On limits of the system — Keynes and Marx

13 Nov, 2019 at 10:41 | Posted in Economics | 19 Comments

 

19 Comments

  1. Anwar, as far as I am concerned, makes two salient points in the video:
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    1. The Phillips Curve was eventually discredited and I presume he is referring to the stagflation of the 1970s where the inverse relationship between unemployment and inflation appeared to be broken.
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    2. That the explanation for the lack of an inverse relation between unemployment and inflation is that as unemployment is reduced, relative wages increase, the rate profitability then decreases, economic activity declines, unemployment increases.
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    If Anwar’s explanation is related to the stagflation of the 1970s, then I believe there is a fundamental mischaracterization of the economic situation in the 1970s. Of course, the stagflation of the 1970s was used by the likes of Lucas and Sargent to destroy Keynesianism (vide their “After Keynesian Macroeconomics”).
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    For me the stagflation of the 1970s has a simple explanation, entirely consistent with Keynesianism and the Phillips curve.
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    The term stagflation of course is derivative of two words, stagnation (i.e. unchanging output or declines in output) and inflation.
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    The inflation part was a supply side phenomenon caused by the rapid rise of the oil price.
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    The stagnation part was a demand side phenomenon caused by the huge shift income from the West to the oil producing economies and hence a massive increase in unemployment in the West at the time.
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    To me, this is a straightforward simple explanation that does not need any fancy economics.
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    On the second point, Anwar’s explanation is purely from the perspective of the theory of value, that is the one dealing with relative prices and returns.
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    He has ignored the income (Keynesian) side of a possible explanation. While relative wages might increase in a boom, incomes in aggregate have increased as has the rate of profitability. The rate of profitability does not decline in a boom.
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    Inevitably, the bust follows the boom.
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    The bust is not due to the decline in the rate of profitability (because there is no decline in the rate of profitability in a boom). The bust occurs because the rate of investment is no longer sustainable because real resource limits have been reached and because the authorities endeavour to quell the ensuing inflation by monetary or fiscal policy adjustments.
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    It seems to me that Anwar, having a few too many toes in the Marxian/classical theory of value camp, has ignored Keynesian/income considerations.

    • Ultimately, I think this is an empirical question and on the factual history, Anwar’s narrative explains the pattern better. Which in no way denies the important role hitting a global resource ceiling and the oil price shock played.
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      One point is simply that economies are complex, even if economics tries too hard or in the wrong way to be simple. Economic phenomena, like all social phenomena, are overdetermined; they have many causes in interplay. It is simply not the case that the fact of the oil price shock (1973) invalidates the marked decline in corporate business profitability at the margin after 1965. The wage increases gained by the industrial strikes of 1969 (U.S. autos and steel) do look like overreach. And, we ought to be cautious about the glib oversimplification of “real wage income”: this was not incidentally and certainly not coincidentally the period when Bretton Woods came apart and the last vestige of the gold exchange standard was abandoned — money truly became non-neutral.
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      Keynes the Liberal, imho, tried way too hard to overlook or minimize the political reality that politics is a struggle over the distribution of power and therefore income. And the New Classicals, with a similar motivation, try way too hard to pretend that the (political) economy is an impersonal but self-regulating “system”.
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      The prize awaits the economist who can see that the political struggle can resolve itself into coordinated social cooperation that, yes, is fairly characterized as a system, but one which is regulated by the exercise of contested power and authority.
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      Anwar may well be right that too many on the left are intellectually unprepared to wield power as the makers of rules for the regulation of “a system”. Good intentions are not an adequate guide to policy, let alone politics.

      • “Ultimately, I think this is an empirical question and on the factual history, Anwar’s narrative explains the pattern better.”
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        Early on in my professional career I worked for many years as an investment/equity analyst (I specialized mineral resources). I have witnessed many cycles of economic activity. I can’t remember one where as a cycle peaked (measured by output) there was not an accompanying a fall in unemployment, not a rise in the general level of prices, not a rise in real wages, not a rise in the level of corporate profitability and not a rise in the rate of profitability.
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        As far as I am concerned, Anwar’s account of the pattern of economic behaviour over cycles of boom and bust is not in accord with the facts.
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        As far as the 1970s stagflation is concerned, the focus always seems to be on the supply side account of cost inflation. Rarely, if ever in fact, is consideration given to the demand side collapse in the West caused by the massive transfer of income from the West to the oil producing economies which was responsible for the falls in employment. This is not a breakdown of the Phillips Curve effect.
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        “Keynes the Liberal, imho, tried way too hard to overlook or minimize the political reality that politics is a struggle over the distribution of power and therefore income.”
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        I’m not sure where that comes from, but I would say this is precisely what Keynes was trying to deal with, particularly in the latter pages of the GT.

      • “The prize awaits the economist who can see that the political struggle can resolve itself into coordinated social cooperation that, yes, is fairly characterized as a system, but one which is regulated by the exercise of contested power and authority.”

        If that prize existed, why wouldn’t Kalecki have collected it?

        • I think he did.

          • 🙂

            • Kalecki was only nominated.

    • “real resource limits have been reached”
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      When has that ever happened?
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      FDR complains about overproduction in his Second Fireside Chat.
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      The last crisis was brought on by liquidity hoarding, not any real resource shock.

      • Yes, I agree – it wasn’t a run of the mill business cycle – it was a full blown financial crisis.

      • There was a real resource shock in 2007 — it is interesting in a way that it should disappear down the memory hole so easily. And that real resource shock had a reflexive relation with financial liquidity: first being driven by the prophylactic provision of liquidity in the first instance; then, in the inevitable collapse of the bubble, driving a brief deflation.

        • “There was a real resource shock in 2007 ”
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          Please explain some more.

          • Go look it up if memory fails you. Am I Google now? Is there no wikipedia where you live? I have no more patience for your nonsense, Henry.

            • Bruce,
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              We have a difference of opinion. I see no problem with that. However, if you make assertions you should be prepared to defend them.

            • Bruce,
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              “I have no more patience for your nonsense”
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              Then you should speak up with argument, not condescension.

        • “There was a real resource shock in 2007 ”
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          It’s disappointing you have not taken the opportunity to explain yourself.
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          The question is did the surge in the oil price in the mid 2000s constitute a shock?
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          The oil price at that time approximately quadrupled over a four year period.
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          Whereas the 1973 oil price rise entailed an almost quadrupling over a period of months and the oil price rise of 1979 a tripling over a period of months.
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          While the oil price rises of 2004 to 2007 might constitute a shock, their shock value was incontrovertibly no where near as powerful as those in the 1970s.
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          It was perhaps more of a case of boiling a frog.
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          In any case, while oil price rises may have made a contribution to the liquidity and financial crisis of 2008, the crisis was not due to a more mundane business cycle recession.

  2. Above I said ” While relative wages might increase in a boom..”
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    I should remove the words “relative wages” from the sentence and replace it with “real wage income”.

  3. Well, the boom 1965-1972 saw corporate profitability decline markedly, in the sense that matters: additional business investment yielded diminished returns. This was reflected in such headline indicators as the Dow Jones industrials, which declined steadily from 1965 to 1980 or so.
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    It is too easy to fall back on simplifications, of which “it was always thus” and economic stasis are two. I would not use the term, “profit” as Anwar does, but there is a relation between wages and profit, mediated by returns on capital invested and it is a paradoxical one. When business is adding to the capital stock and the additions to the capital stock are contributing to increasing marginal productivity of labor and by extension, wages, the marginal productivity of capital and therefore returns are diminishing. Investment booms, but profit not so much. That was the late 1960s.
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    We in the U.S. live in a bizarro reflection of that world: the share of national income going to Capital grows even as wages stagnate. The capital stock, especially the public goods of education and infrastructure are being run down, as the billionaires and retired cash in their chips. Vast sums are invested in projects that promise losses forever, while the most dynamic financiers engage in vulture projects, aimed at destroying businesses. Finance is anything but neutral and inflation assumes the disguise of an asset price bubble.
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    The “boom” in 1965 made people optimistic. It was a foolish optimism in retrospect. Maybe that is a cyclical constant. But, the current Trump boom is something else: a boom in homelessness, debt peonage, the desperation of the gig economy.

    • Establish by political fiat a minimum level of access to resources expressed in terms of today’s dollars, and maintain that real purchasing power by monetary fiat. Basic income of $3000 per month, financed on central bank balance sheets. They can sell panic insurance to fund at least part of the basic income liability.
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      Right now, the Fed is printing money to lend in the repo market at below-market rates. What if the Fed had sold repo rate spike insurance before the September spike, so banks could have hedged against possible spikes and replaced lost cheap repo funding with the panic insurance they bought from the Fed? Then panics become hedgeable and more contained …

    • “This was reflected in such headline indicators as the Dow Jones industrials, which declined steadily from 1965 to 1980 or so.”
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      Bruce,
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      You are confusing secular trends with cyclical patterns.
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      The movements in the DJs are a reflection of trends in American profitability.
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      Rates of American corporate profitability progressively declined from the second war onwards.
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      I would argue that this is due to the fact that America began the post war era in a dominant position but increasingly faced competition from an aggressively developing Japan and a recovery in European industry post WWII.
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      The cyclical patterns evident in the DJs and American corporate profitability are a reflection of other shorter macroeconomic factors. These are what are in contention here.


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