Category Archives: The dismal science

Masaccio: Piketty Shreds Marginal Productivity as Neoclassical Justification for Supersized Pay

Yves here. One of the main agendas of neoclassical economics is to give Panglossian defenses of the current order a veneer of intellectual legitimacy. If our system is the result of individuals and businesses behaving in logical ways, at least in the minds of economists, surely the outcome is inevitable, and therefore virtuous, or else those operators would do things differently. The Big Lie in all of this is that neoclassical economics takes power completely out of the equation. While it does assume selfishness, in that everyone is out or himself to maximize his utility, it also assumes atomized actors who lack the power to influence markets.

One instructive way to see how these arguments break down is by looking at neoclassical economists justify large disparities in pay. Piketty shows that the idea that people are paid what they are worth, or in neoliberal-speak, according to their marginal productivity, to be a sham

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Why is Anyone Surprised that Abenomics Failed?

In case you managed to miss it, there’s been a fair bit of hand-wringing over the fact that Japan has fallen back into a recession despite the supposedly heroic intervention called Abenomics, whose central feature was QE on steroids.

But Japan of all places should know that relying on the wealth effect to spur growth has always bombed in the long term.

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Treasury Liquidity Freakout: Searching for a Market-Maker

As someone old enough to have done finance in the Paleolithic pre-personal computer era (yes, I did financial analysis using a calculator and green accountant’s ledger paper as a newbie associate at Goldman), investor expectations that market liquidity should ever and always be there seem bizarre, as well as ahistorical. Yet over the past month or two, there has been an unseemly amount of hand-wringing about liquidity in the bond market, both corporate bonds, and today, in a Financial Times story we’ll use as a point of departure, Treasuries.

These concerns appear to be prompted by worries about what happens if (as in when) bond investors get freaked out by the Fed finally signaling it is really, no really, now serious about tightening and many rush for the exits at once. The taper tantrum of summer 2013 was a not-pretty early warning and the central bank quickly lost nerve. The worry is that there might be other complicating events, like geopolitical concerns, that will impede the Fed’s efforts at soothing rattled nerves, or worse, that the bond market will gap down before the Fed can intercede (as if investors have a right to orderly price moves!).

Let’s provide some context to make sense of these pleas for ever-on liquidity.

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Does It Pay for Firms to Invest in Their Workers’ Wellbeing?

Yves here. While the findings of this short paper on the merits of employers promoting their workers’ job conditions, that viewpoint is perversely unfashionable today. It is somehow seen as more beneficial to employers to keep their minions cowed and fearful. One of the most active threats is the ease of firing workers. And of course, the belief that employment is tenuous works against the notion of making any investment in employees, even ones that are actually self-serving. But notice that this article does have a specific definition as to what “wellbeing” amounts to, which is workplace satisfaction. A major element appears to be bosses not acting like jerks.

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Joe Firestone: Elizabeth Warren – Better, But Not There Yet

Yves here. As Elizabeth Warren inches to the left on overall economic policy, one wonders if she’s actually shifting her views or responding to Hillary Clinton trying to rebrand herself as a populist. In fairness to Warren, it’s difficult not to be deeply inculcated in flawed economic thinking and thus hostage to false ideas like “We depend on China and Japan to finance our federal spending.” I look at my pre-crisis coverage and am embarrassed to see that sort of idea treated as obviously true. But if nothing else, the shift in Warren’s stance may be a sign that the Overton window is moving a smidge away from the right. After all, a big reason the Republicans so badly trounced the Dems in the midterms wasn’t just Democratic party fecklessness, but also that the Republicans kept their Tea Party extremists well out of the limelight and toned down the anti-women, anti-gay (and outside the border states) the anti-immigrant rhetoric. That actually amounts to a shift to the center, even if more for show than for real.

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Coalition Launches World War on Youth

Yves here. I must confess to not being anywhere near as on top of Australian politics as I’d like to be, and I have a great deal of difficulty understanding the ascendancy of Liberal leader and now Prime Minister Tony Abbott, save that in a parliamentary system, who winds up on top often has more to do with infighting skills than real leadership. This post shows that the latest Abbot scheme for addressing youth un and under employment is a serious contender for Worst Neoliberal Post-Crisis Policy Evah. And recall it has QE as a competitor. So this post serves to launch a watch for Really Horrid Neoliberal Policies so we can start creating a taxonomy, which helps in making fun of them.

For starters, how smart is it to throw young people under the bus in an economy that has become almost entirely a real estate one trick pony? Where is household formation going to come from, exactly? Chinese investors and Chinese-driven extraction boom have both provided a big lift to Oz over most of the last decade. Deflation across non-agricultural commodities is a strong tell that that game is past its sell-by date.

One of the things I noticed briefly about Australian policies when I lived there is that they were weirdly bimodal, as in either really well thought out or terrible. This was confirmed by some Canadian policy wonks I met who said when they were looking for policy ideas from other countries, they’d look at Australia first because they were most likely to have gotten it right. The new Abbott policy suggests that capability is being destroyed.

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The Unattainable Illusion of Meritocracy

I’m a big fan of Richard Bookstaber, the author of the important book A Demon of Our Own Design. And while I’m glad to see a rare new post from him, on how to deal with the matter of inequality (as in whether to deal with the problem ex ante, by creating more equal opportunities, or ex post, by trying to reduce disparities of outcomes), I found one of the core parts of his discussion, on merit and meritocracy, to be maddening. In fairness, this isn’t Bookstaber’s fault; he’s working within an established framework of thinking on this topic.

Repeat after me: in complex societies and organizations, merit is a complete illusion.

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Can Capitalism and Democracy Co-Exist?

Yves here. Real News Network is running an eight-part series on capitalism and democracy, with Chris Hedges and Sheldon Wolin as interlocutors. I thought the second segment in the series, which is historically focused, to be particularly strong. It seeks to trace the evolution of what they call corporate capitalism, or what we’ve sometimes called Mussolini-style corporatism.

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Adair Turner: The Consequences of Money-Manager Capitalism

Yves here. This is a terrific interview with Lord Adair Turner, former head of the FSA. Most of it focuses on the things missed in contemporary economics, particularly macroeconomics, and how some disciplinary “back to the future” would be desirable. A major topic of discussion is how wealth is becoming as concentrated as it was in the 18th century, and the driver then and now was the disproportionately large role real estate has come to play. Then, it was income-producing agricultural land. Now it is urban property, bid up by domestic and international elites who want to live in particularly prized cities. Turner points out the irony that access to cheap finance for housing, meant to help middle and lower income buyers, has instead contributed to rising wealth inequality. He also describes how the ability of banks and financial markets to supply virtually unlimited amounts of credit, against a limited stock of particularly sought-after locations, has the potential to create tulip-mania type results.

Perhaps due to time constraints, Turner didn’t venture into the views of classical economists, that profiting from land, which they derided as rentier capitalism, was economically unproductive. As Michael Hudson has stressed, they urged heavy taxation of land as the remedy.

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Uber Economics: There is No Such Thing as Bad Publicity

Yves here. This post on Uber raises a sobering point about activism and human cognition. How do you opposed a cause you regard as dubious without unwittingly legitimating it? For instance, remember when one of the many justifications offered for the Iraq War was that Saddam Hussein was in cahoots with Osama bin Laden? Even though that idea was patently false, efforts to debunk it actually reinforced the connection between Hussein and Bin Laden simply by featuring their names in close proximity.

If readers, particularly activists, have ideas for how to steer clear of effectively promoting ideas and causes you are challenging, please let us know in comments.

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Bill Black: EU Austerity Witch Doctors Attack Each Other

As things go from bad to worse in the eurozone the putative adults have begun to fight openly in front of the kids.  The putative adults, of course, have refused to act like adults for six years and instead have lived in a fantasy world in which austerity – bleeding the patient – is the optimal response to a recession.  As many of us have been warning for six years, this is a great way to create gratuitous recessions and even the Great Depression levels of unemployment in three nations of the periphery with 100 million citizens.

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Michael Hudson: Piketty vs. the Classical Economic Reformers

Yves here. This post by Michael Hudson is one entry from an issue of a journal critiquing Thomas Piketty’s Capital in the 21st Century. Hudson argues that even though Piketty’s findings about wealth accumulation over the centuries are useful, he nevertheless has done a great disservice by treating “wealth” as an undifferentiated lump. By contrast, classical economists differential between rentier behavior (such earning income from economically unproductive activities such as land ownership), financialization, and leveraged speculation on asset prices. Hudson argues that Piketty’s failure to probe the types of wealth and the impact of income-generation strategies for various types of wealth, as well as his failure to incorporate legal and political arrangements means his book tacitly supports the status quo. Inequality for him is a state of nature, not a function of how our economy is organized.

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Michael Perelman: Globalization, “Free Trade,” and Food as a Strategic Weapon

Yves here. Michael Perelman gave a wide-ranging talk in Ankara called the Anarchy of Globalization which focused on the local impact of globalization. The presentation was wideranging and included a discussion of the evolution of usage and theoretical concerns.

We’ve extracted a section below, on the role of “free trade” agreements and one of their not-widely-recognized side effects, that of weakening food security. The case study is Mexico.

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