The unstable economy and the delusion of ‘the Great Moderation’

economyths-cover“Economists are taught that the economy is intrinsically stable – price changes are small and random, so perturbations are rapidly damped out by the ‘invisible hand’ of market forces. This assumption would be fine, except that it is contradicted by all of financial history. Booms and busts aren’t exceptions, they are the standard course of things…the assumption of stability has been a feature of scientific modelling of natural systems since the time of the ancient Greeks…we need to better account for the dynamic, unpredictable, and reflexive nature of the economy.

…A property of complex systems like the economy is that they can often appear relatively stable for long periods of time. However, the apparent stability is actually a truce between strong opposing forces – those positive and negative feedback loops. When change happens, it often happens suddenly – as in earthquakes, or financial crashes.”

David Orrell (2010), Economyths – How the science of complex systems is transforming economic thought

The above quote is from another book on Complexity Economics. This one is much shorter than The Origin of Wealth, which I discussed last week, and it is livelier and more accessible, so I can highly recommend it as an introduction to these kinds of ideas. Continue reading

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Wealth creation and Complexity Economics: beyond left and right?

origin-of-wealth“Margaret Thatcher once said, ‘There is no such thing as Society. There are individual men and women and there are families.’ From the perspective of Complexity Economics, she was simply wrong. The interactions of millions of people, making decisions, engaging in strong reciprocal behaviour, acting out their cultural norms, cooperating, competing, and going about their daily lives, creates an emergent phenomenon that we call society – a phenomenon as real as the emergent pattern of a whirlpool. Within society are the constructs of states, markets and communities, the three of which together create the economic world that we live in. We may not be able to control or predict the future direction of society, but we can endeavour to ensure that these three elements work together to create wealth, social capital, and opportunity.”

Eric D. Beinhocker (2006), The Origin of Wealth

Complexity Economics has much to offer in its critique of the mainstream, and its incorporation of a plethora of ideas whose application the author suggests could mean ‘the end of left versus right’. There may be some truth in this. The rise of populism across the West and the policies espoused by our would-be political leaders are in some cases hard to categorise simply across the political spectrum. We have those from both the left and the right attacking liberal trade and immigration. Their support has at least partly emerged from the huge number who have grown disaffected with the establishment in the presence of rising income and wealth inequality and stagnant wages, with a small minority seeming to benefit disproportionately from globalization. Having said that, I don’t think the author had these developments in mind. He was writing before the Great Recession, and his vision is more one of states and markets as inevitably intertwined in promoting the common good, beyond ‘left wing utopias and free market fantasies’. Continue reading

The nature of the social world: a touch of philosophy

599px-The_Blue_Marble“The…argument is against methodological individualists, such as Popper (and Margaret Thatcher who claimed that ‘society’ does not exist!), who argue that all explanations can be couched in terms of an individual person’s beliefs and actions. The first refutation concerns emergent properties. There are attributes of people that concern physical properties such as height or weight; there are attributes that we share with other animals such as pain or hunger; but there are many attributes, essentially human ones, that are unavoidably social, for example ‘bachelor’, ‘banker’, or ‘nun’. These are only intelligible within the context of a social institution or practice. The second argument is that many activities we undertake, most obviously perhaps language, must already exist and be available for people to learn and then use. As Wittgenstein argued, there can be no such thing as a private language – every time anyone has a conversation, uses a credit card, or waits for a train they are assuming the existence of a structured, instransitive domain of resources, concepts, practices, and relationships. The successful occurrence of social activities warrants the existence of causally efficacious, although unobservable, social structures.”

John Mingers (2014), Systems Thinking, Critical Realism and Philosophy

Mingers makes a good argument for the relevance of what are variously called structures or systems in social science. There are objects we can think about that are larger than the individual, such as society, which cannot be directly observed while their effects can be. This produces a rational for examining the economy of a nation, particular industries, social groups such as class etc. Continue reading

Rents and rent-seeking: they can be good for your (economic) health

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A number of rents, and the rent-seeking which sustained them, played a critical role in the development of capitalism in the East Asian countries. Not only was the creation of rents critical for primitive accumulation and learning, transfer rents were critical for maintaining political stability even though the economic implications of these transfers varied significantly. The role of rents in economic development is worth stressing in the aftermath of the financial crisis of the late 1990s. The depth of this crisis led many economists to link the immediate economic woes of the regions to the systems of rents and rent-seeking popularly described as ‘crony capitalism’. The implicit counterfactual to ‘crony’ capitalism is a ‘genuine and impartial’ capitalism of free markets, zero rents, fair market-determined returns for everyone, and a minimal state which only maintains a level playing field. However appealing such a mythical capitalism may be, our discussion has been concerned to establish that such a model is not relevant for developing economies, and perhaps not for any economy. The relevant distinction is between rent-seeking systems which are developmental and those which are crippling. The relevant policy question is to understand how one may transform into the other…

…The long-run relationship between rent-seeking and growth is of much greater interest. If growth requires the management of growth-enhancing rents rather than the abolition of all rents, high-growth countries will always have rents and will therefore inevitably have to live with rent-seeking. Globalization and liberalization will not change this fundamental economic problem, nor is globalization or liberalization likely to succeed if policy-makers attempt to proceed on the basis of inappropriate no-rent market models. The no-rent model remains compelling not because the evidence supports it, but because its policy implications are much simpler to understand. Our analysis suggests that identifying the conditions which have in the past been conducive for growth is a much more challenging task. The conditions which allow value-enhancing rents to emerge and which limit rent-seeking costs vary from country to country because countries do not have the same political conditions and do not follow the same technology trajectory. This is where a deeper examination of the historical evidence is important to warn us against falling for seductively simple theories. There is no evidence in Asia, possibly no evidence anywhere, of long-run development taking place on a no-rent basis. Instead, the policy challenge is to construct and reconstruct institutions and politics in developing countries to sustain developmental rents and rent-seeking while attacking value-reducing rents and rent-seeking.

Mushtaq H. Khan (2000), Rent-Seeking as Process, in M.H. Khan and Jomo K.S. (eds) Rents, Rent-Seeking and Economic Development

Olympic success: down to the individual or the system?

Rio 2016 logoSome of my readers may well be enjoying coverage of the Olympic Games in Rio de Janeiro at the moment, if that’s your thing; others may be fed up with it and doing all they can to avoid it. Yes, this post is about sport, but it is also about political economy and social science, whose practitioners have throughout their history debated the meaning of and relationship between the individual and the social in society. I want to explore the lessons for these subjects of countries such as Great Britain, which has done very well in last three Olympic Games in terms of medals won, and overall team performance. Continue reading

Repost: Holistic theory and political economy

599px-The_Blue_MarbleThe following post was originally published in November 2013. As it still seems to get quite a lot of views, nearly three years later, I have decided to repost it. My thinking has developed since it was written, and I would be the first to critique some parts of it. As always, I welcome all constructive feedback.

Holism is the view that natural systems (from physical to social) should be studied from the point of view of wholes, rather than parts. In political economy, a holistic analysis could proceed from the study of society, rather than individuals, and assume that individual behaviour is determined by the social whole, rather than the converse. Karl Marx, in his study of political economy, analysed capitalism as a whole system, with particular structures and tendencies, while also using class as the key building block of society. Thus individual behaviour is said to be determined by the properties of the class within which it is situated.

More generally, heterodox approaches to economics, such as Marxism or post-Keynesianism, tend to take a more holistic approach to analysis and reject the reductionist approach of mainstream or neo-classical theories. As already mentioned, the former view individual behaviour as being determined by social categories such as class or society, whereas neo-classical economics models individual behaviour as the key determinant of social outcomes. Continue reading

Postcapitalism: Paul Mason’s ‘guide to our future’?

MasonCoverI said I would post something on Paul Mason’s thought-provoking book, Postcapitalism – a guide to our future, which has just come out in paperback. It makes a good read, and contains a wealth of ideas from economics, political economy, and futurism, all mixed together in the author’s aim to inspire a progressive transition beyond capitalism, but not to socialism, which he admits has been a huge failure for the left. Instead, he calls his utopian vision ‘postcapitalism’.

Mason starts by describing the current political economic paradigm, neo-liberalism, as having reached its limits with the crisis of 2008 and the subsequent tepid, or in many cases absent, recovery. There has been sluggish output and productivity growth, alongside wage rises for those at the very top of the income distribution but barely any change for the middle and bottom. In fact, these trends were only temporarily overcome by the excessive expansion of credit prior to the crisis which allowed consumption to grow in countries such as the US and UK despite stagnant wages. Continue reading