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’.

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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

The ‘gaping hole’ in the Marxist argument

I do have time for Marx and Marxist thought, its interdisciplinarity, its breadth and depth of vision and its desire to uncover the workings of capitalism. However it remains flawed, and the historical record of state socialism, where attempts have been made to put it into practice, have resulted in a great deal of oppression and suffering.

That is not to say that all is well with capitalism, and we certainly should not avoid addressing arguments for both its radical reform, and the prospect of its evolution into something else.

Here is institutionalist economist Geoffrey Hodgson, who blogs here, from his recent, excellent, book Wrong Turnings – How the Left Got Lost (p.100):

“The dominant Marxist historical picture of rising and falling social classes meant that socialists did not have to think about how their proposed future would work. This was part of its appeal. It pointed to the growth of the proletariat and proclaimed it as the agent of socialist revolution. The tricky problem of explaining in messy detail how socialism could work in complex, large-scale societies could be postponed and addressed later when the working class has ’emancipated itself’. It was part of its historic destiny, and who could argue with destiny?

This left a gaping hole in the Marxist argument. Theoretical debates over the feasibility of socialism have shown convincingly that such as system – where most private property and trade are abolished – would face huge problems and it would slide towards totalitarianism. Twentieth-century experiences have amply confirmed these arguments.

With its wholesale abolition of non-state property and markets, Marxism blocked the road towards an alternative collectivist system involving worker cooperatives trading on markets. Marxism not only failed; it also ruled out more viable alternatives to capitalism.”

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.

Beyond the perfect and imperfect to the real

“There are…, I should admit, forces which one might fairly well call “automatic” which operate under any normal monetary system in the direction of restoring a long-period equilibrium between saving and investment. The point upon which I cast doubt – though the contrary is generally believed – is whether these “automatic forces” will…tend to bring about not only an equilibrium between saving and investment but also an optimum level of production.”

John Maynard Keynes

This brief quote from the great man sums up the argument put forth in his magnum opus, The General Theory, that a capitalist economy does not have an automatic tendency to achieve full employment. It may possess other “automatic forces”, but these will not do the trick. Continue reading

Karl Marx – an intro

Following last week’s brief introduction to Keynes, here is one for Karl Marx, along the same lines. This year is the 200th anniversary of Marx’s birth and his work remains important to an understanding of the modern world.

I found this video interesting as it contains some ideas and perspectives on Marx that I hadn’t come across before, so it is well worth viewing.

As the narrator explains, much of Marx’s writing was on capitalism rather than what should replace it, at least in any detail. His magnum opus, Capital, is hard-going but remains an extraordinary achievement, while his and Engels’ earlier work, The Communist Manifesto, is pretty short but also very much a fiery and passionate diatribe.

Marx praised capitalism’s productive powers and, remarkably, predicted that it would sweep the world. He was also its foremost critic, and the video does a good job of outlining many of the flaws he identified.

Is full employment possible under capitalism?

An interesting interview with Robert Pollin on the Real News Network, in which he discusses the possibility of achieving full employment under capitalism. He considers the ideas on this subject of Marx, Keynes, Kalecki and Friedman.

For me, the historical record seems to support the ideas of Kalecki and Marx, in that achieving full employment may be possible, but sustaining it is much more difficult. This is because it tends to change the balance of power in society in favour of the workers, which the employers don’t like. If high inflation or a squeeze on profits is to be avoided, a new bargain between employers and workers is necessary.

The solution is thus a political one, and leads to a different kind of capitalism. It may be possible for a while but, once again, history suggests that this is hard to sustain, and that a squeeze on profits will result, leading to a slowdown in investment and growth and subsequently to a rise in unemployment once again. This also lends support to the ‘classical’ ideas of Anwar Shaikh on wages and unemployment, which I discuss here.