Understanding the ‘Three Balances’

This 14 minute animated video is a nice introduction to the Three Sectoral Financial Balances, which are an important part of macroeconomics, or the study of the economy as a whole. The dialogue sounds a little odd, but stick with it.

The video helps to dispel some myths about the desirability or otherwise of government budget deficits and surpluses, and how the associated money flows interact with the rest of the economy: the private sector (firms and households) and the foreign sector (the rest of the world).

In particular, the discussion outlines how the US government ran budget surpluses in the late 1990s, but also how this was more than offset by the private sector deficit, and the resultant accumulation of private debt, which ultimately proved unsustainable.

The post-Keynesian economist Wynne Godley, originator of the Three Balances approach, warned about this in 1999 here, and forecast a recession, accompanied by rising unemployment and government deficits, as these trends necessarily began to unwind over the medium term.

Economic ‘distortions’, ideology and the role of government

HudsonTradeDevFDebtMichael Hudson, the heterodox economics Professor whose work I have featured on this blog quite a bit this year, wrote a history and critique of theories of trade and development back in 1992. It was reissued in 2009 and I have just finished reading it.

His central thesis is that, to quote the subtitle, “trade and development concentrate economic power in the hands of dominant nations”. I will not be reviewing the book here, but here is an extract, the gist of which I have agreed with since I was a graduate student (p.169-70): Continue reading

Minsky on stagflation and the limits to state intervention

MinskyCanItHappenAgainGovernment can be a major force for promoting progressive economic and social development. History tells us that this is rarely sustained indefinitely: the political pendulum swings back and forth, and development proceeds unevenly across space and time.

I was reminded of some of the potential limits to state intervention by the quote below from Hyman Minsky in his collection of essays Can “It” Happen Again? , published in 1982. “It” refers to the Great Depression of the 1930s. His Financial Instability Hypothesis argued that ‘stability is destabilising’: periods of successful economic performance tend to encourage an increasingly risky financial structure, leading eventually to a financial crisis. This outcome could take decades to occur, but it seems that he was proved right by the crisis and recession of 2008-9. Continue reading

In brief: the economics of Hyman Minsky

MinskyAs the 2008 financial crisis broke, the term ‘Minsky moment’ became widely used by commentators and financiers (it was originally coined in 1998), as the work of this relatively obscure economist came into fashion. Since then, his major works have been reprinted, and his ideas widely cited, especially among those critical of the financialization of recent decades.

Once again, from Michael Hudson‘s heterodox ‘dictionary’ of economics J is for Junk Economics (p.154-5): Continue reading

Investment-savings, global imbalances and crisis: the economics of Michael Pettis

the-great-rebalancing-coverI have been greatly inspired by economist Michael Pettis, who blogs here. His work on the causes of the Great Recession, the eurozone crisis and, especially, Chinese development, seems to me to be both original and revelatory. In what follows I will outline the basic elements of his insightful theory of the global economy.

Pettis’ work draws on the ideas of Keynes, Minsky and many others, and incorporates lessons from economic history and political economy, which makes its scope broad and widely applicable.

At the heart of his theory are some accounting identities which are basic to international macroeconomics.

To begin with, for any economy, the current account surplus is equal to the excess of domestic savings over domestic investment. To put it another way, net domestic savings (gross savings minus gross investment, whether private or public) is equal to foreign borrowing, or domestic lending abroad. Continue reading

What are capitalism and socialism? Richard Wolff on the difference

A short video below featuring Marxist economist Richard Wolff on what he sees as the difference between capitalism and socialism. Wolff is always thought-provoking and good to listen to, even if one doesn’t agree with everything he says.

For me, it is helpful to see capitalism around the world as coming in many varieties, each with strengths and weaknesses, and as an evolving system, rather than as a pure type. Capitalism hasn’t always existed, and it may transform into something else given time. This would not necessarily be socialism. This line of thinking draws on (old) institutional economics.

Having said that, the essentials of the employment relationship, extensive market exchange, production by firms for profit, private ownership and a legal system which supports individual property rights seem to me to be important in a definition of capitalism. For an in-depth discussion of these issues I can recommend Geoffrey Hodgson’s recent book Conceptualizing Capitalism.