What I am reading right now, and why: Ha-Joon Chang’s Edible Economics

EdibleEconomicsHa-Joon Chang has a new book out: Edible Economics – A Hungry Economist Explains the World. Those who are familiar with any of his ‘popular’ works, such as Bad Samaritans, 23 Things They Don’t Tell You About Capitalism and Economics: The User’s Guide, will know that he is on a mission to educate non-specialists in the population in the ways of pluralist economics in the hope that more informed citizens will enhance the functioning of their own societies, politically, socially and economically.

Chang is progressive and an unapologetic interventionist when it comes to economic policy, but he is not a socialist. He has long argued for the promotion of a more humane capitalism, in the hope that this is possible with the right institutions and policies.

He was born and grew up in South Korea, before moving to the UK to pursue graduate studies at Cambridge University. His PhD was on the political economy of industrial policy, with evidence of its potential efficacy provided by the case study of his country of birth, which is now classed as advanced or rich, with successful global brands ranging from Samsung to Hyundai, and increasingly influential cultural exports such as K-pop. Chang has argued that the Korean government employed a range of interventions in the economy, from trade protectionism of ‘infant industries’ to the allocation of credit to favoured firms and sectors. This helped to accelerate economic growth and development over many years following the Korean war of the 1950s and enabled South Korea to catch up with the West from a position of relative poverty. Perhaps the contrasting developmental case study of communist North Korea has warded Chang off rejecting capitalism and embracing socialism, despite his commitment to a more progressive economy. Continue reading

Quote of the week: no nature without man

“Although it should be obvious, there is no state of nature to go back to, a world without us. The environment is now irrevocably man-made, and we have an active, not a passive, duty to do something about it, to make a better man-made world. Conservationists sometimes appear to be against humans, preferring a non-human world of their imagination, a sort of ‘presenting nature without any people’. Rewilding too often means just abandoning, and that of course has the merit for governments that it is at least cheap. Doing nothing in the uplands, for example, might appeal to some cash-strapped National Parks and to the Treasury, but the results may not be quite as environmentally benign as some of the advocates suggest.”

Dieter Helm (2019), Green and Prosperous Land: A Blueprint for Rescuing the British Countryside, London: William Collins, p.267.

Quote of the week: the economy as an evolving system

“The economy is an unfolding phenomenon. It always changes. And if it happens to reach an equilibrium this is at best a temporary equilibrium. It is sooner or later disrupted not by the fact that there’s an earthquake or that an asteroid has hit the earth. There aren’t so many events of that kind. It is disrupted by the fact that people are not content with their status quo and therefore come up with innovations (i.e., thinking up something nobody has thought of before). Innovators disrupt the existing interactions by doing something not thought of as being possible, acceptable, legitimate. If you ignore this kind of disturbance, you will never understand that the economy is an unfolding or evolving system.”

A. Mearman, S. Berger and D. Guizzo (2019), ‘Ulrich Witt’ in What Is Heterodox Economics? Conversations with Leading Economists, Abingdon: Routledge, p.281.

Some notes on the political economy of central banking

EpsteinPolEconofCentralBankingI have just finished a very useful collection of some of the papers of economist Gerald Epstein, entitled The Political Economy of Central Banking. Epstein is Professor of Economics and Co-Director in the Political Economy Research Institute (PERI) at the University of Massachusetts-Amherst in the US, which is known for the progressive research agendas of its members.

Rather than write a lengthy review, this post sets out some of the key points made in the book and which stood out for me as being original and important. Epstein’s focus on central banks (CBs) remains especially relevant in today’s world of increased inflation and CB efforts to return it to target rates.

  • Epstein argues that CBs, especially the US Federal Reserve, are not as independent as they make out and tend to be captured by a variety of vested interests. In today’s financialised economies, many are predominantly influenced by the financial sector, particularly since its liberalisation, expansion and rising power and influence since the 1970s and 80s. Thus they tend to serve finance and support financial sector profits more than industry/industrial profits and workers/wages and employment.
  • Historically, CBs have often played a more developmental role at various times and in various countries, supporting industrial expansion and allocating credit to more productive sectors in order to encourage economic growth rather than financialisation.
  • Epstein argues that major reforms to CBs and the economy more broadly are needed today to democratise CBs and make them more accountable to society as a whole, so that they better serve the public good and not simply the financial sector. They need to play a larger role in supporting employment in the macroeconomy and industrial growth, especially in driving the green transition which is so vital to building a more sustainable economy.
  • CBs should be more accountable to society eg. to Congress in the US, and their boards and staff more generally should reflect the wider society and economy, including industrial and labour interests.
  • Monetary policy in the form of changes to interest rates have distributional impacts and are therefore political. Thus no CB can be truly ‘independent’ and free of partisan influences and political outcomes.
  • The financial sector, industry and labour (as classes or sectors in the economy) are impacted differently by monetary policy in terms of their respective income flows in the form of profits and wages, as well as their borrowing and servicing of their stocks of debt.
  • Lower interest rates may stimulate industrial investment, economic growth and employment, but can lead to a profit squeeze if the labour market becomes sufficiently ‘tight’. They may also inflate asset prices and boost financial profits. However higher interest rates can also boost financial profits and rentier incomes.
  • Epstein contrasts speculative finance with enterprise finance as two different sets of relations between the financial sector and industry. Speculative finance, more dominated by capital markets, may mean that the two sectors operate further apart and with more conflict between their respective economic aims, while enterprise finance means that banks and industry are more closely connected and cooperate in the service of expanding longer term productive investment and profitability. In a more financialised economy, industrial firms may themselves become more like financial institutions, with potentially detrimental impacts on economic performance. These varying relations, which can also be seen as different class coalitions, may alter their members’ preference for tight or loose monetary policy on the part of the CB. Varying degrees of conflictual and cooperative relations between industry and labour can do likewise.
  • Epstein questions the evidence that sustaining very low inflation, the remit of independent CBs, is a precondition for robust economic growth. He suggests that moderate inflation can be positively associated with growth and that overly tight monetary policy can damage growth performance over a significant period.
  • Quantitative Easing (QE) since the Great Recession of 2008-09 in the US has increased inequality through the inflation of asset prices, and despite some positive impact from increased employment, this has been offset by wage stagnation for many in work. However, an absence of QE and higher interest rates could also have increased inequality by reducing employment growth apart from its other effects. This paradox suggests that more wide-ranging progressive policy responses are needed to reduce inequality in the US and elsewhere, such as changes to labour market regulation and a higher minimum wage, as well as the effective use of fiscal policy.

Epstein’s contributions in the book are varied, original and interesting. His ideas are founded on a political economy approach, so that economics is necessarily seen as political. Particular class configurations in society therefore play a role in determining institutional and policy change, and for the author, CBs can never be ‘independent’ of them. This has major implications for the economy. In a more financialised world, the finance sector itself has become a more powerful influence on CB policy in many countries, and for Epstein, this has had detrimental effects on economic outcomes. The interests of labour in terms of employment and wages have in many cases been neglected in the service of finance and financial profits.

The reforms to CBs that the author proposes are an attempt to democratise aspects of finance and monetary policy so that they better serve the wider society and economy. The aim is to support employment and rising living standards for the majority, and this requires reforms that go beyond CBs alone, with changes made to the financial sector as a whole so that it better supports non-financial business investment. CBs and finance more broadly need to play a more developmental role, as they have done at certain times throughout history. Given the current need for massive investment in the transition to a green economy, there is a case to be made for a comprehensive progressive policy agenda which supports this.

CBs have been called upon to play such a role during episodes of national emergency, such as wartime. In these kind of situations, some of the ‘normal’ rules of capitalism have been suspended in order to focus on a huge collective effort. Repressed interest rates, the state-led allocation of credit to vital industries and price controls have all come into play when needed. A return to more peaceful conditions has tended to see such interventions set aside and a return to freer markets and a less regulated private sector.

Today the global economy faces multiple major challenges which have increasingly called for the state to play more of a role in securing the public good. These include, not least, maintaining political, social and economic stability as nations are battered by a variety of shocks, from the pandemic to war, climate change and inflation, as well as geopolitical instability and a global order under threat of fragmentation as a particular form of globalisation evolves in an uncertain fashion. In understanding and responding to all of this, CBs and their actions are a key part of the institutional and policy makeup. Epstein’s work on the political economy of central banking offers a richer, more comprehensive and more progressive contribution than a purer and narrower mainstream economic approach.

Quote of the week: the problems of neoclassical economics

“[I]t’s very inadequate. I think there are situations in which parts of the theory can give you a little bit of insight. It’s not that I am against the theory, per se, as against the hegemony of the theory. I actually think supply and demand analysis can be a useful sort of heuristic device for some things. Where you get into problems is where you start to believe there are actually supply and demand curves out there in the real world and firms actually draw marginal cost curves to come to their decisions. Then you’re starting to take that a lot too seriously. In the curriculum materials I worked on – people are kind of under obligation to teach certain sorts of things in introductory courses, but I think it makes a big difference whether you treat something as “this is the way the world works” versus “this is the way some people have thought about explaining how the world works”. So, neoclassical theory is one of these tools – I often summarise my views as “broader questions and bigger toolbox”. I think economists should be dealing with things like inequality and climate change, the big questions, and use a bigger toolbox to do that. Neoclassical theory can play a role, can be one of the things in one of the compartments in the toolbox, but it’s clearly inadequate also for a lot of other things like deciding at what rate we should combat climate change. Basing that on a mathematical model and a market interest rate is stupid.”

A. Mearman, S. Berger and D. Guizzo (2019), ‘Julie Nelson’ in What Is Heterodox Economics? Conversations With Leading Economists, Abingdon: Routledge, p.120-121.

Quote of the week: heterodoxy versus the mainstream in economics

“I think heterodox economics is a constructive challenge to mainstream economics; and it has posed that challenge since the 1960s. And heterodox economics is a challenge at the same time to the epistemic hegemony of the economic knowledge centred in Anglo-Saxon mainstream institutions. So it’s not only a challenge to mainstream economics, but a challenge to the institutions which are embodying that mainstream economics. As you know very well, there’s a major humanitarian issue at stake at the moment (sic). Heterodox economics claims that the existing economy based on the idea of the free market does not stand adequately for what the economy should stand for, for human beings let alone other sentient beings. The other major thrust of heterodox economics is that it does not accept the fact that the market as described by neoclassical economics is self-adjusting by converging towards equilibrium. It is not only not self-adjusting but, more seriously, it is not just, from the point of view of heterodox economics. Thus, it has mounted an intellectual challenge to the neoclassical view of automaticity of an adjusting system as well as a philosophical challenge to the view that the societies can be just within the kind of economic system based on orthodox economics.”

A. Mearman, S. Berger and D. Guizzo (2019), ‘Karma Ura’ in What is Heterodox Economics? Conversations With Leading Economists, Abingdon: Routledge, p.87.

Quote of the week: the entrepreneurial versus the cooperative economy

“I don’t have any doubt that, at least in my mind, there is one difference, a central difference between the orthodoxy and the non-orthodoxy. When you think of Keynesian categories, during the preparation of The General Theory, Keynes relied on the distinction between two concepts of modern economies to distinguish orthodoxy from non-orthodoxy: one he called the “cooperative economy”, where factors of production combine in ways described by production functions, and everybody gets their rewards in baskets of goods equivalent to their marginal productivity. The other type of economy is what he called the “entrepreneurial economy” (some people would prefer to call it a “capitalist economy”): there, production is organised by firms. Firms are not consumers; firms are firms. They exist to generate a money surplus, and the production and generation of this surplus – and of course the distribution that follows it – is what this type of economy is about, and this is where aggregate demand can be deficient. An entrepreneurial economy exhibits the characteristics of a modern economy, including how money is organised, the role of contracts, the role of markets, and so on. For me, “non-orthodox economics” is the “non-cooperative economy”.

A. Mearman, S. Berger and D. Guizzo (2019), ‘Fernando Cardim de Carvalho’ in What is Heterodox Economics? Conversations With Leading Economists, Abingdon: Routledge, p.40.

Quote of the week: Anwar Shaikh on opposing capitalism

Anwar-InterviewThis week’s quote comes from the New School’s Anwar Shaikh, whose work I have discussed on this blog a number of times. Working in what he has called the ‘Classical Keynesian’ tradition, his efforts to synthesise the work of Adam Smith, David Ricardo, Karl Marx and John Maynard Keynes culminated in his 2016 magnum opus Capitalism. Although he is both highly critical of and well outside the broadly neoclassical mainstream, he remains an independent spirit and has clearly forged his own path through his research and writing.

The extract below is taken from a volume of interviews with leading heterodox economists, and considers the importance of understanding the world as part of the basis for changing it in a progressive direction, with capitalism being the dominant economic system in the world today. Shaikh’s own book is proffered as a contribution towards that endeavour.

Although I have sympathies with Keynesian economists arguing for policies which achieve and sustain full employment, I can also see where Shaikh is coming from when he argues that the sustaining of it under capitalism has been historically problematic. Sooner or later, economic crises occur, either from within the system itself, or through policy responses to, say, high inflation, which undermine its achievement. However, in Capitalism Shaikh does argue that a social pact between government, business and trade unions can mitigate inflation even in the presence of a tight labour market and high employment rates. Historically, this has been achieved in certain countries at certain times, and for reasonably sustained periods. For me, this is worth shooting for as part of a progressive policy package for improved economic and social performance, and, yes, this would be taking place within capitalism.

At the same time, a combination of reforms to, and the evolution of, the capitalist system itself, may ultimately take it beyond its particular limits and towards something else. What exactly that might be, and what it might be called, may be beyond any one individual’s capacity to imagine. I prefer to leave this problem open for now.

“Many people change the world without understanding, but there are consequences of not understanding it, too. I have done my share of demonstrations and marches. I was a founding member of the Union for Radical Political Economics also. But it seemed to me that providing a space for people to oppose capitalism is not the same thing as providing a framework in which this opposition can be located and which the consequences of opposition can be located also. And some of those consequences are consequences people on the left don’t like to hear. They don’t like to hear that Keynesian policy cannot just provide full employment. Well, I happen to believe that capitalism will not sustain full employment and that’s an uncomfortable belief. But I can’t reject it merely because I don’t like that outcome, so I have to deal with the fact that if that’s the case then that’s the limits of capitalism. Where can you go within those limits? And then it also leads you naturally to ask where do you go beyond capitalism, even though my work is not about that. But it seems to me that understanding the limits helps you think about the fact that you can’t go beyond those limits without leaving the system because these are system limits, not human limits.”

‘Anwar Shaikh’, Ch.13 in A. Mearman, S. Berger and D. Guizzo (2019), What is Heterodox Economics? Conversations With Leading Economists, Abingdon: Routledge, p.219.

Different questions, different answers: seeking an alternative economics

“I was working in the desert myself alongside workers from all over the Middle East and India and Pakistan in searing brutal heat and they were paid minimally. And as an engineer you think: well, things could be done much better. So I thought that economics would have an answer as to why there was inequality and poverty and all that, answers to them. It seemed to me that that’s what I should study. When I got to graduate school I realised that economics doesn’t even have the question let alone the answer. That was a big shock.”

This quote from an interview with New School Professor Anwar Shaikh about his decision to study economics and his early experiences brings to the fore some of the concerns of today’s heterodox economists. I can certainly sympathise. My own experiences in studying economics at school and of beginning to read around the subject in books and newspaper commentary generated enthusiasm for a particular approach to the subject, which gives a primacy to the importance of economic policymaking designed to improve the workings of the economy and society and the well-being of its members. I was attracted by left-Keynesian ideas, what I now recognise as post-Keynesianism, which argued for a government commitment to full employment, secured by judicious macroeconomic management, with any resulting tendency towards rising inflation to be mitigated by incomes policies involving negotiated consensus between the state, employers and workers. Of course, such policies reflected the post-war consensus in many advanced economies, which by what was then the mid-1990s had long been abandoned by the Thatcher governments in favour of a focus on controlling inflation as the main target of macroeconomic policy, while the liberal economy in the form of deregulation and privatisation became the focus of microeconomic policy, ostensibly to improve economic performance and raise living standards. Continue reading

Quote of the week: why textbook economics has failed to advance

This week’s quote is taken from a chapter by Fabio Petri, which explores the social causes of the failure of mainstream economics and its place in political discourse to be radically reassessed in the light of recent crises, not least the Great Recession of 2008-9, and despite the ready availability of alternative theories. He argues that much of this is down to the weakness of the political left in many countries.

“It would seem therefore that the picture generally transmitted by textbooks, of a triumphant advance of economic science brought about by the new insights of marginalism, should be modified into that of a marginal theory aprioristically accepted because of the rosy picture of capitalism it supplied, in spite of its evident incompleteness and weaknesses, in particular in the treatment of capital, weaknesses which – it was fideistically believed – would be surmounted by further theoretical progress.”

Fabio Petri (2023), Class struggle and hired prize-fighters, in J. Eatwell, P. Commendatore and N. Salvadori (eds.), Classical Economics, Keynes and Money, Abingdon: Routledge, p.57.