Archive for the ‘Economic Theory’ Category

Reading Neoliberalism and the Global Financial Crisis Politically

Although it has become more common to hear criticism of neoclassical economics, and neoliberal ideology more broadly, the anti corporate social movements need to guard themselves against the coming reaffirmation, perhaps even reconstruction, of these ideas. This will require first dispensing with a few illusions.

It would be false to suppose that the great recession, precipitated by a global financial crisis, has now rendered neoliberal ideology and its underlying justification in free market economics illegitimate. It never had any intellectual legitimacy to start off with. The Savings and Loans collapses of the 1980s, the global debt crisis, the Asian financial crisis, the collapse of Long Term Capital Management and so on demonstrated that neoliberalism had no real intellectual justification. Despite this the reigning free market orthodoxies continued to carry the day both in academia, the media and government.

This is not even to go into what should be seen as the first chapter of the unipolar era; the disaster that neoliberalism occasioned in Eastern Europe, especially Russia.

There are important institutional reasons why this was so. The past 30 odd years has seen a quite conscious one sided class war being waged by the rich, the purpose, not the affect, of which was to skew wealth and power towards the few at the top. In 2006 the top 1% of the US population had 22.6% of national wealth, the same level as in 1929. To get that level back to the level on the eve of the Great Depression took some work. During the neoliberal era there has been a marked shift in the wages-profit share towards corporate profits. This was enabled by stagnating real wages for non-supervisory workers, partly obtained through what Alan Greenspan called “increasing worker insecurity.” This was developed through the threat of job transfer following the globalisation of production.

It should be stressed that this shift towards profits occurred in the context of increasing labour productivity in the United States. Though workers were working harder and smarter nonetheless wages, for the most part, stagnated. The proceeds of greater productivity went to big business and, thereby, the rich. Living standards and wealth were increasingly maintained by way of high household debt levels and rising real estate prices. During the boom in asset prices this gave Americans a feeling of prosperity, but as the Nazi’s infamously exclaimed during the Weimar Republic that was very much a type of “sham prosperity.” Prosperity built on the back of stagnating wages and highly leveraged exposure to asset prices in a speculative bubble is illusory.

It has been pointed out that in the United States during the neoliberal era policy really was not wholly dominated by free market ideology at all. A better description would be “socialism for the rich and free markets for the poor.” The US has always relied on a dynamic state sector, like all advanced industrial economies, to socialise cost and risk. For example much of the development of high technology industry has come by way of the Pentagon. Military Keynesianism has also typically been the preferred method of demand management in the United States. This is because with this type of economic pump priming various assorted nasties, such as spending on the needy and the somewhat greater equitable distribution of national income, occasioned by orthodox Keynesianism are avoided.

Even in the financial sector where doctrines such as rational expectations and the efficient markets hypothesis were dominant free market dogma does not fully account for policy. To be sure such free market dogma was used to justify deregulation, which enabled financial corporations to act with greater degrees of freedom in the pursuit of profit, nonetheless risk has always been socialised. The bail out of Wall Street in the wake of the current crisis has brought this to relief. However as stated risk has been socialised throughout the neoliberal era as the Saving and Loans and LTCM bailouts demonstrate. The affect of neoliberalism is to socialise risk without financial institutions at the same time being required to be mindful of the wider social affects of their activities. The latter, of course, follows on from deregulation.

A good description of the mechanics of neoliberalism can be found in the writings of Adam Smith. In his “The Wealth of Nations”, the supposed sacred text for neoliberals, Smith speaks of what he calls the vile maxim; “ All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind.” That is what neoliberalism is; it is the vile maxim as currently adopted by the masters of mankind. Given the shift against wages in the wages-profit share it is also worth taking on board another quote from the supposed master of neoliberal thought; “The liberal reward of labour, therefore, as it is the affect of increasing wealth, so it is the cause of increasing population. To complain of it, is to lament over the necessary effect and cause of the greatest public prosperity.” When you put the two quotes together, when it comes to neoliberalism, all is revealed.

Socialising the risk of financial institutions by exposing the rest of society to risk externalities, whilst privatising profits, is an example of the vile maxim par excellence.

Neoliberalism should not be confused with classical liberalism, after all for Smith the argument for liberty was based on the supposition that it would lead to equality. The “neo” in neoliberalism comes from the economic thought of the mid-to-late 19th century, which represents a bastardisation of Smith.

So what is neoliberalism really all about then? The past 30 years has seen relatively stagnant economic growth and a greater transfer of wealth and power to the few, even though workers were more productive. A large scale social, economic and political process such as this cannot simply happen. It is not possible that the broader population would consent to such robbery in the absence of some compelling set of justifications manufactured for this very purpose, especially in a democracy. Large scale social processes, including thievery on a grand scale, requires some type of ideological justification. This is the main purpose of neoliberal ideology. The ideology serves to justify the application of the vile maxim. That the ideology had no intellectual justification and was framed in a misplaced pseudo-scientific framework does not really matter. The ideology was highly functional for the corporate institutions that dominate society.

The libertarian Marxist thinker Harry Cleaver has argued that the way to read Marx is “politically.” Cleaver argues that “Das Kapital” was meant to serve as a “weapon” for the working class in order to facilitate the self-emancipation of the working classes. We should read neoliberalism “politically” also. Hayek et al have furnished a weapon for the rich to use against the poor and the working class. Neoliberalism, as such, is a form of Marxism for the rich.

So long as corporations continue to dominate society then the reigning ideology will be reaffirmed or reconstructed in one form or another. The current focus on neoliberalism by the the anti-corporate global justice movements is both appropriate and corrosive. It is appropriate because this is how the great social robbery of the past 30 years has been justified. It is corrosive because policy never really has been motivated by free market dogma and undue focus on neoliberalism tends to obscure the institutional framework that underlies the current crisis. This is especially the case for behavioural critiques of neoclassical economics.

In a real sense the great recession is really a political, rather than an economic, crisis. Corporations have acquired far too much power and because they are motivated by profit it is to be expected that they would like to maintain their privileged position in society. To the extent that neoliberal dogma is increasingly challenged in the mainstream it is because of the consequences that financialisation has had on the broader real economy; it has hurt the rich too, especially of the manufacturing sector.

What this means is that free markets for the poor and socialism for the rich will continue to dominant policy. This will be so irrespective of the fate of neoliberal ideology. So long as corporations are able to ensure that their preferences are attended to by the state and society this must be so. It might be that the next phase of the current crisis is a reconstruction of neoliberal ideology in one guise or another. The proper response to any such reconstruction is to bring to relief the underlying institutional causes of the crisis in order for us to achieve the social constraint of the corporation. Such constraint would be achieved in hope of the eventual supplanting of this particularly crass form of economic and social organisation all together.

One way in which this neoliberal counteroffensive will proceed is through concern over budget deficits. This is how the first neoliberal offensive kicked off. At the time of stagflation neoclassical economists argued that budget deficits would, and did, lead to all sorts of bad effects, especially a so-called “crowding out” of private investment and hence economic growth. Crowding out was justified by an application of rational expectations, the same underlying idea behind the efficient markets hypothesis. In fact, however, the largest economic expansion in US history followed on after the massive World War Two era deficit. Fiscal deficits lead to economic expansion and they pay for themselves as a result.

Society will come under further attack using budget deficits as a pretext. This will happen all over the western world and will be a classic play coming right out of the neoliberal play book. This play will be enacted by both conservative and social democratic and labour based governments.

Social democratic and labour parties everywhere have fallen into line with neoliberal dogma, for reasons first articulated by libertarian socialist and Marxist thinkers during the height of the revisionist controversy of yesteryear. The industrial labour movement everywhere must now reconsider what are the appropriate forms of political action for it to adopt, given that their preferred political parties have everywhere facilitated the 30 year long assault on the working class.

Social democracy has been a grand failure. Slowly trade unionists are recognising this. Now is the time for the industrial labour movement to show courage and rethink the political sphere. One way this can be achieved is by unions and social movements working together from the grass roots up to attack the immense power of the corporation. Neoliberalism represents a fundamental assault on democracy. A powerful affirmation and extension of democracy is the most useful antidote to corporate power. There is nothing the corporation fears more than an aroused citizenry fighting for its rights.

Where to Now for Behavioural Economics?

New Scientist has an article that features Ernst Fehr and experimental behavioural economics. It’s a good article that covers a good idea. However, we need to be aware of a few points. The first is the context in which the behavioural paradigm has risen to prominence.

One explanation, perhaps now the dominant one, for the global financial crisis relies on the irrationality of economic agents in the market place, a notion contrary to the standard conceptions of economic theory, such as “animal spirits” and the “madness of crowds” etc.

I don’t like these behavioural explanations.

Systemic risk should be seen as an externality. The players on Wall Street were quite rational; it was their task, an institutionally mandated task, to pursue short term profit maximisation. This they did on a grand scale. Shifting the explanation towards such matters as “animal spirits”, in my opinion, is a way of hiding these underlying institutional imperatives and thereby the underlying rational basis for the crisis.

That’s why we see a lot of discussion in the mainstream about behavioural economics. The constitution of humanity itself becomes in a sense responsible for the crisis, for the irrational behaviour exhibited by Wall Street is an intrinsic part of human nature.

That’s too cute by half.

It’s also very important because it leads to reform measures that largely leave the financial power structure in place. Whatever we might think of Simon Johnson’s too overt focus on “too big to fail”, leaving in place this power structure matters if we seek to prevent future crises. The behavioural explanation helps, because it tends to obscure the power structure.

That is not a reflection on behavioural economics itself. It is a reflection on how it is being used in the current context. Behavioural economics boasts good experimental results that do tell us something quite profound about human economic behaviour. There seems to be a link between notions of fairness and justice and economic behaviour. That result is important, not least because it undermines the crass conception of man that underlies standard economic theory.

But this then brings in a second qualm we might have about behavioural economics. Consider the article linked above

Such responses, Fehr suspects, arise from a deep-seated resistance in many people to the idea that something as apparently complex and unique to humans as our social instincts could find a relatively simple basis in chemical changes in brain activity….

…Fehr’s most recent work focuses on so-called neuroeconomics, which explores the roots of our social instincts and emotions. That our precious moral values may ultimately be biologically based upsets some people, Fehr admits, but science is science. “I’m quite happy with whatever I find,” he says. “You have to accept what the data tell you”

As a committed card carrying naturalist I cannot but agree with Fehr’s sentiments. However, a few issues need to be raised. I speak of the increasing shift to neuroeconomics. The idea here is to look at neuronal and brain activity as experimental subjects perform the economic games that Fehr constructs. That’s OK, but very, very limited when what we are after are rich naturalisitic explanations that account for human behaviour.

I think what Fehr and others are doing is spot on, but they should be channelling this at the cognitive not neuronal level. We should be speaking of a “cognitive economics” rather more than we do of a “neuronal economics.”

A good way of looking at this is with reference to the computer. We have software and we have hardware. What Fehr is doing is like looking at what lights up and how electrons move in the Central Processing Unit and other hardware components of the computer as it is running various types of software.

His emphasis however should be on the software. That means focusing on the cognitive level.

Economic theory, like social and moral theory more broadly, should be a part of cognitive science. A settled, experimentally well supported, theory of economic cognition will be the theory of economics. A theory of economics will not be a theory of the economy. We must be “inward bound.”

So Fehr is on the right track, but the emphasis on the hardware could be better redirected to the software i.e. cognitive level.

In a way we would be going back to the way the great David Hume conceived of what in his day was called “moral philosophy.”

I think Hume was right. Since his day we have been riding on the wrong side of the track, and not just in economics.

Categories: Economic Theory

The Global Financial Crisis: Minsky Moment or Marx Moment? Or Maybe a Marxsky Moment?

The noted American marxist journal, The Monthly Review has a most fascinating debate on the global financial crisis between Thomas Palley, a structural keynesian, and John Bellamy Foster and Robert McChesney, both orthodox marxists. The debate featured in the April 2010 edition of this important publication.

Now I have always argued that the crisis has had class war right at its core; that is, it is not possible to understand the economic crisis without taking into account the fact that wages for non-supervisory workers have been largely stagnant, in the United States (the state of “really existing neoliberalism”), throughout the neoliberal era.

But I have also been fond of Misky’s financial instability hypothesis. I have felt that these two aspects need to be combined in some fashion.

Palley does this in a most forceful way. He argues,

The new Marxist, SSA, and structural Keynesian views trace the roots of the crisis back to the adoption of the neoliberal growth model in the late 1970s and early 1980s when the post-Second World War “Treaty of Detroit” growth model was abandoned. The essence of the argument is that the post-1980 neoliberal growth model relied on rising debt and asset price inflation to fill the hole in aggregate demand created by wage stagnation and widened income inequality. Minsky’s financial instability hypothesis explains how financial markets filled this hole and filled it for far longer than might reasonably have been expected

Palley goes on to develop a model that does this in greater detail. His work is impressive, well argued and persuasive. He does speak of Minsky “super cycles”, which Foster and McChesney chide him for on grounds that such cycles do not appear in Minsky’s work. Foster and McChesney here make good points, but the real issue is whether such cycles obtain or not. That is an empirical question requiring detailed study.

To borrow from Isaac Newton, I frame no hypothesis.

The real difference between the two revolves around whether capitalism can be reformed so that such crises do not repeat themselves. For Foster and McChesney the crisis is a reflection of a long standing and deep seated crisis of stagnation, what Paul Krugman would perhaps have called “the age of diminished expectations”, brought about by a persistent crisis of accumulation. This is intrinsic to capitalism and cannot be eliminated.

So they write,

the underlying problem of accumulation in the advanced economies today is one of a deep-seated stagnation tendency arising from a high degree of monopoly (oligopoly) and industrial maturity. More actual and potential economic surplus is generated than can be easily or profitably absorbed by consumption and investment, pulling the economy down into a slow growth state. As a result, accumulation becomes increasingly dependent on special stimulative factors

With such stimulative factors taking the form of overt financialisation, speculative bubbles in asset prices and the like. You could still add in Minsky’s approach here, I think.

Palley is surely right to identify the real issue at play

If there is a difference, it may well be a difference of degree of optimism. Structural Keynesians believe it possible to design appropriate institutions that, combined with traditional Keynesian demand management, can escape capitalism’s stagnationist tendencies and deliver full employment and shared prosperity. New Marxists and SSA theorists are more pessimistic about the capitalist process, the ability to escape stagnation, and the social possibilities of markets. Consequently, their institutional design would have a larger public sector and more nationalization, especially regarding the financial sector

I think Foster and McChesney would agree that this is essentially the debate’s bottom line, so to speak. I certainly myself form that impression.

The problem with Palley’s approach is that he does not really provide us with any real discussion as to why the neoliberal growth model was adopted.

I do not believe, furthermore, that the model is a “growth” model at all.

During the hey day of keynesian demand management, that is what is sometimes called the “golden era of capitalism”, there was a much more equal spread between wages and profits. The whole edifice was broadly social democratic and the trend rate of economic growth was higher than the trend rate throughout the neoliberal era.

The neoliberal “growth” model actually tolerates economic growth that was less than trend, by about 50% less,than that exhibited during the hey day of the keynesian growth model. Growth was not really the object of policy. What was?

To see what was we need to consider the origins of the neoliberal growth model. The reason was declining corporate profits. The purpose of neoliberalism was to increase profits, hence the wages squeeze to which Palley refers. In reality what we had was a neoliberal profit model. Economic growth was below trend, as discussed above, but the take of profits in the wages-profit share leaped to record levels. In fact the record kept getting broken like the record in women’s pole vaulting. That’s why you had stagnating wages, for how can you manage to achieve record profit shares when growth is well below trend? Simple; you take and take some more. For the consumer to maintain the American dream required taking on very high private debt, which brings in my pal Minsky.

I don’t agree with how Foster and McChesney frame their argument, but nonetheless we must recognise that profits, not growth per se, is at the core of capitalism. In this sense a growth model that is great for GDP growth, but which has the tendency to restrict profits, is not functional in the long run under a capitalist system dominated by large corporations whose raison d’etre is to maximise profits.

It’s a type of institutional contradiction. So I think that Palley’s argument is not deep seated enough. I agree with Foster and McChesney on that.

Having said that I also like to add one more point that I think Foster and McChesney do not appreciate.

Say Palley is right about the prospects that a reformed capitalism, the type he outlines, can prevent future crises and lead to sustainable economic growth. That Palley’s approach would do this with greater equity and fairness seems to be an unspoken corollary of the argument. That means corporations would need to acquiesce in the curtailing of super profits.

What implication would this have for the case for socialism?

Precisely zero.

The argument for socialism rests on moral grounds. Marxists, especially marxian economists, like to focus on pragmatic considerations such as accumulation crises, stagnation crises and the like.

The case for socialism is developed through an application of pre-industrial classical liberal ideas, that arose out of the enlightenment and the rise of a spirit of rationalism therein, to a modern industrial capitalist society. Any economic system that has vast concentrations of private power is unjust for precisely the same reasons that the classical liberals used to critique the state during their era.

The case for socialism flows on from such considerations. Marxian economics is quite irrelevant.

What is at issue between Palley and Foster and McChesney is not so much socialism versus capitalism as it is the scientific credentials of marxian economics.

On the latter I pretty much agree with the Australian post keynesian economist, Steve Keen, who has developed a pretty convincing argument rebutting the scientific basis of marxian economics.

This fits in to my broader view that no theory of economics deserves the title “theory” or the honorific “scientific”.

But the fact that marxian economics has no legs does not in the least bit upset my socialist convictions.