for how we organize our economy, what kind of policies we implement and ultimately how we live our lives.

This applies to even the most basic figures that we take for granted, like GDP or the rate of unemployment. The exclusion of household work and unpaid care work from GDP has inevitably led to the undervaluation of those types of work. GDP’s inability to take into account positional goods has directed consumption in the wrong direction and made it an unreliable measure of living standards for rich countries, where those goods are more important. The standard definition of unemployment underestimates the true extent of it by excluding discouraged workers in the rich countries and the under-employed in the developing countries. Naturally, these types of joblessness have been rather neglected by policymakers.

All of this is not to say that numbers in economics are all useless or even necessarily misleading. We need numbers to be able to get the sense of the magnitude of our economic world and monitor how it changes; we just shouldn’t accept them unthinkingly.”

Ha-Joon Chang: why free trade may not be best

ha-joon-chang“When they hear someone criticizing free trade, free-trade economists tend to accuse the critic of being ‘anti-trade’. But criticizing free trade is not to oppose trade.

Apart from the benefits of specialization that the theory of comparative advantage extols, international trade can bring many benefits. By providing a bigger market, it allows producers to produce more cheaply, as producing a larger quantity usually lowers your costs (this is known as economies of scale). This aspect is especially important for smaller economies, as they will have to produce everything expensively, if they cannot trade and have a bigger market. By increasing competition, international trade can force producers to become more efficient – insofar as they are not developing country firms that would get wiped out by vastly superior foreign firms. It might also produce innovation by exposing producers to new ideas (eg., new technologies, new designs, new managerial practices).

International trade is particularly important for developing countries. In order to increase their productive capabilities and thus develop their economies, they need to acquire better technologies. They can in theory invent such technologies themselves, but how many new technologies can relatively backward economies really invent on their own?…For these countries, therefore, it would be madness not to take advantage of all those technologies out there that they can import, whether in the form of machines or technology licensing (buying up the permit to use someone else’s patented technology) or technical consultancy. But if a developing country wants to import technologies, it needs to export and earn ‘hard currencies’ (universally accepted currencies, such as the US dollar or the Euro), as no one will accept its money for payments. International trade is therefore essential for economic development.

The case for international trade is indisputable. However, this does not mean that free trade is the best form of trade, especially (but not exclusively) for developing countries. When they engage in free trade, developing countries have their chances of developing productive capabilities hampered…The argument that international trade is essential should never be conflated with the argument that free trade is the best way to trade internationally.”

Ha-Joon Chang (2014), Economics: The User’s Guide, Pelican Books, p.412-4.

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

Joan Robinson on the nature of economics and the uniqueness of humanity

Joan Robinson (1973)

Joan Robinson was Professor of Economics at Cambridge. She was a leading figure in what became the post-Keynesian school, having been one of the group of academics surrounding Keynes as he developed the ideas which led to his General Theory in the 1930s.

She was highly productive and covered a broad range of subjects during her life, from the economics of imperfect competition to the theory of economic growth, as well as popular books on economic philosophy and the nature of society. She was well-known for being fierce in debate and for her tireless efforts at critiquing neoclassical theory.

The following is a brief extract from an interview with Diego Pizano conducted in 1977 and included in his Conversations with Great Economists (p.90):

“Keynes was certainly aware that an economic approach to history was only one, yet dispensable, element in the study of society. Economics is a discipline constructed on the basis of elements of many sciences – geography, biology and psychology – and it interacts with a whole range of subjects from the history of culture to politics, law and religion. Keynes had a very good background in most of these disciplines but it is probably true that he was not sufficiently aware of the connections that certainly exist between the economic and the biological process.

…I would like to say that it is crucial to understand the biological basis of human behavior to shed light on the problem of the origin of society. Man was once defined as a tool-making animal, but now it has been discovered that chimpanzees construct tools designed for particular uses. Neither tools, nor manners characterize man: language does. The invention of a procedure that enabled man to convey information about things not present and to speculate about things not known was the great step. Language made social life much richer and complex and this obviously implies that the economic life of man is much more complicated than that of any other species.”

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

The political economy of the future: AI, Big Tech and humanity

Human-Intelligence-Can-Fix-AI-Shortcomings-1Peering into our technological future may seem a little inappropriate amidst the current global pandemic, but before Covid-19 had emerged, one of the major themes tackled by many scientists, economists and social theorists of both left and right had been the advance of technology, Artificial Intelligence (AI) in particular, and its potential impact on the worlds of business, the economy, politics and society.

The prospects of humankind given the inexorable march of technology typically range between a variety of utopias and dystopias. What will AI mean for productivity and living standards? Will it lead to a society of abundance with more leisure time than ever before for the majority? How about the distribution of income and wealth, the implications for democracy, and so on?

Four compelling books from 2019, written by, respectively, a computer scientist, two journalists and a maverick scientist and futurist, address some of these issues, from different perspectives, but with some overlap, particularly in terms of the necessary human response to the advance of AI. Continue reading

The blurred boundaries between the market and politics

Chang EconomicsUsersGuideCambridge economist Ha-Joon Chang frequently makes the case for the priority which should be given to a pluralist social science of political economy rather than a ‘pure’ (neoclassical) economics and its pretensions to be more like a natural science.

Political economy, a branch of the study of man in society, an interdisciplinary social science, incorporating the economic, social, political, ethical and even philosophical, can often provide us with richer insights than are on offer from modern mainstream economics alone.

That is not to say that we should ignore the arguments of neoclassical thinking. Economics, the ‘science of rational choice’, as it is sometimes defined these days, does tell us that individuals respond to incentives: change the incentives and our behaviour may change. But it tends to neglect much that I have just mentioned in its quest to be scientific, and therefore somehow apolitical and asocial. It also tends to lack an awareness of its own methodology and how this has evolved in ways shaped by economic and social history.

Along this vein is another insightful quote from Chang’s Economics: The User’s Guide, (p. 393-6), which takes to task economics’ pretension to be apolitical: Continue reading