Wages and technological progress – a walk on the demand-side

What is the link, if any, between wages and technological progress in a capitalist economy? An article in this week’s The Economist magazine sheds some light on the issue. In particular, it considers the apparently lesser-studied effect that wages might have on productivity growth.

The reverse relationship, that productivity growth allows growth in wages, is studied more often. This has certain implications for economic policy. Boosting the supply-side determinants of innovation, such as education, and research and development, become important.

But what of the demand-side? The article mentioned above describes how some economic historians are engaged in a debate over the “high-wage hypothesis” put forward by Robert Allen, which he suggests helped drive industrialisation in Britain. Continue reading

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Journeying through the world of economics: a personal note

2018 marks 24 years since I first took an interest in what is sometimes referred to as the ‘dismal science’. Not a particularly notable landmark, though it is more than half my life. And I certainly have not spent all that time with my nose in books about economics, although I have spent quite a bit of it like that, maybe more than is good for me.

Apparently it was the Victorian historian Thomas Carlyle who coined the phrase dismal science in the 19th century. I am sometimes inclined to agree, when observing a malfunctioning economy and its malfunctioning stewards in government and business. But more often I am prepared to be optimistic that we can find solutions to the problems of humanity. Some of them might even come from studying economics!

Keynes looked forward to a time when the economist’s role in society would be akin to that of dentists, as humble, competent fixers of minor problems. Notwithstanding a call from the UK’s current environment secretary during the campaign for Brexit to pay less attention to experts, economists and their ideological categories of supply, demand and growth have become extremely powerful and accepted, even if with passivity, resignation or incomprehension. Continue reading

Heterodox critiques of quantitative easing

Following last week’s quote from Michael Hudson on quantitative easing (QE), here are some other insightful perspectives which for me offer explanatory power, given the course of economic and financial events over the decade since the crisis began.

The aim of QE is to reduce long-term interest rates, boost private sector lending, and raise asset prices to generate a positive wealth effect on private spending. Altogether, these are meant to raise private sector consumption and investment, and thus economic growth.

Richard Koo, economist at Nomura and originator of the theory of balance sheet recessions, has outlined the potential problem of the ‘QE Trap’ (2015). While QE might have the effect of mitigating such a recession, once the recovery is underway, its withdrawal could lead to slower growth than otherwise. In other words, over the longer term, its overall effect might be negligible or even negative: Continue reading

A Keynesian case for industrial policy

DSC00234Keynesian economics emphasises the primacy of aggregate demand or expenditure in driving the growth of output and employment. More mainstream neoclassical Keynesians, and the New Keynesians, tend to argue that inadequate demand is a short run phenomenon. The more radical post-Keynesians argue that it can be a problem in the long run too.

To varying degrees, these economists make the case for demand management via some combination of monetary, fiscal and exchange rate policy. The more radically minded have also long argued for incomes policies to manage wage and price inflation, and reform to the international monetary system in order to allow national governments the space to manage demand and promote full employment while preventing excessive and destabilising current account imbalances.

While Keynesian economics focuses on demand and, traditionally, macroeconomics, industrial policy aims to impact more on the supply-side of the economy and draws on microeconomics. Continue reading

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.

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

Can we avoid another financial crisis? Steve Keen’s latest book

Professor Steve Keen is an economist working in the post-Keynesian tradition at Kingston University here in the UK. He is well-known as a critic of mainstream economics (see his excellent and wide-ranging book Debunking Economics) and its failure to predict or satisfactorily explain the Great Financial Crisis (GFC) and recession, which he did some years before it occurred. His latest book is Can we avoid another financial crisis?a 130-page polemic aimed at the intelligent layman.

Keen’s central thesis is that mainstream economics failed because it ignores the role of private debt creation by the financial system, known in the jargon as ‘endogenous money’. This grew unsustainably in many countries in the decades prior to the crisis and drove a boom in the real economy and, even moreso, in asset prices (stock markets and housing). Credit expansion in economies such as the US and UK started growing consistently more rapidly than GDP in the 1980s, following the deregulation of the financial sector. Although it was subject to cycles, the trend in private debt as a share of GDP was upward. When its growth slowed or even went into reverse, the result was a severe recession and the aftermath is still with us both economically and politically. Continue reading