Wage Participation and Unemployment in Developed Countries

It is well known that real wages in the developed world have stagnated in the last 4 decades. The figure below shows that wage participation in GDP has fallen too (source here).

This has been associated to higher levels of unemployment. A reduction of around 3% in compensation has been associated to an increase of about 5% in unemployment. The connection is the Kaleckian (Marxist) notion (see Kalecki, 1943) that higher unemployment weakens the bargaining power of workers. The advanced economies do look wage-led, in this simple graphical representation.

Lars Syll on the meaning of neoclassical economics

Lars Syll also replied to Noah Smith on the meaning of neoclassical economics here and here.

What is really neoclassical economics?

So Noah Smith thinks that I, Lars Syll and Steve Keen, and other heterodox bloggers (in which he adds Austrians; you see why they should teach History of Thought?* For a discussion of the meaning of heterodox economics, including why Austrians are not so, go here) use the term neoclassical economics as a pejorative term. In fact, in the post he links to, in which I do criticize his views on Graber's work, I do say this on neoclassical economics: "mainstream (neoclassical) notions about debt are really problematic." So nothing derogatory or abusive is suggested. What is said there is that certain views of that particular school of thought are not necessarily free of problems. So no, neoclassical is not a slur.

But before I get back to what I think Noah is trying to get to, we need to address the actual meaning of neoclassical economics. For starters neoclassical is a bit of a misnomer. Veblen invented the term to suggest continuity between the old classical school and the new marginalist school of his time, fundamentally based on Laissez Faire providing an intellectual link between both groups. But the continuity between classical authors and marginalists is not defensible, once one goes beyond certain policy stances and concentrates on the main theoretical propositions of both schools [in this respect the book by Krishna Bharadwaj is still worth reading]. But we are to some extent stuck with the name. So be it.

The core propositions in neoclassical economics are associated to what Garegnani referred to as the data of the system, that is, the variables that are taken as exogenous and allow explaining the functioning of the system, namely: the endowments of factors of production, the preferences of the economic agents, and technology. On the basis of these variables the supply and demand functions of all goods, including the so-called factors of production (capital, labor and land), can be determined, and as a result the relative prices of all goods and the efficient allocation of resources is established. Central to the approach is that supply and demand for labor and capital determine the remuneration of these factors of production, and as a result, and in contrast to classical political economy and Marx, income distribution is endogenously determined [there are insurmountable problems with this theory, as Paul Samuelson accepted, subscription required; for more go here]. And there are differences between the old version of neoclassical models based on the notion of a long term equilibrium (which is what is still taught in undergrad courses) and the intertemporal version, but for our purposes we can just omit the differences.

Note that Noah says that neoclassical economics is: "Assumption of individual rationality, utility maximization, and supply/demand." But this is at best incomplete, and at worst simply incorrect. Yes they assume individual rationality, but that was also true of classical authors like Smith, Ricardo and Marx, who wouldn't assume that capitalists did not rationally pursue profits. And a more relevant discussion would be about types of rationality, substantive or bounded (like in Simon, but I'll leave that for another post). And also, social utility, not personal individual subjective utility, was essential for classical authors, since nothing that didn't have use value (utility) would be produced. Finally, market prices, but not long term natural or production prices, were determined by supply and demand, and disequilibrium played a role in gravitation towards normal prices. So the three characteristics are not enough to distinguish Ricardo and Marx from Marshall or Noah Smith. The essential thing is that supply and demand determine the long term normal prices of everything including factors of production (endogenous distribution).

Noah then points out that papers that deal with the issues in the core are almost not published. He says that publication of papers that deal with the theoretical core fell "from over half of top-journal econ papers in 1963 to less than 28% in 2011." As it should be, in particular with a core that has been revealed to be so full of problems since the capital debates. And yes, most developments like the Acemoglu and others paper (discusses here in various places by Cesaratto and I, also here). But these are developments outside the core, but still within the so-called protective belt of the neoclassical paradigm or research program (for protective belts and paradigms go here and here). The problem is that they still presume that the neoclassical theory in the core holds. Note that they suggest that a minimal government that protects private property rights is enough for development, something that goes hand in hand with the neoclassical core. So a lot of the time what seems to be the use of neoclassical economics as an insult is just frustration about the inconsistencies that appear between the empirical research in the protective belt and the incoherence in the core.

Mind you, as students and newly minted PhDs like Noah have never heard or read on the capital debates, and have not been exposed to the authors of the surplus approach and Marx (besides reading less in other disciplines in the social sciences) it is not surprising that the term neoclassical is seen as an insult hurled at them by crazy and older heterodox economists. But it's not. Don't get me wrong, the core of neoclassical economics is not good or bad in itself, but it is logically flawed.

* By the way, it should be required at both the graduate and undergraduate level, since many graduate students come from other disciplines. A discipline that does not understand its own history is bound to move blindly rediscovering old truths, accepting already discarded myths, and forgetting useful ideas. And you might have, also, the paradoxical situation of a neoclassical economist that does not know what neoclassical economics is (like Dave Chappelle's black white supremacist).

PS: Note that Noah is not responsible for the definition of neoclassical economics he uses, which was lifted from Wikipedia. And yes Wikipedia is not the best source.

James Galbraith in Greece

In Thessaloniki on June 11, James Galbraith with Alexis Tsipras and Yanis Varoufakis. The full video of Jamie's speech can be seen here. Audio available here. Enjoy!

More on David Graeber’s Debt

Indebted? No problem we have a (minimum wage) job!

David (Fields) posted a link to Geoff Ingham’s review of Graeber’s book. Graeber is an anthropologist, recently hired by the London School of Economics, and that has often been associated with the Occupy Wall Street movement. Note that several mainstream economists have posted recently on the topic, and have been, as is often the case, barking at the wrong tree. Two mainstream takes on Graeber that are typical are from Noah Smith and Brad DeLong.

Noah wrote a post, a while ago, on David Graeber's views on debt. According to him Graeber is "a sort-of-leftish guy with a tendency to fight with other people on the left." Noah would be, by the same token, a sort of neoclassical-liberalish (in the American sense of progressive) economist fighting other people within neoclassical economics. And here lies the problem, because mainstream (neoclassical) notions about debt are really problematic, and there is quite a bit that could be learned by the profession from anthropologists like Graeber (or sociologists like Ingham; see for example this book).

Noah's complaint seems to be that David is confusing or confused or both. In his words: “his [Graber’s] pronouncements on the subject are vague or seemingly contradictory on all of the questions listed above.” In all fairness, Debt is a very long book, which deals both with one might call a Chartalist view of money, and (in my reading) a vaguely Marxist (certainly non-neoclassical) view of the functioning of the economy, but discussing the evolution of debt and economic development more or less since the beginning of Civilization.

But the basics are not difficult to get. Money does not appear as the efficient mechanism to reduce transaction costs (avoid the double coincidence of wants) in barter economies, but is the result of certain social groups ability in imposing a unit of account. As Keynes put it in his Treatise on Money: “money-of-account, namely that in which debts and price and general purchasing power are expressed is the primary concept of a theory of money.” And what is behind money of account is the power to determine what is the unit to be used, or as Keynes says, the power “to enforce the dictionary but also to write the dictionary.” Further, the classical political economy (and Marxist) approach, is not about market efficiency (not even for Adam Smith by the way, but that’s for another post) of individuals making uncoordinated decisions, but about capital accumulation in particular historical conditions, which involve class relations.

So debt is not bad per se, or good (Noah thinks that David’s point is that debt is bad, or something, as he says). Debt is an instrument that can be used by a social group to extract surplus from other social groups, from the elites in early civilizations that could command work from peasants and determine the means by which they were going to be compensated for their work, to countries that need to pay their debts in a foreign currency (normally dollars, which became the dominant currency after the victory in World War-II). Debt is then a way to force social groups and countries into situations of dependency (Noah himself is probably still paying student loans, with interests that he does not control, since he was told this is the respectable path to a happy life; yes he had a choice, but what are the choices for middle class kids with no money for college? Working for Taco Bell?).

Mind you, not all debt is bad. For example, the increase in debt to pay for unemployment insurance during this crisis is good, and in fact, to small to do any good (yes we need more spending and more debt). But not the kind of private, unsustainable debt that shackles workers to badly paid, unrewarding jobs, or that forces countries into economic arrangements that are contrary to their national interests (it was the debt crisis of the 1980s that forced most Latin American countries to accept the Washington Consensus policies).

Brad's complaint is more complicated to describe, and he is angrier it seems, but it appears to be associated to the fact that he believes David is not open to criticism, while his book contains too many factual mistakes. And yes there are some controversial points in David’s book, unavoidable in a book that is this ambitious and inter-disciplinary on top, including in chapter 12 (not sure why Brad was specially picky with that chapter). I do have also some disagreements on minor issues, but overall the framework of analysis seems to correctly point out the relevant social conflicts that arise from debtor/creditor relations, which have been absent in the mainstream analysis. At any rate, my two cents on the issue.

PS: The idea of Chartal or Cartal money is defended by 'serious' mainstream authors, and central bankers like Charles Goodhart, by the way (here). Not that it makes it more relevant. Authority has (or should have) little relevance when it comes to scientific evidence.

O sacred hunger of pernicious gold! What bands of faith can impious lucre hold?

Sociologist Geoffrey Ingham has written a review of David Graeber's Debt: The First 5,000 Years, which can be viewed here (subscription required). According to Ingham, while Graeber's monumental inquiry is much to be admired, there is quite a bit of room for critical refutation, specifically with respect to the exact nature of money, and its essence as a moral base for economic life.

The other Dutch Disease

Simon Wren-Lewis and Paul Krugman have written complaining about Dutch contractionary policies, noting, as should be obvious to any reasonable observer, that is is a huge mistake. Graph below shows Dutch rates of growth, and it's clear that the economy is in a recession (the estimate for 2012 growth rate is from here).

Funny thing, if you look at the 1960s, the period of the infamous Dutch Disease, when the discovery of natural gas supposedly impacted negatively the Dutch manufacturing sector (and should have had a negative effect on productivity and growth), then you see that the economy was doing way better than in the post-1973 period. Perhaps we should rename the disease associated with financial liberalization, and monetary policy focused only on inflation (and the austerity policies that often go hand in hand) as the real Dutch Disease.

The Real Bills Doctrine and the Persistence of Monetarism

The Real Bills Doctrine (RBD) suggests that the central bank passively provides liquidity to the system.* The name of the doctrine results from the notion that banks only discount real bills, associated with the functioning of the economy, in particular for international trade that was essential in the 18th century when the doctrine was developed. In terms of central banking policy, the RBD fundamentally meant that there was no need to lean against the wind, and money supply should adjust to the needs of trade. It is generally presumed that in the 1930s a more activist position – leaning against the wind – was developed.

In particular, Allan Meltzer in his A History of the Federal Reserve seems to believe that the RBD was the main cause of the Depression and that its abandonment was essential for the recovery from the Great Depression, since, in his view, the increase in money supply was the crucial element in the recovery, rather than the New Deal policies. Meltzer (2003, p. 282 and p. 357) says: "the main reason for the failure of monetary policy in the depression was the reliance on an inappropriate set of beliefs about speculative excesses and real bills," and "passage of the 1932 legislation recognized that the real bills doctrine did not provide the flexibility (elasticity) to expand the note issue or prevent the crisis from deepening." In other words, the RBD led to too much contraction, and the Glass-Steagall Act signaled its abandonment.

This view, both of the causes of and the recovery from the Depression and about central banking practices, has been generally accepted and is canonical among economists and policy makers, Old Monetarists like Meltzer, or New Keynesians like Christina Romer, by the way. Friedman and Schwartz's A Monetary History of the United States is the locus classicus of the monetarist view of the Great Depression. Richard Timberlake suggests (here) that the RBD, not the Gold Standard was behind the Great Contraction. Barry Eichengreen is the main defender of the view that the Gold Standard (see here), not the RBD, was behind high rates of interest and contractionary monetary policy, a view not very different from that of Keynes in the early 1930s.

I point this out, since in this view money is essentially exogenous, contrary to the RBD, but also in contrast to the conventional New Keynesian model, which assumes some version of an interest rate rule (i.e. Taylor's Rule). I've already referred to this strange persistence of Monetarist ideas when it comes to economic history (here). I guess that is why Meltzer thinks that inflation is around the corner. By the way, I suggested somewhere else that is not clear that the Fed actually abandoned the RBD in the 1930s, and that a more Keynesian approach to monetary policy does not (in fact it shouldn't) require the abandonment of an endogenous money view.

* The RBD suggests that money is created according to the needs of trade. Hence, money cannot be issued in excess, and is endogenously created by banks. Adam Smith was an early proponent of the Real Bills Doctrine. The RBD is, in a sense, an early version of endogenous money and of some aspects of MMT.

The Trade Deal Scam

From Dean Baker

As part of its overall economic strategy the Obama administration is rushing full speed ahead with two major trade deals. On the one hand it has the Trans-Pacific Partnership which includes Japan and Australia and several other countries in East Asia and Latin America. On the other side there is an effort to craft a U.S.-EU trade agreement. There are two key facts people should know about these proposed trade deals.

See rest here.

Fiscal Conservative to head the Council of Economic Advisors

Jason Furman will be the new chairman of the CEA (see here). He is a veteran of the White House and a Democratic insider. He is also a fiscal conservative associated with Robert Rubin's Hamilton Project, whose mission calls for "combining public investment, a secure social safety net, and fiscal discipline." Yes discipline as in balanced budgets or 'sound finance', as they say, and lower spending, including reforming entitlements (aka privatizing social security, which is the real meaning of 'secure social safety net'). So don't expect any stimulus coming from the Obama team anytime soon. Obama seems to be stuck with the austerian paradigm.