The American Bear

› Monetary Policy and Metaphysics – How Economists Try to Naturalise Terrible Policies and Disappear Into Their Own Theories | Philip Pilkington

After the Reagan and Thatcher governments experimented with monetarism in the late-1970s and early-1980s, something fundamental changed in the way most economies in the world were managed. This era has become known to many as that of “neoliberalism” and is usually thought to be characterised by free-market dogmatism, a hostility to labour, financialisation and trade liberalisation.

All of this is true, of course, but it is not widely known outside of economic circles what changed in the minds of economists. After all, monetarism soon faded into the ether – a failed superstition. What replaced it was, in fact, a regime based on interest rate targeting. Economists and central bankers became generally suspicious of governments’ ability to manage their economies and instead invested heavily in the notion that independent central banks could do the job better.

The truth of the matter? Much more likely that this was a power-grab – after all, it was generally economists that ran the central banks. But what is interesting for our purposes is the rot that the economists used to justify this state of affairs; rot that, at the very same time, ensured that they would not bear any responsibility for their actions and recommendations. What they needed, of course, was a metaphysical law and it is to this that we now turn.

This economic theory today, as it prevails in the pseudo-sophisticated minds of most central bankers and economists, is tortured in its assumptions, absurd in its axioms. But like all good metaphysical constructions, it comes with a rather simple message. The message is that fiscal policy – that is government spending and taxation – is largely ineffective and only results in inflation over any sustained period of time (that is, the mysterious “long run” of the neoclassicals). Instead then we must look to monetary policy and especially the control of interest rates for salvation. The idea is that there exists, at any given moment in time, a certain interest rate that will perfectly balance all forces in the economy; a great harmonising principle that must be upheld with devotion and awe.

This theory, although it is its modern form exerts that fascination on most economists, is actually quite old. Already shades of it could be detected in the 19th century, but it was finally formalised by the Swedish economist Knut Wicksell in 1898. Wicksell claimed that there were two distinct rates of interest. First, there is the “money rate of interest”; this is the worldly rate of interest that we all see and it effectively sets the price of borrowed money. More fundamentally however, there is the “natural rate of interest”; this is an altogether metaphysical construction that can only be shown to exist in highly abstract models built on extremely unrealistic assumptions. The categorical imperative then becomes to divine the natural rate through exercises in metaphysical speculation and force the money rate into line with it. By doing this we will, apparently, achieve economic salvation. [continue]

› Debt and the Decay of the Myth of Liberal Individualism | Philip Pilkington

[…] The myth of the unbounded individual, the lone merchant with the devil-may-care attitude toward his fellow men allowed [Adam] Smith to conceive of a society in which men might live without close ties to one another and yet a society which would not descend into barbarism. Emotional distance, a lack of love or compassion, need not descend into violence and murder, according to Smith, because of the principles of disinterested commerce and exchange which he thought that he had uncovered in Man.

This is the legacy that Smith has left us today. Not just in the field of economics, but also as a sort of moral or mythic code by which we arrange our social intercourse in mass society. When we step into a shop and purchase a good or a service we are acting as Smithian individuals. We see ourselves as unbounded to those around us and free to make whatever decisions we please. And we believe that once the transaction is complete we can wash our hands of it.

The problem is that this is not true and it probably never has been. Today, instead, we see all too clearly the importance of debt. Debt is what ties us together. We may be in the position of creditor or in the position of debtor – or we may even be in the position of neither – but debt affects all of us. Even those of us that balance our books perfectly and do not engage in any form of lending nevertheless rely on banking systems and systems of government founded on the simple and timeless principles of debt. And it is these principles that bind us together.

We are not, in any way, “men who owe no obligation to one another”. Our entire social system is founded on obligation and interconnectedness. This was likely true even in Smith’s time, but his genius was to have hidden it from view and in doing so to construct the founding myth of liberal individualism as it exists in modern times.

Yet today the debt issue explodes once more. And because Smith’s mythology cannot contain it we see all around us anxiety together with its attendant primitive emotions such as envy, anger, spite and malice and, in countries such as Greece, a general collapse of the entire social economy. We see politicians obsessed over government debt sending their countries into ruin simply because they adhere to a redundant mythology. In short, we see the chaos that terrified Smith of a society in which, in his words, injustice prevails.

What Smith gave to humanity in his founding of economics was a great lie with which to structure our newly forming nation-states and mass societies. But it was a lie that was in many ways quite fragile. And it is this lie that we see cracking up all around us today. The question is whether we, as a species, will continue to live within this crumbling fiction or whether we can construct a different mythological system founded on principles that are a closer fit to our really existing circumstances. [read whole]

› Neoclassical Economics and the Foreclosing of Dissent – The Inner Death of a Social Science | Philip Pilkington

“An old adage holds that science progresses funeral by funeral. Today, with the benefits of longer life expectancy, it would be more accurate (if less vivid) to say that science progresses retirement by retirement. In macroeconomics, as the older generation of protagonists has retired or neared retirement, it has been replaced by a younger generation of macroeconomists who have adopted a culture of greater civility.” — Harvard economist Gregory Mankiw

At a superficial glance one might think that economics have succeeded where other disciplines had failed. But all is not so rosy; in actual fact this ‘civility’ was won by a de facto exclusion of literally anyone who disagreed with certain precepts from the upper echelons of the profession. Such exclusion one would rarely encountered outside of a cult or a religion, and it was cast upon a number of groups who make up a fair amount of the profession (broadly speaking we could refer to the neo-Marxians, the Austrians, the neo-Ricardians and the post-Keynesians – although there is much overlap between the different groups). One could imagine the Monty Python crew’s Judean People’s Front and their People’s Front of Judea meeting in similar formal gatherings or sharing information about their common goal – but not the orthodox and the heterodox economists. This isn’t just whisperings behind someone else’s back at a conference; this is a ring-fencing, a wholesale exclusion of anyone that dissents.

As I looked into it more and more, two key points emerged that made sense of the schism. First of all, the reason that the heterodox had been left by the wayside was because they felt that many of their arguments completely undermined the entire neoclassical research program. Thus the neoclassicals had, at some point in history, made a fairly violent institutional attempt to supress dissenters. This actually makes a lot of sense if you understand that many neoclassicals see themselves more akin to hard scientists than to social scientists – an idea most scientists and philosophers of science deride, but the neoclassicals just ignore them (starting to see a pattern here?).

This brings us to point number two – which, to be honest, shocked me a little. I got a strong impression that there was a subtle bullying of sorts going on within the profession – a sort of fascistic atmosphere through which rules of behaviour and thought were enforced. Indeed, I increasingly got the impression that this was precisely what allowed for the ‘civility’ that Mankiw referred to – the exclusion of an out-group being a well-known prerequisite among social psychologists for strong, quasi-totalitarian in-group formation.

This phenomenon was hard to pinpoint and I was reluctant to write anything based on the complaints of those who saw themselves as victims (or even those in the public eye who vouched for them). But recently I stumbled upon an anecdote from a neoclassical economist that highlighted precisely this very dynamic.

The following anecdote is told by Dani Rodrik who, although part of the neoclassical ‘club’, nevertheless maintains more cautious views on a number of issues of doctrine than many of his colleagues. It is taken from a blog entitled ‘Is neoclassical economics a mafia?’ which is a response to a piece written by Christopher Hayes and published in The Nation in 2007 about the exclusion of heterodox economists in the profession:

Hayes makes a number of good points about how ideology permeates a lot of thinking by orthodox economists. Anybody who strays from conventional wisdom is in danger of being ostracized. Some years ago, when I first presented an empirical paper questioning some of the conventional views on trade to a high profile economics conference, a member of the audience (a very prominent economist and a former co-author of mine) shocked me with the question “why are you doing this?”

Rodrik goes on to reflect that the methodology of neoclassical economics has served him well and he has never found it constricting. That’s fine – but is he not moving the goalposts here a bit? It seems that to move the conversation from an anecdote about a very strange sort of censorship being imposed through a pretty creepy sort of groupthink to reflecting on the relative merits of said groupthink is to miss the point entirely. If a cult member related to you a story where someone clearly dictated to them, in a strange, indirect and suffocating fashion, what they should and should not be allowed talk about (remember, Rodrik was talking about empirical research here!) and then moved on to tell you about the relative value of the cult’s belief system would you not feel a bit alienated? Would you not think that the person’s scepticism had been almost wholly absorbed into the cult mind-set – then sanitised, sectioned and channelled into assent? Very Orwell.

Perhaps readers will think me biased because I don’t subscribe to neoclassical methodology and have often attacked it in the past, but Rodrik’s blog post strikes me as alienating and weird – and I invite readers to read it carefully and judge for themselves in this regard. As heterodox economist Matias Vernengo put it in response to this anecdote:

Clearly his co-author was concerned with the effects that being critical of free trade might have on Rodrik’s career. Rodrik’s co-author is, most likely, just a good friend, but his question reveals a lot about the dark corners of the edge of the profession.

The media has occasionally picked up on this general weirdness too. In addition to Hayes’ piece cited above, Playboy recently ran a piece on exactly this topic which Bill Black responded to over at Bezinga. Then, of course, there was Charles Ferguson’s excellent film ‘Inside Job’ which dealt with one side of this issue. In fact if you think about it, it is quite unusual that the media would weigh in on factional fights in academia. But if the above is taken into account it should not be hard to understand why the economics profession might pique the media’s interest. Basically, it’s a pretty damned weird place!

The fact is that there is something pretty nefarious going on in economics departments across the Western world, something that is making them resemble more so a church or a cloister than an academic institution. Adherents such as Mankiw call this shift – which seems to have taken hold over most of the last generation of economists – one of ‘civility’ to one’s fellow economists, but when looked at from without it more so resembles the formation of a powerful sect which violently demarcates the lines of accepted discourse to ensure that their hegemony is maintained.

Read the rest →

› Guess Who's Emerging From the Crisis? | Paul Krugman

sarahlee310:

Iceland, of course. Kitchen-sinked and cleaned-up, the Icelandic central bank has just decided to push up rates by 25 basis points to combat signs of inflation amidst “robust” domestic demand.

› From The Price of Inequality: Joseph Stiglitz on the 1 Percent Problem | Vanity Fair

sarahlee310:

Adapted from The Price of Inequality, by Joseph Stiglitz, to be published in June

Put sentiment aside. There are good reasons why plutocrats should care about inequality anyway—even if they’re thinking only about themselves. The rich do not exist in a vacuum. They need a functioning society around them to sustain their position. Widely unequal societies do not function efficiently and their economies are neither stable nor sustainable. The evidence from history and from around the modern world is unequivocal: there comes a point when inequality spirals into economic dysfunction for the whole society, and when it does, even the rich pay a steep price. […]

The relationship is straightforward and ironclad: as more money becomes concentrated at the top, aggregate demand goes into a decline. Unless something else happens by way of intervention, total demand in the economy will be less than what the economy is capable of supplying—and that means that there will be growing unemployment, which will dampen demand even further. In the 1990s that “something else” was the tech bubble. In the first dec­ade of the 21st century, it was the housing bubble. Today, the only recourse, amid deep recession, is government spending—which is exactly what those at the top are now hoping to curb. […]

The word “rent” was originally used, and still is, to describe what someone received for the use of a piece of his land—it’s the return obtained by virtue of ownership, and not because of anything one actually does or produces. This stands in contrast to “wages,” for example, which connotes compensation for the labor that workers provide. The term “rent” was eventually extended to include monopoly profits—the income that one receives simply from the control of a monopoly. In time, the meaning was expanded still further to include the returns on other kinds of ownership claims. […]

In their simplest form, rents are nothing more than re-distributions from one part of society to the rent seekers. Much of the inequality in our economy has been the result of rent seeking, because, to a significant degree, rent seeking re-distributes money from those at the bottom to those at the top.

But there is a broader economic consequence: the fight to acquire rents is at best a zero-sum activity. Rent seeking makes nothing grow. Efforts are directed toward getting a larger share of the pie rather than increasing the size of the pie. But it’s worse than that: rent seeking distorts resource allocations and makes the economy weaker. It is a centripetal force: the rewards of rent seeking become so outsize that more and more energy is directed toward it, at the expense of everything else. Countries rich in natural resources are infamous for rent-seeking activities. It’s far easier to get rich in these places by getting access to resources at favorable terms than by producing goods or services that benefit people and increase productivity. That’s why these economies have done so badly, in spite of their seeming wealth. It’s easy to scoff and say: We’re not Nigeria, we’re not Congo. But the rent-seeking dynamic is the same. […]

In a society in which inequality is widening, fairness is not just about wages and income, or wealth. It’s a far more generalized perception. Do I seem to have a stake in the direction society is going, or not? Do I share in the benefits of collective action, or not? If the answer is a loud “no,” then brace for a decline in motivation whose repercussions will be felt economically and in all aspects of civic life. […]

There are many costs to this lack of opportunity. A large number of Americans are not living up to their potential; we’re wasting our most valuable asset, our talent. As we slowly grasp what’s been happening, there will be an erosion of our sense of identity, in which America is seen as a fair country. This will have direct economic effects—but also indirect ones, fraying the bonds that hold us together as a nation. […]

Widening inequality is corrosive of trust: in its economic impact, think of it as the universal solvent. It creates an economic world in which even the winners are wary. But the losers! In every transaction—in every encounter with a boss or business or bureaucrat—they see the hand of someone out to take advantage of them.

Nowhere is trust more important than in politics and the public sphere. There, we have to act together. It’s easier to act together when most individuals are in similar situations—when most of us are, if not in the same boat, at least in boats within a range of like sizes. But growing inequality makes it clear that our fleet looks different—it’s a few mega-yachts surrounded by masses of people in dugout canoes, or clinging to flotsam—which helps explain our vastly differing views of what the government should do. […]

There is no good reason why the 1 percent, with their good educations, their ranks of advisers, and their much-vaunted business acumen, should be so misinformed. The 1 percent in generations past often knew better. They knew that there would be no top of the pyramid if there wasn’t a solid base—that their own position was precarious if society itself was unsound. Henry Ford, not remembered as one of history’s softies, understood that the best thing he could do for himself and his company was to pay his workers a decent wage, because he wanted them to work hard and he wanted them to be able to buy his cars. Franklin D. Roosevelt, a purebred patrician, understood that the only way to save an essentially capitalist America was not only to spread the wealth, through taxation and social programs, but to put restraints on capitalism itself, through regulation. Roosevelt and the economist John Maynard Keynes, while reviled by the capitalists, succeeded in saving capitalism from the capitalists. Richard Nixon, known to this day as a manipulative cynic, concluded that social peace and economic stability could best be secured by investment—and invest he did, heavily, in Medicare, Head Start, Social Security, and efforts to clean up the environment. Nixon even floated the idea of a guaranteed annual income.

This book is next on my reading list.

› WAPO Provides Important Misinformation on Greece's Choices | Dean Baker

A front page Washington Post article discussed the choice that people in Greece must consider, of either staying in the euro and facing perhaps a decade or more of double-digit unemployment, or leaving the euro and facing the uncertainty of going back to its own currency. The Post misrepresented the tradeoffs involved when it presented the views of Nikas Niakaros, an exporter of feta cheese:

“But instead, Niakaros is sweating bullets. Like many Greek exporters, he depends on a supply chain of imported goods — from specially enriched feed for his sheep to the natural gas used to power his factory — that would spike in price if Greece left the euro. Business loans, meanwhile, would be far more expensive and harder to get. Add unpredictable jumps in inflation as happened during the era of the drachma, and, Niakaros said, the cost benefits of a cheaper currency would disappear.”

While this may accurately present Mr. Niakaros’ assessment, he happens to be wrong. If the Greek currency falls by 20 percent relative to the euro, this could mean that the price that Mr. Niakaros pays for his imported inputs will rise by 20 percent. It should also mean that the price he can sell his feta will rise by roughly 20 percent measured in the new Greek currency. However, the amount that he pays in wages to Greek workers and rent for his property will almost certainly not rise by 20 percent. This should mean that he will hugely increase his profits on the portion of his output that he exports.

While it is interesting to get the views of the people of Greece on how they would be affected by an exit from the euro, the Post should be careful not to present inaccurate information unchallenged. Most of its readers probably will not know that Mr. Niakoros’s assessment of the situation is wrong.

› China’s Billionaire People’s Congress Makes Capitol Hill Look Like Pauper

pieceinthepuzzlehumanity:

The richest 70 members of China’s legislature added more to their wealth last year than the combined net worth of all 535 members of the U.S. Congress, the president and his Cabinet, and the nine Supreme Court justices.

The net worth of the 70 richest delegates in China’s National People’s Congress, which opens its annual session on March 5, rose to 565.8 billion yuan ($89.8 billion) in 2011, a gain of $11.5 billion from 2010, according to figures from the Hurun Report, which tracks the country’s wealthy. That compares to the $7.5 billion net worth of all 660 top officials in the three branches of the U.S. government.

The income gain by NPC members reflects the imbalances in economic growth in China, where per capita annual income in 2010 was $2,425, less than in Belarus and a fraction of the $37,527 in the U.S. The disparity points to the challenges that China’s new generation of leaders, to be named this year, faces in countering a rise in social unrest fueled by illegal land grabs and corruption.

[Read More]

(via pieceinthepuzzlehumanity-deacti)

› The economics of digital sharecropping

With a reported 900 million active members, Facebook is, by far, the largest digital-sharecropping operation that the internet has yet produced. About one out of every eight people on the planet sharecrops for Facebook today - and their collective labor is expected to put about a billion dollars of cash into CEO Mark Zuckerberg’s pocket when the company goes public in a few weeks. In a 2006 post, I explained why sharecropping is such a powerful business model for social networks and other online businesses:

One of the fundamental economic characteristics of Web 2.0 is the distribution of production into the hands of the many and the concentration of the economic rewards into the hands of the few. It’s a sharecropping system, but the sharecroppers are generally happy because their interest lies in self-expression or socializing, not in making money, and, besides, the economic value of each of their individual contributions is trivial. It’s only by aggregating those contributions on a massive scale - on a web scale - that the business becomes lucrative. To put it a different way, the sharecroppers operate happily in an attention economy while their overseers operate happily in a cash economy. In this view, the attention economy does not operate separately from the cash economy; it’s simply a means of creating cheap inputs for the cash economy.

(Source: azspot)