Relentlessly Progressive Political Economy

Travis Fast

I go away for one week and a simple article in the Nation has brought out the Dons to defend orthodox economics. Who leads that advanced charge you ask? Well not the “red in the tooth and claw” Chicago boys but their more cosmopolitan and media savvy brethren like Paul Krugman. And I say brethren because despite Krugman’s protestation to the contrary he is very much one of them: a real economist.

After participating as a partisan in the “state failure school” in an attempt to remain significant in the wake of a seismic shift in economics during the eighties and nineties. And after having loudly shilled for free trade by acting as though free trade benefits all, albeit whispering that some non-market distorting program of redistribution was required to spread the benefits to the losers. Now, Krugman assures us that there is nothing to the basic neoclassical model which tilts the public policy balance in favour of capitalism over democracy, or inequality over equality. Krugman of course knows better than this. For what else could explain all the triangulating he has done over the course of his career in an attempt to remain relevant? Why now is he willing to shout that gains from trade require government intervention, while only whispering that there are gains to be had? What is that you feel at your back Paul, the winds of change?

Check out this piece of dissembling from Krugman:

The other is the effects of trade on income distribution. Anyone who thinks that neoclassical economics says that everyone gains from free trade, and that you have to reject the assumptions of the field to raise concerns, obviously doesn’t know anything about the subject: ever since Stolper-Samuelson 1941 we’ve known that trade can easily hurt large numbers of people, so the question is always an empirical one. A dozen years ago I thought the effects were small, but that was based on the numbers, not a judgment in principle. Now I’ve revised my views up, because the numbers are bigger.

Now I do not know what Krugman was teaching to his undergrads; and this is key because it determines the most unnatural selection process of who goes on to grad school in economics, and I do not know what made it into his new intro text, but this strong of a position never made it into any of the articles when the big free trade debates were going down. He tells us as much when he states: “A dozen years ago I thought the effects were small, but that was based on the numbers, not a judgment in principle. Now I’ve revised my views up, because the numbers are bigger.” Ah you see, at the time the numbers said one thing, now they say something else, and like a good scientist (empiricist?) professor Krugman has amended his position. Comforting as it is that such a positive exercise like neoclassical economics can predict such rosy outcomes and then fail so miserably once the real data is in, or as the song lyric goes: “once the needle is in and the damage is done,” we can’t let Krugman off that easy. For there is a contradiction in Krugman’s defence.

Indeed, Krugman’s claim that for neoclassical trade theory “the question is always an empirical one” rings churlish to my ears—that is, of course if notes could prevaricate. Just what empirical data was Krugman looking at back then? If this was pre free trade data then how could it have much relevance for predicting post free trade outcomes. In order to do that Paul needed a model, for it is only a model that can transform the input into a predictive output. And by his own admission, the output was junk. In such a case, there are only two options; (a) either your input data was junk and your model was sound—junk in, junk out—or (b), your input data was good and your model was bad–angels in, devils out. Well I suppose there is a third option: (c) both the input data and the model were junk.

How do we know which one was the case? A little analytical logic can help us. Paul tells us that he is a dyed in the wool empiricist when it comes to trade: “just the facts ma’am, and only the facts.” Hence, the input data must have been good. But Paul tells us, that with hindsight, the output data (the prediction) was bad. Therefore, a simple process of elimination means that his trade model must have been junk—angels in, devils out.

Paul should not feel bad because almost every vintage of the standard trade model that were being used to bolster the case for free trade back then shared one thing in common: they all predicted minuscule to minimal negative effects. A coincidence? I should think not.

And is this not the very basis of the dispute that is now fluttering around the internets between heterodox and orthodox economists? Paul tells us that the methodology is neutral, that one can arrive at any number of policy conclusions from it, and yet orthodox economists almost always seem to come down in favour of policies that preserve the greatest field of choices for what Marxists would call owners of the means of production (capital), and thereby less government regulation and less democratic direction of the economy. See Paul the problem is not that we know nothing about the subject as you contend, it is just that we are not buying what you are selling. I know, I know, you are not selling anything…in that case come back when you have something new to sell.

There is room for hope however. In the 2007, AEA Presidential Address, Akerlof demonstrated the existence of identity (the objectiveness of subjectivity–existence if you like). Let us hope it does not take Paul the same amount of time it took him to finally digest Storper-Samuelson 1941.

As an aside, I look forward to the AEA Presidential Address of 2050 wherein some bright aging orthodox economist will discover society exists: then we will really be cooking with gas.

Two links to this commentary:

http://bookclub.tpmcafe.com/

http://maxspeak.org/mt/

Travis Fast

Some months ago I gave a talk on “what is neoliberalism.” And there I made reference to the curious mental gymnastics now being played by liberal economists in their attempt to square their faith in free trade with the actual outcomes being generated by free trade. Shameless I know, but I am going to quote myself at length.
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Save one critique I will not take the time here to rehearse all the limitations inherent to the basic neoclassical model as they are well known and described elsewhere in great detail. The neoclassical methodology necessarily leads to a process of abstraction that produces an ‘other-worldly’ ontology of capitalism. That is, the neoclassical model starts not with an axiomatic reduction of existing capitalism(s) and the behaviour of different classes and countries who occupy different structural locations and therefore have widely diverging utility functions on that basis alone, but, rather, with a series of axioms derived from an idealized economic system and a single representative agent. There is a basic problem involved when deriving an analysis not from what ‘is’ but from what ‘ought to be’ and declaring what ‘is’ to be a aberration from the ‘ought.’ To be clear, this is not a problem of modelling: all models are a parsimonious rendition of more complex phenomena. The neoclassical problem resides with deriving one’s analytical model from a trans historical and trans spatial meta-model when one’s object is both time and space bound.

For example, take the theory of comparative advantage upon which arguments for free trade are based. When Adam Smith outlined his defence of free trade he did so by making both a political and an economic argument. Economically he built his case on considerations of absolute costs (the idea that between two identical products the cheaper of the two should be purchased without regard to its national origins). Smith argued:

If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage. The general industry of the country, being always in proportion to the capital which employs it, will not thereby be diminished, no more than that of the above-mentioned artificers; but only left to find out the way in which it can be employed with the greatest advantage. It is certainly not employed to the greatest advantage when it is thus directed towards an object which it can buy cheaper than it can make.

Equally important however, Smith also argued for free trade on political grounds. He argued that a policy of free trade would prevent particular interests (one industry or sector) from gaining tariff protection and thereby directing a greater part of the social surplus into their pockets at the expense of society as whole. Free Trade was to be supported as a political principle because it prevented the formation of domestic monopolists who would not only use their privileged status to capture more of the social surplus but would also use their enhanced standing and resources to capture the state. Smith summarizes his argument thus:

This monopoly has so much increased the number of some particular tribes of them that, like an overgrown standing army, they have become formidable to the government, and upon many occasions intimidate the legislature. The member of parliament who supports every proposal for strengthening this monopoly is sure to acquire not only the reputation of understanding trade, but great popularity and influence with an order of men whose numbers and wealth render them of great importance. If he opposes them, on the contrary, and still more if he has authority enough to be able to thwart them, neither the most acknowledged probity, nor the highest rank, nor the greatest public services can protect him from the most infamous abuse and detraction, from personal insults, nor sometimes from real danger, arising from the insolent outrage of furious and disappointed monopolists.

We can conclude with Giovanni Arighi that it is a pity that Smith is often quoted but never read by our beloved liberal economists. By using Smith’s simple axiom about the tendency of powerful cartels of capital to capture the state and thereby shape public policy with respect to their own benefit we are moved closer to the reality of the political economy of liberal democracies then any axiomatic description of comparative costs will ever take us.

We can usefully contrast Smith’s promotion and defence of free trade with that offered most famously by David Ricardo and which has subsequent to Ricardo been turned into the iron law of comparative advantage upon which the near universal dogma of free trade is today based. Ricardo’s defence of free trade represents a hollowing-out of the substantive content of the reality of the political economy of capitalism. The Ricardian argument for free trade is grounded not on a general political insight about the realities of the tendency of individual capitalists to capture the state in pursuit of their narrow self-interest; nor on the real processes of capitalist competition which is ruled by considerations of absolute costs but rather on the technical merits of specialization and the potential gains from trade rooted in the concept of comparative advantage and relative prices.

As is well known, Ricardo demonstrates that gains from trade can be made even if one of the two nations involved entering into a free trade agreement is relatively backward in all branches of industry. To make a long story short, for Ricardian comparative advantage (and all subsequent iterations) to hold there must be a monetary mechanism which adjusts the terms of trade between two countries such that eventually at least one good in the least developed country can be exported competitively. Should this monetary mechanism not operate as such then the whole Ricardian law of comparative advantage is rendered nothing more than a scholastic enterprise with some merit as an intellectual puzzle which is applicable to a null domain. In order to illustrate more clearly what I mean here it is useful to provide a contemporary example.

One of leading lights of American neoliberalism, Brad Delong recently penned an article entitled “Has Neo-Liberalism Failed Mexico?” Delong’s immediate answer to his question is ‘yes free trade has failed Mexico’, as he observes:

…the 3.6% rate of growth of GDP, coupled with a 2.5% per year rate of population increase, means that Mexicans’ mean income is barely 15% above that of the pre-NAFTA days, and that the gap between their mean income and that of the US has widened. Because of rising inequality, the overwhelming majority of Mexicans live no better off than they did 15 years ago. (Indeed, the only part of Mexican development that has been a great success has been the rise in incomes and living standards that comes from increased migration to the US, and increased remittances sent back to Mexico).

Delong tellingly goes on to reflect:

Intellectually, this is a great puzzle: we believe in market forces, and in the benefits of trade, specialization, and the international division of labor. We see the enormous increase in Mexican exports to the US over the past decade. We see great strengths in the Mexican economy – a stable macroeconomic environment, fiscal prudence, low inflation, little country risk, a flexible labor force, a strengthened and solvent banking system, successfully reformed poverty-reduction programs, high earnings from oil, and so on. Yet successful neoliberal policies have not delivered the rapid increases in productivity and working-class wages that neo-liberals like me would have confidently predicted had we been told back in 1995 that Mexican exports would multiply five-fold in the next twelve years.

Delong concludes his article without providing any indication of why he thinks free trade failed Mexico. Undoubtedly this is a complicated question of which no attempt will be made to provide a rigorous answer here. However, I would nevertheless like to suggest why neoliberal trade theory failed both the patient (Mexico) and the practitioner (Delong).

Where to begin? First off, leaving aside all the assumptions required to make the theory of comparative advantage yield its sanguine conclusions about the benefits of free trade – perfect competition between infinitesimally small firms that maximize profit and are price takers, perfectly mobile factors including labour, full employment of all resources in particular labour, zero transportation costs, homogeneous product markets, well behaved if not identical production functions and the like — there is the issue of the monetary mechanism which establishes relative prices between the two countries in such a way as to make the backward country competitive in a least one industry. Now even if we grant that something like the quantity theory of money is true or that some reasonable facsimile thereof (in terms of directing relative prices including interest rates) is the general case (which is empirically doubtful) there is simply no way in which the relationship between the US and Mexican currencies and interest rates can be said to mechanically adjust in that way.

The US dollar is not just any other currency, it is the international numeraire and fountainhead of the international financial system. And what is more, the US is not just any other country given its shear weight in the global economy. The US dollar enjoys the status it has, not because the US is the most productive country in the world, but, rather, because the US is the lone hegemon in a unipolar world. What attracts global savings to the US is only partly explained by economic fundamentals while the rest is explained by political realities which make US assets, in particular US treasury bills, some of the most risk free in the world. Hence, both the value of the US dollar and the US interest rate reflects an amalgam of factors that have almost nothing to do with the relative productivity between the US ands Mexico, nor with the health of their respective balance of payments. On this rather obvious observation alone (obvious insofar as even a cursory glance at the twin US deficits, US interest rates and the value of the US dollar reveals a less than tenuous link between them) it should be clear that the very mechanism that is said to reveal comparative advantage and force movement toward those industries, both in terms of capital and labour, does not exist.

If we were to add to the above observation all the ways in which the starting assumptions of the neoclassical trade model were violated it would not be long before our model became a near useless guide as to the likely path of adjustment upon the opening of free trade between Mexico and the US and its likely impact on income distribution. Even, however, if we are to disregard all these inconvenient facts there is the further issue of the substantive content of free trade deals. It is as if neoliberals like Delong think that free trade deals are an exercise in moving from a position of autarky to a position of complete free trade (the absence of any and all barriers to trade). As anyone familiar with NAFTA or indeed the present Doha round of world trade negotiations can well attest, free trade deals are anything but agreements to remove all the barriers to trade. Such deals decrease some tariffs, eliminate others, and leave others in tact not to mention all the ingenious forms of trade distorting policies nations come up with to protect particular industries and sectors after the deals are inked. Moreover, they do so in a way that reflects the relative hierarchy of the contracting parties in the international economy. In short, trade deals themselves have a political economy and this is nowhere truer than in ‘free’ trade deals that involve the US and the EU.

In such a world, a capitalist world I should add, the problem with neoliberal economics is not merely a problem of poor modeling but rather reflects a terminal problem with the very ontology of capitalism upon which its modelling exercises are carried out – the problem my dear Bradford is not in you but in the heavens of your ontology. All of the above speaks to the central reason why neoclassical (liberal) economics is not altogether very useful for understanding the political economy of neoliberalism although a critique of it can be quite revealing as an exercise in de-mystification.

Usually when we talk about racism in the media, we refer to subtle undertones. Luckily, the Toronto Sun ensures that it’s readers don’t have to read in between the lines:

Natives growing restless

OTTAWA — Unbowed by federal government threats to cut funding, First Nations across the country continue to make plans for a one-day shut down of the railway system that could spread into weeks.

Relations with the federal government have soured since Finance Minister Jim Flaherty’s budget ignored demands to make First Nations poverty a priority.

Things weren’t helped this weekend after it surfaced that the Canadian military labelled the Mohawk Warrior Society and radical native groups as “insurgents” in a draft anti-guerrilla field manual obtained by Sun Media and another news organization.

Defence Minister Gordon O’Connor’s office issued a statement Saturday saying native groups would not be included in the final version of the manual.

AGRESSIVE

Indian Affairs Minister Jim Prentice’s aggressive stance on First Nations demands have pushed relations to a new level of acrimony.

Read the entire article here. The actual contents of the article are, for the Toronto Sun, relatively critical. I’m guessing it was at the editing/print stage that the overtly racist headline was inserted. Then the word “agressive” was placed as a heading to the fourth paragraph. I would suggest that this was meant for those who quickly glance at the article to think, “those natives are aggressive – they should calm down”. But the article was actually referring to Jim Prentice’s “aggressiveness”, not those pesky aboriginals’.

The People for Education, an Ontario public schools advocacy group, released a report today that found that Ontario’s public schools raised over $500 million from private (non-government) sources. This includes philanthropy, charitable donations and profits from cafeterias and vending machines. Either kids are being taken to the cleaners at lunchtime or schools have stepped up their efforts to privately finance childrens’ education.

Funding schools is the responsibility of the province. According to the report, while the Liberals have lowered class sizes, art, libraries, special ed, and ESL continue to experience shortfalls. Some of this need is clearly being picked up through charitable donations. The problem with doing this is that it will lead to large inequalities in which some schools will have and more will not. As the People for Education point show, the evidence speaks for itself: the top 10% of fundraising schools “raised more than the bottom 80% put together”.

The province must take this as a sign and fund access to special ed resources and extra-curricular activities. Otherwise, all we’re teaching is a hands-on lesson in systematic inequality.

Well actually they called it by its old fashioned name “price guaging.” It is nice to know that other policy wonks are interested in similar such concerns and arrive at similar such conclusions.

At least in other jurisdictions oil reserves are going back to where they belong. In Canada we just sell them to Americans.

Travis Fast

In response to the question: “is France a lagging indicator?”

If you actually read through the French socialist party’s policies you will
see that they were committed to the same form of political suicide as the
rest of the social democrats in the West. More of the same half asssed
Keynesianism peppered with an adoration for an insensitive and overly
bureaucratic elite and then lightly salted with a wink to the environment
and immigrants. All those who argued neoliberalism was a purely Anglo
phenomena must be feeling a little heavier today.

So yes France is a lagging indicator. Interesting that their cousins in
Quebec lurched right a couple of months ago. Now we can all sit back and
watch as ECB opens the spigots full bore and capital starts investing at a
rapid pace. I am sure it will be vindication of Neoliberal policy three years from
now. Problem is, the Anglos may just be well into sewers by then
and we may all get to watch the spectacle of the French and German’s
performing a rearguard defence of neoliberalism. Fortress America versus
Liberal Europe. Get the popcorn.

Travis Fast

The price of gasoline has been going up and so has consumption. It used to be that the $1.00 mark would induce reduced consumption (just like the text book says it should). Well not anymore. So what is up? Has the price mechanism failed? Depends who you ask. Conventional economists are going to talk add infinitum about elasticities of demand. But in order for that story to make any sense they will have to explain a rather sudden change in the elasticities of demand.

I don’t buy it. What we are really witnessing is capitulation on the part of the consumer to higher prices. The gas companies tested higher prices and discovered there was no backlash in terms of consumption, or a sustained push by government to open the books. Gasoline is like other addictive substance. The initial effect of a price increase is hesitation by the consumer then capitulation to a new price level. That is, for various reasons the price mechanism simply does not work the way the textbooks describe.

Despite the fact that producers have known, since at least Katrina, that capacity was low and despite the fact that oil companies have been making mountains of cash, new refining capacity has not been planned for the last two decades and there are no new refineries on the short term horizon. Indeed, it appears that both the demand and supply side of the price mechanism have failed.

All of this amounts to a prima facie case for government to regulate the price of gasoline even on terms determined by orthodox economic analysis. Don’t hold your breath. As we have discussed before, mainstream economists are loathed to advocate for the regulation of private markets even when they are failing. Queue Friedman’s Ghost.

The Progressive Conservatives have set the bar high this election cycle with the announcement of a major environmental policy. I quote their press release:

“We’ve already rewarded Manitobans who choose fuel efficient cars with a 3% PST rebate,” said the PC Manitoba Leader. “Today, we’re taking our commitment to environmentally-friendly transportation one step further by getting rid of the PST on all bicycles, whether it’s for a serious cyclist or a child learning on a bike with training wheels.”

It seems like the PCs have found the magic environmental bullet. Combined with their announcement of more bike lanes, can you think of a farther reaching plan to reduce emissions AND make Manitoba a better place to live? Let me take a stab at the new average family’s after-dinner conversation:

Child: Mom, time to go to ballet class.
Mom: Thanks to Mr. McFadyen’s removal of the PST on bikes, we were able to afford a bike for each member of the family! Now we only have to use cars for 98% of our transportation.
Child: Wow! Thanks Hugh! I wish I could vote!

Hugh, your work has truly put the “progressive” in the Progressive Conservative Party of Manitoba.