Economics in crisis – it needs a ‘Reformation’

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With great insight, Chris Waller draws the parallels between the state of the Church in the 16th century and the state of contemporary economics (1):

Economics needs its Reformation, not only a new theoretical basis, if one can be found, but more importantly, the financial economy needs to be taken out of the hands of a small and overly powerful clique – a clique which, like the Church of Luther’s day, has been shown to be not only corrupt but criminally incompetent in the very matters in which it claimed to have special insight and expertise. Economics in the twenty-first century is in the grip of the very same mind-set that impeded any possibility of intellectual progress in the 16th century and now stands in need of its Nicholas Copernicus, its Giordano Bruno, its Galileo and its Johannes Kepler.

There are voices out there raised against the current economic orthodoxy but, if history is any guide, those who wield power will do their utmost to stifle anything which they regard as heresy and they will not relinquish that power without a struggle: things will get worse before they get better and the Greek people may well be the actors in what is only the first act of a very modern tragedy. (1)

 

Furthemore… asks Chris Waller … Even if economics were solidly founded in theory, we are still left with the bigger question: what is the purpose of the application of this theory?’

A point also made by Neil Wilson when he writes ‘Let’s stop chopping people’s feet off to fit the New Procrustean bed.  Let’s make the bed big enough for all of us.’ (2) He also draws a parallel between mainstream economics and a religion:

Under a New-Keynesian economic system there must be suffering so that the purity of the model is maintained. And since this religion fits with the views of those with the money and power, it is funded and propagated. (2)

 

‘And when the real world throws up endless evidence that the model is utterly wrong, the mainstream economists scream that, no, the world must be forced back into the model. (2)

 

In the same vein,  Professor Richard Wolff  told Bill Moyers (in the excellent video interview below) that he had to go to a Business school to learn how real world economics works because it wasn’t what was being taught in the elegant equilibrium models of the Economics Department at Harvard or other prestigious Universities.  Professor Steve Keen goes further by saying that there is ‘a paradoxical but transcendental truth’ – Neoclassical economists don’t understand neoclassical economics.

 

The problems outlined are pretty damning.  We are told that ‘there is no alternative’ (Mrs Thatcher’s TINA) .. and yet it is an economic system which doesn’t predict real world events like the financial crisis in 2008; that the real world throws up endless evidence that the model is utterly wrong; that economics in the twenty-first century is in the grip of the very same mind-set that impeded any possibility of intellectual progress in the 16th century; and that since this theory fits with the views of those with the money and power, it is funded and propagated.  Moreover, a system which doesn’t serve society, is justifying ‘austerity’ policies and leaves ‘Greece effectively stretched on the rack, we have unemployed living in pipes, and the Spanish youth left to wander the streets scratching a living and their heads’.

How is this dire state of affairs possible?

Professor Bill Mitchell writes (3):

Some of the body of mainstream theory was applicable to the convertible, fixed exchange rate currency systems that were defined under the Bretton Woods system. Under that system, the government was revenue constrained as a result of the link between currency on issue and the stock of gold held by the central bank. As a consequence, the government had to raise taxes and/or borrow from the non-government sector in order to spend…. By the 1960s, a series of what were called “competitive devaluations”…  were made and set up a series of leapfrogging actions among trading rivals. The system collapsed soon afterwards when it became obvious that the US government could not longer support it.

So, at present, the overwhelming perception that the wider society has of economic affairs, options available to government, causalities between economic variables etc is based on a myth. There is mass deception which is propogated by my profession for various reasons.’ (3)

The system is ‘a complex web of inter-related myths’.

But is there only one strand of economic thought or are there different schools?

This useful but far from complete tree was published in (I think) the Washington post:

w-mmt2

For the mainstream, the disputes are solely between the Neo-Classical economists and the Neo-Keynesians.   But there are also the ignored Post-Keynesians.  Professor Bill Mitchell is a notable omission from the Post-Keynesian list above but that may be because he is Australian.  Professor Steve Kean is also missing from the line under Minsky (but that may be because he is also Australian).

In explaining some of the origins of these approaches, Professor Bill Mitchell writes (3):

‘I have noted in the past that the body of theory we call neo-classical (characterised by marginal analysis) emerged in the fourth quarter of the C19th as a counter to the growing popularity of Marxist thinking and the threat it was posing for the wealthy capitalist class. Industrialists provided funding to economists of the day to develop a theory that would show capitalism to be “fair”. This was the basis of marginal productivity theory, which claims that all rewards taken from the system are in strict proportion to the contribution the recipient makes to the production process.

So wages and profits are alike – each goes to the recipient (worker and capitalist) as a reward for their respective contributions.

Mainstream macroeconomics was built on this microeconomic theory which “proved” that free markets were optimal and self-regulating and that most of society’s ills were the result of government distortions of the market.

The theory has survived despite being internally inconsistent… and lacking predictive capacity.

There are vested interests therefore in preserving a body of theory that promotes, for example, damaging deregulation which has allowed national income to be redistributed to profits and undermines the security of worker entitlements (including their jobs). It is thus not a battle with ignorance but a hegemonic struggle.

However, the elites exploit the ignorance of the majority to maintain these myths.’

Neo –Keynesianism arose out of a synthesis of Neo-classical economics and Keynesianism.  A leading architect is Professor Gregor Mankiw, Professor of Economics at Harvard University, former chairman of the Council of Economic Advisers under President George W. Bush and in 2006, an economic adviser to Mitt Romney and continued during Romney’s 2012 presidential bid.  I think it is pretty safe to say that Mankiw is not a Democrat.  He is also author of the mainstream undergraduate textbook Principles of Economics.

In November 2011, some of the students in his Economics 10 class caused a storm by walking out of his lecture. Their criticism of his course speaks volumes as to the current lack of plurality in economic approaches taught in Universities:

“..we found a course that espouses a specific—and limited—view of economics that we believe perpetuates problematic and inefficient systems of economic inequality in our society today … Economics 10 makes it difficult for subsequent economics courses to teach effectively as it offers only one heavily skewed perspective rather than a solid grounding on which other courses can expand. … Harvard graduates play major roles in the financial institutions and in shaping public policy around the world. If Harvard fails to equip its students with a broad and critical understanding of economics, their actions are likely to harm the global financial system. The last five years of economic turmoil have been proof enough of this.”

As Chris Waller writes, in economics just as in the 16th century church, ‘those who wield power will do their utmost to stifle anything which they regard as heresy’.

However, it is clear that not knowing which economic school, politicians and economic analyses are ‘coming from’ contributes to TINA and the confusing ‘smoke and mirrors’ reported in the MSM.  People are ‘turned off’ by the impenetrable jargon and arcane language…

Professor Stephanie Kelton, another advocate of MMT, has created a shorthand  (as explained by Alittleecon).  There are deficit hawks, deficit doves and deficit owls (4):

The hawks are the austerians who argue government deficits are too high, so we must cut expenditure fast. Government should get out of the way and let the private sector do what it does best. George Osborne and chums are definitely in this category.

The doves argue that the private sector is very weak at the moment, unemployment is high and so we must temporarily increase spending to stimulate the economy. They would agree with the hawks however, that generally, large deficits are bad and so we need a medium term strategy to get the deficit down. Paul Krugman is probably the most famous deficit dove, but over here, economists like Jonathan Portes fall into this category, and also maybe Ed Balls (although he often sounds like a hawk).

The problem for the doves is that their argument is easy to tear down with scaremongering about burdening our grandchildren and Greek-style bankruptcy. Because the doves agree these are medium to long term risks, the hawks win the day because they just use the analogy of government being like a household and having to spend within its means. Most people can relate to this, so while people don’t like austerity, many think there is no other way. (4)

But what about the Modern Monetary Theorists and Post-Keynesians?

They are the deficit owls.  They reject the idea that the government is like a household!  Hence, they argue that we do not need a medium term strategy for getting the deficit down because there is never a risk of the UK government being ‘broke’ and unable to pay its bills. (4)

Richard Wolff (and many others) emphasise that mainstream economics is not working, and does not reflect the real economy.  Furthermore, as Chris Waller (and many others) say ‘the financial economy needs to be taken out of the hands of a small and overly powerful clique’.  These are pretty huge indictments.

In addition, the heretics or the alternative, heterodox economists are ignored or pilloried by the mainstream (although, no burnings at the stake to date) but as Neil Wilson, another deficit owl, says:

We can have jobs for all and sufficient income for all. There is no need for poverty. And very likely without having to ‘tax the rich’ either. So we all win.

Let’s harness the output we’re leaving on the table. Let’s stop chopping people’s feet off to fit the New Procrustean bed.

Let’s make the bed big enough for all of us. (2)

If the ‘alternative economics’ was good enough for Roosevelt, Keynes and Lincoln, it makes sense to start listening to the heretics.  Can’t quite picture Ed Miliband as Henry VIII though…

(1)  http://www.economania.co.uk/new-reformation-chris-waller.htm

(2)  http://www.3spoken.co.uk/2013/02/new-keynesian-more-like-new-procrustean.html

(3)  http://bilbo.economicoutlook.net/blog/?p=19265

(4)  https://think-left.org/2012/10/15/how-to-be-a-deficit-owl/

Full Show: Taming Capitalism Run Wild

February 22, 2013

Economist Richard Wolff and Restaurant Worker Advocate Saru Jayaraman talk about battling rampant capitalism, and fighting for economic justice.

Even as President Obama’s talking points champion the middle class and condemn how our economy caters to the very rich, modern American capitalism is a story of continued inequality and hardship. Even a modest increase in the minimum wage — as suggested by the president — faces opposition from those who seem to show allegiance first and foremost to America’s wealthy and powerful.

Yet some aren’t just wringing their hands about our economic crisis; they’re fighting back. Economist Richard Wolff joins Bill to shine light on the disaster left behind in capitalism’s wake, and to discuss the fight for economic justice, including a fair minimum wage. A Professor of Economics Emeritus at the University of Massachusetts, and currently Visiting Professor in the Graduate Program in International Affairs of the New School, Wolff has written many books on the effects of rampant capitalism, including Capitalism Hits the Fan: The Global Economic Meltdown and What to Do About It.

What is George Osborne playing at?

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RichardJMurphy@AnnPettifor: Extraordinary how a private banking crisis became a welfare state crisis – with just the swish of an ideological wand…

On a day when previously supporting economists urged George Osborne to change tack (1) we learnt that many billions are being put aside, doing nothing in an economy with 0.7% negative GDP growth!

As explained in ‘Simon says: QE is the biggest confidence trick of all time.’ (2) Quantitative Easing has the unspoken-about capacity to eliminate government debt. So far, it has in effect reduced the debt burden down to about 45% of GDP (3).  Alternatively, those gilts could be monetised (turned into money) and spent on stimulating the economy. In spite of being asked, by Paul Mason of the BBC and others about this possibility, Mervyn King did not acknowledged that this is a reality (4).  But then he did not deny it either!

Richard Murphy of Tax research writes:

… we haven’t got national debt of just over a trillion now, it’s just under £700 billion. Now that’s a lot, but it’s only 45% of GDP and that was so commonplace during, for example the Thatcher years, that no one noticed it. (3)

Not only are we not being told this but it gets worse! 

Payguy2 writes (2)

… we have a situation where over a third of the outstanding National debt is sitting in the Government owned Bank and another section of the Government, the Debt Management Office – an arm of HMT – is paying interest to the Bank which is again just sitting there unused.

 

 

This is corroborated by Neil Wilson who has unearthed a piece of astounding news when investigating that the Asset Purchase mechanism was slowly unwinding’:

That is when I discovered that the UK’s version of Quantitative Easing, unlike any other QE system in the world, doesn’t automatically sweep the interest paid on the government bonds back to the Treasury.” (5)

As you teach any child it is good to save for a rainy day. The UK Chancellor of the Exchequer appears to have taken that advice to heart and has a nice fat piggy bank set aside.

The question is: how much more rainy does it have to get before he spends it?

£31bn sat there doing nothing in an economy with negative GDP growth. (5)

 

 

That is right!  £31 billion that Government has spent on interest for Government gilts which the Government has bought back from banks, pension funds and other institutional investors.

Now, in the ‘real world’, if you buy back or pay off an IOU, you assume that you have cancelled that debt.  You don’t put the IOU into a special drawer marked ‘money that I owe myself’ and pay interest, on that ‘money that I owe myself’, into an account that you have opened for yourself to hold that interest.  It is nonsensical!

So what does this ‘nonsense’ suggest?

Richard Murphy says:

What it shows is that despite the Treasury taking all the risk on quantitative easing it is refusing to take the income back into the Treasury coffers even though it could at any time. The result is that the government is artificially inflating the apparent cost of borrowing in its accounts as an excuse for imposing cuts on the UK economy. That’s something called fraud, I think. And it’s one that has to stop. (6)

The comments thread following Richard Murphy’s blog further concluded:

JohnM says:

August 15 2012 at 10:57 am

The scandal is that the free (tory) press also know this.
While it is possible that it may generate a lot of vote-buying for the election, it may also be used to enrich the rich further.

Ivan Horrocks says:

August 15 2012 at 11:46 am

My thoughts entirely: all there to try to buy the next election. Its been a successful strategy in the past.

At the next PMQ (which is some way, away, I know) Miliband needs to make this the first subject that he questions Cameron about.

 

As to the health of the UK economy, the latest set of statistics speak for themselves:

http://bilbo.economicoutlook.net/blog/?p=20369

There is no way to put a sugar coating on the data. All sectors (industries) contracted. The ONS said that:

1. Real GDP “decreased by 0.7 per cent in Q2 2012 compared with Q1 2012″.

2. “Output of the production industries decreased by 1.3 per cent in Q2 2012 compared with Q1 2012, following a decrease of 0.5 per cent between Q4 2011 and Q1 2012″.

3. “Construction sector output decreased by 5.2 per cent in Q2 2012 compared with Q1 2012, following a decrease of 4.9 per cent between Q4 2011 and Q1 2012″.

4. “Output of the service industries decreased by 0.1 per cent in Q2 2012 compared with Q1 2012, following an increase of 0.2 per cent between Q4 2011 and Q1 2012″.

So production and construction have now contracted for two consecutive quarters and are thus unambiguously in recession. And now the service sector, which had resisted the broadening gloom until now, is also in decline.

What an appalling indictment of government policy.

Larry Elliott observes in If the economy was a sick patient, George Osborne would be struck off :

‘Britain’s economic performance has been similar to that of the eurozone crisis countries Spain and Portugal, even though the Bank of England has the luxury of being able to set bank rates and the pound has the freedom to fall.’

I take this to mean that George Osborne is deliberately holding back economic recovery.  Michael Burke (7) has shown that the UK’s budget deficit is rising not falling, and Professor John Ross has calculated (8) that:

‘Gauged by decline in GDP, using a common international purchasing measure, dollars, no other economy in the world has shrunk even remotely as much as the UK.’

As usual, Payguy2 pulls the evidence together in a coherent whole (9):

Monetization of government debts is perfectly safe in a liquidity trap. It would solve the need for austerity and allow governments to repair their economies. Unfortunately the global elite want depressions as unemployment lowers wage demands, increases the time debtors owe money to creditors and increases interest rates and their yields. …

The second part of QE is the insane bit. Sitting in the wholly publicly owned Asset Purchase Facility is £325 billion of outstanding government debt. The same debt Cameron says it is critical we eradicate. His plan for it is that in a few years time, the Asset Purchase Facility should sell it back out to the banks we bought it off and then rip up the money the banks give us for it.

Given the original reserve crediting didn’t cause the money supply to widen this is just treasonous and insane. The resale obviously can’t be inflationary – the money creation bit from part one happens over 5 years before the reissue of gilts.  Re-issue will obviously be deflationary as banks will allocate liquidity to buy the gilts instead of using the money for something else. But it cannot be inflationary as there is no money creation at that point.

The second part of QE should be abandoned. A sensible government would announce that the money supply is shrinking, that the £325 billion in the Asset Purchase Facility can be safely monetized and that public sector cuts are cancelled and a £175 billion stimulus package can safely be afforded.

How likely is this? Given how corrupt, incompetent and misleading [it] is [of] the current government to mis-explain how the economy works in order to justify selling off the public sector to their friends and funders.

The Tories and their backers want high unemployment and household debts to rise as this lowers wage demands and increases corporate profits. They are deliberately engineering a slump in order that the banks who provide 50% of their funding and the donors who can afford the £250,000 dinners with Cameron can slightly increase their profits.

Business is sitting on £700 billion of retained profits, banks are rich enough to pay an average of £350,000 to their staff. So what does Cameron do? He abolishes the bankers’ bonus tax, drops the 50p highest tax rate, lowers corporation tax and exempt overseas subsidiaries of multinationals from paying tax.

The rest of us get a 5% hike in VAT, trebling of university tuition fees, youth unemployment raised …

Banking reform debate hots up as party conference season approaches

15 August 2012 10:25PM

It seems that the only conclusion that can be drawn, is that George Osborne et al are deliberately misleading the electorate and deliberately wrecking the economy in order to justify lowering wages, lowering benefits, increasing unemployment, increasing household debt, running-down the NHS/state education and dismantling public services.  Furthermore, there is a little nest-egg of £31 billion ready to be pulled out as a sweetener for the 2015 General Election.

But this behaviour of a government raises deeper questions.  Professor Michael Hudson offers this global overview (10):

In these respects neoliberalism is a doctrine of power and autocracy, a weaponization of economic theory in today’s financial war against the economy at large. Its fiscal program is to un-tax banks and insurance companies, real estate and monopolies. The result is a financial war not only against labor but also – indeed, most of all – against industry and government, because that is where the money is. Gaining the power to indebt economies at increasing velocity, the banking and financial sector is siphoning resources away from the real economy. Its business plan is not to employ labor and expand output, but to transfer as much of the existing flow of revenue as possible into its own hands, by capitalizing it into interest payments.”

And David Malone concludes (11):

I don’t think the banks will lend in to the real economy because they calculate that such a socially useful strategy gives low returns to them. Should they ‘defect’ from this generous strategy and chose instead the selfish strategy of ‘hoard and wait’ then they could make not just a large return but an epic one. They could emerge as owners of everything people will need in order to rebuild their lives. Water, power, rail, hospitals, you name it.

This is what the banks are waiting for. And our politicians are giving them our money so they can.

 

It is probably a great mistake to think that George Osborne, or at least those advising him, do not know what they are doing.  What George Osborne might gain as a result of taking the flak for being the ‘worst Chancellor’ of all times is a matter for speculation.

Related post:

https://think-left.org/2012/08/04/neil-barofsky-how-washington-saved-wall-street-and-abandoned-main-street/

 

(1) http://www.telegraph.co.uk/news/politics/georgeosborne/9477918/George-Osborne-no-longer-enjoys-faith-of-former-prominent-economist-backers-over-deficit.html

(2)  https://think-left.org/2012/07/27/simon-says-qe-is-the-biggest-confidence-trick-of-all-time/

(3) http://www.taxresearch.org.uk/Blog/2012/07/13/the-untold-truth-about-quantitative-easing-is-it-simply-cancels-debt-and-that-means-national-debt-is-now-just-45-1-of-gdp/

(4)   Financial crisis, five years on: Q&A

9 August 2012 9:33AM

Paul Mason and Jeremy Werner asking Mervyn King yesterday about monetizing the debts in the Asset Purchase Facility. King does not deny the monetization.

It is time somebody FOI-ed the Bank to ask for full break down of the maturity dates of all the gilts in the APF. The shortest we know is 3 years and this was bought 2009 so some of the gilts will start to monetize … about now.

There is no prospect of selling the gilts back put into the private sector until 2017 at the earliest (OBR projection is … the government to have large deficit spending requirements until at least then).

Come on guardian- read some MMT and then ask the right questions. Do not let the establishment get away with an utterly fraudulent description of the economy.

(5)  http://www.3spoken.co.uk/2012/08/the-uk-governments-rainy-day-fund.html

(6)  http://www.taxresearch.org.uk/Blog/2012/08/15/16938/

(7)  https://think-left.org/2012/08/04/the-uks-budget-deficit-is-rising-not-falling/

(8)  https://think-left.org/2012/08/10/the-incredible-shrinking-uk-economy/

(9)  http://www.guardian.co.uk/business/blog/2012/aug/15/banking-reform-vickers-report

(10)  http://goo.gl/G0lk3

(11)  http://www.golemxiv.co.uk/2012/08/a-waiting-game/#comments