Globalisation, Brexit and Rodrik’s political trilemma

From Brexit to trade wars, the advance of globalisation has not had a great few years. Hoping for a bit of enlightenment to counter the political rhetoric we are so often exposed to, I thought I would turn to Dani Rodrik’s 2011 book The Globalisation Paradox: why global markets, states and democracy can’t coexist.

At the core of Rodrik’s theoretical contribution in the book is what he calls his ‘political trilemma’ in relation to globalisation and politics: the impossibility of combining hyperglobalisation, democratic politics and the nation state or national sovereignty. In this reading, one country can combine any two of the three, but not all three at once.

Thus, under the postwar Bretton Woods compromise, countries were able to combine democracy and national sovereignty with moderate globalisation. Trade in goods between the richer capitalist nations became gradually more free during the 1950s and 60s, while there were restrictions on global capital flows and fixed but adjustable exchange rates, freeing up monetary policy to target growth in aggregate demand to support full employment. Continue reading

Geoffrey Hodgson on Hayek, liberalism and social democracy

Those on the political left are generally not fans of Friedrich Hayek and the Austrian school of economics. So this short lecture by institutional economist Geoffrey Hodgson was something of a surprise. He demonstrates that in many ways, Hayek supported policies which would be described as social democratic, with state provision and regulation of all sorts of aspects of society and the economy, especially as a counter to the possibility of totalitarianism.

Hodgson makes clear where he agrees and disagrees with Hayek, not least on the definition of classical liberalism, and it makes for an interesting argument. He also touches on his own ideas on the role of institutions under capitalism.

The relevant part of the video with Hodgson’s talk starts at 3:15 and finishes at about 31:00.

Heterodoxy on central bank independence and monetary policy

In the wake of Donald Trump’s call for lower US interest rates in the midst of solid economic growth and low unemployment, The Economist magazine ran a couple of articles on the threat of populist leaders to central bank independence (CBI) and low inflation.

It is more than 40 years since the publication of the intellectual justification for CBI of Finn Kydland and Edward Prescott, propounding the idea of time inconsistency. Based on the concept of the natural rate of unemployment (NRU), political control of interest rates will give rise to the temptation for politicians to boost aggregate demand and lower unemployment in the short run, below the NRU. This will prove unsustainable over the longer run, merely producing higher inflation, with inevitable costs to economic efficiency and growth.

This was apparently what caused the stagflation of the 1970s, when unemployment and inflation rose together, undermining the putatively Keynesian Phillips curve. The upshot is that politicians and voters are better off with CBI, with the central bank given a fixed mandate of low inflation and autonomy in how it achieves this.

But what is the reality of CBI and monetary policy? Here are some quotes from heterodox economists critiquing the mainstream consensus. 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.

We are not smart enough to leave things to the market (Ha-Joon Chang’s Thing 16)

This post is one of an occasional series inspired by Ha-Joon Chang’s iconoclastic and very readable book 23 Things They Don’t Tell You About Capitalism. The quote below is from ‘Thing 16’.

23-things-they-don-t-tell-you-about-capitalism
“People do not necessarily know what they are doing, because our ability to comprehend even matters that concern us directly is limited – or, in the jargon, we have ‘bounded rationality’. The world is very complex and our ability to deal with it is severely limited. Therefore, we need to, and usually do, deliberately restrict our freedom of choice in order to reduce the complexity of problems we have to face. Often, government regulation works, especially in complex areas like the modern financial market, not because the government has superior knowledge but because it restricts choices and thus the complexity of the problems at hand, thereby reducing the possibility that things may go wrong.”

Ha-Joon Chang (2012), 23 Things They Don’t Tell You About Capitalism, p.168

The argument that humans have ‘bounded rationality’ and experience uncertainty (as opposed to calculable risk), in which they simply do not know what is going to happen in the future, illustrates the importance of a range of institutions in modern society. These both constrain and enable human activity. The market is an institution, but one of many, even in what is often called a market economy. Continue reading

Political choices for capitalism: beyond left and right

esdm-coverSome more clear words of inspiration about the potential directions for capitalism from institutionalist economist Geoffrey Hodgson:

“Thatcherism was seen by many Marxists as the only rational response by the capitalists to the crises of the 1970s. Hence the viable choices were either Thatcherism or a workers’ revolution to overthrow capitalism.

This view was profoundly anti-institutionalist. An institutionalist would argue that there is no reason to presume that Thatcherism is (or was in Britain at that time) the only viable version of capitalism. There are other versions of capitalism, and these can begin to develop at any point in time. After all, there are manifest  varieties of capitalism throughout the world. The consequence is that we do face very real choices, even within capitalism. We are not confined to these rather narrow political alternatives proposed by many Marxists: either socialist revolution or accept an extreme and exploitative version of capitalism.

In contrast, there is the possibility of a politics that engages with the present more directly. It talks about real, immediate alternatives and opens up areas for discussion. These areas would include, for example, about different kinds of market, different degrees to which the market may operate, different kinds of planning, the role and limits of the state, different planning agencies, a pluralism of structures and agencies operating at the economic level, different types of mixed economy and so on. This debate becomes possible once you escape from the false dichotomy of accepting either the most rapacious version of capitalism or socialist revolution. This dichotomy disables serious discussion and analysis about what is possible in the present.”

Geoffrey M. Hodgson (2006), Economics in the Shadows of Darwin and Marx

Geoff Hodgson on capitalism and democracy

9780226419695A quote from my current reading on the nature of capitalism which I found particularly inspiring. Hodgson argues that many thinkers have neglected the institutional diversity of capitalism in their push to promote ‘pure’ versions of either market individualism or socialism:

“As long as we are trapped in the Tweedledum-and-Tweedledee debate between planning and markets, we shall be unable to appreciate the intermediating networks and institutions that have played a vital role in the development of modern capitalism. Experience reveals the limitations of both wholesale socialism and atomized individualism. Along with individual property rights, all successful capitalisms have embraced corporate organization and other intermediate layers of organized power as well as varying measures of state intervention. These are important for both its emergence and its vitality.

But while intermediate organization is necessary, it is not sufficient. It guarantees neither dynamism, democracy, nor legality. The experience of fascism in the twentieth century shows that big business can connive with autocracy against democracy and liberty. As US President Franklin D. Roosevelt argued: “The liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state itself.” Excessive corporate or military power can also undermine or constrain democracy. Countervailing power has to balance rather than overwhelm other legitimate authority. The maintenance of politicoeconomic systems with their counterbalanced powers requires constant vigilance.”

Geoffrey M. Hodgson (2015), Conceptualizing Capitalism