The Dull Compulsion of the Economic (iv)
(1) I forgot to post this New York Times piece yesterday: Do We Need a New Internet?
(2) Yesterday I linked to a piece on the increasingly dire financial situation in Eastern Europe, which threatens to spill over into Western Europe (with both already seriously hobbled by the global financial crisis). Today, Baseline Scenario reminds us that Ireland requires immediate attention, and calls on G7 finance ministers, meeting in Rome, not to neglect another unexpectedly pivotal player in European finance. Unfortunately, as this article from Vienna’s Die Presse (in German, but there’s a good photo) recounts, the biggest news coming out of Rome seems to involve the possibly sozzled Japanese finance minister
(3) I wish Veblen were alive to write about today’s philanthropy barons. “Charity” really is turning into a kind of conspicuous compulsion that seems to have raw power (often ill-used at that) as its source. Lord knows what the effects could be. But I think it’s key to understanding the evolution of a ruling class that has been the overwhelming beneficiary of a kind of economic growth that is itself only now evaporating away.
(4) Nouriel Roubini writes that Republicans are starting to speak of bank nationalization.
(5) Krishna Guha of the Financial Times writes of the strange shift in bond investors’ perceptions of deflation risk in the medium term, and what that might mean for policy.
(6) Plans for the “car czar” dropped in favor of a panel more subject to presidential control.
(7) From Bookslut: “McGraw-Hill Cos., the owner of the Standard & Poor’s credit-rating service, won’t be publishing a book on the financial crisis that the author says addresses S&P’s role in the markets’ plunge.” Thanks to Marginal Revolution.
(8) More turmoil in UK financial sector as Lloyd’s (buyer of HBOS) finds itself under the nationalization gun.
(9) Yves Smith links to this FT story about big companies increasingly cutting links with partners they consider too risky to continue doing business with, in a kind of “corporate version of the paradox of thrift.”
Response to Brad DeLong
Yesterday I linked to an exchange between CUNY anthropology professor and political economy theorist David Harvey and Berkeley economist and former Treasury official Brad DeLong that I got off Marxmail. The exchange consisted of a blog entry by DeLong on his site that was prompted by the circulation on the internet of a short essay by Harvey on the Obama stimulus package, and Harvey’s response to DeLong, published on his website. In my post, I made a short comment to the effect that DeLong seemed to be taking refuge in pedantry in his attack on Harvey. I didn’t articulate why I felt this way, so it was in a sense unsurprising that DeLong left the following comment on our blog:
Gee. And I remember when writers for Dollars & Sense had read Joan Robinson, and understood why objectively-reactionary Marxisant critiques of Keynesianism were ill-founded.
Guess I’m getting old…
DeLong has a point. I’m not an economist, and, of course, DeLong’s knowledge of Marx almost certainly overwhelms my own (I’ve never read Theories of Surplus Value, for example), never mind his grasp of seminal figures in the non-Marxian tradition like Joan Robinson, Keynes and John Hicks (I’m sorry to say I’ve mostly read secondary literature on these writers, with the exception of Keynes). And I’m gratified that DeLong has a respect for the history of our magazine. For my part, I respect DeLong’s work and visit his site almost every day. He’s right: I shouldn’t have posted the comment without some sort of substantive justification for my evaluation of the exchange between DeLong and Harvey; I could have simply directed readers to the exchange itself without comment. So, I offer Prof. DeLong a heartfelt and humble apology.
That said, I still have reservations about Prof. DeLong’s attacks on Harvey, though I do agree that Harvey lost the thread at several points in his response to DeLong. DeLong says that David Harvey’s piece on the stimulus is lacking in intellectual rigor, and that this lack of precision serves a kind of obfuscatory purpose. His argument is reminiscent of those employed by logical positivists against metaphysics in the middle of the last century, but the tool with which DeLong proposes to both illuminate this confusion and rectify it is the marginalist economics of the neoclassical tradition. To put it simply, DeLong says that Harvey’s condemnation of the stimulus is a convoluted harangue that can really be reduced to a simple proposition that can be analytically refuted by the invocation of what is essentially an identity relation in mainstream economics: that there is no inherent level of debt that cannot be financed, because interest rates will set at a point that eventually matches supply of savings with demand for debt, either at a national or international level. In a follow-up post, DeLong refers to Harvey’s position as a kind of revival of the “Treasury View” (a belief that deficit spending had to be kept at a clearly ineffective or even in ways counter-productive level to prevent what was considered inevitably crippling inflation from taking hold, that prevailed in the British Treasury during the depression and played no small role in increasing the latter’s severity). And DeLong notes that it may be true that the price of government deficits run up in response to the crisis may become so high that domestic private investment will become depressed (or “crowded out”), and hence that economic growth will fall as a result, though that hasn’t happened so far: demand for US public debt has remained high, and yields on government debt surprisingly–even, until very recently, alarmingly–low (while debt levels have blown into the stratosphere). So, according to DeLong, Harvey is not merely befuddled: he’s plain wrong in attacking the Obama stimulus package, even on his own confused terms.
The certainly naive–in mainstream eco
nomic terms, of which I am, admittedly, hardly a virtuoso practitioner, as I know DeLong is–objection I have to DeLong’s position (which I think I share with David Harvey) is that the world has changed so much since Hicks and others did their great, though by no means flawless work–and that is beyond dispute, even for a relative novice–that the old identities no longer make much sense. Hicks himself said the following about the IS-LM diagram which DeLong refers to for support:
“The IS-LM diagram, which is widely, though not universally, accepted as a convenient synopsis of Keynesian theory, is a thing for which I cannot deny that I have some responsibility (“IS-LM: an Explanation,” Journal of Post Keynesian Economics, 3 (2): 139-54, 1980, quoted in Steve Keen, Debunking Economics
, 2001, London, Zed Books)”
Again, I’m not going to try to punch above my own inconsiderable weight, as I did yesterday, by getting involved in the technical details surrounding debate about IS-LM analysis. All In want to do here is point out some of the things that even I have seen in the literature that suggest that the kinds of identities DeLong sees as decisive are, well, somewhat porous, at least on the surface. The Neoclassical synthesis of Keynes and the marginalist tradition was, after all, forged at a time when all the major economies except the US were relatively closed, and for a good reason: they were devastated by depression and a World War. Accordingly, the US used its unique powers of seigniorage in the early post-war period to run up balance of payments deficits, expand export markets, and allow its allies to rebuild their economies (partly out of fear that they would otherwise fall to communism). As these economies quickly became competitors, though, this system broke down, and was replaced by Neoliberalism, which entailed a partial (official, anyway) rejection of the Keynesian tradition. Now that Neoliberalism is being, happily, toppled, interest in the Keynesian tradition has revived. But that doesn’t alter the fact that history has moved on, often-times in ways that leave us breathless in accounting for its crazy effects. The hugely and breathtakingly expanded role of debt in the leading economies has perhaps been the most obvious instance of this, giving rise to other controversies that have upset other certainties of conventional economics (the “dark matter” debate, which hearkens to–of all things–the supremely bizarre world of subatomic physics and quantum mechanics to account for something that had been considered a heresy in economics, the tendency of savings in labor-intensive countries to migrate to capital-intensive ones, being perhaps the best instance of this). Steve Keen mentions another, related controversy, one that should give us further pause in considering the solidity of neoclassical “identities”:
Testing the first hypothesis takes some sophisticated data analysis, which was done by two leading neoclassical economists in 1990. If the hypothesis were true, changes in M0 should precede changes in M2. The time pattern of the data should look like the graph below: an initial injection of government “fiat” money, followed by a gradual creation of a much larger amount of credit money:
Their empirical conclusion was just the opposite: rather than fiat money being created first and credit money following with a lag, the sequence was reversed: credit money was created first, and fiat money was then created about a year later:
There is no evidence that either the monetary base or M1 leads the cycle, although some economists still believe this monetary myth. Both the monetary base and M1 series are generally procyclical and, if anything, the monetary base lags the cycle slightly.
The difference in the behavior of M1 and M2 suggests that the difference of these aggregates (M2 minus M1) should be considered… The difference of M2 minus M1 leads the cycle by even more than M2, with the lead being about three quarters.”
Thus rather than credit money being created with a lag after government money, the data shows that credit money is created first, up to a year before there are changes in base money. This contradicts the money multiplier model of how credit and debt are created: rather than fiat money being needed to “seed” the credit creation process, credit is created first and then after that, base money changes.
How can savings and investment helpfully be considered an identity at all under such conditions? Keen says we need to go on to consider credit as having, in an important sense, completely eclipsed the ability of the authorities to match savings to investment via interest rates targeted at underlying economic activity (so LM–the money markets–becomes detached from IS–the goods markets):
If only it were the world in which we live. Instead, we live in a credit economy, in which intrinsically useless pieces of pape–or even simple transfers of electronic records of numbers–are happily accepted in return for real, hard commodities. This in itself is not incompatible with a fractional banking model, but the empirical data tells us that credit money is created independently of fiat money: credit money rules the roost. So our fundamental understanding of a monetary economy should proceed from a model in which credit is intrinsic, and government money is tacked on later–and not the other way round.
DeLong would no doubt–and rightly–point out Marx’s considerable errors in analysis and ask Harvey–and me, I guess–why we should refer to him as opposed to the neoclassical model, imperfect though it may be. Though Marx had much–much more than anyone at his time–to say about the occasional serious distortions caused by credit (itself an endogenous feature of a capitalist economy), surely he wouldn’t have anticipated the sort of thing described by Keen.
One thing that Marx does point us in the direction of, though, is, of course, the indispensable class dimension in which political and economic phenomena occur in a capitalist system. And here’s where DeLong’s refuge in neoclassicsism is, to me, a fault compared to a reference to the Marxian tradition. DeLong, as we have seen, sees the ability of a nation to run up debt in a crisis as dependent on whether or not the interest rates set in national or international markets can support the kind of economic activity required to pay off the debts incurred. To him, national and international prices of credit are determined, ultimately, in markets. But it seems that we may have reached a point in which governments are increasingly having to look toward some pacification of long-abused working classes, no matter what the consequence. We see this in places like China, as well as in the developed world. And though some of this activity is expressed in clearly reactionary terms, it’s clear that we’re moving toward a new world in which economic policy is made with the clear intention of meeting the needs of these classes. One hopes this will take place on an international level: otherwise, disaster threatens, just as it did in the ‘thirties. I think this is the point Harvey wanted to make. This point is confirmed in Harvey’s original piece, when he tells us to focus on what’s really going on, as opposed to exaggerating the importance of debates about intangibles like the crisis of “trust” in the wake of the crisis.
I hope Prof. DeLong responds to this piece. He says he’s familiar with our magazine. He may or may not know that we are dedicated to conveying (in an unashamedly leftist-way) economics in a way that is accessible to a popular audience. If, as I imagine, he has objections to what I have said, I hope he will provide a rebuttal of the sort that relies on more than appeals to the (recognized) authority of luminaries like Joan Robinson. I may have acted amiss in being snarky towar
ds him yesterday without support, but his brief response to us was no better. I have taken responsibility for my culpability here, apologized, and admitted my ignorance of things I’m too prone to discussing without support. But he hasn’t, as yet, provided us with much better. I realize he’s really busy, but if he’s really interested that Dollars & Sense has taken a position on something he says, he should follow through in a way that will illuminate us, rather than belittling us.