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.
Carmen Reinhart and Kenneth Rogoff’s famous ratio of 90% debt-to-GDP, above which countries allegedly begin to experience negative growth, has been cited widely as a justification for austerity by politicians from American Senators Paul Ryan and Tom Coburn to European Commisioner Olli Rehn. Thus the commentariat have lit up at the recent discovery by Robert Pollin, Michael Ash and Thomas Herndon that Reinhart and Rogoff’s 2010 paper Growth in a Time of Debt contained serious errors, including methodological problems and unwarranted omissions of key data. In their new paper, the University of Massachusetts economists challenge the original growth-rate at the 90% debt-level, which may have been over two percentage points too low: a notable difference. Pundits such as as Paul Krugman have seized on this rebuttal as fresh evidence for a long-standing suspicion that the 90% case was overstated (the correlation never proved the direction of causality, he points out). Defenders of Reinhart and Rogoff such as a Douglas Holtz-Eakin claim that nothing in the takedown really rocks their world (the idea seems to be that debt is intrinsically known to be bad anyway, like sin). With the political tensions over austerity ratcheted up of late, the debate is only likely to heat up from here.
Many countries are now debating the causes of the global economic crisis and what should be done. That debate is critical for how we explain the crisis will influence what we do.
Broadly speaking, there exist three different perspectives. Perspective # 1 is the hardcore neoliberal position, which can be labeled the “government failure hypothesis”. In the U.S. it is identified with the Republican Party and Chicago school economics. Perspective # 2 is the softcore neoliberal position, which can be labeled the “market failure hypothesis”. It is identified with the Obama administration and MIT economics.
Perspective # 3 is the progressive position which can be labeled the “destruction of shared prosperity hypothesis”. It is identified with the New Deal wing of the Democratic Party and labor movement, but it has no standing within major economics departments, owing to their suppression of alternatives to orthodox theory.
In the wake of the global financial crisis, Keynesianism has had something of a revival. In practice, governments have turned to Keynesian policy measures to avert economic collapse. In the theoretical area, mainstream economists have started to give grudging attention to Keynesian perspectives previously dismissed in favor of New Classical theories.
This theoretical and practical shift is taking place at the same time that environmental issues, in particular global climate change, are compelling attention to alternative development paths. Significant potential now exists for “Green Keynesianism” : combining Keynesian fiscal policies with environmental goals.
Here’s my most recent — and, I believe, imminently winnable — campaign: Let’s stop calling countries “markets” or “economies.” And while we’re at it, let’s not call any set of countries “emerging markets.”
It seems like a small thing – the change in terminology from “countries” and “people” to “markets” and “economies.” But it makes countries and people – in all their diverse reality – disappear. And it puts an unspoken premium on places that are buying lots of goods from U.S. corporations.
Some of us slip into this terminology ourselves, from time to time, without even thinking. But, when I hear my colleagues and students use it, I find myself cringing for all that is unsaid between the lines. And I cringed even more at a recent Washington, D.C. event when an Obama government official proudly introduced herself as someone with “emerging market” expertise.