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

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

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

Michael Hudson on class struggle

JisforJunkEconAnother extract in this occasional series from Professor Michael Hudson’s alternative economics dictionary J is for Junk Economics (p. 58). Here he briefly outlines the historical evolution of class struggle under capitalism since the 19th century:

“The 19th century’s characteristic class conflict saw industrialists fight to keep profits high by keeping money wages low. This was to be achieved by promoting free trade so as to buy food and necessities more cheaply abroad – and by taxing landlords instead of labor and its necessities. Ricardian value theory assumed that raw manual labor would earn mere subsistence wages in any case. So lower prices for food and necessities would mean that industrialists could pay lower money wages to hire workers. Importing low-priced food would therefore save employers money, as money wages would fall to subsistence levels.

The main political struggle accordingly was between capitalists and landlords, with capitalists aiming to minimize economic overhead in the form of land rent and monopoly rent. The class struggle by the industrial capitalist class began as a fight against landlords who sought protective agricultural tariffs (Britain’s Corn Laws) to keep food prices (and hence, subsistence wages) high. After the bourgeois revolutions of 1848, the fight against the landlord class was well on its way to being won, giving way to the class struggle against labor unions and socialists over wages and working conditions.

Class conflict has always been concerned with whether the tax burden should fall on land rent (landlords), business profits or consumer spending. But now that banking and the financial sector finds its major source of business in real estate (accounting for 70% to 80% of bank loans) – followed by mining and other privatized natural resources and public monopolies such as water, power and communications – interest is paid more out of economic rent than out of industrial and business profits. The financial sector accordingly has joined forces with real estate, natural resource extraction and other monopoly rent seekers. These rentier sectors now struggle jointly against labor.”

The causes of poverty: individual or structural failure?

Chang EconomicsUsersGuide“Starting from the Disney animations that we watch as young children telling us that if we believe in ourselves, we can achieve anything, we are bombarded with the message that individuals, and they alone, are responsible for what they get in their lives. We are persuaded to accept what I call the L’Oréal principle – if some people are paid tens of millions of pounds per year, it must be because they are ‘worth it’. The implication is that, if people are poor, it must be because they are either not good enough or not trying hard enough.

Individuals are in the end responsible for what they make out of their lives. Even if they are from broadly the same backgrounds, different people end up in different positions because they have different talents in different things and make different levels and types of efforts. It will be silly to blame everything on the ‘environment’  or luck. Attempts to suppress the effects of individual talents and efforts too much, as in the former socialist countries, can create societies that are ostensibly equal but fundamentally unfair…There are, however, causes of poverty that are ‘structural’ in the sense that they are beyond the control of the individual concerned.

Inadequate childhood nutrition, lack of learning stimulus and sub-par schools (frequently found in poor neighbourhoods) restrict the development of poor children, diminishing their future prospects. Parents may have some control over how much nutrition and learning stimulus their children get – and some poor parents, to their credit, make great efforts and provide more of those things than do other parents in similar situations – but there is a limit to what they can do. They are by definition under great financial stress. Many of them are totally exhausted from juggling two or three insecure jobs. And most of them had a poor childhood and poor education themselves.

All of this means that poor children start the race of life already weighed down by sandbags on their legs. Unless there are social measures to at least partially compensate for these disadvantages (eg., income support for poor parents, subsidized childcare, greater investments in schools in poor areas), those children won’t be able to fully realize their innate potentials.

Even when they overcome childhood deprivation and aspire to climb the social ladder, people from poorer backgrounds are likely to meet more obstacles. Lack of personal connections and a cultural gap with the elite often mean that people from underprivileged backgrounds are unfairly discriminated against in hiring and in promotion. If those people also happen to have other ‘wrong’ characteristics – in terms of gender, race, caste, religion, sexual orientation and what not – they will have an even harder time to get a fair chance to demonstrate their abilities.”

Ha-Joon Chang (2014), Economics: The User’s Guide, Penguin books, p.336-8.

Pandemic of inequality

The Levy Institute has just published a short paper on the inequalities associated with the Covid-19 pandemic in the US. It can be found here. A summary of the paper is below.

The costs of the COVID-19 pandemic—in terms of both the health risks and economic burdens—will be borne disproportionately by the most vulnerable segments of US society. In this public policy brief, Luiza Nassif-Pires, Laura de Lima Xavier, Thomas Masterson, Michalis Nikiforos, and Fernando Rios-Avila demonstrate that the COVID-19 crisis is likely to widen already-worrisome levels of income, racial, and gender inequality in the United States. Minority and low-income populations are more likely to develop severe infections that can lead to hospitalization and death due to COVID-19; they are also more likely to experience job losses and declines in their well-being.

The authors argue that our policy response to the COVID-19 crisis must target these unequally shared burdens—and that a failure to mitigate the regressive impact of the crisis will not only be unjust, it will prolong the pandemic and undermine any ensuing economic recovery efforts. As the authors note, we are in danger of falling victim to a vicious cycle: the pandemic and economic lockdown will worsen inequality; and these inequalities exacerbate the spread of the virus, not to mention further weaken the structure of the US economy.

The authors focus on the greater likelihood of ill health among the poorest in the population, and how they are more likely to suffer serious complications should they contract Covid-19.

They also repeat the case often made in papers from the Levy Institute, that high levels of inequality have weakened aggregate demand and growth, not least in the US. This has been associated with high levels of household and corporate debt, and played a major role in the historically weak recovery from the 2008 crisis. If steps are not made to reduce inequality, not least in access to healthcare, the US economy is likely to continue to perform poorly over the long term. This will be in addition to the shocks resulting from the response to the pandemic itself.

The Promise – and Pitfalls – of State-led Development in Resource-rich Countries: Resource Nationalism in Latin America and Beyond — Developing Economics

The eclipse of neoliberalism in 2000s coincided with the so-called commodity ‘super cycle’ that lasted between 2002 and 2012. In search of a new model, resource-rich states began to articulate resource nationalism as a development strategy. While ownership and control of minerals and hydrocarbons are intricately tied to claims of state sovereignty and exercise of […]

via The Promise – and Pitfalls – of State-led Development in Resource-rich Countries: Resource Nationalism in Latin America and Beyond — Developing Economics

Michael Hudson on trickle-down economics

hudson-200x300Another excerpt in this occasional series from Michael Hudson’s J is for Junk Economics, his often enlightening and generally iconoclastic dictionary of the dismal science (p.231-2).

The pretense that reversing progressive taxation and giving more income to the wealthiest One Percent will maximize economic growth and prosperity for the 99 Percent. The actual effect is to help the rich get richer. The rentier class has manipulated the tax code so that, as Leona Helmsley put it: “Only the little people pay taxes.”

A supporting factoid is that the One Percent spends its income buying products produced by labor. That was Thomas Malthus’s argument for why British landlords should receive agricultural tariff protection (the Corn Laws). His argument endeared him to John Maynard Keynes, but in practice the wealthy bought largely foreign luxuries and financial securities or more property. Today’s One Percent lend out their income and wealth to further indebt the economy to themselves.

Another false assumption is that financiers and property owners (the FIRE [Finance, Insurance and Real Estate] sector) will save and invest their revenue to expand the means of production and employ more labor. In practice, the wealthy wield creditor power to force governments to privatize the public domain and buy companies already in place. When the fictions of “trickle-down economics” lead to financial crises, the wealthy demand that governments rescue banks, give bailouts to uninsured depositors and bondholders, and shift taxes to further favor the FIRE sector at the expense of labor. The result of trickle-down policy is thus economic polarization, not prosperity.

One of the earliest and most blatant expressions of trickle-down demagogy is found in the pleading by Isocrates in his Areopagiticus (VII, 31-34, written in 355 BC). Like most Sophist rhetoric teachers, he charged fees so high that only the wealthy could afford to study with him, so it hardly is surprising that his written speeches supported the oligarchy. “The less well-to-do among the citizens were so far from envying those of greater means that they…considered that the prosperity of the rich was a guarantee of their own well-being.” This may be the earliest written example of the Stockholm Syndrome.

Isocrates praised harsh judges for being “strictly faithful to the laws”. This meant creditor-oriented laws. He noted that “judges were not in the habit of indulging their sense of equity”, that is, what would be fair in the traditional morality of mutual aid. His over-the-top rationale for why Athenian judges “were more severe on defaulters than they were on the injured themselves” (meaning the creditors “injured” by not being paid in full) was that “they believed that those who break down confidence in contracts” (as if being unable to pay was a deliberate attack on pro-creditor laws) “do a greater injury to the poor than to the rich; for if the rich were to stop lending, they [the rich] would be deprived of only a slight revenue, whereas if the poor should lack the help of their supporters they would be reduced to desperate straits.” It is as if usury doesn’t deprive the poor of their land and liberty, which Socrates did not hesitate to explain as the “sting” of usury that stripped debtors of their land and hence degraded their status as citizens.”