what you get here

This is not a blog which expresses instant opinions on current events. It rather uses incidents, books (old and new), links and papers as jumping-off points for some reflections about our social endeavours.
So old posts are as good as new! And lots of useful links!
The Bucegi mountains - the range I see from the front balcony of my mountain house - are almost 120 kms from Bucharest and cannot normally be seen from the capital but some extraordinary weather conditions allowed this pic to be taken from the top of the Intercontinental Hotel in late Feb 2020

Thursday, February 21, 2019

A better economics

No sooner was my post about The Global Minotaur up than I found another of Yanis Varoufakis’ books freely available on the internet – this time a very original Foundation of Economics – a beginner’s companion (1997). It links nicely to a post last month about populism which had a little section dealing with the state of economics readers may have missed -
2008, of course, should have been the death knell for economics since it had succumbed some decades earlier to a highly-simplified and unrealistic model of the economy which was then starkly revealed in all its nakedness…..Steve Keen was one of the first economists to break ranks very publicly way back in 2001 and to set out an alternative - Debunking Economics – the naked emperor dethroned. This coincided with economics students in Paris objecting to the homogeneity of syllabi and reaching out to others – creating in the next 15 years a movement which has become global
This is a good presentation on the issues (from 2012) - and I am now reading an excellent little Penguin book The Econocracy – the perils of leaving economics to the experts by Joe Earle, Cahal Moran and Zach Ward-Perkins (2017) from their experience of stirring things up on the Manchester University economics programme. The book’s sub-title says it all!
Dani Rodrik is one of the few economists with a global reputation who has bothered to give them support (Ha-Yoon Chang is another) and indeed Rodrik published an important book recently reviewing the state of economics - Economics Rules – the rights and the wrongs of the dismal science; (2016) which was nicely reviewed here. Clicking the title gives you the full text – and it seems a very good read
The Financial Times recently reviewed several other such books - so the situation is not beyond repair but we have to be realistic. Academic economists have invested a lifetime’s reputation and energy in offering the courses they do - and neither can nor will easily offer programmes to satisfy future student demands for relevance and pluralism….. chances are that the next cohort will be more pliable... 
The excerpt suggested that Steve Keen was one of the “first economists to break ranks in 2001” – in the sense of presenting a wholesale critique of the economics discipline. But Varoufakis’ Foundation of Economics – a beginner’s companion was published even earlier - in 1997. And his “Further Reading” section – a veritable model of a bibliography – includes critical books from the 1970s and one from the 1950s.
I know how boring economic writing is – but it is time we understood that commentators, business people and governments make the subject boring for a very good reason….It makes us apathetic. - and less inclined to challenge the system...

I was once, if briefly and somewhat under false pretences, an economics lecturer – but my financial illiteracy is almost criminal but not, sadly, at all unusual. Most of us seem to lack the patience to buckle down and take the time and discipline needed to understand the operation of the system of financial capitalism which now has us all in its thrall. We leave it to the "experts" and have thereby surrendered what is left to us of citizenship and political power.

What makes Varoufakis' various books such excellent reading is the sheer originality of his prose –showing a mind at work which is constantly active…...rejecting dead phrases, clichés and jargon… helping us see thlngs in a different light..... using narrative and stories to keep the readers’ interest alive…He's in total command of the english language - rather than, as so usual, it in control of him.....
You don’t expect to find good prose in the “Further Reading” section of a book, but just see what Varoufakis does with the task…… 
The main reason for writing this book was a lack of sources to which I could refer my students for a more wholesome diet than that offered by conventional textbooks. The problem with books and articles which treat their reader to the fascinating debates is that they are too hard for beginners; especially for today’s university environment which is more demanding on first year undergraduates’ time than once was the case. Thus in order to achieve maximum emphasis I will confine myself to a small number of suggestions for further reading. 
The one book you must read First, I must recommend Robert Heilbroner’s bewitching introduction to the evolution of economic ideas entitled The Wordly Philosophers (1953). If you are to read one book beyond the standard economics textbook (and perhaps the one you are holding), attempt this one; you will not regret it.
Textbooks The first economics textbook which set the scene for today’s multi-colour glossy door-stops was written by Paul Samuelson (first published in 1948). It is entitled “Economics” - and is the most famous text since the Second World War and, still, the most interesting (notwithstanding my overall displeasure with economics textbooks). All the textbooks have since attempted to emulate Samuelson and, as is always the case with imitators, they succeeded only partially. Those of you with a sense of textbook history will benefit from reading Samuelson’s mega-hit.
An economist’s ambition I don’t care who writes a nation’s laws—or crafts its advanced treatises — as long as I can write its textbooks.Paul Samuelson 
If you want something more contemporary, helpful on a day-to-day basis (especially for first year economics students) and with an appreciation of the limitations of economics and the importance of history and political debate, try the large (though not expensive) volume which was put together by the economists at the Open University. Being part of a distance-learning institution, the Open University team edited a book that students can read independently as opposed to a reference manual to be consulted after a lecture. Its title is Economics and Changing Economies (published by the Open University in association with Thomson Business Press in 1996). It contains chapters on everything that you are likely to encounter in your first (perhaps even your second) year as an undergraduate and each topic is treated sensitively and with a humility that is uncommon (unfortunately) amongst economics texts. If you want to improve your essay skills and dazzle your tutor with your command of particular topics, don’t miss this book.
If you wish for something smaller and somewhat simpler (e.g. if you are an interested general reader rather than a student worried about particular assignments), I suggest Robert Heilbroner and Lester Thurrow’s Economics Explained (Simon and Schuster, 1994). On the other hand, if you want a ‘cutting-edge’ neoclassical textbook, I find Robert Frank’s Microeconomics and Behavior (McGraw-Hill, 1993) to be the most (although still insufficiently) open-minded of the introductions to neoclassical thinking.
Unconventional textbooks. I will mention only two. For a holistic, open-minded and rather comprehensive approach to economics, I suggest Vicky Allsopp’s Understanding Economics (Routledge, 1995). Allsopp manages to remain well within the mainstream while reorganising the various topics in such a way as to make it easier for the beginner to see economic thinking as more than technical gymnastics. For instance, she offers her readers a chapter on ‘Law, custom and money’ which is a far better introduction to the concept of money (not an easy one!) than the standard chapters on money demand, money supply, assets, etc. which pollute most textbooks. Additionally Allsopp offers a comprehensive chapter on ‘Investment’, a much neglected yet crucial topic.T
The second suggestion here is one for those of you whose appetite was whetted by the glimpses of non-neoclassical economic theory in this book. If you wish to explore those ideas further, a good place to start is Malcolm Sawyer’s Introduction to Radical Economics (Macmillan, 1989). There you will find simple introductions to the Ricardian, Marxist, Neo-Keynesian and Neo-Austrian ideas mentioned in this book’s more critical chapters (primarily Chapters 6 and 7).
The road to paradise Let’s face it: economics is boring most of the time. Economists’ best efforts (of course I include myself in this sad category) are unlikely to offer excitement and reading pleasure for more than a few moments. To punctuate the boredom, I suggest that you move to the borderline between economics and the other social sciences. That is the way, if not to heaven, to less arid fields of thought.Looking at books I enjoyed as a student, one book whose effects I have tried to emulate here is Economics: An anti-text, edited by Francis Green and Peter Nore (Macmillan, 1977), a book devoted to countering the brainwashing of economics textbooks.
I also recall fondly another book  whose influence stays with me today: Ed Nell and Martin Hollis’s Rational Economic Man (Cambridge University Press, 1976). I remember it was hard-going in parts but lucid and simple, as well as very exciting, in other parts. Much of my Chapters 4 and 11 have been inspired by that book.
 Unfortunately time has left its mark on it and it will perhaps seem somewhat dated to a fresh pair of eyes. None the less it may still be a good idea to borrow a well-thumbed copy from a library for perusal. Since then Nell and Hollis have published other books which are more up to date. Nell’s Making Sense of a Changing Economy: Technology, markets and morals is an interesting read (Routledge, 1996). However, again with a view to narrowing down your ‘shopping list’, I want to urge you to read some of Hollis’ work. (If you could see and hear me I would be gesticulating very energetically in support of this recommendation!)
Although not an economist (Hollis is a philosopher), his writings pack great insight and inspiration for students of the economy. Have a look at his enticing (and easy-going) The Philosophy of Social Science: An introduction (Cambridge University Press, 1994).
And if you feel more adventurous and altruistic to your future self, tackle two more of his books: Reason in Action (1996) is a collection of articles on many philosophical issues central to economics (e.g. the free-rider problem) whereas The Cunning of Reason (1987) is a wonderful investigation on what it means for a social animal to be rational.
Be warned: these two books (both published by Cambridge University Press) are hard work for first year students and you are unlikely to plough through their entirely. Nevertheless even reading bits of them, and making a point of returning to them in the years to come, will fill you with joy and pride.

Wednesday, February 20, 2019

The Global Minotaur

A blog with a good search facility is a fantastic resource - able to summon up a vaguely-remembered reference. A few days ago, I realized that I had forgotten the full significance of Nixon’s decision in 1971 to break the connection with gold which had been agreed in 1944 at the Bretton Woods Conference. I remembered that Yanis Varoufakis had written a powerful book about it in 2011 - The Global Minotaur -America, the true origins of the financial crisis and the future of the western economy – but it was inaccessible up in my mountain house. I googled….to discover that the entire book is now available to be downloaded (just click the title).

Varoufakis is a Greek economist – which offers two reasons for expecting a badly-written book….economists seem almost genetically incapable of expressing themselves clearly; and English is not his natural language. But the book is a joy to read – not least when he makes use of Greek mythology to illustrate a point. He clearly had good proof-readers….
I generally try to keep notes on key books – which are better written in hand than cut and pasted (our memory more easily retains what we take the trouble to write out in long-hand). But all too often I succumb to the temptation of cut and paste – as now from a very useful summary of the book 
The theme of the book is very well laid out in the introductory chapter. The author looks at six explanations which have been offered for the crisis but finds them useful but insufficient: (i) a failure to understand risk; (ii) regulatory capture; (iii) irrepressible greed; (iv) cultural origins (Anglo-Celtic  beliefs in flexible labour markets, etc.); (v) toxic theory (efficient markets hypothesis, rational expectations, etc.); (vi) systemic failure of capitalism, the role of the USA in financing its debts and deficits from the surpluses of Germany and Japan. 
Chapter 2, ‘Laboratories of the Future’, provides a brief historical account of the development of capitalism á la Marx, the role of crises, Goodwin’s predator prey model, and the role of finance in modern capitalism with the ability to create bubbles, and the end of the Gold Standard after the 1929 Great Crash.
 Chapter 3, ‘The Global Plan’, provides a historical account of the Marshall plan to save global capitalism, the breakdown of the Bretton Woods agreement, the ending of the US dollar’s convertibility to gold in 1971, and the ‘surplus recycling mechanism’: the absorption of surpluses created in Japan and Germany by the USA. Varoufakis argues that the European Union was a clever US plan to bring Europe into the US axis of economic influence. He ignores the view that the EU was meant as a third force: to stand against the USA (a view strongly held by Charles de Gaulle) and as a bulwark against communism. 
Chapter 4, ‘The Global Minotaur’, discusses the role of the USA in the global economy. The author argues that the major flaw in the Bretton Woods agreement (similar to a major flaw in the European Union) was that there was no automatic global surplus recycling mechanism. In the early post war years, the USA recycled its surplus dollars to Japan and Germany (especially) under the Marshall Plan. However, after the end of convertibility of the dollar to gold, the USA had increasing deficits financing wars in Vietnam and South East Asia. Varoufakis argues that the USA persuaded OPEC to raise oil prices (as they are denominated in US dollars) which would increase the demand for US dollars.
The rest of the world continued to finance the US deficits as the US dollar was still regarded as a reserve currency (although later the Europeans would have liked to make the Euro the reserve currency). The US economy was expanding, with stagnating real wages and increasing profitability that led to an inflow offoreign capital. The cheap loans that the USA made to Soviet satellites in the 1960s became a burden when interest rates soared under Volcker’s regime of high interest rates. This, Varoufakis suggests, led to discontent in the Soviet satellite states that eventually led to the demise of the Soviet Union. This is an interesting twist on the usual interpretation of history. In
Chapter 5, ‘The Beast’s Handmaidens’, Varoufakis argues that the Europeans, Irish, British, and Japanese were in awe of the American ‘great moderation’and happily followed US supply-side economic policies. Wall Street, is for Varoufakis, a ringleader of the handmaidens engaged in a roller coaster ride of mergers and take-overs. The development of various ‘clever’ derivatives (CDOs and CDSs), that were supposed to remove (reduce?) risk from financial markets, expanded at an almost exponential rate. This expansion helped the asset price bubble supported by ‘toxic theory’ that suggested that markets were efficient and bubbles did not exist. Free markets reigned supreme with the growth of Thatcherite and Reaganite governments.
Huge capital flows from Germany, Japan, and China fed the financial booms in Wall Street and supported the twin deficits. In 2005 Paul Volcker had foreseen the impossibility of a never ending increase in debts being funded by foreign capital flows: ‘The difficulty is that this seemingly comfortable pattern can’t go on forever’ (p. 145). Curiously, the author does not discuss the Asian Crisis of 1997 which was a fore-runner to the GFC. 
Chapter 6, ‘The Crash’, provides a blow by blow account of the early stages of the crisis in 2007, the collapse of Bear Stearns, problems faced by BNP Paribas, and the Swiss UBS. In December 2007, President Bush (a free marketeer par excellence) intervenes to save house owners from foreclosure and the Federal Reserve (the Fed) steps in providing (almost) unlimited credit to the financial system. By September 2008, Lehman Brothers collapses as the US government refuses to save it. This is often taken to be the start of the GFC. Several European banks and finance houses that held ‘toxic assets’ are in trouble and the whole western world is in a tailspin, with central banks suddenly doing an about-turn on monetary policy (usually by interest rate management) and no longer targeting inflation.
During the crisis, several banks (and car manufacturers) were nationalised but as things got better the banks were denationalised and back in the driving seats! ‘In short, socialism died during the Global Minotaur’s Golden Age, and capitalism was quietly bumped off the moment the beast ceased to rule over the world economy. In its place we have a new social system: bankruptocracy — rule by bankrupted banks … ’ (p. 167).
 The financial crisis spread all over the western world with declining GDP and increasing unemployment, and even the developing world found its growth rates slowing down. Tiny little Iceland went through a dramatic crash! European Union countries, especially Portugal, Ireland, Italy, Greece, and Spain (PIIGS), have been experiencing a continuing recession with their banks and financial houses facing bankruptcy, and the existence of the Euro is under continuing threat. The UK disposed of its Labour Government and replaced it with a coalition of the Conservatives and Social Democrats, which imposed austerity measures that have led to a double dip recession. These economic crises have led to political crises, and that is still continuing.
Chapter 7, ‘The Handmaidens Strike Back’, turns to the methods employed by the USA and European Central Bank to attempt to rescue countries in crisis and the banking system. Varoufakis argues that the Geithner-Summers plan of 2009 of creating a simulated market for CDOs was essentially a method of helping the banks to convert toxic assets into ‘clean’ assets helped by the Fed and the Treasury. 
Chapter 8, ‘The Minotaur’s Global Legacy’, discusses the symbiotic relationship between Japan and the USA. The post-war growth of the Japanese economy was sponsored by the USA, Japanese exports were purchased by the USA, and in return the Japanese recycled their surpluses by investing in the USA. The Japanese boom came to an end with a collapse in the housing and asset price bubbles in the early nineteen-nineties, and it faced a liquidity trap situation. (It is interesting that the Japanese experience of loosening monetary policy for several years did not help the economy to come out of the recession. It apparently did not warn the IMF and other central bankers that simply loosening monetary policy would not cure the underlying problems of the global crisis.) The European Union provided Germany with an expanding market for its exports, leading to current account deficits in the other European countries. This was continued with the introduction  of a fixed exchange rate within the European Union by the introduction of the Euro (except for the few countries that refused to join, especially the UK).
The US financial crisis spread throughout Europe, but the policies introduced by the European Central Bank failed to stave off disaster for Greece, and now other countries. This, he argues, is because there was no ‘surplus recycling mechanism’ in the European Union with fixed exchange rates within the Euro countries: the large surpluses of Germany were not being recycled to the remaining members of the EU.
His solution to the EU crisis is based on three elements: first, the ECB would assist banks to write off the debts of deficit countries; secondly, the ECB would take on significant amounts of debt financed by Euro Bonds (not individual country bonds); thirdly, the European Investment Bank would invest in the deficit countries. The author does not discuss the necessity of a unified fiscal authority that acts as an equalising agent to help out the poorer states in the Union. The chapter ends with a brief discussion about whether China would be able to save the world by providing an expanding market. 
Chapter 9, ‘A Future without the Minotaur?’ argues that the crucial problem of the world economy is the absence of a ‘global surplus recycling mechanism’ (GRSM). For some time, the USA managed to have a surplus which it recycled to Japan and Germany (post-World War 2), then when it created large deficits with the wars in South East Asia, it left the gold standard and was being supported by the surpluses of Japan and Germany. But as a result of the crisis the US economy contracted and that affected the German, Japanese and Chinese economies. Can the Chinese economy take over the role of the Global Minotaur (the USA)? His argument is a loud, NO! He favours Keynes’s policy prescription in the 1940s of an International Clearing House with its own currency, the Bancor.

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