An interview with Andrew Mazzone, President of the Board of Trustees, Henry George School of Social Science [VIEW HERE].
Archive for the ‘Political Economy’ Category
This paper examines the major competing interpretations of the economic crisis in the US and explains the rebound of neoliberal orthodoxy. It shows how US policymakers acted to stabilize and save the economy, but failed to change the underlying neoliberal economic policy model. That failure explains the emergence of stagnation, which is likely to endure. Current economic conditions in the US smack of the mid-1990s. The 1990s expansion proved unsustainable and so will the current modest expansion. However, this time it is unlikely to be followed by financial crisis because of the balance sheet cleaning that took place during the last crisis. [READ MORE]
This paper examines several mainstream explanations of the financial crisis and stagnation and the role they attribute to income inequality. Those explanations are contrasted with a structural Keynesian explanation. The role of income inequality differs substantially, giving rise to different policy recommendations. That highlights the critical importance of economic theory. Theory shapes the way we understand the world, thereby shaping how we respond to it. The theoretical narrative we adopt therefore implicitly shapes policy. That observation applies forcefully to the issue of income inequality, the financial crisis and stagnation, making it critical we get the story right. [READ MORE]
The Federal Reserve and Shared Prosperity: A Guide to the Policy Issues and Institutional ChallengesTuesday, January 27th, 2015
The Federal Reserve is a hugely powerful institution whose policies ramify with enormous effect throughout the economy. In the wake of the Great Recession, monetary policy focused on quantitative easing. Now, there is talk of normalizing monetary policy and interest rates. That conversation is important, but it is also too narrow and keeps policy locked into a failed status quo. There is need for a larger conversation regarding the entire framework for monetary policy and how central banks can contribute to shared prosperity. It is doubtful the US can achieve shared prosperity without the policy cooperation of the Fed. That makes understanding the Federal Reserve, the policy issues and institutional challenges, of critical importance. [READ MORE]
Inspired by the work of Doctors Without Borders (Médecins Sans Frontières), I have recently started a project called Economists Without Borders (Economistes Sans Frontières). Its purpose is to inoculate the global economy against the virus of neoliberalism. Last week, I had two difficult “missions” to Vienna and Warsaw.
In Vienna, I confronted an outbreak of the neoliberal globalization – free trade strain of the virus. Without doubt, this is the most virulent and dangerous of all strains. People who get infected become blind to all evidence, deaf to all argument and prone to intellectual condescension. Massachusetts Avenue in Washington DC is a hot zone of infection. The bad news is that if you are over forty and infected it is doubtful you can be cured. However, younger patients have a chance of recovery. Here is the anti-viral I prescribed titled “The Theory of Global Imbalances: Mainstream Economics vs. Structural Keynesianism”.
In Warsaw, I confronted an outbreak of Milton Friedmanism which is one of the oldest strains of neoliberal virus. Friedmanism is a gateway virus that weakens defenses against other neoliberal strains and younger minds are particularly susceptible to it. The good news is that if diagnosed early there is a good chance of recovery. However, if treatment is delayed, intellectual ossification and closed-mindedness sets in. This ossification is almost always associated with inflation obsessive compulsive disorder and austerity fever. Here is the treatment I recommend titled “Milton Friedman’s Economics and Political Economy: An Old Keynesian Critique”.
The distinction between wage-led and profit-led growth is a major feature of Post-Keynesian economics and it has triggered an extensive econometric literature aimed at identifying whether economies are wage or profit-led. That literature treats the economy’s character as exogenously given. This paper questions that assumption and shows an economy’s character is endogenous and subject to policy influence. This generates a Post-Keynesian analogue of the Lucas critique whereby the econometrically identified character of the economy depends on policy rather than being a natural characteristic. Over the past twenty years, policy has made economies appear more profit-led by lowering workers’ share of the wage bill and tax rates on shareholder income. Increasing workers’ wage bill share increases growth and capacity utilization regardless of whether the economy is wage-led, profit-led or conflictive. That speaks to making it the primary focus of policy efforts. [READ MORE].
Milton Friedman’s influence on the economics profession has been enormous. In part, his success was due to political forces that have made neoliberalism the dominant global ideology, but Friedman also rode those forces and contributed to them. Friedman’s professional triumph is testament to the weak intellectual foundations of the economics profession which accepted ideas that are conceptually and empirically flawed. His success has taken economics back in a pre-Keynesian direction and squeezed Keynesianism out of the academy. Friedman’s thinking also frames so-called new Keynesian economics which is simply new classical macroeconomics with the addition of imperfect competition and nominal rigidities. By enabling the claim that macroeconomics is fully characterized by a divide between new Keynesian and new classical macroeconomics, new Keynesianism closes the pincer that excludes old Keynesianism. As long as that pincer holds, economics will remain under Friedman’s shadow.
Paul Krugman wrote a reply to my two postings (Part 1 and Part 2) on the flimflam of mainstream economics. Below is my response to Paul that was posted as a comment on his Conscience of a Liberal website. I am posting it because I think it sheds more light on the failings of so-called New Keynesianism.
I enjoy what you write and have great admiration for your work, but this piece is unfair.
(1) Here is an article of mine on what you term the paradox of flexibility, published in 2008 and extending James Tobin’s seminal paper on “Keynesian Models of Recession and Depression”.
(2) I do not think I am misportraying you. Your own macroeconomic framework seems unconvincing to me as a description of a capitalist economy, being Keynesian at the zero lower bound and classical the rest of the time. I think of Keynesianism as being a macroeconomic theory that applies at all times. But these are issues that require more space for discussion.
(1) A first con is the labeling adopted by New Keynesians. As I showed in my post, New Keynesianism has near-nothing to do with Keynes’s theoretical thinking as expressed in The General Theory. I too am not interested in an exegesis of what Keynes meant, but I am interested in honesty in labeling to help avoid damaging confusions. (more…)
The teaching of economics has recently been in the news. One reason is the activities of Manchester University undergraduates who have formed the Post-Crash Economics Society to protest the monopoly of mainstream neoclassical economics in university lecture halls. A second reason is criticism of the neoclassical reasoning in Thomas Piketty’s runaway best seller Capital in the Twenty-First Century.
This criticism and calls for including heterodox economic theory in the curriculum have prompted a defense of mainstream economics from Princeton University’s Paul Krugman and Oxford University’s Simon Wren-Lewis. Both hail from the mainstream’s liberal wing, which muddies the issue because it is easy to conflate the liberal wing with the critics. In fact, the two are significantly different and their defense of mainstream economics is pure flimflam. (more…)