Steve Keen – how economics became a cult

Post-Keynesian economist Steve Keen, of Debunking Economics fame, discusses in the video below his criticisms of mainstream economic thinking and his work constructing a model based on the work of Hyman Minsky, which necessarily incorporates money and finance.

The model can produce periods of economic stability with rising inequality, followed by instability and recession as possible outcomes. These patterns fit very well the experience of many rich countries during the last few decades.

He also touches on the dialectical thinking of Hegel and Marx, which he studied during his early career.

Keen was one of the heterodox or non-mainstream economists to use a mathematical model to predict a major economic crisis a number of years before the Great Recession of 2008 occurred, by modeling Minsky’s ‘financial instability hypothesis’.

Re-reading Keynes

Economist John Maynard KeynesI recently re-read John Maynard Keynes’ magnum opus, The General Theory of Employment, Interest and Money (hereafter GT). First published in 1936, this was the great man’s attempt to persuade his fellow economists that changes to their understanding of economic theory and policy were necessary to remedy the mass unemployment which seemed to be a recurring feature of capitalist economies, particularly during the Great Depression of the 1930s.

It is now a decade since the onset of the Great Recession, when governments across the world ‘rediscovered’ Keynes, or what they thought were Keynesian ideas, for fighting the economic slump. There was a brief revival of activist fiscal policy: taxes were cut, public spending increased and government deficits rose. But once the threat of collapse had been averted, there was a turn to austerity in many countries, amid renewed worries about ‘credibility’ and business confidence. Continue reading

Harder or smarter? Work intensification and reforming capitalism

stress_at_workBritish workers are suffering, with little to show for it. As Sarah O’Connor writes in last Wednesday’s FT: “[they] are working harder than at any time in the past 25 years, to tighter deadlines and with less autonomy. Medical research shows a link between “high strain” jobs, which combine high pressure with a lack of control, and cardiovascular disease, musculoskeletal problems, stress and depression.” She notes that the recent World Mental Health Day brought news of employer initiatives to combat workplace exhaustion. But will this be enough? Continue reading

Marx, Keynes, Hayek and Minsky on economic crises: room for agreement?

At first glance, it would seem fanciful that the theories of Karl Marx and Friedrich Hayek could be drawn on together to explain economic crises, or cycles, booms and busts. Certainly, the two men’s politics could not have been more different: Marx predicted (and hoped for) either the collapse or the overthrow of capitalism and its replacement by socialism and communism. Hayek thought that most kinds of state intervention in the market were the thin end of the authoritarian wedge.

The ideas of John Maynard Keynes and Hyman Minsky are more compatible, and both have many disciples in the post-Keynesian school. Minsky developed Keynes’ theory of investment and its role in instability under capitalism. For Keynes and Minsky then, capitalism is inherently unstable, money and finance play a large role in this instability and it is the job of government to save the system from itself.

On economic policy, these four influential thinkers part ways. Marx offered little theory of policy; Hayek, like others in the Austrian school, rejected it as damaging and favoured a laissez-faire approach; Keynes and Minsky were interventionists. Continue reading

Equality and growth – no conflict?

“To lay a factual foundation to the argument for raising the American income floor, we need to sweep away the remnants of an older view that policies cannot promote both equality and growth. The older view assumed an “efficiency-equity trade-off.” If such were true, then nothing could be done to foster economic growth without the collateral damage of greater inequality, or greater equality without the collateral damage of less growth.

History does not confirm such a trade-off. To remember why, first consider a simple point about the political process…A dominant historical outcome has been that vested interests have blocked initiatives that would promote growth and/or equality. A conspicuous example is the suppression of mass public schooling – an investment that clearly promotes both equality and growth. Our second consideration comes from the numbers: history does not record any correlation – negative or positive – between income equalization and economic growth, either in our new American history over the past 360 years or world history over the past 150 years. The correlation does not emerge, regardless of whether “growth” means the GDP per capita growth rate or its absolute level, and regardless of whether “equalization” means the share of social spending in GDP, some measure of policy-induced redistribution, the level of pre-fisc income inequality before taxes and transfers, or even the rate of change in any of these.

Economists have explored the effects on income per capita growth of three kinds of egalitarian variables: tax-based social spending and its composition; fiscal redistribution, measured by the gap between pre- and post-fisc inequality; and the greater equality of pre-fisc incomes before taxes and transfers. An empirical literature using contemporary world evidence finds that the growth effect of equalizing incomes is not significant. History agrees. American experience does not reveal any clear effect on GDP of greater tax-based social spending or more progressive redistribution from rich to poor. Indeed, recent analyses suggest that greater pre-fisc equality has a positive effect on growth. This result supports the argument that egalitarian investments in human capital simultaneously achieve more equality and more growth. While these statistical results can be and have been debated, they do not support any claim that equalizing incomes must lower growth. American income history offers no support either.

If there were any fulcrum at which historical insight might be applied to move inequality, it would be political…no nation has used up all its political opportunities for leveling income without harming economic growth. Improving education, taxing large inheritances, and taming financial instability with regulatory vigilance – the opportunities are there, like hundred dollar bills lying on the sidewalk. Of course, the fact that they are still lying there testifies to the political difficulty of bending over to pick them up.”

Peter H. Lindert and Jeffrey G. Williamson (2016), Unequal Gains – American Growth and Inequality since 1700, Princeton University Press, p.261-2.

There are influential theoretical arguments in economics supporting policies which promote growth by, on the one hand, increasing and, on the other, reducing inequality. The above conclusion to Lindert and Williamson’s comprehensive historical study of American growth and inequality is either ambivalent to or in support of a positive relationship between reduced inequality, certainly at its current level in many countries, and faster growth.

Their argument is that the forces generating inequality are largely exogenous (they come from outside the economic system), and so can be altered through policy without harming growth.

Clearly there are limits to this. Perfect equality of incomes and wealth would destroy the incentives required for economic activity. Ever-increasing inequality could also lead to the sort of social division and political instability which would be destructive of the status quo. Neither extreme is sustainable.

From a macroeconomic perspective, greater inequality can promote or reduce growth, depending on the economic context. If productive investment is constrained by a lack of savings, redistributing income and wealth to those economic agents who tend to save a larger share of their income, such as the wealthier members of society or firms, would provide the resources for that investment by increasing the economy’s savings rate. In this situation, greater inequality can boost growth.

This is an argument often associated with Marxist thinking and the central notion of the rate of profit or surplus in providing the resources and motivation for new investment. Growth is “profit-led”.

By contrast, if productive investment is constrained by a lack of consumption spending, then redistribution to those who consume a larger share of their income, normally the poorer members of society, will boost consumption and stimulate investment. In this case, reducing inequality can boost growth, while policies which increase it will lower growth.

This latter argument finds support in Keynesian and post-Keynesian thinking, so that spending for consumption helps drive investment spending. Growth is held back by “under-consumption” and is “wage-led”. If this is the case, then a strong argument can be made for win-win progressive policies which boost household incomes and wages and reduce inequality while raising growth.

Inequality shapes and is shaped by both economic and political forces. There is perhaps “plenty to play for” in terms of policies which promote greater social justice under capitalism, without undermining its foundations. In today’s climate, they are surely essential to sustaining those foundations.

Mariana Mazzucato’s economics: value and the role of the state

Mariana-Mazzucato2Mariana Mazzucato is known for her view that the state plays a vital role in promoting innovation, which is an essential part of the process of economic growth and development. In her book The Entrepreneurial State she debunked the myth that a flourishing economy requires the state to ‘get out of the way’ of the private sector.

In her latest, The Value of Everything, published earlier this year, she attempts to reignite the debate over the sources of value which, she argues, has been neglected in mainstream circles since the rise of neoclassical economics at the end of the nineteenth century.

Indeed, until the neoclassical school became influential, the source of value in economics was a central concern and a matter of some controversy. The Mercantalists saw gold and precious metals as source of value, and their accumulation was held to be the object of economic policy. For the Physiocrats, only land and natural resources produced value, while for the Classical political economists like Adam Smith, industry was the source. Karl Marx held that labour and its production of a surplus product were the origin of value. Continue reading