Radford on McCloskey

If I had someone to blame for my lack of posting these last couple months, other than myself, it would be Peter Radford. His excellent posts at the RWER blog have lulled me into a sense of inadequacy, or something. Maybe there really is a lump of labor when it comes to the blogosphere.

But I digress. Radford has a great essay on McCloskey’s argument about bourgeois culture and capitalist growth. He absolutely nails it towards the middle of the piece, with regard to the attitude of laissez-faire folks towards workers:

All that destruction ended up on the shoulders of those who experience capitalism second hand. They are the ones McCloskey says should be happy to tolerate the capitalists. They are the poor whose boat has been so generously lifted by the great capitalist tide. It is not for them to complain. They are lucky. After all it is not their hard work or effort that made all this possible. It is those capitalists. They did the heavy lifting. Workers merely work. And we all know they only do that up to the point at which the disutility of losing leisure matches the utility of earning a wage. After which they revert to their natural lazy and indolent state. Or unemployment.

So it is only right that the workers bear the brunt of the great changes afoot as the clever capitalists engage in a humungous gear change.

Hence structural unemployment.

It appears that our wise capitalists and financiers have learned that American workers are too expensive and not very well educated for the new things we need to do. This is, obviously, the worker’s own fault. So they are justifiably unemployed. They need to learn new tricks. And they need to do those new tricks for a lower wage. This is because there are hordes of cheap and apparently well educated workers elsewhere willing to catapult their own wealth by working all hours for less. This naturally excites the capitalists who can similarly catapult their own wealth beyond its current meager levels. But those American workers have to give up the notion of maintaining their living standards, at least until they get themselves a better education more fitting to the new wave of up-scale jobs about to be unleashed by all this creative destruction. Just don’t ask the capitalists to chip in for that education. You see, education is a private, not a public good. Workers benefit from a better education so they should pay for it. The capitalists will look after themselves thank you very much. So should the workers.

As we emerge from the crisis and ponder the lingering unemployment problem our capitalist friends have an important message: this is only the destructive bit. We can rest assured a new wave of creativity is rushing ashore to lift us all to riches beyond our wildest dreams.

He goes on to critique that argument about the new wave of productivity. if the gains in productivity of the last several decades haven’t helped workers, why should some new wave come in and save the world? Radford sums up the problem well, as it has been elucidated in this crisis:

The problem being that there are too many losers this time. The destruction vastly outweighed the creation.

And that congealed top layer of society is untouched. So the destruction is asymmetrical and acute.

McCloskey’s book is about bourgeois dignity, but Radford asks the right question: “What about worker dignity?” Indeed.

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Hyman P. Minsky Summer Seminar

The Levy Economics Institute of Bard College is pleased to announce that it will hold the second annual Minsky Summer Seminar June 18–26, 2011. The Seminar will provide a rigorous discussion of both the theoretical and applied aspects of Minsky’s economics, with an examination of meaningful prescriptive policies relevant to the current economic and financial crisis.

This summer seminar at the Levy Institute is probably one of the most important economics seminars that will take place this year. Minsky’s theories, which are completely absent from any top, mainstream economics graduate program, explain the inherent instability of financial markets as part of the normal cycle of the economy. During prosperous times, speculative euphoria leads to an endogenous credit bubble. This credit fueled euphoria is of course unstable, an eventually leads to panic and financial crisis.

The tools used in mainstream macroeconomics completely rule out any possibility of asking these types of questions. Dynamic optimization done by a representative household and a representative firm limits macroeconomics to consider the “stable equilibrium” of the economy, and the only questions that can be asked concern what happens when there are slight deviations from that stable point. The answer, of course, is that the market forces and arbitrary opportunities push the economy back to the stable point.

Economic historian Charles P. Kindleberger was likely the foremost authority on economic bubbles. In Manias, Panics, and Crashes: A History of Financial Crises (2005) Kindleberger surveyed major financial crashes and used the Minsky model to understand their evolution. Had this work been taken seriously when it was published in 2005, we would almost certainly have been better prepared to deal with the subprime mortgage crisis. But instead, it took the largest  economic crisis since the Great Depression to bring renewed interest to Minsky’s model. Hopefully, the Levy Institute will continue to help us make sense of this extremely important phenomenon that the mainstream has neglected.

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GOP Will Regret Anti-workers Overreach

With the Democratic senate caucus still away in Wisconsin, the GOP caucus has found a loophole to pass its anti-worker bill. The policy and social justice implications of this move are obvious, and it’s unnecessary to belabor them here; simply put, this is a bad, bad, bill- a brash political move to seize the upper hand against workers for good.

But it will backfire. It didn’t take long for the opinion polling to demonstrate clearly that Scott Walker’s overreach would earn him ill repute in a state with a proud history of labor rights. Walker and his GOP lackies chose to plow ahead, amid ceaseless protests in the Capitol (which have only grown tonight, of course). Now it’s time for the reckoning. This anti-worker bill will be used in every coming election, both in Wisconsin and around the country, as a way to show that the GOP has gone too far.

I was wondering when the tipping point would come; my economics training taught me about social structure of accumulation theory, in which an economic downturn can resolidify support for various policies that will restore economic balance. We didn’t quite get that in 2008, because of politics. Instead, we got a half-baked stimulus and a dead-on-arrival Employee Free Choice Act. We got a weakened health care bill that was a Phyrric victory and has been a political football since the minute of its passage. We got a climate change bill that passed only one house, again, dead-on-arrival in the Senate.

Social structure of accumulation theory, as I wrote in an assignment in November 2008, would predict that we’d have many restorative policies by now. Instead, somehow, the pendulum swung a little left, and then was dragged way right by shrill voices with the worst of intentions. With this anti-worker bill, I think, the pendulum will swing back. We needed a tipping point to restore sanity (not just the Jon Stewart kind) in this country. We needed a wake-up call to show moderates that Republicans don’t care about fiscal rectitude- instead, they are out for their own political gain and for the economic gain of the well-heeled. This short-term success spells long-term doom for the GOP.

Or so I hope.

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The Social Animal

David Brooks was interviewed on National Public Radio this week, not for the usual political commentary, but to discuss his new book, The Social Animal, which in fact does look worth checking out. When asked by Robert Siegel what sparked his interest in probing the human mind, he responded:

Mr. BROOKS: Failure. I covered a bunch of policy failures, so in – and when the Soviet Union fell, we sent all these economists into Russia, when what they really lacked was social trust. We invaded Iraq totally oblivious to the psychological trauma and the cultural realities of Iraq. We had financial regulatory policies based on the idea that bankers were sort of rational creatures who would make smart decisions.

And I’ve covered education for 20 years, and we’ve reorganized all the boxes to very little effect. And the reality of education is that people learn from people they love. But if you mention the word love at a congressional hearing, they look at you like you’re Oprah.

And so all these policy failures were more or less based on a false view of human nature: that we’re cold, rationalistic individuals who respond to incentives. And so while all these failures based on this bad view of human nature were over in one side of my life, all these scientists, philosophers and others were developing a more accurate view of human nature, which is that emotion is more important than reason, that we’re not individuals, we’re deeply interconnected. And most importantly, that most of our thinking happens below the level of awareness.

This cold, rationalistic, atomistic agent is exactly the agent that inhabits economic models and plays game theory. It is because this is the type of agent that can be modeled neatly using the techniques borrowed from physics and engineering. In order to theorize about a more useful economic agent, the neoclassical economists standard tools of dynamic optimization and dynamic programming would have to be thrown out the window; economists are most unwilling to throw their entire toolkit out the window, for fear of being reduced to level of other, “soft” and “non-rigorous” social sciences.

Brooks also makes an interesting point about how this research has changed his view of markets:

And it’s made me much more suspicious, actually, of the free market, because we have to have – you know, the free market produces a lot of wealth, but it’s embedded. It’s embedded in a series of understandings. And if you don’t have those relationships, then people can’t thrive in that free market.

Do they have an ability to control their impulses? Do they have an ability to work in groups?

Groups are much smarter than individuals. And the groups that do well, it’s not shaped by how smart the people are in the group, it’s shaped by how well they signal each other. Do they take turns when they’re having a conversation? And so, even when you see something like the free market, you don’t see like Ayn Rand rationale individuals. You see groups and competing groups and collaborating groups deeply intertwined with one another.

It is becoming increasingly clear that a more useful economic theory will be one that is holistic, rather than atomistic, and more humbly interdisciplinary, rather than disdainful of other fields of study.

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“Why Isn’t Wall Street in Jail?”

These are just some great paragraphs from Matt Taibbi, and I should’ve posted them several weeks ago:

So there you have it. Illegal immigrants: 393,000. Lying moms: one. Bankers: zero. The math makes sense only because the politics are so obvious. You want to win elections, you bang on the jailable class. You build prisons and fill them with people for selling dime bags and stealing CD players. But for stealing a billion dollars? For fraud that puts a million people into foreclosure? Pass. It’s not a crime. Prison is too harsh. Get them to say they’re sorry, and move on. Oh, wait — let’s not even make them say they’re sorry. That’s too mean; let’s just give them a piece of paper with a government stamp on it, officially clearing them of the need to apologize, and make them pay a fine instead. But don’t make them pay it out of their own pockets, and don’t ask them to give back the money they stole. In fact, let them profit from their collective crimes, to the tune of a record $135 billion in pay and benefits last year. What’s next? Taxpayer-funded massages for every Wall Street executive guilty of fraud?

The mental stumbling block, for most Americans, is that financial crimes don’t feel real; you don’t see the culprits waving guns in liquor stores or dragging coeds into bushes. But these frauds are worse than common robberies. They’re crimes of intellectual choice, made by people who are already rich and who have every conceivable social advantage, acting on a simple, cynical calculation: Let’s steal whatever we can, then dare the victims to find the juice to reclaim their money through a captive bureaucracy. They’re attacking the very definition of property — which, after all, depends in part on a legal system that defends everyone’s claims of ownership equally. When that definition becomes tenuous or conditional — when the state simply gives up on the notion of justice — this whole American Dream thing recedes even further from reality.

 

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Supply and Demean

Stephen Colbert offers a great economic analysis of income disparities in his “The Word” segment from March 1st.

The main focus of the segment is on income disparities in the U.S., starting with a recent Mother Jones issue which called the U.S. economy a “Vampire Economy.” Mother Jones also provides a neat webpage with “eleven charts that explain everything that’s wrong with America.” The same Word segment also references the January 2011 Atlantic article called “The Rise of the New Global Elite” and points out the fact that nearly half of the members of the U.S. Congress are millionaires.

This is an impressive amalgamation of important economic data presented in an extremely entertaining way.

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