Andrew Smithers on flawed central bank policies

In the spirit of yesterday’s introduction to my new series on the work of Andrew Smithers, here is a fairly recent video in which he criticises the recent policies of central banks. This includes their efforts to keep interest rates low in an attempt to sustain demand in the economy, as well as quantitative easing, which have driven up asset prices to unsustainable levels, the consequence of which is the risk of a new financial crisis and major recession.

Considering the work of a maverick economist: introduction to a new series

AndrewSmithersI recently happened upon the work of economist Andrew Smithers, whose books and articles portray an unconventional and original thinker, and one who is unafraid to challenge the conventional wisdom in economic theory and policymaking. He could be classed as heterodox, while not falling easily into any particular political or ideological category. He studied at Cambridge in the 1950s, and was taught by, among others, the distinguished post-Keynesian Nicholas Kaldor, as well as Brian Reddaway. While he is now retired he continues to contribute to economic debate, via the Institute for New Economic Thinking, the Financial Times and elsewhere.

He has many years experience in international investment and has written extensively on financial economics, bringing together the spheres of finance and the real economy. His latest book is The Economics of the Stock Market, which is on my current reading list. However, I decided to start with his 2013 work The Road to Recovery, written in the wake of sluggish global growth following the financial crisis, followed by Productivity and the Bonus Culture, published in 2019, which tackles more comprehensively phenomena described in the earlier book.

The global economy has more recently been hit by shocks arising from a pandemic and war, but one of Smithers’ main contributions to economic debate is his argument that poor growth in output and productivity in the US and UK is largely down to the ‘bonus culture’ that has arisen in recent decades. Continue reading

Many Middle Ways: Mark Carneyism – a former central banker’s political economy

MARK_CARNEY_COLOUR_RT012-scaledThis is the latest post in my series on the ‘many middle ways’ that are possible for our political economic system, which lie somewhere between market fundamentalism and state socialism, both of which I reject as unworkable if we wish to achieve widely-shared and sustainable prosperity alongside the promotion of human rights and liberty, broadly conceived.

Mark Carney is a former governor of the Bank of England, and before that of the Bank of Canada. He is now UN Special Envoy for Climate Action and Finance, alongside a number of other advisory roles. Before he began his career in public service, he worked at investment bank Goldman Sachs. His book Value(s), subtitled Building a Better World For All, was published earlier this year. It is quite a tome, coming in at over 500 pages. It has been praised by a variety of influential individuals, ranging from Christine Lagarde, President of the European Central Bank, to popstar Bono. Continue reading

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

The Chinese economy: development, finance and reform

800px-Chinese_draakEven before the Covid-19 outbreak, the Chinese economy was slowing, after more than three decades of rapid economic expansion. Thirty years of recorded growth at around ten per cent per annum is unprecedented in human history. This has enabled hundreds of millions of people to be lifted out of poverty, and the material transformation of a poor country to one that is classified by the World Bank as upper-middle-income.

Despite all this, there is a broad consensus, including among Chinese government officials, that the country’s development model needs to change if it is to continue its transformation and become a rich country. Many economists argue that this will involve a rebalancing of the economy, in order to continue to grow and develop in a way that is more sustainable both for China itself, and for the rest of the world, given that as the world’s second largest economy behind the US, internal changes now have a major impact globally. 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.”


“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

Too much finance – misallocation, corruption and ideology

800px-A1_Houston_Office_Oil_Traders_on_Monday“[T]he financial sector has become much more profitable than the non-financial sector, which has not always been the case. This has enabled it to offer salaries and bonuses that are much higher than those offered by other sectors, attracting the brightest people, regardless of the subjects they studied in universities. Unfortunately, this leads to a misallocation of talents, as people who would be a lot more productive in other professions – engineering, chemistry and what not – are busy trading derivatives or building mathematical models for their pricing. It also means that a lot of higher-educational spending has been wasted, as many people are not using the skills they were originally trained for.

The disproportionate amount of wealth concentrated in the financial sector also enables it to most effectively lobby against regulations, even when they are socially beneficial. The growing two-way flow of staff between the financial industry and the regulatory agencies means that lobbying is often not even necessary. A lot of regulators, who are former employees of the financial sector, are instinctively sympathetic to the industry that they are trying to regulate – this is known as the problem of the ‘revolving door’.

More problematically, the revolving door has also encouraged an insidious form of corruption. Regulators may bend the rules – sometimes to the breaking point – to help their potential future employers. Some top regulators are even cleverer. When they leave their jobs, they don’t bother to look for a new one. They just set up their own private equity funds or hedge funds, into which the beneficiaries of their past rule-bending will deposit money, even though the former regulators may have little experience in managing an investment fund.

Even more difficult to deal with is the dominance of pro-finance ideology, which results from the sector being so powerful and rewarding to people who work in – or for – it. It is not simply because of the sector’s lobbying power that most politicians and regulators have been reluctant to radically reform the financial regulatory system after the 2008 crisis, despite the incompetence, recklessness and cynicism in the industry which it has revealed. It is also because of their ideological conviction that maximum freedom for the financial industry is in the national interest.”

Ha-Joon Chang (2014), Economics: The User’s Guide, Penguin Books, p.306-7.

Minskyan processes and the coronavirus shock

The Levy Institute has a brief paper here by Michalis Nikiforos on how the shock of the coronavirus pandemic has hit already fragile economies, making the likely eventual economic outcomes particularly damaging. His main focus is the US, but the analysis can be applied to other advanced economies.

The abstract of the paper is below:

The spread of the new coronavirus (COVID-19) is a major shock for the US and global economies. Research Scholar Michalis Nikiforos explains that we cannot fully understand the economic implications of the pandemic without reference to two Minskyan processes at play in the US economy: the growing divergence of stock market prices from output prices, and the increasing fragility in corporate balance sheets.

The pandemic did not arrive in the context of an otherwise healthy US economy—the demand and supply dimensions of the shock have aggravated an inevitable adjustment process. Using a Minskyan framework, we can understand how the current economic weakness can be perpetuated through feedback effects between flows of demand and supply and their balance sheet impacts.

In the paper’s conclusion, he outlines the necessary policy response including, importantly, that:

“unlike the response to the 2007-9 crisis, the assistance provided to large corporations come with strings attached – so that they do not return to the same old (destabilizing) practices once the emergency has passed.”

This was written before the $2 trillion US support package passed through Congress. It seems as if the author’s hope has not been fulfilled.

Prospects and Challenges for the US economy

Here is the latest Strategic Analysis paper from the Levy Economics Institute of Bard College on the prospects and challenges for the US economy over the next few years. The Levy Institute is officially nonpartisan, but much of its output is in the post-Keynesian tradition, and influenced by luminaries such as Hyman Minsky and Wynne Godley.

Minsky and Godley were instrumental in highlighting the interdependence of the real and financial sectors of the capitalist economy and the role of the latter in contributing to its periodic instability.

The post-Keynesian or ‘left Keynesian’ tradition is a broad church, but is generally critical of capitalism while suggesting policies which attempt to mitigate its defects, in particular the presence of unemployment, inequality and instability. It emphasises the importance of aggregate demand and macroeconomic categories and relationships.

The Levy Institute publishes a short Strategic Analysis on the US economy like this one every year. It is accessible while being based on a stock-flow consistent macroeconomic model that Godley spent the final years of his life helping to build.

The paper highlights the risks to the US over the next few years of an overvalued stock market, overstretched and fragile corporate sector balance sheets, an overvalued dollar, a slowing global economy and the US administration’s erratic trade policy. It is well worth a read.

Hyman Minsky explains his financial instability hypothesis

In this rare video, Hyman Minsky explains his financial instability hypothesis. The video dates from 1987, but Minsky was prescient in originating a theory that characterises capitalist economies with developed financial systems as inherently unstable and requiring the intervention of ‘Big Government’ (counter-cyclical fiscal policy) and a ‘Big Bank’ (the central bank acting as lender of last resort). His FIH has become much more widely known since the advent of the 2008 financial crisis.

Minsky was influenced by his teacher at Harvard, Joseph Schumpeter, as well as by John Maynard Keynes and Michal Kalecki. His work falls under the post-Keynesian tradition, emphasising the role of finance and the importance of effective demand in the economy, with the former a major cause of instability in the form of booms and busts. His thinking also incorporated ideas on institutions such as households, firms, banks, and governments, and explored how their balance sheets of assets and liabilities evolve over business cycles.