Economists have often been characterized as a dry, calculating bunch, focusing on the allocation of scarce resources with carefully drawn supply and demand curves. The reason for this is that economics has, in Neoclassical theory and particularly within the writings of Lionel Robbins, emphasized choices and competition under conditions of scarcity. Mainstream economic theory, rooted in Neoclassical thought, has continued in this vein, with a focus on market efficiency as the rule. So, why do I have a problem with it?
Mainstream theory embodies decades of debate and rigorous application, but its focus on choice under scarcity has centered the study of economics on products, not people. The assumption that people are there to either consume or produce products moves away from any requirements for basic human well-being, as emphasized by Amartya Sen in his own criticism of Neoclassical economics, supposes that consumers and producers always want to buy or sell more goods, and fails to focus on aspects of nature (such as forests or coral reefs) as more than resources, such as entities with a right to exist without subjugation to the human race.
These assumptions are flawed and not universally held.
Mankiw tells us in his most recent NYTimes column that economists agree that Free Trade is good. He links to a poll in which, essentially, mainstream economists of different persuasions, some Keynesian and some not, and different political views, some liberal and some conservative, say that trade agreements are good. He backs his argument by suggesting that theoretically the argument is at the heart of the economics profession since the beginning; I guess an argument of authority.
And no better authority than Adam Smith. Mankiw says:
“The economic argument for free trade dates back to Adam Smith, the 18th-century author of ‘The Wealth of Nations‘ and the grandfather of modern economics. Smith recognized that the case for trading with other nations was no different from the case for trading with other individuals within a society.”
And it is true, Adam Smith was for laissez-faire, in general, and thought that less intervention in trade would be good. But there is in Mankiw’s argument an implication that does not follow from careful analysis of Smith’s doctrines, namely: that Adam Smith can be seen as a forerunner of modern neoclassical trade theory based on the Heckscher-Ohlin-Samuelson (HOS) comparative advantage argument (for the limitations of that theory go here).
The gathering pressure for Congress to “fast track” the Trans-Pacific Partnership (TPP) demonstrates yet again that trade liberalization is one of the few aspects of economic policy about which there is agreement across the mainstream of the political spectrum, in both the United States and Europe. Almost all conservative commentators endorse it with gusto, for centrists it is an article of faith, and even many progressives accept it implicitly by their criticism of industrial country protection.
The neoliberal ideologues sell it by bestowing the label “free trade,” which is allegedly reached by repeated measures of “trade liberalization.” No matter that the TPP has little to do with trade and everything to do with setting loose capital on a global scale. Well tested and demonstrably disastrous in the North American Free Trade Association, this liberating of capital includes 1) global extension of corporate patents under the moniker “intellectual property rights,” 2) shifting enforcement of those patents from national governments and courts to ad hoc international tribunals, and 3) prohibiting as “protectionist” measures protecting labor rights and the environment.
This is not “freer” trade, but re-regulation of trade to entrench corporate profit making. However, if you call it freer trade, you can sell it to the public. In order to discredit this corporate sales pitch, I have to drive a stake through the heart of the Free Trade dogma that is the ideological justification for neoliberal globalization.
The Piketty bubble may be coming to an end. Economists are starting to criticize the heart of his argument. That is not to diminish important aspects of his book. But the most profound of his claims simply may not hold.
Arriving with a fanfare worthy of Caesar, Thomas Piketty’s long book, Capital in the 21st Century was at first welcomed almost uncritically by enthusiastic centrists and progressives both. Why not? As one read the first sections of the book, who wouldn’t have? I am an admirer and remain one. Here was an economist widely respected in the mainstream telling us point blank that the rich earned far more than they deserved, that economic theory regarding labor markets failed, that the most respected economists had little sense of the real world, and that inheritance was a source of persistent inequality.
Most impressive was the quantity and depth of empirical backing. Piketty scolded economists for depending on models with little empirical basis. This needed to be said by someone so respected. Piketty’s remarkably influential work on income inequality with his colleague Emmanuel Saez is what really revolutionized thinking about economics—and paved the way for his enthusiastic acceptance. Using tax records, they showed the remarkable concentration of wealth in the top 1%—basically they counted how many really rich people there were. Their findings about the extreme distribution of income towards the risk were shocking and confirmed anecdotal evidence.
The empirical analysis in the new book went further. It showed that the equality that existed since World War II and began to reverse in the early 1980s had been an aberration. Capital usually grew faster than incomes throughout history. And it would likely continue to do so! Piketty found that this relation in which r, the rate of return on capital, exceeded g, the growth rate of the economy, seemed permanently etched into not merely history but the future.
And he told us that the best way to deal with such a law of inequality was to tax the rich through a global wealth tax.
I am pessimist by nature (or nurture), I guess. So I never thought that the current crisis would lead to a collapse of mainstream economics.
As I often point out to my students, in the U.S., it was the Great Depression, and the rise of the Neoclassical Synthesis that made Marginalism dominant. Up to that point the profession was dominated by an eclectic group that included many institutionalists, like Commons or Seligman, a non-Marxist defender of an economic interpretation of history, both of whom were presidents of the American Economic Association (AEA). Mitchell, another institutionalist that was president of the AEA, was the head of the National Bureau of Economic Analysis (NBER). And the administration was full of institutionalist economists during the New Deal. So a crisis might actually lead to the consolidation of a paradigm that was actually contradicted by the facts (yes, full employment of factors of production is hard to defend if you have 25% unemployment, but blame it on rigid wages and you’re fine). Read the rest of this entry »
The global capitalist economy has now entered its sixth year of recession, as it continues to suffer from its worst crisis since the Great Depression. Initially dismissed as routine financial turbulence in the summer months of 2007, the crisis conditions accelerated slowly, yet continually, to reach an officially declared full-fledged recession in the late 2000s.
What is more revealing, the current crisis began not in the so-called emerging markets of the global periphery, but erupted directly in the hegemonic centers of the capitalist world. At the root of the crisis are not, as commonly accused, the “corrupt” governments of crony capitalism, and their over-interference with market rationality, but the upfront irrational exuberance of “free markets,” with their unfettered workings guided by the private profit motive. Read the rest of this entry »
Do corporations seek to maximize profits? Or do they seek to maximize power?
The two may be complementary—wealth begets power, power begets wealth—but they’re not the same. One important difference is that profits can come from an expanding economic “pie,” whereas the size of the power pie is fixed. The pursuit is a zero-sum game: more for me means less for you. And in corporations, the pursuit of power sometimes trumps the pursuit of profits.
Take public education, for example. Greater investment in education from pre-school through college could increase the overall pie of well-being. But it would narrow the educational advantage of the corporate oligarchs and their privately schooled children—and diminish the power that comes with it. Although corporations could benefit from the bigger pie produced by a better-educated labor force, there’s a tension between what’s good for business and what’s good for the business elite.
The First World Keynes Conference convened over the heated days of June 26-28 at the Izmir Economics University. Given the current impasse in mainstream economics over the ongoing great recession, it is no surprise that the Conference attracted quite a few dissident voices from many alternative paradigms and fields of research.
It is quite clear to all social scientists able to maintain their sense of scientific clarity that the causes of the global crisis lie beyond the rhetoric of toxic assets, in the realm of what should be called Toxic Economics Textbooks. As the opening lines of the Conference Invitation attest,
“The vastly dominant mainstream model –New Consensus Macroeconomics (NCM) and the related Dynamic Stochastic General Equilibrium (DSGE) model – has not only suffered a severe blow by the eruptions of the recent world financial crisis but must be seen as part of its cause: the quasi-religious believe in super-efficient markets and the self-regulatory capabilities of the representative agent, the main assumption of the framework, pursuing relentlessly its own egoistic interests has distracted most professional economists from investigating the unthinkable: a violently unstable economy. The uncritical acceptance of very restricted formal models as a good approximation of reality has led many economists to produce tools which reinforced organic instability.”
“Growth in a Time of Debt,” the much-touted paper by economists Carmen Reinhardt and Kenneth Rogoff, that suggested economic growth stalls once a nation’s debt hits 90 percent of its gross domestic product, has been debunked. But the austerity policies that this research helped undergird are still alive and well. Despite the on-going austerity-driven economic meltdown in Europe, and despite the International Monetary Fund’s recanting of the supposedly positive benefits of cuts, austerity continues, as John Maynard Keynes once put it, “to dominate the economic thought, both practical and theoretical, of the governing and academic classes of this generation.” Why is it so hard to shuck this notion that governments should cut spending and/or raise taxes in times of economic slack?
Two answers present themselves to us.
The first is politics. Few of the Republicans who fret so much about today’s allegedly crushing debt burden did so in 2006, at the height of the boom, when the U.S. debt to GDP ratio was steadily climbing above 60 percent and the deficit was at then-all-time high – and when a Republican was in the White House.