Tag Archives: economic theory

Making the best of a good crisis?

17 May

A recent debate has emerged around the use European elites can make of the Eurozone crisis. According to the Naomi Klein theory of social change, backed up recently by Paul Krugman, crises are used by capitalists as opportunities to reform economies in their favour. Whether such crises, or “disasters” to use Klein’s turn, are wars provoked by outside interventions (Iraq) or financial crises of the kind we are seeing today in Europe and elsewhere, the point is that crises are good for those who favour neoliberal policies.

In the context of the austerity versus stimulus debate, Krugman suggests that the reason why austerity is preferred is not that it works (it clearly isn’t working) but it is because stimulus might work. If European economies begin to grow again, then the window of opportunity to replace “social Europe” with a neoliberal alternative will have gone. Successful stimulus will only strengthen the case against deeper structural reform. Krugman notes that this view is already entering into the evaluation of Japan’s recent attempt at monetary stimulus: cautious voices are pointing out that if this works, then there will be no incentive to tackle the country’s underlying problems.

There is quite a bit wrong with this explanation for austerity, however compelling it may seem at the intuitive level. Everyone likes to bash those far-sighted capitalists – the elusive 1% – who conspire behind closed doors to get what they want at the expense of everyone else, the 99%. But this is more a conspiracy theory than it is an explanation of why governments are committed – for the time being – to the austerity agenda. Profiting from a crisis is one thing. Creating a crisis in order to implement a cunning plan is another. In Europe, there is no doubt that authors of the bail-outs have tried to calibrate carrot and stick, using the difficulties of the present crisis in countries like Greece and Portugal as a way of encouraging structural reform. They have also cautioned against any suggestion that the crisis is over, believing that such talk will undermine the commitment of national elites to the reform programme. All this, however, is a far cry from the notion that crises are manufactured as opportunities for neoliberally inspired reforms.

Krugman makes the added point that elites chose austerity over stimulus because they feared the latter could be too successful. He invokes the work of the Polish Marxist Michal Kalecki and his notion of the political business cycle. According to Krugman, Kalecki’s idea explains why businessmen don’t like Keynesian economies. In fact, Kalecki argues something much more specific. At issue for Kalecki is not the ability of Keynesian deficit spending to return crisis-ridden capitalist economies to the status quo ante, which is what Krugman and others imply. Kalecki’s point is not about the stabilizing effects of Keynesianism but rather about its transformative and radical political effects. These are not internal to Keynesianism itself – Keynes was far from being a radical on this point – but are part of the political consequences of Keynesian policies (hence the title of Kalecki’s famous 1943 essay, ‘Political Aspects of Full Employment’).

Kalecki argues that full employment, as a policy goal, is both feasible and attainable. However, politically, the problem with maintaining full employment is that it empowers the working class to the point that it begins to challenge the basic contours of the capitalist economy itself. Full employment has a creative effect by way of ideas and actions that threatens the fabric of capitalist society. It holds up the prospect of a better society and stimulates people to think about how that alternative could be achieved. Kalecki’s point is that stimulus makes a return to the status quo ante more difficult and that is why owners of capital will do everything to frustrate governments who identify full employment as their main goal.

In today’s context, what is striking is that the austerity versus stimulus debate is had against a backdrop of consensus around the nature of the economic system. Both are means to an agreed end and Krugman’s argument for stimulus is that it works better than austerity in this regard. Kalecki’s point about stimulus was that it throws open, because of the mobilisation and politicisation of workers, the question of what the ends are and of what kind of economic system we would like. If we want to bring back Kalecki to the present discussion, it is this aspect that we should emphasize. And to resist Krugman and Klein’s conspiratorial accounts of intended crises and infinitely cunning capitalist elites.

Economists, stop talking like that for God’s sake!

10 Apr

Today, we publish a guest post by Ivan Manokha. Lecturer of international political economy at Sciences Po, Paris, and Vice Dean of the graduate school at Sciences Po, Manokha’s post unpicks the rarefied language with which economists speak of daily life and takes issue with the presumption of choice that is made in mainstream economic theory to explain people’s behaviour.

By Ivan Manokha

How is it that the unemployed are still able to consume? The answer is found on page 45 of Olivier Blanchard’s famous textbook on Macroeconomics. Their ‘consumption cycle’, argues Blanchard, carries on simply because in order to subsist they opt to ‘dissave’, i.e. spend the money that they have on their savings account. Saving in the good times thus nicely offsets dissaving in the bad times.

This kind of statement is symptomatic of a number of problems that characterize the science of Economics and which, I would argue, account in part for its failure to understand the current crisis and to come up with solutions to deal with it.

First, the statement of Blanchard is symptomatic of a total disconnect between the assumptions and models of economists and social reality. Indeed, in their world, rational individuals, even when they fall into the category of ‘liquidity constrained households’ (read:  the poor) always enjoy the liberty of arbitrating between employment and leisure. Unemployment is voluntary and those who do not have a job find themselves unemployed because they have arbitrated in favour of leisure (because, the argument of the Real Business Cycle theory goes, wages are currently not high enough and these rational individuals wait for the job market to become ‘tighter’ when they will accept to work). Well, I suggest they go and speak to all the existing jobless, whose number has increased dramatically since 2008, in order to find out why is it that they still choose leisure over employment.

Second, and even more importantly, there are no social antagonisms or conflicts in the dream world of Economics. Indeed, all Economics textbooks will tell you that there are people who have capital, there are those who have land, and there are those who do not have either of the two, but, don’t worry, they have … ‘human capital’. The inequality of possessions is thus rationalized away by the very categories used to describe social reality and is never itself explained. To be fair, the classical economists who came up with these assumptions felt that this state of affairs could not be left unexplained and tried to offer some justification. Adam Smith, for instance, stated that “more industrious and prudent persons, rather than spending the full produce of their labour, ‘saved’ part of it and gradually accumulated capital.” Out of these individual choices the social fabric of inequality was made. This was more fiction than fact but at least Smith was compelled to say something, an urge that is completely foreign to modern day Economics. Now, all these proprietors of different ‘factors of production’ – capital, land and ‘human capital’ – meet in the place of ‘freedom and opportunity’ and enter into an exchange relation from which they all benefit (they all ‘maximize their utility’). In other words, for lucky owners of ‘human capital’ there is no compulsion to look for employment in order to survive. They do so willingly because they will obtain a net gain from it.

There is one major obstacle to the functioning of the ‘invisible hand’ – the State. This structure does not act as economists might predict. Instead of simply providing for the security of private possessions of capital and land and concentrating on national defense,  it intervenes in the economy in order to ‘de-commodify’ certain things (e.g. health and education) and to establish certain rules for labour markets (minimum wage, conditions for making people redundant, etc.). There are also these damn unions because of which wages exceed ‘the market clearing wage’… As a result, we are told there is inefficiency and waste; state spending, given the fact that there is a limited amount of money in the economy, necessarily ‘crowds out’ private investment. We can guess that it is because of such ‘crowding out’ that big corporations like Apple are sitting on so much cash and are not investing it back into the economy… Fortunately for us, there is the current crisis which has exposed the fact that certain accounting identities are not in fact accounting identities at all. State spending in Greece went down 20% but did private investment go up by 20%?

It is time for Economists to realize that the absolute majority of the world’s population does not have a choice between leisure and work but is compelled to look for a job; that not all of those who do not find a job will be able to ‘dissave’; that when those lucky ones who are employed are told that they have to accept cuts in wages and benefits and that their contracts have to be changed to make their firing easier (that the labour market has to be made more ‘flexible’) there is a chance that they will go to the streets and rebel. The real world is not characterized by a harmony of interests but it is a world of inequality of possessions, of inequality of opportunity, of inequality of power. So long as our thinking continues to be dominated by the fiction of Economics, we will not be able to deal with the crisis.

All that is solid…

7 Feb

As sometime fans of Slavoj Zizek it was with real disappointment that we read his latest contribution to the London Review of Books, ‘Revolt of the Salaried Bourgeoisie.’ At his best, Zizek is a piercing and hilarious critic of contemporary ideology. This time, however, he seems to have been taken in. The piece contains more than one howler, a number of which were dissected over at Lenin’s Tomb. Zizek’s main point seems to be that current economic problems are not susceptible to orthodox Marxist analysis because the economy no longer functions by extracting ‘surplus-value’ from wage-laborers, but via the “privatisation of the general intellect.” This privatisation is represented by figures like Bill Gates, whose intellectual property rights give him “rent(s) appropriate through the privatisation of knowledge.” (Tell that to the Chinese workers at Foxconn…)

Zizek’s main piece of evidence in favor his his “post-industrial” analysis of this ‘information economy’ is that “any attempt now to link the rise and fall in the price of oil to the rise or fall in production costs or the price of exploited labour would be meaningless: production costs are negligible as a proportion of the price we pay for oil, a price which is really the rent the resource’s owners can command thanks to its limited supply.” But this is a silly argument. For one, it is Marxist economics 101 that value and price diverge. Moreover, all Zizek is really talking about is monopoly rents, which just about any economic theory can grasp, and which disproves none. Finally, any anti-sweatshop campaign can tell us that labor costs “are  negligible as a proportion of” the final price of, say, a $30 Nike cap. There is little monopoly rent there.

More problematic, Zizek’s further point is that we can understand recent protests as the political activity of the “salaried bourgeoisie,” a strata of professionals and managers, whose salaries are paid by the rent-receiver, but who now feel the austerity squeeze. These are not a ‘revolutionary subject’ because they are indifferent to the plight of the real 99%, the globally jobless, the post-proletarians, who don’t even have the right to work.

In his rush to join the time-servers and declare a new era of informational capitalism, based on information and creativity on the one hand, and mass joblessness on the other, Zizek has missed the chance to make a potentially valid point in a more serious way. It is certainly true that the Occupy/Indignado phenomenon has a touch of the petty bourgeois element to it. In fact, as others like Jodi Dean have argued quite powerfully, this class element seems to be inscribed into the politics of Occupy itself: “The refusal to be represented by demands is actually the refusal or inability to make an honest assessment of the social composition of the movement so as to develop a politics in which different forces and perspectives do not simply neutralize each other.” This political analysis is available to us without having to trot out trite nostrums about the new economy.

Moreover, if there really is something new under the sun in the realm of surplus extraction, it probably has more to do with the development of debt and finance over the past thirty or forty years, not the (fake) disappearance of industrial production. The piles of debt under which so many workers sit represent yet another claim on their labor time. It is not just lower wages, but that a substantial amount of what they get paid is not theirs to control. They are paid less than what they produce, and then a further chunk of their means of subsistence is siphoned off. To be sure, debt burdens are a long-standing feature of the capitalist economy, and one should not overstate the novelty of the situation. Capitalism is an extremely dynamic economic system, and it is easy to get caught up in the dynamism and believe that everything has changed. But if we are looking for the distinctive features of surplus extraction in the present, it won’t be found in the heady, but superficial, claims that we have entered an informational age in which surplus is extracted through ‘rents.’ More promising is the attempt to grasp the role of debt and finance, not as replacing, but overlapping with the regular old wage-contract.

The Political Power of Economic Ideas

16 Aug

Stealing our title from a book of the same name, we thought we would offer a slightly more speculative post today. It is evident which economic idea currently possesses a grip on public debate independent of the economic interests it advances: austerity. In a recent interview (available free on iTunes at ‘Behind the News’ with Doug Henwood), the economist Brad DeLong pointed out that the ‘hard money, anti-inflation, fiscal austerity’ lobby in the US used to be a group whose economic interests matched up with ideology. But now, it is hard to match interest to ideology. The interest of manufacturers and retailers is in growth and thus in some forms of debt-financed stimulus, not in turning off the spigot just at the hinge of a double recession. (Recall that, after government spending fell in the fourth quarter last year, government spending declined by 5.2% in the first quarter this year, the largest drop since 1983. All this happened before the debt-ceiling debate even got underway.) An economic idea appears to have independent, political power.

Delong was bemused enough by the disjunction between ideas and interests that he said he was inclined to “punt it over to sociologists or cultural studies people” to explain the austerity craze: “I listen to Ron Paul and Rand Paul and it feels like ideas that ought to have died a century ago…ideas that made sense when your super-rich were really landlords who lent out money on 99 year leases.”

As we suggested before, we may not have to look quite so far as cultural theory to explain the public willingness to embrace austerity. The Democratic Party has been the party of austerity for a while now. When a party beats that drum enough, it becomes the only sound a good portion of the population hears – a portion that does not have an economic interest in that idea. But there is another economic idea out there, which complements austerity: the economic limits of the state. An important feature of what the blogosphere calls the neo-liberal progressive turn in the Democratic Party has been the idea that the state can only play a limited economic role. It perfects imperfect markets. In an interesting post on unemployment insurance, Mike Konczal at Rortybomb called the neoliberal model “an approach to governance where the state’s role is one of creating and completing otherwise incomplete markets.” Whether or not neoliberal is the right word, there is a very specific idea at work here. It is the post-Cold War idea that one must scale back ones expectations for collective intervention in and management of the economy. The distortions are too radical, the coercion too extensive, the information too disperse, to do anything but correct market failures. Note that this does not necessarily even mean provide public goods – this neoliberal turn went hand in hand with ‘creating’ markets in classic public goods like transportation (toll roads) and education (vouchers).

So the ruling ideas here are not just austerity and the attack on entitlements, but also a scaled back sense of what democratic control of the economy can mean. Indeed, the background, unifying idea is a lowering of expectations generally. It strikes us that, for anything even as old school as a debt-financed jobs program to get off the ground politically, a much wider argument will have to be won. This is an argument that the state can and should do more than just shave the rough edges off markets, and create markets where they don’t create themselves. It is not enough to show that markets sometimes radically fail, or that dominant economic theories failed to predict the crisis. Those are negative arguments, but they do not create new ideas to replace the old ones. A positive argument will have to be won regarding the ability of a democratic state to manage the economy.

Employment Math, or How to Make Prejudice Look Scientific

12 Aug

In lieu of our own long post we highly recommend this excellent take-down of Narayana Kocherlakota over at Rortybomb. Who is Kocherlakota? The President of the Minneapolis Fed, and one of three who dissented from the Fed’s decision to keep rates low until 2013. Rortybomb shows that, among other things, Kocherlakota plugs some really screwy ‘gut assumptions’ into a crappy and heavily criticized Nobel Prize winning formula for explaining unemployment rates. This formula backs up the bullshit position that the spike in unemployment is more or less because lazy workers prefer to collect unemployment insurance than go get all of those great jobs on offer there (and because employers are scared of tax raises!). One of the nice things about the post is that it shows that both the formula and the empirical assumptions plugged in are equally distant from reality.

It’s as if the biggest problem in the economy were that we were not exerting enough pressure on the jobless to go back to work, rather than on investors to create jobs. That’s even more ass backwards than Tea Party attitudes about the debt-ceiling.

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