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.
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.
I do so tire of this debate. Neoliberals lost, it was predictable at the time; the left was right; the right and right moderates were wrong: now go back to defending inequality as an economic good in and of itself or if you are Clintonite/Blarite liberal prattle on about individual responsibility.
You simply can’t argue that the path of relative price differentials between luxury and mundane, cheap and quasi perishable consumer goods makes up for income inequality. First, income and consumption inequality are two separate issues. Second, if I have to buy the same good twice in a year because it is of dubious quality then my actual price is double. Third there are these uncomfortable facts: Fourth, even if we disregard the latter three points it seems absurd to argue that cheap-shit bought on credit somehow vindicates the neoliberal policy paradigm especially when we are in the middle of a consumer credit crisis.
But crisis or no crisis in the credit markets “Cheap Shit Bought on Credit” was not the political slogan of neoliberals although it is perhaps a fitting epitaph for the policy paradigm.
In our downloads section we have placed the newly released issue of PAER. There are several good articles in this issue with, and no offense to JKG, the last article by Peter T. Manicas titled “Endogenous growth theory: the most recent “revolution” in economics?” is worth a read. A fairly dry title I grant, but a good little overview of the history of the development of what Marx might have called Bourgeoisie economic theory, although as Manicas points out, the real bourgeoisie really has no use for neoclassical micro-economics, at least as a science of capitalism.
Most economists acknowledge that their assumptions are false, but take for granted that the model is justified in terms of its putative predictive value. But, sadly, neither do we have predictive power! Economists, like weathermen and stock market analysts, are never without an explanation of a failed prediction. On the other hand, and perhaps remarkably, even among economists, there is doubt as regards the capacity of theory to understand the real world. Davis (2004) concluded that “a majority of AEA members” who responded to a survey he conducted, admitted, “at least privately, that academic research mainly benefits academic researchers who use it to advance their own careers and that journal articles have little impact on our understanding of the real world and the practice of public policy” (359).
Inadvertently this points to the weakness in Manicas’ argument about the evolution of neoclassical economics. It is not enough to simply postulate that economics evolved the way it did because of two core assumptions—methodological individualism and the invisible hand—and their collision with mathematical elegance. This indeed has become the staple explanation among those practicing the history of economics. What needs to be explained is why a discipline that is putatively about capitalism finds so little takers among capitalists and yet remains so well funded by capitalists. It was Rockefeller that founded Chicago, and it was the economics department at Chicago which cleaned up Rockefeller and his class. Herein, I think partially lies, the resolution to our riddle.
“Economics! What is it good for? Say it again! Absolutely everything! Uhm, ah, Say it again ….”(set to the tune of WAR).