Disparate Models, Desperate Measures: The Convergence of Limits ∗

This chapter was originally written back in 2003 and published in 2005 in the volume edited by David Coates (god father to a Miliband son I think) Varieties of Capitalism, Varieties of Approaches.  The data contained inter alia is by now stale in one sense.  However in another sense the document holds up for its time and place in the early Anglo-American debates on neoliberalism.  The trends I analyzed–rising income inequality, reduced welfare state effort, eroding quality and conditions of work, and a secular decline in productivity growth–across the rich OECD zone regardless of which model of capitalism was being pursued were in fact, as I noted at the time, secular trends.  At the time, 2003, most academics still had their heads in the ground about inequality and the punitive dynamics of neoliberal labour market policies.   Indeed the  hegemony of neoliberalism was so complete at that time most social democratic intellectuals refused or were incapable of acknowledging the state of affairs.  Even worse many were actively crafting and implementing neoliberal policies.

In the above sense I think the chapter still holds up.  Moreover, it also holds up in terms of its main hypothesis that the advanced capitalist zone, despite being populated by nation states with very different institutions and public policy regimes, was producing increasingly poor outcomes for workers and citizens. For A version of the chapter “Disparate Models, Desperate Measures: The Convergence of Limits,” leave a comment to request the document.

∗This article was originally published in David Coates (ed.) Varieties of Capitalism, Varieties of Approaches. New York: Palgrave Macmillan, (2005). The version of the article reproduced herein may be reproduced on a not for profit basis subject to the GNU Free Documentation License and provided proper citation is provided.

The economy lab, the dark age of free trade theory, and the naive view on natural resources and economic development

Over at the Economy Lab in the Globe which Failed, which itself has gone from bad to worse, one of the economists they keep in their stable has either produced an extraordinarily naive analysis or a dishonest one.  I am going to go with naive for the sake of professional courtesy.  Not that that is the MO of economists but I am atheist fan of Jesus and not an economist…so here goes.

To be honest I can’t figure out which vintage trade model Gordon is using.  My informed gut tells me something like an off the shelve H-O-S intro text book model of free trade.  That would fit with his own vintage and the fact that he is an econometrician.  Although that creates a paradox because, as surely Gordn knows, the H-O-S free trade theorem preforms dismally–by even economic standards–in econometric work outs.  In layman’s terms: the work-horse model of free trade which is standard in introductory economics texts fails at a predictive level.

There are any number of reasons for this but just for fun here are few in no particular order:

  1. The economies entering into trade were in a state of autarky (self sufficiency) and full employment.  Both of which are patently false.  More often than not nations pursue trade in the search for a remedy to chronic underemployment and unemployment and have already been engaged in trade.
  2. Product and capital markets are perfectly competitive.  Again patently false.
  3. Factors (capital and labour) are perfectly mobile within a national jurisdiction but not between.  You might get me to agree on labour but the whole point of neoliberal globalisation and its animating quintessential core is the free movement of capital.
  4. As a corollary, capital (investors) is made up of 100% domestic nationals.  Extremely dubious assumption with respect to mining, oil and gas and a whole host of other sectors.
  5. There are no firms.  While capital and labour are the only inputs (and resource endowments) there are no firms.  Just one large something or other allocating labour and capital according to their scarcities.  A model without firms that actually do the trading?  Bizarre me thinks.  This becomes particularly important with respect to determining who benefits from the gains of trade.
  6. Capital is a natural endowment.  Which translated means that for the standard model the explanation is that some countries have lots of capital some do not.  Why that is; the model does not care.  But saying that you don’t care is far cry from saying anything remotely interesting.  Capital is after all nothing other than produced means of production in its physical form and its ephemeral and essential form a complex social relation.  Sorry I can’t really simplify that at this time.  But to get a sense of what I am getting at just recall that the origins of Canada is a colonial enterprise in which colonial settlement was driven by the desire to expropriate natural resources from the original inhabitants.  The origins of Canada, and its rich endowment of natural resources is thus the history of politically constituted property and not some “natural” process of economic development.

O.k. so that is that.  Of course the OEM version of free trade theory is going to be a predictive disaster.  Why anybody bothers to teach it outside of using it is an example of what happens when liberal geeks go wild is beyond me.  But let me do a real world work-out.

Let us take Newfoundland and Labrador as a historical case in point.  Here is region that has leaped from one natural resource boom to another and it has always ended in some form of administration.  The failure to develop a modern diversified economy in which resources play a role but not the primary role.  Contrast the fortunes of early diversifiers in the union, who did so via a tariff wall and you get the picture.

In Newfoundland and Labrador Gordon’s advice is being followed as the mining and oil and gas sectors account for around 40-45% of provincial output but only 4-5% of direct employment including temporary construction employment.  Neither the oil, nor the profits touch land (outside of royalties taxes and wage payments which are all relatively low) in that province because of the weak to non-existent processing of raw materials.

Gordon thinks this is the road map to economic success, I think it leads to ruin.  He is willing to bet standard trade theory on it, I am going with history.

Here is why.  Two seconds of reflection will reveal that in Newfoundland and Labrador almost every single assumption built into the standard free trade model is violated: most certainly 1 through 6 outlined above.  Perhaps most interestingly is that Newfoundland and Labrador would not have a comparative advantage in oil and gas had it not been for the federal and provincial governments.  I am sure Gordon was decrying Hibernia as white elephant back in the day.  The problem is today the two levels of government are fighting over the allocation of royalty payments as the project is paid in full and is churning out lucrative profits for all involved.

Maybe Gordon can write something about that in his next post to the Economy Lab.  I won’t hold my breath.  My discipline right or wrong and all that jazz.

The irony of greed: The end game for Neoliberalism?

The global economy is in the toilet and the Boomers’ representatives are chanting: “flush, flush, flush.”  Me? I am eating cigarettes and wine while admiring the remarkable consistency in the myopia of all of it.

In the name of fiscal prudence the whole of the advanced capitalist zone is in engaged in austerity budgeting and calls for more of the same.  Even Martin Wolf, in his otherwise insightful column in the FT online today, felt the need to tap his hat and nod in the direction of the genteelism of supply.  Exhibit A, the conclusion to his incisive intervention:

Reconsidering fiscal policy is not all that is needed. Monetary policy still has an important role. So, too, do supply-side reforms, particularly changes in taxation that promote investment. So, not least, does global rebalancing. Yet now, in a world of excess saving, the last thing we need is for creditworthy governments to slash their borrowings.

As is widely acknowledged, monetary policy has little outside of conciliatory role to play at this time.  In so far as the CBs should not make the mistake of tightening policy as the ECB and the BoC did.  But apart from the role of spoiler there really is not much left for the CBs to do.  The problem is squarely fiscal.  As Wolf himself went to pains to argue.  Why then the conclusion given that further tax reductions are not only going to make the fiscal positions of governments worse they will also likely have the same effect as lowering interest rates at this time:  Nadda, ziltch, rien, nothing?  The problem is that Wolf has to tip his hat to conventional wisdom.  If not; he has no hope of bending the ears of policy makers.  Oh well, that is his plight not mine.

Here, given none are listening we may speak frankly.  The world economy is in the toilet because free trade, tax cuts, deregulation and above all the liberalization of finance over the last thirty years let loose a Tsunami of forces both economic and political.  The liberalization of finance and production allowed for the national gutting and then global whipsawing of labour.  As the profiteers profited and retired workers slept while the assets they had built were being systematically stripped and the fortunes being amassed were then turned to the seedy business (although a time honoured practice if one cares to actually read Smith) of buying off the government–and it must be stressed the intelligentsia too–broadly understood.

We now have the perfect storm.  A generation of public and private sector functionaries has been trained to believe that the market can do no wrong and the government no good.  As a corollary is of course the proposition that monetary and regressive tax policy is everything.

The irony, of course, is that any credible account of the present crisis would have to admit that we are here because free trade, tax cuts, deregulation, the flexibilization of labour markets  and above all the liberalization of finance brought us here.  How odd it is then that we should be treated to more of  the same as the cure for what ails us.

Never count on economists to defend the public interest

This is something that should always be kept in mind in economic policy discussions: most economists are pro-Market, not pro-Public Interest.

It is especially important to keep this in mind when we read commentary such as this, in which an economist from one of Canada’s smaller economics departments conflates being pro-market with being in the public interest.

This point is sometimes hard to see, especially since many economists hold to the deeply ingrained syllogism that being pro-market is straightforwardly being in the public interest.

But they are a lobby group like any other, and cannot be relied upon to defend the general public interest.*

Economists, particularly academic economists (and like all academics), rely on, for their social status, research funding and a quiet concious, having the public view them as working in the public interest. And given the majority of economists are true believers in the “market” that inevitably gets conflated with being in the public interest

Cloaking oneself as being in the public interest is of course one of the oldest rhetorical stances to take since like wearing the national flag it clearly puts the speaker in the role of the hero and casts those being spoken against in the role of the villains. This is all the more easy to to do when the terms of conversation are being articulated in fuzzy, ill defined concepts such as the “public interest” and “pro-market”. When an economist uses those terms they have very exotic definitions in mind that most lay people would not readily grasp. Perhaps I am being too charitable: I can’t, in fact, find a definition of the public interest in any my economics text-books.

The public interest is a rather fuzzy notion. We can perhaps all agree that it has something to do with public goods but that just raises the thorny issue of what is and what is not a public good. In any case the argument at least has to be made that a specific policy is in the public good and why. Just standing around hands waiving in the air mindlessly chanting pro-market rhetoric like “free trade” or deregulation does not really cut the mustard.

Indeed after a generation of pro-market policies like financial liberalization and deregulation with cascading financial crises of increasingly damaging intensity culminating in the Great Financial Crisis that was 2007 and from which no advanced capitalist economy has yet to emerge; in which whole nations like Iceland, Greece and Ireland were raised; in which untold millions of workers were put and remain out of work; and as a consequence a massive hole was blown in public finances around the world, it should be clear that pro-market policies are not always or even in the majority of cases un-problematically in the public good to say the very least.

Notice that even if you are want to argue that it was bad government regulation in the US which caused the Great Financial Crisis the fact is that decades of financial liberalization and deregulation (pro-market policies) directly led to the formation of global investment and insurance markets which made sure that a “made in the USA” problem had serious global consequences. And it is not just that economists did not foresee these negative consequences they actually argued in favour of these policies on the grounds that such a crisis was less likely to occur and that the consequences would be less severe in the event that it did occur because these pro-market policies allowed risk to be more evenly spread. So much for theory.

That a pro-market economist is given a national soap-box on which to conflate being Pro-market with being in the Public Interest does not bode well for the Public Interest.

* The first four paragraphs are an inverted paraphrase of the linked commentary. I apologize to my readers for reproducing a very clichéd prose style.

Free Trade and Rent Seeking Euro Pharma

I have always detested the normative descriptor “free” in front of international trade deals.  On one level it is oxymoronic ™ to call something “free” when it is in the furtherance of buying and selling more things not about increasing the supply of free things.

On a more serious plane, trade agreements are not about removing regulations but more often than not about harmonizing them.  For example, in the negotiations between Canada and the EU to conclude a bilateral trade deal the Europeans are leaning heavily on Canada to change its patent regime on pharmaceuticals so that European drug makers can bilk an extra 3 billion a year in prescription drug costs.  An article over at the globe summarizes the proposal as follows:

  • Extending the term of patent protection by up to five years if drugs are stuck in the regulatory approval process;
  • Lengthening the period of data exclusivity, which prevents generic companies from using data from clinical trials to create similar drugs, from eight years to 10 years or more; and
  • Strengthening notice of compliance regulations, which ensure that generic companies are respecting patents, by adding an appeals process.

Shorter, increase the length of patent protection for Big Pharma thus increasing the time for them to harvest monopoly profits.  This is classic rent seeking behaviour.  Interestingly most free trade fan boys (economists) push trade deals because they promise to undermine rent seeking by domestic producers.

It is time to normatively rename free trade agreements (FTA) to Rent Seeking Trade Agreements (RSTA).

The 10 Big Economic Lies of 2010

So it is the end of the year and what a stunning year it has been for all sorts of creative story telling inside the economics profession (particularly in its conservative manifestation). I am going to kick this list off with No. 10 and take my readers’ input for the remaining nine.

To my mind the No. 10 has to be the revisionist claim that arguments for free trade are not about jobs but rather some other metric of economic goodness. Empirically when free trade turned out to be a job killer in Canada, especially after the low CDN dollar policy had ended, conservative economists began circulating the missive that free trade was never about jobs but rather X efficiency or some other idea that lacked any empirical test / verification. In idiomatic terms we call this “moving the goal posts to infinity”; in layman’s terms we call this chicken !@#$%^&; in scientific terms we call it proof positive of a degenerating paradigm.

En effet, this has been a banner year for the depths to which conservative economists are willing to plumb in order to rehabilitate that snow plough job which is micro-macro 101. There are many more, I will post one a day until Xmas eve.

IMF research paper: “Inequality, Leverage and Crises”

A recently released research paper coming out of the IMF is worth your time. Particularly so if you find yourself making what you take to be a serious argument about the link between inequality and macroeconomic stability but can’t seem to get any respect. Over thirty years of neoliberalism it has been constantly argued that inequality was good for growth and economic stability; this IMF paper argues the opposite and has the neat feature that it is based in evidence rather than in elegant counter intuitive theory.

Below is the abstract for the research paper by Michael Kumhof and Romain Rancière (hat tip to Andrew Jackson over at PEF)

The paper studies how high leverage and crises can arise as a result of changes in the income distribution. Empirically, the periods 1920-1929 and 1983-2008 both exhibited a large increase in the income share of the rich, a large increase in leverage for the remainder, and eventual financial and real crisis.

The paper presents a theoretical model where these features arise endogenously as a result of a shift in bargaining powers over incomes. A financial crisis can reduce leverage if it is very large and not accompanied by a real contraction. But restoration of the lower income group’s bargaining power is more effective.

Potash, Economic Nationalism, and National Champions

Harper did the unthinkable. It is only in the rarest of circumstances that the federal government actually uses its powers of review to quash foreign takeovers. Yet this is not really where the action is–that is, what caused the cons to deny BHP bid to take over Potash.

The action is just beginning. In less than 12 hours from now the major Canadian print media outlets–from the globe and mail through to the National post and Macleans, are going to be blitzed by a uniform message: the conservative government was wrong to kill BHP’s bid. The chief purveyors of this line are going to be, of course, Andrew Coyne and Stephan Gordon. And both are likely to riff off the same logic.

The argument will most likely be something like the following. Investment decisions that are made in the context of competitive private markets produce the most efficient outcomes. Public attempts to interfere with that outcome are most likely to be sub-optimal. Of course we could point to Canadian banking legislation which effectively guarantees an oligopolistic market structure and then point out that these same talking heads prattled on about our regulatory environment being responsible for avoiding the excesses of the GFC. But having a general comprehension problem in moving from point A to B they will of course celebrate the beauty of free markets.

But wait there is more. There is always, of course, more with talking head economists. Even if they grant that potash and the potash industry is far from a competitive industry–indeed BHP’s bid is largely about consolidating the market to guarantee price making capacity–they will pull out plan B.

Plan B is rather devious. Plan B says that even when the norms of perfect competition are violated government intervention is not necessarily warranted. The inspiration here is some pissy little paper written by Hayek. I won’t tangent. The cut and thrust; the pith and substance here is that even under imperfect competition private market structured are subject to outside scrutiny and competitive pressures such that we can proceed as though the results of perfect competition nearly apply. The government on the other hand when picking a national Champion will have no such information and might as well be flipping a nickel to make its choice.

This is a stupid argument. The very fact that BHP is making an offer gives the state an indication that Potash is a viable national Champion. But wait here is more. Potash is strategic: there is every good reason to believe that in a world of increasing consumption fertilizer, like oil, is going up.

So between the market structure and future path of potash prices it should be incredibly hard to paint a picture of government interference causing a net loss.

But both the abstract science and the empirical reality be damned because the real action here is about precedent. The last thing the Coyne’s and Gordon’s of this world want is a positive example of the public interest trumping private profits with the math on the side of the public.

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.

Krugman looses it and losses it bad: Maybe economics is a morality play

Krugman is precisely what is wrong with American progressives. He thinks after spending a life watching while nobody left of him was left standing; that after mission accomplished, he would be benighted. The reality is that he has been rendered superfluous. The War is over kid and you were used like a peon.

Like Stiglitz, Paul reminds of a good reform liberal who, after coming back from the crusades, realizes that the war he thought he was fighting was not the war he was actually fighting. That hit home for Stiglitz circa his tour at the world bank. Old Joe has never really recovered. Something opened his eyes at the world bank and suddenly almost all the little tightly written mechanical equations he ever employed seemed to evaporate into thin air.

Earth to planet Paul there is a reason Larry gets the plumbs. Hint: and it is not because he is a better economist than you. Larry understands something your naiveté never will. Economic laws are made by Humans (for Larry men) the rest is commentary. Larry does not speak truth to power so much as he cloisters it in shiny white garb serving up technocratic, but nonetheless, ideological resources ready to hand for power. If Larry gets annoyed sometimes maybe it is not because of principle, maybe it is because he thinks the powers he serves are too deft to their own interests. And that really was the conceit of Keynes.

You behave as you believe: public policy is for the betterment of human kind. Here is what is going to happen Paul; 8-10 years from now you will be proven right and nobody will care. Whatever the configuration of economic and political forces at that time will be they will not give one shit about your sage like prevision.

In short, you will be equally as superfluous as you are now. Here is a clue Paul. Keynes, your hero, was in a very interesting milieu with socialists and communists to his ascendant left and self serving, myopic, reactionary forces to his right. Keynes could under these conditions position himself in the centre: You can’t. Your left flank has long since been burnt.

Sorry my dear comrade you are now the indefensible poll-bearer of the left. So please stop Kvetching and pony-up.

Apostle Paul writes:

The point is that it would have been much better if the Depression had been ended with massive spending on useful things, on roads and railroads and schools and parks. But the political consensus for spending on a sufficient scale never materialized; we needed Hitler and Hirohito instead.

Gee Paul and why might that be? Why might capitalists prefer fascism and war to useful things? The answer to that question is where the morality play of economics leaves-off and objective political economy begins.