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

How Abraham Lincoln’s political economy ‘trumped the Free Trade British System’

I have written before on the oft-neglected American School of political economy, drawing on the work of Michael Hudson here and here.

Along the same vein, November’s issue of the Cambridge Journal of Economics features an article by Emir Phillips. It is included as the Editor’s Choice, so you can read it for free on the journal website or by downloading the pdf.

Here is the abstract:

The Whigs could legitimately emphasise what Hamilton’s Report had not touched upon: urban labourers made unemployed by import competition could not shift to ‘collateral employments’ with the presumptive ease asserted by Free Trader Democrats. More than anything, it was the structural cyclical instability (Minsky moments) that engendered a new party (Republican) to exert political pressures for government involvement in the management of the economy (mercantilism). Economic beliefs played the most fundamental role in Lincoln’s career, and his mercantilist views, in conformity with Hamilton, Clay and the economist Carey, were key determinants in effectuating the Industrial Revolution within the United States through tariffs, government-supported macro-projects and structurally stimulating aggregate demand through a national currency. Permeating Lincoln’s political economy was a fierce non-neutral view of money wherein banks created the funds to ignite the American System. Henry Clay, Henry Carey and Abraham Lincoln were seeking to supplant the Ricardo–Malthus long-term model of economic growth (emphasising distribution within a relatively stagnant economy) with one of expanding productive powers and rising wage levels. These interventionist issues are still quite relevant since US economics students are taught modernised versions of the doctrines of Ricardo and Malthus which were controverted more than a century ago by the American School, and more specifically by Abraham Lincoln.

The article tells the story of how 19th century Whig-Republicans, and Abraham Lincoln in particular, accelerated industrialisation in the US through government intervention in the economy, such that

Mercantilist nationalism (Republican Party of 1860) confronted both the Free Trader Jacksonian-Democrats and the US Constitution, and created a commercially linked Nation whose industrial productivity over the next 60 years (all US Presidents without exception were Republican until President Wilson) supplanted England as the world’s workshop (p.1455).

The policies used included a combination of tariffs to protect domestic industry from English manufactured exports and raise government revenue, investment in transport infrastructure, particularly railroads, and management of the national currency to sustain aggregate demand and investment in industry.

The American System or School saw capital and labour as potentially complements, in that investment in productive capacity in increasing returns industries, namely manufacturing, would stimulate rising productivity and output. This would enable both profits and wages to rise, so that both capitalists and workers would benefit from economic development, resulting in some form of social harmony and supporting national democracy. Thus

[b]y 1845, Lincoln perceived these United States as entirely dependent upon certain economic activities subject to increasing returns, with each regional section being a synergetic phenomena built upon a mutual dependency created by finely knit and interlocking network of rail, divisions of labour and raw inputs into a manufacturing Northeast. Within this matrix, social mobility (‘equal opportunity for the pursuit of happiness’) was enchained to industrial productivity to the benefit of all Americans. The increasing returns found in Northern manufacturing created the synergetic element that made the United States greater than its parts (the States). The Republicans were then the National Capitalist Party, with wealth creation and not Constitutional adherence as its abiding precept (p.1455-6).

Trump’s trickle dries up — Michael Roberts Blog

An interesting take on Trump’s economic stimulus and current and prospective US economic performance from Marxist economist Michael Roberts. The full post is at the link below.

“The economy now has hit 3 percent. Nobody thought we’d be anywhere close. I think we can go to 4, 5, and maybe even 6 percent.” – Donald Trump, Dec. 16, 2017 Well, Trump’s boast turned to dust in 2019. US GDP grew by 2.3% in 2019, well below President Trump’s promise of 3%+ growth. […]

via Trump’s trickle dries up — Michael Roberts Blog

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.

Heiner Flassbeck – Harz IV and the purpose of economics

Here is the latest post from Heiner Flassbeck, formerly of UNCTAD, and who now runs his own consultancy which focuses on macroeconomic questions.

The post explores how a decade of wage repression following the Harz IV reforms in Germany resulted in weak growth in wages relative to productivity, which in turn weakened growth in domestic demand and led to a boom in exports. The piece contains some useful charts comparing the growth in foreign and domestic demand in Germany and France.

These trends created major economic imbalances in the eurozone which in the long run proved unsustainable as they weakened economic performance in the region and were a major factor behind the global financial and eurozone crises.

Whether you are a supporter or detractor of the ‘European project’, these arguments should not be ignored. They point to the need for reforms to the structure of policymaking in the eurozone, particularly in Germany, it being the largest country with the largest current account surplus. Such reforms are needed in order to promote widespread prosperity and help to safeguard the future of the region. On the other hand, if this need is neglected, the disruptive breakup of the eurozone cannot be ruled out.

Flassbeck concludes as follows:

“In order to counter the centrifugal forces in Europe, Germany must lead the way by withdrawing its reforms and normalising wage developments. On the other hand, Germany would undoubtedly be hit hard economically in an exit scenario of Italy or France. It would have to reckon with its production structure, which is extremely export-oriented and which was formed in the years of monetary union, being subjected to a hard adjustment. The German recession is already showing how susceptible the country is to exogenous shocks.

The basic decision in favour of the euro can still be justified today with good economic arguments. The dominant economic theory, however, has ignored these arguments from the outset and politically disavowed them. Built on monetarist ideas in the European Central Bank and crude ideas about competition between nations in the largest member state, the monetary union could not function. All those who want to save Europe as a political idea must now realise that this can only be achieved with a different economic theory and a different economic policy that follows from it. Only if the participation of all members of society in economic progress is guaranteed under all circumstances and the competition of nations is abandoned can the idea of a united Europe be saved.”

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.

Intangibles, monopoly and the sluggish economy

The latest issue of the Cambridge Journal of Economics carries an interesting article on what the author, Özgür Orhangazi, calls the ‘investment-profit’ puzzle. He focuses his analysis on the US economy, and tries to account for the slowdown in investment and growth there since the early 2000s, and particularly since the crisis of 2008, despite a rise in the rate of profit.

The puzzle in question is the disconnect between rising profits and sluggish or falling rates of investment. It contributes to the literature blaming factors such as globalisation and financialisation for the disconnect. In particular, ‘investment’ in intangible assets in the high technology, healthcare, telecoms and non-durables sectors has risen relative to investment in tangible capital assets, cementing monopoly power and reducing some of the competitive stimulus for increasing investment in tangibles, thereby slowing economic growth. Continue reading

US profits revision — Michael Roberts Blog

Last Friday, the US real GDP growth figures for the second quarter of 2019 were released. The annualised rate of real GDP growth slowed in Q2 to 2.1% from 3.1% in the first quarter. This was the slowest growth rate since the end of 2016. US real GDP was 2.3% higher than in the same […]

via US profits revision — Michael Roberts Blog

Where to Invade Next – social progress and a productive economy

WhereToInvadeNextI have ‘enjoyed’ (if that is the appropriate word) much of the work of US filmmaker Michael Moore. He tirelessly aims through this work and beyond it to campaign for a more progressive society and politics. He tries to entertain, inform and persuade. I often get the feeling when watching his films that he is preaching to the converted, but I still find myself learning something new.

His 2015 offering Where to Invade Next sees him visiting various countries around the world, mainly in Europe but also elsewhere, exploring aspects of their culture which as an American ‘liberal’ he admires more than the home-grown alternative. For each aspect, he plants the stars and stripes, indicating his ‘invasion’, and vows to steal the particular idea and take it back to the US. Continue reading

The UK’s pay squeeze – no end in sight?

workersSince the Great Recession, and among the world’s richest economies, pay growth in the UK has been historically weak. The Economist magazine reported on 20th April that the pay squeeze in the UK has eased during the last year or two, but is by no means over.

Nominal wages are now growing at around 3.5% year, while real wages (adjusted for inflation) are growing at 1.5%. In a way, this slight improvement is to be expected, with employment at a high level and unemployment relatively low, creating a tightening labour market, and shifting bargaining power from employers towards workers.

Another piece of good news is that more of the jobs now being created have higher pay. To put it another way, the composition of the workforce is changing. As The Economist put it, “strawberry-pickers have made way for stock-pickers”. Continue reading