anwar shaikh, adam smith (lecture 02 – 09/07)

different questions of equilibrium ('turbulent regulation'), looking at industrial production index

1. growth is the normal state

2. growth is exponential (linear on a log scale)

3. growth is turbulent, too. the line is fluctuating

neoclassical economics does real violence to this graph and the trends it depicts.

then looking at US real investment index, which appears only more turbulent. “investment is more volatile than output” (based on looking further ahead, making a guess re: further prospects for profit—not simply prospects re: demand, as Keynesians would argue)

then looking at US real GNP per capita—the system has grown roughly ten fold in these terms. which is a feature, clearly, of productivity growth.

all this is built into the classical vision of political economy.

(for neoclassicals, growth occurs on a 'balanced growth model' – the premise is a static framework, in which growth enters as an 'addition' to the story)

fluctuations around an anticipated trend are called the 'business cycle'

looking at a business cycle graph—the first major depression was in the 1840s, setting the context for the revolutions of 1848; you also have a boom with the mexican war, and (dampened) boom with the civil war, WWI.

using the graph to draw the distinction between 'recurrence' and 'steady cycle' – booms give way to busts, and busts give way to booms. there is an already-discussed phenomenon of overshooting equilibrium, and then falling behind it, etc., etc.

(for neoclassicals, the mismatch between producer expectations and consumer preferences is assumed away, via perfect knowledge. the most sophisticated math cannot show stability—it can only make the assumption that equilibrium exists, and even then this entails its own assumptions. a lousy answer to a lousy question.)

- - - - - - - - -

how did the classical economists try to understand capitalism, given that they did not suffer from these sanitizing assumptions? they saw fluctuations and growth—this was Smith's premises.

not sanitizing, but analyzing.

Smith begins by arguing that “wealth of nations comes from labor which they apply to production.” (Chp 1, p. 1). annual labor is the fund which provides the nation with necessities and conveniences.

(for neoclassicals, its capital and labor—but, for classicals, capital is 'past labor'. labor is the active element. this is the sense in which Smith makes this claim).

Smith then goes on to say that not all labor is 'production labor' (“productive labor” is the term Smith uses—we will use 'production' vs. 'non-production' to remove the connotations of 'productive' vs. 'non-productive'). Smith mentions lords/king/army all as 'non-production' activities, not because they're worthless/'bad' but because it's defined on the basis of its 'effects.' in short, not defined on the basis of worth or even social necessity, but on the basis of its producing effects.

implication of this, of course, relates to social reproduction. production labor produces a certain amount—part of this goes to its own reproduction, and the remainder is a surplus product. this surplus product not only has to support re-investment, but has to support the king, the judiciary, the educational system, the army, the police, etc. the spending on non-productive activities can inhibit the growth of the economy (the means of violence, etc.--on this point of view, military activities may pump up demand, but they're also parasitic in this sense)

(for modern economics, anything supported by the market qualifies as productive. a Japanese minister made a claim about 'unproductive labor' and security in the USA)

given that production labor is the fund for new wealth, it's obvious that if you could increase the productivity of labor, you'd get more with the same labor. for Smith, the central factor in increasing productivity is the division of labor ('greatest source of increase in productivity')

comes, of course, from the natural propensity to 'truck, barter, etc.' this is 'mythic anthropology', and neo-classical economics will pick up on this part of Smith, in particular. (remember--one of the most elaborate form of the division of labor is a caste system; not driven by a caste system, but by social hierarchy. or gender, which also is not a choice; socially imposed. the idea that the division of labor may make you more productive is fine, but it should not excuse the mythic anthropology here).

in short: the social division of labor as voluntary choices made by free and equal human beings.

the division of labor leads to divisions in abilities—not due to inheritance, but due to training. Smith is clear that these are not natural traits, but socially given. (this is an important counter-point to conservative mythologies re: Smith)

also, the division of labor is limited by the extent of the market. how much can you increase the division of labor? well, if there's a limit to how many pins you can sell, so there's no point to try and make production more efficient. Smith is not very clear whether this is the pin market, or the aggregate market.

money, for Smith, arises from the division of labor—to facilitate the exchanges to which it gives rise. that special commodity which gets picked in the course of the development of exchange to facilitate the transactions (different times/places pick different commodities—furs were quite common, salt, tobacco, etc.).

value—Smith says that we want to distinguish between two different definitions. one is 'value-in-use'--the utility of some particular object. the other is 'value-in-exchange'--the quantity of other goods you can get for your particular object.

the former is about its usefulness, the latter concerns its exchange ratio

the world 'utility' for Smith does not mean what it means for 'neo-classicals.' today it means 'subjective satisfaction.' no way to compare across people—a psychological reaction to a commodity, or a thing. for Smith it simply means 'usefulness'--Smith says that air, for example, has great utility. doesn't want to confuse it with 'desirability.'

'value-in-exchange' is mediated by money, of course. if exchange rates are mediated by money, then you have 'price.' Smith's concern is to explain the laws of money price.

on the surface, the market price seems to be the issue. but classical economists thought that was trivial—we're looking for a central regulating mechanism. underneath the demand and supply is there a regular center of gravity to which price is attracted.

for Smith, that regulative principle is the amount of labor expended in the production of that commodity. next time we will pick this argument up.

anwar shaikh, why classical political economy (lecture 01 - 08/30)

classical economists asked this question: how can we have patterns of recurrence? how can g. depressions recur?

the surprising answer, though, is that capitalism does not work through individuals' intentions. it runs 'behind their backs.'

the market possesses powerful internal structural patterns that emerge from the centrality of the 'profit motive'

what happened in the 1930's?

the system broke because the profit motive led it to that outcome.

the key point is that the classical tradition sees the system in these terms, in terms of a pattern (boom + bust)

classical economists do not mean the same thing as the modern orthodox economists by 'equilibrium'. they see boombs past it, and busts below it--whereas the orthodoxy is content to understand the economy at equilibrium.

neo-classical position--the idea is that equilibrium is a state of rest ("attained and held state"). a gravitational attractor. you're entitled to view equilibrium as a pretty good approximator of reality (analogy to a pendulum)

classical position--the equilibrium point is itself not fixed, and the system can itself move around it. we want to talk about equilibrium points, then, but as 'turbulent regulation.' order in and through disorder. the pattern occurs through overshooting and undershooting.

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what is it specifically about classical economists that distinguishes them from neo-classicals?

neo-classicals

1. self-interest as the primary human motive--rational economic man makes all decisions.
   
2. utility maximization--not just as a principle for understanding firm-level decisions, but also as a principle of behavior
3. firms are price-takers, they all take a common price. competition forces firms to produce at a common price (a competitive economy)
4. profits, wages, and technology is all equal between firms. everything is studied at equilibrium.
   
5. full employment is a stable and regular outcome. if there's unemployment, wages will be bid down, and workers will be hired (unemployment is a feature of government intervention, distortions, etc.) [remember, neo-classicals aren't worried about demand]

keynes and post-keynes

arose in a post-depression context. central argument is that economy can get stuck in a state of persistent unemployment, if there's a lack of demand. unemployment, in other words, is a feasible equilibrium state.

in this context you need the state. the state becomes an important complement to the market. to 'push' it up to a full employment state of existence, which can be a 'higher-level' equilibrium

classical

the inventors of modern economics, and in search of a deeper answer to these questions. unemployment, for example, can be sustained easily, if there aren't profits to be made.

you can't re-open factories if private profit is the dominant law, even if it's socially desirable.

a better understanding of the world we live in is offered by the classicals.

key features of classical political economy

1. economic acts are embedded in a social context. not abstract agents/firms, but embedded (this opens up possibility of thinking about race, gender, etc.)
2. focus is on industrial capitalism (not merchang capitalism, etc.)
3. emphasis is on the 'laws of motion'--patterns produced by capitalism. system is always 'changing and moving'
4. emphasis is also on competition, which has its own hierarchies and forms (amongst workers, between nations. the dominant form is between firms)
5. order in and through disorder
6. expansion and growth are inherent. the system is always moving.
   
7. incentive to mechanize is inherent in the system
8. conflict between private aims/incentives and social goals.
   
9. the state now appears in a very different light, as compared to both the neo-classical and keynesian models. classical economists are more likely to see the State as a State of the 'system.' a conflict between the profit motive and State intervention.
   

the main point--the purpose of the course is not to study dead economists, but about an alternative vision of the system we (today) inhabit.

Of course this is nonsense. The overwhelming majority of Americans, along with the overwhelming majority of Haitians and Hondurans, would be absolutely delighted if Haitian and Honduran workers producing clothes for the U.S. market would be paid more. Labor costs are a small fraction of the prices that consumers face. Wages are so low because that yields even more profits for those who already have more money than they can ever spend; the low wage floor is being determined by government policy in Washington, Haiti, Honduras, and elsewhere, not by the desires of consumers. No magic formula of economics determines the minimum wage that can be sustained in Haiti and Honduras. At the margin - whether the minimum wage shall be $3 a day or $5 a day in the export sector in Haiti - it is determined politically. If you say that the leverage of the U.S. consumer market should be used to support higher wages for poor workers in poor countries, rather than the opposite, you're likely to be told that this is not allowed. This leverage has been allocated to something else. The power of the U.S. market can only be used for things like forcing developing countries to enforce the patents, trademarks, and copyrights of U.S. pharmaceutical companies, software companies, and Hollywood.

It wasn’t only his desire to restore the health of capitalism that set Keynes apart from Marx. His theory of crisis was also fundamentally different. Where Marx saw the driving force of capitalism as accumulation for accumulation’s sake—the constant drive toward profit—Keynes continued to assume that “consumption…is the sole end and object of all economic activity.” The lack of “effective demand” in Keynes’ theory of crises is another way of saying that capital is not being invested; it does not, however, explain why. In short, whereas for Marx the possibility of the separation of purchase and sale that makes crisis a possibility is the starting point for understanding capitalist crisis, for Keynes it is the endpoint. Keynes’ theory of crisis—the lack of aggregate demand—is merely a description of the effects of crisis, not an explanation of why crises take place.
(...) The appeal for some, then, of Keynesian policy is that it calls for some redistribution of wealth from the top to the bottom, and that he pushes for “full employment.” However, Keynes’ perspective on this was strictly a ruling-class one. He supported not higher wages, but rather “the maintenance of a stable general level of money-wages” in order to maintain “equilibrium.” Keynes also thought it important that wages not become too high. In fact, though Keynes criticized the neoclassical theory of wages, he did not completely reject its premises, writing, for example, that, “A reduction in money-wages is quite capable in certain circumstances of affording a stimulus to output, as the classical theory supposes.”
(...) What Keynes added to this understanding was that at times, capitalists might view all other options as money-losing prospects and no matter how low the state moved interest rates, capitalists may still save. Keynes called this a “liquidity trap” and this is exactly the scenario that befell Japanese capitalism in the 1990s. For this reason, Keynes saw manipulating interest rates as only one tool for encouraging investment. The theory is that interest rates can be used to stimulate investment if real interest rates—that is interest rates adjusted for inflation—are cut to a point that they are negative. However, the Japanese experience illustrates that even if interest rates are negative, capitalists won’t invest if there is not a perceived avenue for investment. A similar dynamic is currently playing out within the U.S. economy. Federal Reserve chairman Ben Bernanke has reduced the target for the Federal Funds rate from 5.25 percent to 1 percent. This has failed to induce lending or investment because there is little for capitalists to invest in that is profitable. Furthermore, central banks only have control of the economic policies within their own countries. It makes the system unstable, because central banks can end up working at cross purposes based on national needs as opposed to having a cohesive view of fiscal policy within the global economy as a whole.
(...) Keynes conceptualized something called the “multiplier” effect. That is, by pumping $100 into the system at the right place, it could generate significantly more activity. Giving $100 to a worker might mean they immediately spend it at the local grocer. The grocer might then turn around and spend $90 of it himself on something else and so on and so on. On the flip side, giving $100 to a billionaire might not accomplish the same thing because the billionaire has no immediate need for the $100 and is only to going to spend if he sees investment opportunities with high rates of return.
(...) Neoliberal ideology, for its part, rejects the role of fiscal stimulus and puts greater emphasis on monetary policy, which accounts for the predominant role of the Federal Reserve Bank over the past thirty years in dealing with economic problems. In practice, however, neoliberals do have a fiscal policy—cutting taxes on the rich and increasing defense spending. As a result, during the neoliberal era government spending as a percent of GDP and per capita has risen, not fallen. Theoretically, neoliberalism is opposed to state intervention. In practice, military spending and corporate welfare are not only accepted but welcome. Now that the system is in crisis, ideology is discarded, and those who may have crowed loudest for the state to leave the market alone demand that the state intervene to save it.
(...) A key linchpin in this agenda was the dollar policy. Coming out of Bretton Woods every currency was pegged to the dollar, which, in turn, was pegged to gold. The fixed exchange rate put a dollar at $35 for an ounce of gold. Currencies would move against the dollar based on whether individual nations had balance of payments problems. If you had a deficit, you had to cut imports or else be forced to devalue. This arrangement more or less held until 1971 when the United States pulled the plug on the gold standard.
(...) The Bretton Woods institutions eventually took on much broader mandates than rebuilding capitalism in Europe and Asia, and after the crisis of the 1970s, adopted neoliberal loan conditions requiring nations to privatize and deregulate their economies. As Joel Geier writes,

Under the original Bretton Woods system, IMF loans were aimed at preventing devaluation and propping up demand. U.S. capital accepted these Keynesian measures when the U.S. was the major world exporter, ran large trade surpluses, and the rest of the world depended on its currency to pay for those imports. But in the 1980s, the IMF turned all of its previous policies on their heads: It now deliberately imposed devaluation and forced reductions in national income and demand in order to limit imports—all as a means to guarantee repayment of debt to international finance capital.

(...) The Great Depression played out in two acts. There was an initial drop to the depths in 1932, a recovery from 1933 to 1936, and then a second drop in 1937 and 1938, even after the initial Keynesian salves had been applied. The economy only decisively recovered in 1939, when the United States began war production for the Allies.
(...) The war effort created the rise in effective demand—in reality, government war spending, not consumer demand—that Keynesian measures failed to produce. As a result, employment and production, especially of arms, helped stimulate economic growth and an end of the Depression. Keynes himself saw the stimulating effects of the war effort as a vindication of his theories, having commented before the outbreak of war, “It is, it seems, politically impossible for a capitalist democracy to organize expenditure on the scale necessary to make the grand experiment that would prove my case—except in war conditions.”29 Of course, the cost of this method of recovery—fifty-five million dead—was a brutal price to pay. Moreover, the war played an important role in helping to wipe out and devalue capital and drastically reduce wages, both of which contributed to the restoration of profit rates after the war, but which were not part of Keynes’ remedies for crisis.
(...) Moreover, in adopting these state-led measures, nations were simply returning to the same policies of “war socialism”—“forced savings, controls on money, credit, prices and labor, priorities, rationing, government-borrowings”—that they had put in place during World War I, “despite the ‘orthodox’ approach to economics that prevailed at that time.”30 It was a sleight of hand for Keynes to now promote war—a product of the unplanned, competitive character of the world system—as proof of his theories.
(...) Yet there was never a point, except during the war itself, where the United States, or any European country, reached full employment. Though the term full employment was thrown around, in practice it was adjusted to mean, in the words of the American Economic Association in a 1950 report, the “absence of mass unemployment.” Proceedings of the British Royal Institute for International Affairs in 1946 defined full employment as “avoiding that level of unemployment, whatever it may happen to be, which there is good reason to fear may provoke an inconvenient restlessness among the electorate.”
(...) It was only well into the 1960s that they started to face competitive pressures that unearthed the contradictions. The U.S. was spending huge sums on its arms industry while its most dynamic competitors—Germany and Japan—were reinvesting in new plant and equipment. Those competitors began to outpace the U.S. in the 1970s. In order to retain economic power, the U.S. needed to lower its labor costs relative to Japan and Germany, a difficult task especially important given that it was saddled with heavy arms expenditures when those nations were not. It was this crisis, in which stagnation was accompanied by inflation, that ultimately paved the way for the neoliberal restructuring of capitalism.

(...) In practice, neoliberalism did not produce a full break from Keynesianism; and in some important respects the limitations of a return to full Keynesian economic policy are already clear. First of all, interest rate reductions—the first line of defense recommended by Keynes—have already been used under the Fed chair Alan Greenspan (when the economy was in boom) and now by Ben Bernanke (in response to the financial crisis). In the first instance, easy money helped create the housing bubble that formed the basis of the current crisis; and the more recent cuts aimed at lifting the financial crisis have not unfrozen bank lending. Second, the government has already run up large deficits for the past two decades—the federal debt now stands at $10.6 trillion, and the current deficit is set to go up to a $1 trillion next year as new stimulus plans are brought on line. The question is how far can this go? The government can print more money, as it has already begun to do now that the dollar has rebounded; but there is a long-term danger of runaway inflation, which could force them to raise interest rates that put a halt to growth.

(...) It is a sign of just how much the economic literacy of the left has deteriorated that Keynesianism—born as a reforming ruling-class economic program—today may become the default position when calling for an alternative to neoliberalism. Yet socialists must make a distinction between those measures of state intervention—such as the bank bailouts—that are measures of state monopoly capitalism designed to save the bankers to the detriment of the working-class taxpayer; and those measures of state intervention that will come as a result of popular demands. Socialists are not indifferent to the reforms—or the struggles to achieve them—that will be necessary to reverse the three decades of capitalist assault on the working class.

Today figures like Krugman are seen as partly challenging these conclusions, and as representing the return of Keynesian economics. But this is not a return to Keynes in the sense of his general theoretical critique of capitalism’s fundamental flaws. Rather it is a return to Keynesianism as a “special case” of “depression economics”, where monetary policy is ineffective and expansive fiscal policy needs to be given priority.12 The ascendancy of neoclassical economics, which bastardised and subordinated Keynes’s mildly critical view of capitalism, is not itself challenged. Nor is capitalism questioned. Rather it is assumed that mistakes were made in monetary policy and in regulatory systems that have pulled the economy back down into the “special case” of Keynesian “depression economics”.
(...) Hence, what Keynes called the “outstanding faults” of the capitalist economy are hardly addressed as such. Keynes, is presented, by his most publicised (and reactionary) biographer, as the great “remedist” and little else.13 The resulting policy emphasis is on fiscal stimulus, a mild redistribution of income, renewed financial regulations, and international reforms in currency trading. The crisis is treated as a kind of external shock (or, as Krugman says, the spread of an unknown virus).14 The severity of the downturn would suggest that long-term forces (more than the normal business cycle factors) are concerned. Yet, the fact that capitalism is an inherently contradictory historical system, which displays increasing irrationality in its later stages is off limits within the economics mainstream, even among its supposedly left of centre theorists, such as Krugman and Joseph Stiglitz.
(...) Part of the problem is that although Keynes’s thinking was too radical for the system he was trying to defend, it was at the same time not radical enough. It did not fully explain the core contradictions of capitalism. For a truly general theory of accumulation and crisis under capitalism Marx together with later Marxian political economy remain critical. For Marx the essence of capitalism lay, according to his famous shorthand, in the relation M-C-M’. Capitalism was a system in which money capital (M) was exchanged for commodities (C) that were transformed into new commodities through production, which were then sold again for more money M’ (or M + ∆m, i.e., surplus value). The nature of this process was such that it was unending. The M’ was then reinvested in the next period of production, with the object of getting M’’ at the end, and so on, ad infinitum.15 Any interruption in the unending accumulation of capital in this sense pointed to a crisis. Moreover, the very existence of a system organised in this way made it possible for a crisis to occur through a shortage of effective demand. For Marx, there was never any doubt about the root cause of capitalist economic crises. “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit”.16
(...)With respect to financial expansion and crisis, Marx wrote in volume 3 of Capital that the whole “sphere of production may be saturated with capital”, with the result that profits increasingly enter into the sphere of speculation. “If...new accumulation”, he wrote,
meets with difficulties in its employment, through a lack of spheres for investment,

i.e., due to a surplus in the branches of production and an over-supply of loan capital, this plethora of loanable money-capital merely shows the limitations of capitalist production. The subsequent credit swindle proves that no real obstacle stands in the way of the employment of this surplus-capital. However, an obstacle is indeed immanent in its laws of expansion, i.e., in the limits in which capital can realise itself as capital.17

The “credit swindle”, arising with the turn to money capital (represented by Marx as M to M’) as the basis of the amassing of wealth, inevitably precedes a bust. “Business always appears excessively sound right on the eve of a crash”. For Marx nothing was more natural than a liquidity crisis in an economic slowdown, where capital hungered insatiably for cash. Mimicking the 42nd Psalm, he wrote that the capitalist desires and hordes money in every form: “As the hart pants after fresh water, so pants his soul after money, the only wealth”.18
(...) Yet, if Marx constitutes the starting point for a general theory of capitalism and crises, his analysis doesn’t encompass many of the specific problems of today, given the historical evolution of the system since his time. For Marxists, beginning with Hilferding, Lenin and Luxemburg, the historical evolution of the system in the early twentieth century was understood primarily in terms of the development of a new stage of capitalism, often referred to as monopoly capitalism. This reflected the fact that the most significant change in the structure of capitalism in the twentieth century arose out of what Marx called the concentration and centralisation of production, resulting in the rise of the giant firm and the modern credit system.
(...) Their work was extended into an analysis of the role of the state and popularised in Paul Baran and Paul Sweezy’s Monopoly Capital: An Essay on the American Economic Order (1966).20 This theoretical perspective was later applied to the world economy and the creeping stagnation of the 1970s, ’80s and ’90s, in a series of works by Sweezy and Magdoff. These thinkers argued that the capitalist economy did not naturally tend toward rapid growth.21 Rather specific historical “developmental factors” were necessary for strong growth to appear for any length of time.22 This was particularly the case for a system dominated by monopoly capital, in which monopolistic price formation and profits were associated with certain restraints on accumulation. The main problem of accumulation for monopolistic corporations was to find sufficient investment outlets for the enormous and rising surplus at their disposal. Short of new historical factors that increased investment outlets, absorbing surplus capital, the accumulation system tended to sputter out. Hence, “the normal state of the monopoly capitalist economy”, Baran and Sweezy argued, was “stagnation”.23
(...) In the decades immediately after the Second World War the United States and the other advanced capitalist economies experienced a period of prosperity, subsequently described as the “Golden Age”. This was based on the stimulus from special historical factors such as (1) a high level of consumer liquidity immediately after the war; (2) the rebuilding of the war-devastated European and Japanese economies; (3) a second great wave of automobilisation (which included the impetus to the rubber, steel, and glass industries, the building of the interstate highway system, and the suburbanisation of the country); (4) the growth of the sales effort in the form of the expansion of advertising and other forms of sales-related waste; and (5) high military spending associated with two regional wars in Asia. But by the 1970s these countervailing factors to the tendency to stagnation were mostly on the wane. The result was a rapid slowing down of the economy. Net investment in the United States declined, with the investment that was taking place being fed largely out of corporate depreciation funds. In this situation, a new outlet for the surplus (profits) of corporations was needed.
(...) Magdoff and Sweezy argued, as early as 1970, that there was a “long-run decline in liquidity” arising from the putative “‘success’ in controlling the business cycle”. The result was that the US economy was faced with the growing problem of a major “debt-squeeze out”, requiring that real and paper values be brought back into accord, sometime in the future. The longer that debt ballooned without a major contraction the bigger the problem would become.25 Incredibly, this process of financial expansion continued over the decades, with only relatively minor credit adjustments or “credit crunches”, until the Great Financial Crisis of 2007–09.
(...) Total debt in relation to GDP in the US economy rose from 151 percent in 1959 to 373 percent in 2007, with the quality of debt decreasing as its quantity expanded. But the real economy showed an increasing addictive toleration—the need for more to get even a decreasing effect—to the expansion of debt. In the 1970s the increase in US GDP was about sixty cents for ever dollar of new debt, by the early 2000s this had decreased to around twenty cents for every dollar of new debt.27
(...) In 1997, Paul Sweezy declared that globalisation was a very long-term trend of capitalism, traceable to its very origins in the fifteenth and sixteenth centuries. This globalising trend had major effects in some periods such as the rise of China as a major force in the world economy. Nevertheless, the dominant phenomena governing world accumulation at the end of the twentieth century, he argued, were the trio of “(1) the slowing down of the overall rate of growth, (2) the worldwide proliferation of monopolistic (or oligopolistic) multinational corporations, and (3) what may be called the financialisation of the capital accumulation process”.29 It was clearly financialisation that was the most startling and unstable development. If the financialisation process were to go into reverse or even to slow, Sweezy suggested, the result would be a deep stagnation. There was no telling when this would happen. Financialisation, Magdoff and Sweezy argued, could continue for some time. Still, at some point the rising mountain of debt would grow beyond the capacity of capitalist governments to intervene effectively as the lender of last resort, and a financial avalanche would result in an unprecedented crisis. Such a major, historic crisis of capitalism, arising out of conditions that were equally unprecedented, would pose not merely the “return of depression economics” as this was understood, in a very limited fashion, by orthodox economists, but would mean the collapse of an entire financialised regime of accumulation with lasting real world repercussions. The most likely long-term result was a deep slowdown in the trend-rate of growth. With the Great Financial Crisis of 2007–09 and the advent of the most serious economic downturn since the Great Depression these expectations based on an understanding of the historical development of the system have come true. In terms of the conditions that are to be experienced by working populations around the globe as a result of this unprecedented downturn (comparable only to the 1930s) the worst is clearly still to come.
(...) Already, emerging economies, where the crisis may turn out to be most wrenching, are finding their export markets drying up. For China, with exports in 2001–06 amounting to over 30 percent of GDP, and net exports close to 4 percent of GDP, the shrinking of markets in the United States, Europe, and Japan constitutes a serious threat. China currently is experiencing the sharpest deceleration in economic growth in thirty years. Chinese exports have dropped, auto sales have plummeted, and jobs are shrinking in the cities. House prices are now falling in major urban areas and there is a drastic decline in real estate investment, which spells a much bigger financial crisis. Millions of China’s “floating population” of migrant workers who fueled industrialisation are unemployed and are returning to rural areas. The sharp drop in economic growth and looming signs of deflation in China, it is feared, will pull world economic growth down to close to zero.30 To the not inconsiderable extent that the US generated global financial explosion has contributed to the growth in the Chinese real economy the US generated global financial implosion shall contribute to its contraction. Economic crises are endemic to capitalism, but the level of economic disaster affecting the system, as shown by conditions in the United States, on the one hand, and China, on the other, is now without precedent in the post-Second World War period, and the end is not yet in sight.
(...) The most serious ecological threat is of course global warming, which is inducing widespread, multi-faceted climate change, with disastrous implications for life on earth. But in a wider sense, the global environmental crisis involves manifold problems and cannot be reduced to global warming alone. These multiple hazards have a common source in the world economy, including: the extinction of species, loss of tropical forests (as well as forest ecosystems generally), contamination of and destruction of ocean ecology, loss of coral reefs, overfishing, disappearing supplies of fresh water resources, the despoliation of lakes and rivers, desertification, toxic wastes, pollution, acid rain, the approaching exhaustion of easily available crude oil resources, urban congestion, the detrimental effects of large dams, world hunger, overpopulation, etc. Together these threats constitute the greatest challenge to the survival of humanity since its prehistory.
(...) James Hansen, director of NASA’s Goddard Institute of Space Studies, and other climatologists, now claim that the goal must be to reduce the atmospheric carbon level below the present 387 ppm, to 350 ppm or less. This means that net CO2 emissions must “approach zero”. It also necessitates major changes in energy and land use, requiring massive social reorganisation. According to Hansen and his colleagues, “if the present overshoot of this [350 ppm] target CO2 is not brief, there is the possibility of seeding irreversible catastrophic effects”. Indeed, “continued growth of greenhouse gas emissions, for just another decade, practically eliminates the possibility of near-term return of atmospheric composition beneath the tipping level for catastrophic effects”. The world is now facing the prospect of irrevocably leaving the mild, protective climate of the Holocene, which has defined the environmental conditions for the entire duration of human civilisation.
(...) Indeed, there is only one way of accounting for the fact that orthodox economists constitute the leading ideological opponents of aggressive reductions in greenhouse gas emissions, even at the risk of a planetary inferno—and that is their primary role as ideological defenders of the capitalist system and promoters of its drive for profits and accumulation at any cost. Nothing so clearly demonstrates what John Kenneth Galbraith characterised (in the title to his last book) as The Economics of Innocent Fraud. “Capitalism, as we know it today”, James Gustave Speth, former head of the United Nations Development Programme, has written, “is incapable of sustaining the environment”.36 To turn to mainstream economics for answers is therefore a serious, perhaps fatal, error of current policy.
(...) From an ecological perspective, of course, this system of growth at any cost, synonymous with capitalism, places the world economy in direct conflict with environmental sustainability. China’s rapid growth in recent decades has also led to record rates of environmental degradation on its part. China is now close to the United States in annual carbon dioxide emissions, though far below the latter in emissions per capita. Yet, despite the seriousness of this contradiction between the capitalist economy and the planet, establishment economists generally argue against any major attempt to avert climate change, i.e., to bailout nature. At the same time they do not hesitate to advocate spending trillions of dollars to bailout banks. President-elect Obama’s chief economic advisor, Larry Summers, is notorious for his anti-environmental diatribes. He has said, on more than one occasion, that it makes as much economic sense in terms of future welfare to spend on various non-environmental factors—for example, to rebuild infrastructure (roads, bridges, etc.)—as to seek to preserve the environment, say, tropical forests. In addressing the global warming problem, Summers naively stated in 1992, that under “the most pessimistic estimates yet prepared...global warming reduces growth over the next two centuries by less than 0.1 percent a year”.39 Yet, under the most pessimistic estimates of climatologists at that time—now proving accurate—global warming under business as usual threatened both life on the planet and human civilisation itself. Indeed, nothing is more deranged than the notion of Summers and other orthodox economists that the planet as we know it can be destroyed, while the capitalist economy can continue as before.
(...) The growing scale of the capitalist economy and the weight that it is imposing on a limited biosphere are not everything. More important, ultimately, is the actual integrity of ecosystems and the basic biogeochemical processes of the earth system. Here Marx’s theory of the metabolic rift helps us understand capitalism’s intensive, not merely extensive, destruction of the environment. Marx’s vision had included an ecological element from the beginning. In his Economic and Philosophic Manuscripts of 1844 he wrote of the environmental damage wrought by industrial capitalism, in the form of the “universal pollution to be found in large towns”. For Marx, “Man lives from nature, i.e. nature is his body, and he must maintain a continuing dialogue with it if he is not to die”.40 But Marx’s ecological critique of capitalism crystallised only with the publication of Capital, volume 1 in 1867. He was influenced by the critique of British industrial agriculture developed by Justus von Liebig, the leading German chemist of the day. Building on Liebig, Marx pointed to the fact that by shipping food and fiber hundreds and even thousands of miles to new urban centres (a reflection of the growing division between town and country) industrialised capitalist agriculture was in fact depleting the soil of basic nutrients (such as nitrogen, potassium, and phosphorus), which were no longer recirculated to the earth. This created a major crisis of the soil in Europe and the United States in the nineteenth century. Marx described this as an “irreparable rift in the interdependent process of social metabolism, a metabolism prescribed by the natural laws of life itself”. He argued that society demanded the “restoration” of a sustainable human metabolism with nature, which however could only be accomplished under a society of associated producers.41 In the most radical conception of sustainability ever developed, Marx wrote:

From the standpoint of a higher socio-economic formation, the private property of individuals in the earth will appear just as absurd as the private property of one man in other men. Even an entire society, a nation, or all simultaneously existing societies taken together, are not owners of the earth. They are simply its possessors, its beneficiaries, and have to bequeath it in an improved state to succeeding generations, as boni patres familias [good heads of the household].42

(...) Confronted with ecological crises, no attempt is made by the system to go to the root of the problem in the social relations that are undermining what Marx called “the vital conditions of existence”. Rather the problem is shifted around, with capitalism continuing “to play out the same failed strategy again and again”.45 The result is a compounding of ecological disaster. The solution that capitalism provided to the nineteenth century soil crisis that Liebig and Marx addressed was not to restore the human metabolism with the soil, but rather to develop synthetic, particularly nitrogen-based, fertilizers, which marked the beginning of modern agribusiness, and which (because of the high petroleum use) is a major source of global warming, as well as contributing to ocean dead zones. Capitalism’s solution to world agricultural production in the form of modern agribusiness has resulted in a further polarisation of wealth and hunger. Of the more than six billion people in the world today, the United Nation indicates that around one billion are hungry, and their numbers (both relative and absolute) are growing. In the United States itself over 36 million people, about 12 percent of the population, were “food insecure” in 2007.46
(...) Yet, globalisation taken in itself is not a very useful way of understanding the accumulation dynamic of the system at this specific stage of its development, which is better characterised, as Sweezy argued, in terms of the three elements of slow growth (in the centre and in the world economy as a whole), monopolisation via multinational corporations, and financialisation. Continuing globalisation, coupled with financialisation, has created the illusion, propagated by some ideologues of the system, that “the world is flat”.47 Yet, capitalism remains a world economic system divided into separate nation states with differing power resources—a contradiction that is impossible to transcend within the system. Meanwhile, the growth of multinational corporations based in the centre countries has served historically to channel global surpluses away from the peripheries toward the centres. The concentration of power (economic, military, financial, communications) at the centre is intrinsic to capitalism as a world system, although the specific nations that constitute the centre and periphery (and semi-periphery) may change. The world economy is therefore disproportionately focused on the needs of accumulation at the core. The capitalist world system is most stable when governed by a single hegemonic power, such as Britain for most of the nineteenth century, and the United States for most of the twentieth. In periods of hegemonic instability and world economic crisis the system approaches conditions of total crisis, as witnessed by the First and Second World Wars.
(...) At present there are very palpable fears in Washington’s higher circles regarding the continuing—and from their perspective necessary and non-negotiable—role of the dollar as trade settlement and reserve currency, even in the face of current Chinese support for the dollar system. Washington understands that China’s blind support for the dollar is problematic, especially in the event of a rapid devaluation of all existing dollar obligations resulting from Federal Reserve policy. China holds $652 billion in US Treasury debt (an increase from $459 billion at the end of 2007). Altogether it owns 10 percent of the US public debt. A rapid devaluation of the dollar would only be seen in China as an expropriation. An ensuing movement of China away from the dollar, however limited—and none but limited moves are immediately possible—could drastically destabilize the entire US dominated world economic order.52
(...) The fault lines are most obvious in terms of the peril to the planet. As Evo Morales, president of Bolivia, has recently stated: “Under capitalism we are not human beings but consumers. Under capitalism mother earth does not exist, instead there are raw materials”. In reality, “the earth is much more important than [the] stock exchanges of Wall Street and the world. [Yet,] while the United States and the European Union allocate 4,100 billion dollars to save the bankers from a financial crisis that they themselves have caused, programs on climate change get 313 times less, that is to say, only 13 billion dollars”.55

(...) What exactly this something else is we do not know, and cannot know at this point: because it depends on the responses not just of states and corporations, but more importantly the response of the world’s populations. On top of the intense class alienation, exploitation, and inequality endemic to capitalism at every level, we are now faced with widening global fractures. So far, on a continental level, leadership in recognising that the only answer is the revolutionary one—a new socialism for the twenty-first century—has been taken by the peoples of Latin America, in Cuba, Venezuela, Bolivia, Ecuador, and is also manifest in struggles taking place in Brazil, Mexico, Nicaragua, and elsewhere.58 Latin America, which was the first continent to feel the full brunt of neoliberal globalisation, the hardest hit region outside of the Middle East in terms military interventions in the last quarter-century, and the region that was the initial basis of US international hegemony, is now showing the way to the world—not only in relation to the struggle for substantive equality, which is essential, but also in relation to saving the planet from capitalism. As Morales has stated, “Humankind is capable of saving the earth if we recover the principles of solidarity, complementarity, and harmony with nature, in contraposition to the reign of competition, profits, and rampant consumption of natural resources” that distinguishes the failed system of capitalism.59

A serious economic crisis can force some rethinking of economic and political dogma. The current crisis is serious for most of the world: the IMF is projecting world economic growth of just 0.5% this year – the worst since the second world war – and this number could easily be revised downward.
(...) One of the first casualties of the current recession was the extreme fiscal conservatism that has plagued the country for decades. It seems like ages since the Clinton administration, facing projected budget surpluses of more than $5tn, decided that it needed to pay off the entire national debt before committing to any new social spending. President Barack Obama's proposed budget has a deficit for this year of 12.3% of GDP – twice the size (relative to the economy) of the next largest deficit in the six decades since the second world war. (That was Ronald Reagan's "military Keynesian" budget of 1983.) Like his successor George W Bush, Reagan never admitted that deficit spending was needed to pull the economy out of recession. Instead he pretended that he was just meeting "defence needs" and granting tax cuts where tax cuts were due (mostly to the wealthy).
(...) If the debt grows at the same rate or slower than the GDP (in nominal terms) it will not grow as a percentage of the economy. That is what matters, not the absolute size of the public debt – a big scary number ($10.9tn) that is often thrown around by conservatives.
(...) That is because the US dollar is overvalued, and this overvaluation has artificially stimulated our imports and reduced our exports for many years. The idea that the United States needs a "strong dollar" could be the next widely held economic misconception to bend to reality.
(...)

Friday’s currency turmoil and stock market plunge was a case of the chickens coming home to roost from the class-war policies being waged by European and Asian industry and banking squeezing their domestic consumer markets – that is, labor’s living standards – in favor of export production to the United States. The internal contradiction in this industrial and financial class warfare is now clear: To the extent that it succeeds in depressing labor’s income, it stifles the domestic consumer-goods market. This disrupts Say’s Law – the principle that “production creates its own demand,” based on the assumption that employees will (or must) be paid enough to buy what they produce.
(...) This is not to say that no class warfare is being fought in the United States. Indeed, living standards for most wage earners today are down from the “golden age” of the late 1970s. But the U.S. economy had its own financial deus ex machina to soften the blow: Alan Greenspan’s asset-price inflation that flooded the banks with credit, which was lent out to homebuyers and stock market raiders. Rising home prices were applauded as “wealth creation” as if they were a pure asset, much like dividends suddenly being awarded to one’s savings account. Homebuyers were encouraged to “cash out” on the rising “equity” margin, the (temporarily) rising market price of their homes over and above their (permanent) mortgage debt. So while most mortgage money was used to bid up the price of home ownership, about a quarter of new lending was reported to be spent on consumption goods. Credit card debt also soared. In the face of a paycheck squeeze, U.S. consumers were maintaining their living standards by running further and further into debt.
(...) To understand the dynamics at work, one needs to look at the balance of payments – not so much the balance of trade itself, but the currency speculation, international lending and arbitrage that has dominated exchange rates over the past two decades. Exchange rates no longer reflect relative wage levels, “purchasing power parity” or living costs as in times past. Today, they reflect the flow of international borrowing where interest rates are low and lending at a markup where credit is tight – and then hedging this arbitrage, and jumping on the bandwagon to speculate on which way currencies will go.
(...) [carry trade] Hundreds of billions of dollars, euros and sterling worth of yen were borrowed and duly converted into foreign currencies to lend out at a markup. Arbitrageurs made billions by acting as financial intermediaries making income on the margin between low yen-borrowing costs and high foreign-currency interest rates. As Ambrose Evans-Pritchard wrote over a year ago in the Financial Times, “the Bank of Japan held interest rates at zero for six years until July 2006 to stave off deflation. Even now, rates are still just 0.5 per cent. It also injected some $12bn liquidity every month by printing money to buy bonds. The net effect has been a massive leakage of money into the global economy. Faced with a pitiful yield at home, Japan's funds and thrifty grannies shoveled savings abroad. Banks, hedge funds, and the proverbial Mrs Watanabe, were all able to borrow for near nothing in Tokyo to snap up assets across the globe. BNP Paribas estimates this "carry trade" to be $1,200bn.”
(...) As global currency markets no longer provide the easy pickings of the last decade, the yen carry trade is being wound down. This involves converting Icelandic currency, euros, sterling and other non-Japanese currencies back into yen to settle the debts owed to Japanese banks. This repayment – and hence re-conversion into yen – is pushing the yen’s price up. This threatens to make Japanese exports higher-priced in terms of dollars, euros and sterling. Last week, Sony forecast that its earnings will fall as a result, and other Japanese companies face a similar squeeze in sales, not only from rising yen/dollar prices but from the global slowdown resulting from two decades of pro-financial anti-labor economic policies.
(...) The soaring yen and plunging foreign currency rates are the result of unwinding the Japanese “carry trade” strategy to rescue its banks. Japanese industry will pay the bill. And despite the fall in sterling and the euro, Europe’s policy of emphasizing exports to the American market rather than to sell to its own domestic labor force looks pretty bad in view of the imminent economic slowdown in store. U.S. consumer spending and living standards will have to fall – and it seems, to fall sharply – in order to finance the “trickle down” economy at the top. Current Treasury policy is to bail out the creditors, not the debtors. The banks are being saved, but not U.S. industry, and certainly not the U.S. wage earner/consumer. Instead of pursuing a Keynesian type of deficit spending in a manner that will increase employment (government spending on goods and services, infrastructure spending and transfer payments), the Treasury and Federal Reserve are providing money to the banks to buy each other up, consolidating the U.S. financial system into a European-type system with only a few major banks. The financial system is to become monopolized and trustified, reversing two centuries of economic policy aimed at preventing financial dominance of the economy.
(...) Seeing the imminent shrinkage of the U.S. market, lenders and investors are dumping their shares, not only those of U.S. firms but also stocks in European and Asian export sectors. This is the “inner contradiction” of today’s financial rescue operation. Finance itself cannot survive in the face of a stifled domestic “real” economy.
(...) [the crux] So the world ought to be at an ideological turning point. But the last thing that Europe’s oligarchy wants to see is higher labor standards. Nor does the U.S. financial class. Europe and Asia put their faith in a U.S. consumer-goods market rather than their own. The U.S. financial sector found this appealing as long as consumption was financed by running into debt, not by workers earning more money or paying lower taxes. Industrial and political leaders throughout the world have been so anti-labor that there is little thought of raising domestic living standards via higher wage levels and a tax shift off labor and industry back onto property where progressive tax policies used to be based.
(...) As foreign exporters are rudely awakened the dream of an American demand, when will the point come at which Europe and Asia seek to build up their own domestic consumer markets as an alternative? The first problem is to overcome the ideological bias in which central bankers are indoctrinated, in a world where politicians have relinquished economic policy to bankers trained in Chicago School financial warfare against labor and even against industry. It probably is too much to hope that today’s European central bankers and kindred economic managers will drop their neoliberal anti-labor ideology and see that without a thriving domestic market, their own industrial firms will languish. The solution must come from a revived political sector representing the interests of labor, and even of industry itself as it sees the need to revive domestic markets.

The IMF plan was for Argentina to go in for further privatisation of public assets and more deregulation, along with maintaining very high real interest rates, in the hope of “restoring investor confidence” and once more attracting foreign capital into Argentina. Instead, the Kirchner government stopped bothering about placating foreign investors and directed its attention to domestic producers. It used a stable and competitive exchange rate regime to ensure that domestic production revived and grew. It focussed on improving the consumption levels of ordinary people and reducing poverty. It sought to provide basic (but privatised) services at more accessible rates, often through renationalisation or through controls on the pricing of utilities. Significantly, the government also took a hard line – which ultimately proved very effective – with Argentina’s external creditors, forcing a majority of them in 2005 to accept a debt write-off agreement that effectively cancelled 65 per cent of the value of the country’s outstanding debt.

the upside down world of neo-liberal economics:
Neo-liberalism assumes that wo/men are hardwired to follow self-interests and that our self-interests are ultimately collectively positive. One can't help thinking what a different vision neoliberal economics would've mapped out for us with its forbidding formulae and graphical illustrations had it begun from the assumption that wo/men are hardwired to cooperate and share. Unfortunately, it follows the same path as many of the early Enlightenment figures with its rather negative view of human nature and optimistic view of the competitive consequences of this negative human nature. Neo-liberalism pre-empts Gordon Gecko—greed is good. When all the wo/men in the market place are greedy together, a spontaneous and ideal order emerges. In this sense, all market places are the same. Pigs, bombs and currency are interchangeable. This private language of measurable movable quantities views the economy as a set of scales that tend in the natural order of things towards balance. As much greed as is possible is satisfied within the constraint of scarce resources. This (with a straight face) is called optimum social welfare. In the competitive nature of the marketplace one wo/man may triumph and accumulate far in excess of the others on the basis of his superior characteristics of greed. This (still with a straight face) is also called optimum social welfare. Everybody had a chance to participate and it is the total satisfaction of greed not the distribution that counts. Competitive greed is the given. Since it is innate it exists in all times and places. As a result, neoliberal economics marginalizes history, geography and institutional rules or rather turns the world of history, geography and institutions upside down.
(...) Neo-liberal individualism means we are free to be different so long as we all behave the same

neoclassical micro and macro: science or silliness?
Daniel Bell, certainly no theoretical revolutionary, nonetheless writes: “Modern economic theory is based upon two specific assumptions about economic behavior and its social setting. One is the idea of utility maximization as the motivational foundation for action; the other is a theory of markets as the structural location where transactions take place. The assumptions converge in the thesis that individuals and firms seek to maximize their utilities (preferences, wants) in different markets, at the best price, and that this is the engine that drives all behavior and exchange. It is the foundation for the idea of the comprehensive equilibrium.”
(...) It is important to understand how surprising this claim may be to anyone not immersed in this tradition. Greed breeds bliss. That this self-serving answer that “a decentralized economy motivated by self-interest and guided by price signals” is superior to all alternative designs has long been claimed true and has permeated the economic thinking of even most non-economists is sufficient ground for investigating it seriously. Since the proposition is put forward by policymakers, social commentators, and most economists, it is important to know not only whether it is true, but whether it even could be true. Much of what mathematical economists devote themselves to, therefore, is demonstrating the validity of such claims.
(...) An interesting by-product of this approach, which may go a long way to explaining its appeal, is that if we accept all the assumptions and characterizations as being accurate or at least indicative representations of reality, it shows that each agent operates with a maximum of efficiency and that no agent can be made better off without some sacrifice by another agent. In the economist’s terminology, the general equilibrium is “pareto optimal.” Once we achieve an equilibrium, for you or I to get more pleasure, someone, somewhere, must get less. There is no wasted capability, no inefficiency in how things are produced or allocated, at least in this sense that to get anyone better off someone else would have to suffer a loss.
(...) That is, the model cannot easily or usefully account for the reality that economic agents do not actually know such things as future prices, future availability of goods, changes in production techniques or in markets to occur in the future, etc. Instead, to achieve its results—proofs about equilibrium conditions—the model assumes that actors have perfect knowledge at least of the probabilities of all possible outcomes for the economy. Sir John Hicks, also of great economics fame, says “One must assume that people in one’s models do not know what is going to happen, and know that they do not know what is going to happen. As in history!” Yet economists assume just the opposite. Abstracting from time and uncertainty, they ignore that agents have different consciousness and life experiences and that approaching problems of decision-making in the absence of sure knowledge, they have different expectations and make different choices than economic models suggest.
(...) General equilibrium theory has no room for [involuntary] unemployment. Certainly this is an interesting prediction in a society where some sectors of the workforce suffer unemployment rates as high as thirty percent.
(...) Oligopoly and imperfect competition have also been abstracted from so that the theory does not allow one to answer interesting questions which turn on the asymmetry of information and bargaining power among agents, whether due to size, or organization, or social stigmas, or whatever else.
(...) In addition to ignoring the effects of markets on personal preferences, the inevitability of unemployment and inflation, the structure of workplaces and the role of classes and class struggle, the theory also leaves out unions, racism, sexism, and for the most part, the state. Commodities and work are considered buyable in any quantities whereas they really often come only in “lumps.” The prevalence of “public goods” and “externalities” (where my consumption or production affects not only me but others or even everyone, as in when it generates drunkenness or oil spills, for example) is systematically underemphasized. The stratification of the workplace to achieve greater long-run control rather than to ensure immediate profit-maximization is deemed inconceivable even though it is ubiquitous in our economy.
(...) General equilibrium theory “is a work of art, so compelling that one thinks of the celebrated picture of Apelles who painted a cluster of grapes so realistic that the birds would come and pick at them. But is the model “real”? Obviously there is disequilibrium in the labor market...If the model as elaborated by Arrow et. al. has validity, it is only as a “fiction”—logical, elegant, self-contained, but a fiction nonetheless.”
(...) Consider the following statement from the eminent economist, Lord Kaldor: “The powerful attraction of habits of thought engendered by ‘equilibrium economics’ has become a major obstacle to the development of economics as a science...the process of removing the scaffolding, as the saying goes—in other words of relaxing the unreal basic assumptions—has not yet started. Indeed, the scaffolding gets thicker and more impenetrable with every successive reformulation of the theory, with growing uncertainty as to whether there is a solid foundation underneath.”
(...) In short, neoclassical equilibrium theory is a “fiction,” “impenetrable” for its “forest of assumptions” and unable to become less abstract, perhaps without “solid foundation,” suitable only for “imaginary problems” of the “angel-pinhead variety,” “scandalous,” “dangerous,” and “likely unjustifiable.” Yet this same theory is the core of what students of economics labor to learn and the centerpiece of the reigning social “science” which supports such “common sense wisdom” as the notion that competitive capitalist market systems are optimally efficient.
(...) A century of thought, countless volumes, infinitely rigorous mathematical analysis, how many hours out of how many student’s lives reading “Dean” Paul Samuelson et. al.—and the ultimate contribution to wisdom of the whole miasma is the assertion that economic agents tend to do what they find “advantageous.” This is what the “deans” of economic theory offer? This immense and “satisfying” intellectual edifice has no capacity to predict and no facility for assisting the practitioner in creating “viable, useful economic policy.” The economist-king is wearing no clothes and even knows it but prances forth without modesty anyhow? This yields an interesting query: why do economists continue to pour so much energy into the refinement and teaching of this elaborate “fiction.” And why do students put up with it?
(...) Is this palatable? A vast edifice that claims to be a science but really has little if anything to say to serious people concerned with how our economy works continues to exist because practitioners are eager for mathematical elegance before all else? Perhaps Frisch is correct that this is a motivating factor in the daily efforts of many economists, but if so it would seem to be the last in a long line of factors relevant to the maintenance of the whole theoretical structure—more a rationale than a real cause. For surely economists could exercise their mathematical faculties in context of real analysis or, alternatively, if that is too difficult, those with especially active mathematical inclinations could simply become pure mathematicians and dispense with excessive pretensions about being scientists of real economies.
(...) And surely, if one examines the history of general equilibrium theory, then the transition from what was without doubt a desire to understand and explain real economic relations (Ricardo, Smith, Mill, Marx, and even Walras, the father of general equilibrium theory) to the tendency to show-off mathematical prowess must be explained by something deeper than merely a mathematical “peacock disposition.”
(...) Here is the crux of the matter. Whatever the inclinations of particular economists, in fact the mathmatization of neoclassical micro-theory is mystification with a purpose. First, it legitimates the occupation of economics by clothing its prescriptions in language that looks like the language of physics. Physics is valid and the lay person must take its results as they are presented; so too for the new economics. Second, and much more important, this elaborate mathematical structure serves the aims of “soul-destroying,” “world-polluting” commercialism by deprecating the importance of “aesthetic and humane factors” in economic calculations. General equilibrium theory shows the viability of an unreal system and this is translated into assertions about the world that we live in until most people just accept that “our economy is efficient and stable, the best one possible.” Theories can pursue truth or serve vested interests. In the later capacity they will incorporate only concepts suited to attaining the results desired. An economic theory, for example, may highlight profits, quantities of output, amount of investment, and prices, and leave out class struggle, alienation, direction of investment, and bargaining power. Then the theory will serve capitalists, and, since capitalists pay economists’ wages and endow their universities, economists and their students who comply, will benefit as well.
(...) So whatever the motives of a particular economist might be, the sleight of hand called micro economics is not art or science, but propaganda. The explanation for the longevity of the confidence game is rendered obvious: the commercial magnates who decide what is and what is not to be valued in society, who is and who is not to be respected and well paid, legislate by countless means that general equilibrium theory is jolly good while maverick critics are fringe lunatics. And students can read this handwriting on their classroom doors even more clearly than they can read Samuelson’s text. They know that they will never gain credentials and wealth worth protecting if they don’t play the game as it is meant to be played, firstly propping up capitalism and capitalists and only then and cons within that foremost aim incidentally trying to find some non-threatening new “truths” or old rehashes on which they can build a career.
(...) “A second problem with neoclassical economics is that its technical structure fundamentally reflects its philosophical origins. It is the science of society of the rising bourgeoisie. As such it assumes right at its heart that individuals are what count and that the relations of production are thoroughly privatized.... For example, a fundamental assumption of the theory of consumer behavior is that one person, or family, or consumption unit’s satisfaction from a particular consumption package is independent of the satisfaction of other consumption units. Exit socialism right there!”
(...) Thus where microeconomists use equilibrium to mean “market-clearing,” macroeconomists use it to refer to a condition of stability, with no apriori assumptions that markets will necessarily all clear. Indeed, the whole point of the macro-theorists is to recognize the possibility that the economy might “function smoothly” and yet have a high rate of unemployment or inflation or underutilize some of its productive capacity.
(...) Each of the equations of a macro-system is backed by an economic description of why one should believe it. Yet, few of these descriptions amount to rigorous statements about how all component institutions of the economy function and how their interrelated activity sums to an aggregate relation embodied in the equation. Instead, for the most part supporting arguments just translate the mathematical expression into a verbal story about the same variables, still at the macro level. For example, a supporting argument about the GNP response to new taxes won’t demonstrate on the micro level how each unit and all consumers and other actors in the economy react to the taxes in terms of their individual preferences and circumstances and how the results sum into a rise or fall in average overall prices or consumption and investment and how that in turn influences GNP, but will instead simply say something like “a rise in taxes engenders a rise in prices which in turn causes a drop in demand which then... and then ..., etc.” Some stories are more compelling than others and serious debates are always in progress over the exact form the different equations in the macro-system should assume. But none of the stories have a detailed micro underpinning (we already saw that micro theory can’t underpin anything requiring realism) and the gap between the mathematical model and any really descriptive economic model grows even larger as economists try to specify the functions and their parameters more precisely.
(...) In fact, at best the whole of macro-theory is a kind of “art” in which analysts use hunches, intuitions, or prejudices, plus their own experience of real world trends, to hypothesize certain mathematical relations between macro-variables in the hope that their model systems will then function like the world they seek to explain. At worst macro theory is an ad hoc construction designed to intellectually legitimate policy prescriptions proposed in the first place for interest-based reasons having nothing to do with theory.

hip heterodoxy:
If the mainstream itself is opening up, molting the restrictive Homo economicus and general equilibrium casing, then is the field changing? And does that mean that the worldview of neoliberalism, and market fetishistic policy prescriptions, are losing the important intellectual bedrock in which they are grounded?
(...) Ruccio wasn't quite buying it. "There's a fracturing taking place," he conceded. "It's very hard to put your thumb on what neoclassical economics is. And yeah, there are new research agendas, but what gets taught at every institution in the country from undergraduate to graduate is the same utility-maximizing story. The teaching remains the same, and the policies remain the same."

ignorance and ideological hegemony: a critique of neo-classical economics
In what follows, the content and causes of Mayhew's and the Beeds’ articulated frustration is pursued. Recent literature on the production of knowledge and ignorance-squared is discussed and then used to investigate neoclassical economic knowledge. Subsequently, it is argued that it is fruitless to appeal to neoclassical theorists to become more methodologically pluralist or to enhance their rhetoric. It is concluded that, although a number of causes exist for the intellectual narrowing of the discipline, a fundamental answer to the query "why is this the case?" may be found in Gramsci's notion of ideological hegemony.
(...) Herein is pursued a somewhat different sociological question which is not how to come to know what one doesn't know, the form of ignorance acknowledged by Marshall in the quote above; but why it is the case that neoclassical economists don't want to be aware of what it is that they don't know, which is subsequently defined as ignorance-squared.
(...) To supplement this assertion, it is argued that neoclassical economists, as traditional intellectuals, cultivate the social production of ignorance in the struggle for ideas. This is done through narrow pedagogy, delineation of research parameters, and by constraining the production and presentation of non-neoclassical knowledge.
(...) Training in textbook economics and economic research systematically fosters ignorance-squared, in that students and researchers are shielded from any acquaintance with problems outside the domain of successful puzzle solving. The curriculum is always crowded with the positive heuristic of neoclassical economics; there is always too much to teach. There is never time for reflection, for perspective, for the cultivation of awareness, and most importantly, for the presentation of other contentious viewpoints, much less for the knowledge produced outside the disciplinary boundaries. When neoclassical economists restrict their own discourse, as well as their students’ ability to engage with others of the same, or related specialties, then "ignorance-squared", in the manner put forward by Ravetz (1993) is enhanced.
(...) There is nothing necessarily negative about the fact that we proceed through life unaware of most of what there is to know. What is argued however, is that neoclassical economists promote ignorance-squared.
(...) To illustrate, there are numerous reasons for promoting ignorance-squared. Given the search costs combined with specialisation, there is only so much time to devote to methodological issues. Therefore, the dominant paradigm will draw the attention of most scholars. Moreover, the more a system (of thought) is entrenched, and the longer the time it has been operating, the more difficult and expensive it becomes to change that system (Collingridge 1980). Likewise, the more a person has invested in the training required to be admitted to the neoclassical coterie, the more it is in that person's interest to prevent the depreciation of knowledge threatened by alternative modes of discourse. Another reason may be the appeal of elegant mathematically constructed neoclassical axioms. For instance, Einstein's theory of relativity became the standard textbook theory of gravitation in the 1920s. Yet, it wasn't until the 1950s that radar and radio astronomy became sophisticated enough to generate and test the theory via precise predictions with experimental uncertainties less than one percent. The general acceptance of the theory in the intervening 30 years had been largely attributed to its beauty (Weinberg 1992: 98), similar to the dominance of general equilibrium theory in economics in the second half of the twentieth century. Given the conceptual apparatus of ignorance-squared, let us now examine the production of economic knowledge that incorporates simultaneously, the production of ignorance.
(...) Neoclassical economists normally treat economic instability as the effect of exogenous, stochastic factors even though nonlinear economics suggests that what may previously have been considered exogenous, or random, may more likely be endogenous to capitalist social formations. As such, economic fluctuations are seen as created by the processes of capitalism itself (Baumol and Benhabib 1989; Savit 1988). This is certainly not a new idea. Marx, Keynes, Hicks, Harrod, Kaldor and Hayek all considered causes for instability which were endogenous (Zarnowitz 1985).
(...) The 'rational' consumer of the mainstream economist is a working assumption that was meant to free economists from dependence on psychology (Simon 1976:131; Tversky and Kahneman 1987). The dilemma is that the assumption of rationality as intertemporally optimising is often confused with, and regularly presented as, real, purposive behaviour. In fact, the living consumer in historical time routinely makes decisions in undefined contexts. They muddle through, they adapt, they copy, they try what worked in the past, they gamble, they take uncalculated risks, they engage in costly altruistic activities, and regularly make unpredictable, even unexplainable, decisions (Sandven 1995).
(...) In his work Arthur divides up the profession into two world views, the neoclassical and the 'new' economics: neoclassical economics is based on diminishing returns; 19th century deterministic dynamics approaching equilibrium; homogeneous factors; no externalities; and is structurally simplistic around the concepts of supply and demand. Alternatively, 'new' economics introduces increasing returns; is evolutionary; focuses on heterogeneity and externalities; and is structurally complex and ever changing (Waldrop 1992:38; Bak and Chen 1991). Most students graduate, only having come into pedagogical contact with the former worldview.
(...) We are left with the pre-eminence of equilibrium economics when the balance of supplies and demands on all spot and futures markets takes place simultaneously, (Hicks 1939; Arrow 1971; and Debreu 1959). In this purely competitive, certain, optimising world of general equilibrium, pure profits are zero. Before students are permitted to achieve this level of sophistication, they must first go through the partial equilibrium components of marginal cost and revenue relationships.
(...) More recently, Nitzan and Bichler point out (1995 454-455) that modern corporations are not even "acting as if" they equilibrate marginal cost-marginal revenue to maximise profits. Rather, they attempt to "beat the average". References to the "average" or "normal" pervade the business literature - from the analysis of stock performance, through the stacking of country growth rates and risk premia, to the ranking of corporate profitability. In these terms, according to Nitzan and Bichler, the primary goal becomes "differential pecuniary accumulation", through which the corporation seeks to control a "larger share of the societal surplus". Consequently, success has less to do with the intuitively convincing textbook equality between marginal cost and marginal revenue, than with the capture of external contested income, thereby redistributing the available social surplus.
(...) Change, not rest is the characteristic 'state' of capitalism. "The essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process that is in continual disequilibrium. It may seem strange that anyone can fail to see so obvious a fact long ago emphasised by Karl Marx" (Schumpeter 1976:82).
(...) As Mayhew, and Beed and Beed suggest, the exercise of ideological power drives a portion of the full non-neoclassical transcript underground, in this instance to less reputable heterogeneous journals. In mainstream discourse, the subordinates (academic workers and students) tend to reveal only what is "safe" and "appropriate"; that which is delineated by the dominant paradigm or its ideological purveyors. Total subordinate revelation is only forthcoming in student or worker newspapers or "less reputable" heterogeneous journals, all treated with condescending contempt by the orthodoxy.
(...) The proficiency shown in neoclassical tools, concepts and language becomes the hallmark of identification and quality. The Krueger Commission on Graduate Education, established in the United States to report on tertiary education standards in 1990, reported that department procedures "bias the selection towards good technicians, rather than good potential economists". This implies that graduate education de-emphasises creativity and problem solving as the student requires "little or no knowledge of economic problems and institutions" (Krueger 1991:1040-42). Consequently, ignorance is promoted as a qualitative manifestation of a "good economist". The result is that the dominion of organic intellectuals, representing a class position and propounding its symbolic representation, is solidified. In order to join this coterie one must accept and disseminate the ideological and political constituents of class power that it represents.
(...) Economics is constructed around more than subjective differences of epistemology, methodological preference or appreciation of elegant techniques; the differences at the core are also political. Neoclassical economics has represented, for two hundred years, the political self-representation of autonomous, self-subsistent, and self-interest-optimising individuals. The populist works of Friedman (1962) in Capitalism and Freedom, or the more adrenalin-pumping stuff of Ayn Rand (1952 and 1957) in The Fountainhead and Atlas Shrugged provide adroit examples of the ideological and political content in the grasp of the "Invisible Hand". It is here where the connection between promoting ignorance-squared and ideological construction is entwined.
(...) "And your education! Is not that also social, and determined by the social conditions under which you educate, by the intervention, direct or indirect, of society, by means of schools, etc?" (Marx 1976: 502).
(...) Questioning, wondering, doubting, revising and collaborating are all practices which Socrates and now McCloskey (1985) would proffer to those interested in expanding the breadth of our knowledge through communication. Yet, students, and many of their preceptors, do not know that they do not know that capital cannot be measured; that utility is metaphysical; that optimisation is non-falsifiable; that capitalism is inherently unstable; or that, as Ricardo discovered, when we say 'supply and demand' we are explaining nothing (Dobb 1975: 52 and 119). The incentive remains not to find out; or at the very least, not to recognise the numerous serious-minded non-neoclassical economists who take all of the above for granted! Rather, mainstream protagonists spend time proving to each other that what they are doing is what they should be doing; and then convincing the disciples that what they should be doing is what their mentors are doing, ie., producing "acceptable" knowledge. The entire process is justified from within by noting that economists are all optimising their utility functions (Becker 1975).
(...) A student may actually accept what s/he is taught as normal, even justifiable, as part of the social order. Another may reject the information as "unreal", "incomplete", "too abstract", "not relevant", or "not falsifiable" and yet have no "realistic" option to present as a critical counter-claim. In either case, to survive, to pass the course, to increase their potential material enhancement upon graduation, both types of student must internalise and become technically proficient with what is served up. At the level of ideas, this symbolic production and re-production of both knowledge and ignorance-squared is replicated, with or without conscious consent (Gramsci 1971:passim).
(...) By disseminating a paradigmatic discourse and the concepts to go with it as well as defining the standards of what is legitimate, a symbolic climate is created that prevents subordinates from thinking their way free. Thinking "free", is used in the sense that acts are dialectically interactive with intentions, neither consciousness nor action being "unmoved movers" (Scott 1985: xvii and 38-39).
(...) No matter how hard neoclassical economists try to drive away the world of complexity, it too continues to confront them. Yet, to the frustration of "heterogeneous" antagonists the neoclassical paradigm remains dominant, blatantly promoting ignorance-squared. Elegance and technique have replaced relevance. What has been shown herein is that the production of that elegance has involved the opportunity cost of simultaneously producing ignorance. Ignorance-squared is replicated amongst students given the social interests of those dominant in the paradigm. This process of producing ignorance becomes entwined with the promotion of ideology to the detriment of us all. McCloskey importunes the deaf, for dialogue with more relevant tributaries of the mainstream is not in the interests of those presently in control.

two articles on mozambique:
(first, in defense of the economic order:)
Mozambique is one of the world's poorest countries. It's also an African success story. Here, such things are relative. To the immediate west, Zimbabwe's Robert Mugabe misrules his country toward calamity. Nigeria, Ivory Coast and others are beset by civil conflict and corruption. But Mozambique, scarred by 16 years of civil war and Soviet-style economics, turned itself in the right direction on its own. Optimism, however guarded, and Africa do sometimes go together.
(...) But hyperinflation and a stagnant economy forced leaders of the neo-Marxist liberation movement, Frelimo, to shift their approach. Starting in the early 1990s, the ruling party cut subsidies, opened to outside investment, privatized firms nationalized after independence in 1975 and got a grip on borrowing and the budget. An independent central bank brought inflation into single digits. According to the World Economic Forum's competitiveness index, Mozambique has reformed more than any sub-Saharan African country.
(...) The payoff is the highest average growth rate, at 8% over the last decade, among the continent's non-oil exporters. GDP per capita is a still tiny $320, but that's compared with $178 in 1992. Since 1997, poverty rates decreased more in rural areas (from 71% to 55%) than in urban (62% to 52%), according to the World Bank. Child mortality has declined to 152 per 1,000 live births from 235. And primary-school enrollment has risen to 71% from 43%. Once a leading recipient of food aid, Mozambique now exports maize, with 5.6% average yearly growth in farming in the last 15 years. Banks, telecom and tourist firms, many from neighboring South Africa, have come in.
(...) But neighbors in similar straits haven't put in place Mozambique's fixes. Inflation in Zimbabwe is 1,700%; nearby Malawi and Zambia, their economies distorted by subsidies on commodities, are growing haphazardly. "You need political will" to get it right, says Mr. Baxter. "Starting from a low base" or "being a former colony" -- oft-heard excuses for Africa -- has little impact on economic performance. What matters, as regional dynamo Botswana also shows, is governance.
(...) Erratic "Uncle Bob," as his deferential neighbors call Zimbabwe's 83-year-old Robert Mugabe, is a useful reminder that local politicians pose the gravest threat to Africa's future.
(...) In the meantime, having done the so-called first generation of market reforms, the government is dragging its feet on legalizing land ownership, fighting corruption and loosening a restrictive labor code to bring in more investment. "Now they're stuck," says Mr. Lima. "There is a strong socialist background here. If we want to perform, we need to be different."
(second, in response:)
(...) Africa observers often single out a storyline from one country - sometimes it's cheery, sometimes not - in order to apply lessons to the whole continent. But I'm having trouble seeing what Kaminski and others see.
(...) Kaminski's paean to private enterprise leaves me particularly cold. Because Mozambique's development is heavily concentrated in the southern capital, the vast majority of the country sees few of the benefits of growth. And much of the economic improvement over the last 15 years can simply be chalked up to the peace dividend. When hostilities ended - with one million dead - Mozambique had nowhere to go but up. The country currently ranks tenth from the bottom on the UN's Human Development Index (just ahead of Burundi, and well behind Rwanda). It used to rank as the very poorest country in the world. So, yes, I guess things could be worse.
(...) But, most importantly, all this talk about privatization and foreign investment is very much beside the point. As Kaminski concedes, one in six Mozambican adults is infected with HIV. "Appreciating the change for the better takes some imagination," he writes. But you cannot speak of "the change for the better" unless the discussion starts with HIV. It's the only yardstick that matters in Mozambique, and in the rest of southern Africa as well. Some 37,000 Mozambican children contracted HIV in 2006, a jump of 60% over six years before. Nearly four of every 10 adults in Beira, the country's second largest city, are HIV-positive. Those are apocalyptic figures, however creative your thinking.
(...) The luxury building is full of foreigners here on business; the more posh of the country's two shopping malls is on the ground floor. It looks as if the land where the Four Seasons stood will be developed in much the same way, except that Part of the site will be set aside for a new American embassy. I have yet to meet a Mozambican who cares that the hotel is gone or about what will take its place.

sarkozy taking france back to 1789:
In his victory speech, he vowed to “rehabilitate work, authority, morality, respect, merit”. Whether it was used deliberately or subconsciously, “rehabilitate” is an interesting choice of word, because it carries the implication of bringing back into vogue something that existed in the past. You will seldom find its proponents acknowledging that the neoliberal “reform” process falls squarely in that category, for it is based on the assumption that rapid “growth” and “wealth creation” are contingent on further empowering the owners and controllers of capital while wresting from workers many of the rights that were gained after long and arduous struggles.
(...) Trade unions tend to sell out, or become so bloated and bureaucratized that they lose the respect and allegiance of their members. But those that continue to serve their historic purpose of agitating and bargaining for better conditions face the wrath of the entrepreneurial classes: they are dismissed as relics of the distant past and as hurdles to “progress”. From the capitalist point of view, the ideal solution to the nuisance posed by organized labour is legislation that strips it of its powers.
(...) So much, then, for the legacy of May ‘68. It was, in fact, liquidated long ago. Sarkozy isn’t inheriting a socialist state any more than Royal would have sought to create one, had she won last Sunday’s election. France does, however, retain elements of the welfare state. As Tony Judt commented in The New York Times a couple of weeks ago: “The dysfunctional French social model, we are frequently assured, has failed. In that case there is much to be said for failure. French infants have a better chance of survival than American ones. The French live longer than Americans and they live healthier (at far lower cost). They are better educated and have first-rate public transportation. The gap between rich and poor is narrower than in the US or Britain, and there are fewer poor people.”
(...) European social democracy has been in decline for decades: most of the parties associated with that label have convinced themselves that there is no alternative to neoliberal economics and, furthermore, that deviations from the capitalist path are indefensible on the electoral battlefield. No one exemplifies this trend better than Sarkozy’s friend and admirer Tony Blair. The centre has shifted, making it simpler for conservatism to slide towards extremist variants of the creed. Sarkozy, with his appeals to nationalist pride, is one of the consequences. If the drift continues, it is not inconceivable that the far right in Europe will before long acquire “respectability” of the sort it hasn’t enjoyed since the 1930s.
(...) There is a small possibility, of course, that the reality of power will moderate Sarkozy’s crypto-fascist tendencies. However, given that their new president appears to have little time for notions such as liberté, egalité and fraternité, it’s more likely that the plurality of French citizens will sooner or later find themselves rallying to defend not the legacy of 1968 but the spirit of 1789.