Book Review: Economics for Everyone

Economics for Everyone: A Short Guide to the Economics of Capitalism

Jim Stanford (2008), Pluto Press, the Canadian Centre for Policy Alternatives, and Fernwood Publishing Inc.

Upon first reading Economics for Everyone I was disappointed. At the time of its publication I was a doctoral student at the end of a long road of education in and around economics, political economy and political science and I was looking for a concise and penetrating settling of theoretical scores. After a couple years, with the polemical urge tempered, I reread Economics for Everyone (Economics) from the perspective of a professor evaluating a potential introductory textbook on economics and political economy. Viewed from this angle Economics is an impressive introductory text.

With respect to introductory economic textbooks there is really only a choice between two genres. The first introduces students to the basic elements of neoclassical economic analysis and its mathematical formalizations. The second genre introduces students to the origins, evolution, key institutions and social relations that obtain in a capitalist economy. It is to this second genre that Jim Stanford’s text belongs. One of the inherent challenges for texts of the second genre is that there is a stark difference between educating students about the economy and educating students about the practice of economics as a social science (i.e. the discipline of economics). More often than not heterodox textbooks end up serving as introduction to the history of the polemics and controversies of economics as a discipline and thus function as prelude or substitute for actually talking about capitalism and its key institutional underpinnings. Economics for the most part avoids this trap.

Economics is organized into five sections beginning with a discussion of “why we should study economics; the origins and evolution of capitalism as distinct form of economic organization; and the political economy of economics. All in 64 pages! Clearly the only way to achieve such a concise statement is via the hegemonic voice. Yet this voice is the voice of agnostic radicalism rather than an orthodox unitarianism. From an educator’s point of view, the schematic nature of the introductory section serves well enough to delimit the objects of analyses while at the same time introducing students to the idea that capitalism is both historically novel and socially mutable. This is important because the world is indeed populated by a series of extant capitalist “models” which produce qualitatively different results across a broad range of metrics. Stanford’s agnostic radicalism thus finds its empirical grounding in the reality that many different types of policies are indeed possible within capitalism.

Section two of Economics is dedicated to the gear box of capitalism—work, tools (capital) and profit. In this section the central agents of the capitalist economies are introduced; i.e., workers and capitalists and their associative economic units and their linkages. Here I wish Stanford had paid closer attention to management and managers and the difference between profit producing labour (workers) and profit maximizing labour (supervisors and administrators). This is unfortunate because one of the major failings of orthodox economics is its near silence on the question management Nonetheless, Stanford does touch on the problem of work effort and some of the carrots and sticks employed by management to elicit higher productivity. Thus for those wishing to go deeper into the issue of supervision and human resource management this text does provide an opening. The same can be said of Stanford’s treatment of the household as the site of reproduction. That is to say there is enough in his schematic presentation to allow both instructors and students to delve deeper into subject matter should they choose.

The third section introduces the dynamic elements of capitalist economies: competition, investment and growth, employment and unemployment, distribution and the environment. Each is taken up with the same rapid-fire vigour which like the previous sections should serve to stimulate the curiosity of students.

The fourth section is likewise a rather hefty presentation of the “Complexities of Capitalism”. Here the list of topics covered is too extensive to present here. All the traditional macroeconomic policy questions are dealt with from monetary and fiscal policy through to international trade and development which culminates in the presentation of a basic macro model of the economy. What I found interesting about this section was that it also raised three issues not customarily broached in introductory texts: the financialisation of the economy, pensions and a rather long discussion of that much neglected topic in orthodox textbooks—the state and liberal democracy.

The last section deals with that age old dispute between reform liberals and socialist reformers and revolutionaries. It is a muddled conversation and wish Stanford had simply presented the Nordic model as one possible alternative vision while noting Kalecki’s observations about the instability of high road equilibrium strategies. Students would be better served in my opinion to focus their attention on the structural barriers to any serious project of economic reform. This could have been partially accomplished by referring back to the chapter on the state and liberal democracy. The question is not if another world is possible for in the abstract it always is. The real question is how and under what conditions it could be possible.

The fuzzy nature of the last section is in no small part, perhaps, a function of Stanford’s agnostic radicalism. Indeed the weakness (strength?) of this textbook would only become apparent should Stanford choose to write an intermediate version. Then all the serious disputes between heterodox economists could not be papered over by the authority of the hegemonic voice that is characteristic of introductory textbooks.

That said, this is an introductory textbook and a very good one at that. It can be used in whole or part depending on the needs of the instructor. There is also an online resource which has course outlines, lesson plans and a glossary. Union educators and summer session instructors will particularly appreciate the truncated course plan for short intensive sessions.

No. 8: We got effeciency here

For some I know this will seem a little too low on the list, but it is low because it really is low. When you are trapped inside GET (general equilibrium theory) reality is your enemy. Inside GET everything is tranquil–like a heroin addict after the needle is in and the payload delivered. In this exotic den of opium everything is tractable (well no really, Nash cooked this dream off like a poet in the night). Take a brave step away and not all that starts well ends well–and here we are not just talking about aggregation problems.

The efficient market hypothesis (EMH) not only claimed that financial markets were narrowly efficient as in they embodied all the relevant information and said information was conveyed in usably due time, but, also, that following Hayek such information was superior to any information that could be gathered and thus regulated by a central authority.

The outside play here was that ay attempt to regulate financial markets was doomed to failure because market participants would necessarily have at their disposal timely and thus superior information than public regulators. This argument got pushed so far that it was even argued that self regulation by private individuals would be superior as private actors would have better information. This logic of course suffered from a begging the question problem as in: if information is rapidly disseminated by market actors why can’t the state access that information and evolve policy and regulations in lock-step? That is to say, if information is efficiently conveyed why can’t regulators access and then use this information to regulate.

Two defences are available to the apostles of EMH. The first would argue that because the state is not a direct player in markets it in fact does not have access to this information. This is likely true, but the problem is that such a defence invites government participation in financial markets precisely so it can monitor and regulate the industry. YET, this conclusion is exactly the one EMH was designed to trounce. EMH was above all about the capacity of markets to auto-regulate. Why after all is the state needed when private markets are already efficient.

The second, and preferred, line of defence is then the argument that markets were efficient but the quality of the information was bad and that in time markets self corrected via what layman have come to call the Great Financial Crisis (GFC). Here the GFC is painted not as a crisis but an updating from poor information to good and is thus a confirmation of the EMF.

This second line of defence of course suffers from the obvious wrinkle that it boils down to the proposition that markets get things hopelessly wrong and that they can do so for such a prolonged period of time that the whole economy (not just finance) gets sucked into the vortex of ignorance. Presented as such the second line of defence is rather effervescent. For if the updating process takes such a long time and is capable of spreading bad information across a whole host of different markets from housing through to food and energy then the case for government regulation would seem strong.

But alas no! No because we only need to default back to defence one which is that the state does not have any better information than markets. But this only begs the question about the role of the state not just in terms of the regulator but in terms of a participant. In principle there is nothing that stops the state from becoming a significant player in financial markets: taking in information and then asking prudential third party questions.

In a nutshell those who would defend EMH via the second stratagem did so to avoid increased state involvement but then they have to defer to stratagem one in order to salvo the second. But stratagem one begs the question.

None of this is gainsaid by the obvious blooper that calling something efficient which demands that entire economies suffer the pain of “updating” is incredibly glib. Auto-regulation ought to imply smooth processes of adjustment. IF what EMH boils down to is that good information is turbulent which is eventually self-correcting after long period of pain then we really are back to the debates which raged before and after the Second World War.

My bet is this: Diamond and Fama will never win the Swedish bank prize but many economists will retain the ontological model in the back of their heads and demand no less from their graduate students.

A pity really.

Causes of the financial Crisis

These animated lectures are really good. One problem is that watching the drawing can be more interesting then the lecture. Here is David Harvey’s Crises of Capitalism. One critique that I would have is that this not really an original contribution by David but rather a summary of an account of the crisis that has been consistently told among Marxian political economists. But it is an efficient 10 minute summary and with the animations highly entertaining.

A tale of Two Cities: FIRE and Manufacturing in the US (PII)

Yesterday I took a look at the changing share of value added between the FIRE and manufacturing sector in the US. Today I have thrown up a graph plotting the relative decline in manufacturing employment and the relative ascendency of employment in the FIRE and BS sectors of the US economy. Clearly the two are inversely related but a causal connection between the two remains an open question.

One of the things that complicates the analysis is that many of activities that once were done in-house from accounting, to facilities management, through to recruitment and equipment procurement are now done at arms-length via outsourced contractors.

To illustrate what I am getting at here the following example may help. In 1980 ACME car company decides to contract out for its cleaning services prior to 1980 these cleaning duties were performed by unionised janitors. So, prior to 1980 the cleaning labour would have been included in manufacturing employment and after 1980 in business services.

Nonetheless, the graph on value added shares from yesterday’s post that something more than just redefinitions are at work. In the next post I will drill down into the FIRE and BS sectors to see what is the main driver of employment growth in those sectors.

Goldman Sachs, Market Makers and standard economic theory

I wish I had the time to work through this more systematically but I do not. But can anyone watching the US senate grilling of G&S execs believe in the micro-foundations of orthodox economics (scientific liberalism)? What I liked was Sen. Levin’s interpretation of a Market Maker (MM) and G&S’s interpretation of MM. The G&S position is thus: we can sell anything to anybody without divulging what we think it is worth; in fact our obligation is to sell shit, if it is shit, it is just that shit, and we have no obligation to divulge our position about its quality.

This is simply buyer beware all trussed up. I am kind of sympathetic to this position as far as it applies to capitalism. The job of a capitalist enterprise is to make a profit: Some profit by selling quality and some profit by selling fake versions of Viagra. To paraphrase Marx: “capitalists seek profits; that in the process real or imagined needs get satisfied, satisfied well, or not is of secondary importance to the capitalist.” People sell lemons all the time in the attempt to lay-off their risk. In for the penny into the pound.

The community sets the standards on what is fraud and what is not. Now of course it is clear that firms like G&S bought the regulator (or in more polite form captured the regulator). So all of this is a bit of a smoke screen: political theatre. The real question is about how the state came to give these firms such latitude to determine what is fraud and what is not: or what is a lemon what is not?

Standard micro economic theory has a highly transparent view of information. Between the rational expectations and the implied substance of the efficient market hypothesis G&S should never have been able to push junk onto a market and find buyers in a sustained fashion over a prolonged period of time. But the G&S defence wants it both ways: we can sell shit because buyers should know they are buying shit. And they want to say we can sell shit because nothing obliges us to divulge the fact we are selling and saying shit.

And this is not much different from standard economic theory. Standard economic theory is want to say that shit can be sold because the market will almost instantly recognize that it is shit and that is the natural limit thus we do not need regulation to define shit. But G&S’s actions prove that market makers have an informational advantage that will not necessarily disappear by the discovery processes of market agents; at least not any meaningful sense of what is meant by this. The EMH boyz now want to redefine colossal market failure (the failure for good information to drive out bad) as the financial crisis. The crisis, the market pancaking thus becomes the rectifying process, the proof of real information discovery. That is like saying nautical engineers are successful because when ships sink they really sink.

What the sad story of G&S actually indicates is that market makers really make markets and that information is, by design, and in the absence of regulation, asymmetrical and consciously so. In a more revolutionary direction G&S, along with the entire private financial sector, indicates that private entities, if they have the financial wherewithal, will thwart, to the best of their abilities, the capacity for public oversight and regulation. This being the case it would seem to suggest that some activities ought to be brought under the public domain.

Stiglitz: Capitalism is Characterized by Big Bubbles and more

Stiglitz is one of the few (liberal) economists who is not suffering from a massive bought of cognitive dissonance owing to the GFC. This hour long interview with Joseph Stiglitz is well worth watching. Don’t have an hour? Then watch the first fifteen minutes.

Krugman should talk to the CD Howe about Canadian Banking policy

Canadians’ need to be mentioned south of the border will probably find some glee in Krugman’s musings on the Canadian policy conversation. But as edifying as it is to be talked about in such a positive light by such a luminary as Paul Krugman and under the New York Times flagstaff no less; is Krugman right to characterize the policy conversation as “defying conventional wisdom” especially when it comes to the conversation about financial regulation in Canada?

Unfortunately the answer is no. Since the latter half of the 1990s, the Major Canadian banks (MCBs) have been pushing for deregulation that would allow them to, besides become bigger, go global and get into global financial markets. Indeed in the run-up to the Great Financial Crisis (GFC) there was mounting pressure to allow just the kinds of mortgages that were being offered to the south, and for awhile at least, a zero down, teaser rate, 30 year mortgage was allowed. That the product came late market in Canada and was cut short by the GFC is sure luck (or perhaps laggard nature of Canadian financial deregulation).

But if Mr. Krugman would like an indication of not only the intense lobbying that was going on in Canada to allow the MCBs to be more like his banks he need only peruse the CD Howe web site. In 2007 it released a Commentary titled: Branching Out: The Urgent Need to Transform Canada’s Financial Landscape and How to Do It. Inter alia it was argued that mergers should be allowed to go forward and not just among the big five themselves but that the MCBs should be allowed to merge with big insurance companies as well. Allowing banks to become this big would enable them to become significant international players that would be able to behave and mitigate risk like the other big international banks:

Size is also important for a bank in dealing efficiently with financial risk. Larger banks have more ready access to modern risk management techniques that allow them to achieve better diversification and, hence, lower risk. Modern ways of managing bank risk rely increasingly on direct access to international capital markets. Credit risk derivatives, loan syndication and especially securitizing asset positions have become the prevalent tools to reduce the risk that banks take on . However, in order to effectively securitize assets, banks have to offer pools of assets that are well diversified and of sufficient size in order to ensure enough liquidity in the market.

Hmm pretty standard pre GFC thinking here. All that liquidity. Remind me again Paul what is the US in right now (and Canada also looked to be in)? A liquidity trap…how can that be? What with all the risk reduction which comes from diversification into credit derivatives, magic turtles and the goose that lays golden eggs. What indeed could possibly go wrong?

Banks clearly benefit from operating broadly across different segments in their core business of taking deposits and granting loans. But banks can also benefit from diversifying geographically and across different financial products. Historical evidence shows that when banks were able to operate across various regions (such as in Canada and Europe) failure rates were lower than when banks faced geographical branching restrictions (such as until recently in the US). Similarly, as fee revenue has been steadily increasing for banks over the last 15 years relative to interest revenue, the product mix a bank can offer has become an important instrument to hedge general business risk and ensure stable profitability.

Yah those fees… think of all those fees! Originate to distribute; that is Mosses and the prophets. What a model. Especially if it comes with a tax payer funded rescue when it all goes pop.

Maybe Paul is right, size does not matter all that much, what matters is what banks intend and are allowed to do with their size. But whatever the case may be, as the commentary by the CD Howe makes clear, circa 2007 the policy conversation was very much one of follow the leader. As the economists advising for the CD Howe and thus must be considered some of the sharpest tools in the economics shed illustrate, this had nothing to do with the enlightened nature of the policy conversation going on in Canada prior to the GFC.

It is good thing Canada suffers from policy lag and a populist suspicion of the MCBs and bankers and had the good luck of successive minority parliaments in which giving the economists and the banks they were shilling for what they wanted would have been the death blow.

Lunacy on Loonie spreads to the Department of Finance via the Bank of Canada

At some point we are going to have to throw in the towel and conclude that there is a concerted effort to promulgate the noble lie.  It was one thing when the business press argued that the BOC faced technical limits to their capacity to retrench the value of the Canadian dollar, and yet another thing when almost every commercial bank economists pushed the same fallacy.  But now no less than the BOC and the Department of Finance, respectively incarnate in Carney and Flaherty, are pushing the same argument.  The FP reports:

Bank of Canada Governor Mark Carney said on Tuesday that foreign exchange intervention did not usually work without complementary policy moves.

“I agree with what the governor of the bank said yesterday …. that it is a limited tool,” Mr. Flaherty told reporters.

At least Carney was smart enough to add the vague qualification “complimentary policy moves.”  Flaherty of course stripped it down to the most elegant version of the Nobel Lie.  For those looking for further detail about why it is simply not true that the BOC is constrained in its capacity to devalue the dollar go over to worthwhile Canadian and read the series of posts on this subject.

So I am curious why would the BOC who most definitely knows what Worthwhile Canadian knows be misleading the public?  The only thing I can come up with (because I do not assume people are dumb) is that the neither the BOC nor the Canadian government has any interest in a policy that would be largely regarded as one of competitive devaluation.  So instead of fight the policy issue out in public on its merits they are attempting to smother it under a “technically not feasible” argument.  That is, they are doing what the BOC always does.  Depoliticize and dispense .

The most noble lie

Forget the Bank of Canada: We need an INVITE program to stem appreciation of the CDN Dollar.

If what we are worried about is an overvalued CDN dollar which is caused by speculative flows then why the focus on the Bank of Canada?  Exchange rates are not really in the BOC’s mandate.  Sure in the case where an appreciating CDN dollar is causing further deflationary pressures it could be argued that exchange rates are within the purview of the Bank’s mandate.

But the BOC is a conservative (in both the ideological and cultural sense) institution.  Canada does not face the same structural dynamics (problems) as the UK and the US.  And thus I doubt arguments for non-conventional monetary policy responses are going to get very far with the Bank.  Moreover there are downside risks to pursuing unconventional monetary policy.  We might get a lower exchange rate at the expense of perverse side-effects.  So forget the BOC; leave them out altogether.

Thankfully, however, when it comes to exchange rates there are policies available to the government. On such policy could be called an  Investment Inflow Tax Equilibration  program (INVITE).  It would work like this.  A simple 2% tax on all inward portfolio investment (as Brazil just announced) would help stop appreciation in its trax.  Second if we really think much of the dollar’s appreciation is being driven by gas and oil then an additional 2% tax on all oil and gas investment inflows regardless of the type (portfolio or direct) would help further dampen the speculative plays in that sector.  The terminator seed on the INVITE program would be when Canada’s manufacturing sector returned to some degree of health.

Today’s Big Question

Today’s big question is will bond holders take an equity stake in GM or risk a severe hair cut in bankruptcy court. I have no particular experience in Corporate US bankruptcy law so I am hard pressed to see the angles. It strikes me though that given the union has already accepted a swap and the Government the Bond holders are in a precarious state as the major principles have agreed to make the swap. Yet in this ideological climate where the non-governmental financial sector in the US has a huge sense of entitlement and there still exists tremendous ideological support for a certain noblesse oblige in official quarters when it comes to private finance I just can’t come to good sense of what the bondholders know that the rest of us don’t.

Canadians have a particular interest in all this because both the feds and the provinces have stepped in to provide financial support and the unions at Chrysler in any event are posed to take it on the chin. I personally find a debt for equity swap appealing; or in the case of workers a concessions for equity alternative more appealing than the gun of bankruptcy court.

It does beg the question, from a strategic point of view, if the CAW would not be smart to be making a concessions for equity play so that in the event that Chrysler did end up in bankruptcy they would appear to have already been willing to take on the risk and cast the bondholders in a dim light.

In some corners workers taking equity stakes in a context in which they do not enjoy control is a sticky wicket. I am sympathetic to this position, but I think with a little savvy they could play their equity stakes for bigger control. And the sticky wicket argument assumes that if workers take a stake they end up over-identifying with the company and its future viability as a capitalist enterprise and thereby internalise the boss’ voice in their head. That is likely true, but they do so independent of an equity stake in times such as these. So the real question becomes are auto workers capable of running a car company? I think the answer is yes and further I think they are capable of running better car companies than management. Line workers in tandem with engineers could do incredible things from better product design to better assembly design.

There is the argument to be made that when workers take the step towards managing themselves they take a step towards managing their economy.  And I can’t help but think that workers with better sense of how things work at each stage of finance production and distribution would be a useful paliative to today’s malaise and the glib attitude of our ruling class.

Perhaps a more aggressive stance around the bargaining table would enhance the opportunities for workers self control and direction. Perhaps not…but that is the really big question for today.