Michael Hudson: Adam Smith was no ‘free market’ economist

hudson-200x300Here are some further enlightening extracts from Michael Hudson’s iconoclastic J is for Junk Economics, this time on Adam Smith (p.28) and the school of Classical Political Economy. Hudson has an extraordinary knowledge of economic history, as can be gathered from viewing any of his interviews on YouTube, or reading his books.

Smith is often falsely regarded as being an advocate of the free market, justifying a libertarian focus on deregulation and minimal levels of taxation. Hudson shows that Smith’s (and the Classical’s) thinking was a bit more complicated: Continue reading

Covid-19 and creative destruction – Marx, Schumpeter and the role of the state

The impact of the uncertainty generated by Covid-19 and the subsequent lockdown in countries across the world has been devastating for economies and societies. There is more to come. The world economy was already struggling somewhat in 2019, with slowdowns in the US and China, the two largest economies. In fact, what was at best sluggish growth in output and productivity in many countries had been a feature of the decade or so which followed the financial crisis of 2008. The onset of the pandemic has hit already weak or fragile economies hard.

Keynes famously argued that the ‘animal spirits’, or waves of optimism and pessimism among businessmen potentially looking to invest, were a major factor in the determinant of growth and employment, and hence economic prosperity. Uncertainty about the future could lead to spending on new industrial capacity and jobs being postponed, driving the economy into stagnation or recession. It was the job of government, he said, to ‘socialise’ investment. In other words, through judicious policy choices, it should try to maintain optimistic expectations among businessmen and make sure that there were sufficient investment opportunities to keep spending, and therefore employment, at a socially optimum level. 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

What happens when economics doesn’t reflect the real world?

A nice interview with Anwar Shaikh of the New School for Social Research, whose magnum opus, Capitalism: Competition, Conflict, Crises was published in 2016. In this video he outlines the basics of his framework as developed in the book. He describes his approach as being part of political economy, with the social and the economic inextricably connected.

Shaikh cites as his main intellectual influences Adam Smith, David Ricardo, Karl Marx and John Maynard Keynes. He argues that it is profitability that is the prime motivation for economic activity under capitalism. This idea underpins his theoretical approaches to growth, unemployment, inflation, money, prices, international trade, finance and so on.

He emphasises the importance of balancing theory with empirical evidence. He also makes a strong case for his theory of ‘real competition’, which he describes as akin to a war, as opposed to perfect or imperfect competition.

Geoff Harcourt on Keynesian theory

In this enlightening video, Professor Geoff Harcourt, who was a distinguished pupil and colleague of Joan Robinson at Cambridge University, discusses a range of issues in Keynesian and post-Keynesian economics.

He covers the need for pluralism in economics; his definition of post-Keynesianism; the work of some of its key protagonists; uncertainty and its impact on business and the economy; the capital theory debates; and finally his vision for analysing a modern capitalist economy, and his most enduring intellectual influences.

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’.

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 a 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