Chinese development – the end of the miracle?

800px-Chinese_draakThe Economist magazine has an interesting article this week questioning the sustainability of the Chinese growth model and drawing some parallels between it and the Soviet Union in the post-war period.

During the last 40 years, the rapid development of China has been perhaps the most extraordinary example of economic transformation in human history, both in speed and scale. The economy grew by around ten percent per year for three decades. Growth has in recent years begun to slow, but is apparently still humming along at more than six percent, a decent clip by any standard. Hundreds of millions of its population have escaped from poverty and the new ‘workshop of the world’ has flooded the world with cheaper goods.

But cracks have begun to show, particularly since the financial crisis of a decade ago. The Chinese government’s response to a collapse of exports was to ramp up lending from state-owned banks and embark on a massive spending spree on infrastructure. Continue reading

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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’.

Michael Hudson on John Maynard Keynes

Another in this occasional series from Michael Hudson’s excellent J is for Junk Economics:

“John Maynard Keynes (1883-1946): In the 1920s, Keynes became the major critic of World War I’s legacy of German reparations and Inter-Ally debts. Against the monetarist ideology that prices and incomes in debtor countries would fall by enough to enable them to pay virtually any level of debt, Keynes explained that there were structural limits to the ability to pay. Accusing Europe’s reparations and arms debts of exceeding these limits, Keynes provided the logic for writing down debts. His logic controverted the “hard money” austerity of Jacques Rueff and Bertil Ohlin, who claimed that all debts could be paid by squeezing a tax surplus out of the economy (mainly from labor).

Modern Germany has embraced this right-wing monetarist doctrine. Even in the 1920s, all its major political parties strived to pay the unpayably high foreign debt, bringing about economic and political collapse. The power of “sanctity of debt” morality proved stronger than the logic of Keynes and other economic realists.

In 1936, as the Great Depression spread throughout the world, Keynes’s General Theory of Employment, Interest and Money pointed out that Say’s Law had ceased to operate. Wages and profits were not being spent on new capital formation or employing labor, but were hoarded as savings. Keynes viewed saving simply as non-spending on goods and services, not as being used to pay down debts or lent out to increase the economy’s debt overhead. (Banks had stopped lending in the 1930s.) He also did not address the tendency for debts to grow exponentially in excess of the economy’s ability to carry the debt overhead.

It was left to Irving Fisher to address debt deflation, pointing to how debtors “saved” by paying down debts they had earlier run up. And it was mainly fringe groups such as Technocracy Inc. that emphasized the tendency for debts to grow exponentially in chronic excess of the economy’s ability to carry its financial overhead. Emphasis on debt has been left mainly to post-Keynesians, headed by Hyman Minsky and his successors such as Steve Keen and Modern Monetary Theory (MMT), grounded in Keynes’s explanation of money and credit as debt in his Treatise on Money (1930).”

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

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

James Crotty on individuals and institutions in society

Crotty-InterviewJames Crotty is an economist at the University of Massachusetts Amherst, whose work ‘attempts to integrate the complementary analytical strengths of the Marxian and Keynesian traditions.’ This sort of approach to economics, or political economy, as many such heterodox thinkers prefer to call it, is right up my street. A collection of his papers was published last year.

Here is a very brief excerpt from one where he considers the relationship between individuals and social structures in economics and social theory more broadly. While mainstream economics tends to reduce the objects of study to the behaviour of the individual, some alternative theories place equal importance on emergent social structures such as the economy as a whole, the state, the political system etc.

In this line of thinking, such structures are dependent on but not reducible to the individuals. They ’emerge’ from the interactions of individuals. In the jargon, they are non-reductionist. Such an approach is much more fruitful when it comes to macroeconomic analysis.

“Sensible social theory must try to acknowledge and integrate the insights of both individualist and structuralist methodology. To be sure, social structures can be changed by groups of individuals. And Keynesians insist that individuals do have significant freedom of choice; they do not always make choices consistent with the orderly reproduction of society. But institutions also socialize individuals, and hierarchical societies do differentially socialize distinct classes of individuals and assign them to qualitatively different economic and social roles. In addition, institutional structures constrain agent choice and set bounds on expected economic outcomes. Moreover, institutions are economic agents themselves. Institutional decision-making requires a theory of choice of its own, one that incorporates the effects of particular organizational structures, strategies, and conventions. Marx’s famous dictum that “men make history, but they do not make it precisely as they choose” is methodologically on the right track…

…[B]oth microtheory and macrotheory must be institutionally specific and historically contingent.”

James Crotty (2017), Capitalism, Macroeconomics and Reality, Cheltenham: Edward Elgar, p.60-61.