Saturday, April 21, 2012

Michael Hudson: How Financialization Makes You Poorer

This is a blog about what is wrong with economics, not what is wrong with the economy, but the reason what is wrong with economics matters is because what is wrong with the economy can be traced, in many ways, to what is wrong with economics. Economics and economists ought to help us to understand how the economy -- our decentralized decentralized system of production and trade and investment -- works, and macroeconomics ought to help us understand what choices we are making collectively. In that sense, it ought to inform government, especially democratic government. But, mostly, it doesn't. It confuses, and talks up a lot of rot. But, there are a few people out there, who are zeroing in on the essence of the choices we are making. Michael Hudson is one. Michael Hudson: Productivity, The Miracle of Compound Interest, and Poverty « naked capitalism:
"After World War II many women stayed home and raised families. But since the 1950s they have been forced increasingly into the labour force for what are called two-job families – and now, three-job families (with only two family members). If you project labor participation rates, by the year 2020 every woman will have to work 18 hours a day or economic trends will falter. What was applauded as a post-industrial economy has turned into a financialized economy. The reason you have to work so much harder than before, even when wages rise, is to carry your debt overhead. You’re unable to buy the goods you produce because you need to pay your bankers. And the only way that you can barely maintain your living standards is to borrow even more. This means having to pay back even more in years to come. That is the Eurozone plan in a nutshell for its economic future. It is a financial plan that is replacing industrial capitalism – with finance capitalism. Industrial capitalism was based on increasing production and expanding markets. Industrialists were supposed to use their profits to build more factories, buy more machinery and hire more labor. But this is not what happens under finance capitalism. Banks lend out their receipt of interest, fees and penalties (which now yield credit card companies as much as interest) in new loans. The problem is that income used to pay debts cannot simultaneously be used to buy the goods and services that labor produces. So when wages and living standards do not rise, how are producers to sell – unless they find new markets abroad? The gains have been siphoned off by finance. And the financial dynamic ends up in austerity. And to make matters worse, it is not the fat that is cut. The fat is the financial sector. What is cut is the bone: the industrial sector. So when writers refer to a post-industrial economy led by the banks, they imply deindustrialization. And for you it means unemployment and lower wages."
This is so important to understand. In 2008, the finance sector, after failing spectacularly, demanded that government take emergency measures to preserve the financial sector, alleging that any other course would destroy the global economy. Those emergency measures have destroyed the global economy. And, yet, we -- the general, voting public and the politicians, who represent us and the centrist busybodies, who decide what is wise and "serious" policy -- are apparently paralyzed, like deer in the headlights, unable to understand and move forward on a sensible rational policy And, why? Well, one critically important reason is that economics -- particularly macroeconomics -- has never bothered to figure out what money and finance is all about. What is the function of money? What is the function of finance? These are basic questions. The answers are not exactly rocket science. And, yet the essentially predatory nature of financialization is ignored, except by a few, articulate scholars, like Michael Hudson, who are marginalized for their trouble.

Friday, April 20, 2012

Eschaton: Fine, Galtian Overlords, Make Us Poor, But...

Eschaton: Fine, Galtian Overlords, Make Us Poor, But...: you have to make people suffer so? It's one thing to take an income hit, it's another thing to spend an entire life with high degrees of income insecurity. It isn't just stagnant or declining incomes that's the problem, it's that most people face a daily nontrivial probability that they're going to be completely fucked.

At the risk of pointing out the obvious -- or what should be obvious, at least -- one thing is a means to the other.

The only uses for financial wealth are "ownership" and "insurance" (I am using quotes to indicate that I am using the term in a broad, economic sense to mean something more than auto insurance or life insurance), and the only way to obtain high returns to financial wealth, is lots of volatility, which has the effect of separating poorer people from their wealth, or ownership claims, making them desperate enough to buy "insurance" at usurious rates and at risky terms, which will result in many of them, say, experiencing medical bankruptcy or the foreclosure on a home.

Atrios -- Duncan Black -- it will be noted was a Ph.D. economist in another life.

Friday, March 9, 2012

The Madness Behind the Method, Part 1

There's an old saying in the military to the effect that amateurs focus on strategy, while the professionals do logistics. It highlights the prosaic reality that a commanding general's job consists largely of making sure his army is fed, clothed, supplied and moved; strategy and tactics are almost an afterthought, and success in logistics may well overshadow what is called strategy or tactics, in determining the outcome of conflict and battle. There's a useful analogy in this wry observation to the situation in the intellectual battlefield of economics: the amateurs focus on theoretical modeling, while the pros do methodology. For the past month of so, there's been a quickening of exchanges in the econblogs over the merit of "microfoundations" in macroeconomics: the pre-occupation of the field with connecting analysis of the behavior of economic aggregates with the expectations and inter-temporal optimizations of (representative) individual actors, largely in models of a type known as Dynamic, Stochastic General Equilibrium (DSGE) models. Although conducted largely in good humor, the exchanges have been fairly stark in terms of outlining alternative views of the value of the DSGE/"microfoundations". On one side, some bloggers have been somewhat dismissive; on the other, some have tried to explain the approach and its value. I say, "tried" without prejudice, since the topic is somewhat technical and esoteric. It is an unusual discussion for the econblogs, because it goes directly to the usefulness of economics, as a body of knowledge and doctrine, and is not a subspecies of ideological partisan sniping over ephemeral policy issues. The usual pattern resembles a kind of ritualized tribal warfare, in which the same tropes are rehearsed. Allies close ranks around their champion, or join together to harass some hapless victim or to engage with a talented provocateur. Some allegedly left-of-center econbloggers would scarcely have an opinion, if they were not constantly provoked by Tyler Cowen (Marginal Revolution). But, here, we get to see some genuine transparency of thought, as bloggers on the same "side" expose their differences and doubts and deepest assumptions. And, this is real core stuff. "Microfoundations" trace back to the Lucas Critique, an event that has helped shape macroeconomics as a field for a couple of generations. Robert Waldmann, in his comment, contrasts the Lucas Critique with Friedman's outline of Positive Economics, as the two methodological touchstones for macroeconomics. As Simon Wren-Lewis observes practically every paper published in what are considered top journals includes several pages laying out the "microfoundations" for the model presented in the paper. And, it is precisely the value of doing so in every case, that is being called into question in this blogospheric back-and-forth. A nearly universal practice, closely associated with professional prestige, is being called into question, with regard to its practical value. And, the back-and-forth is occurring among people of good will and a more-or-less common ideological world-view. It's a remarkable development, a breach of some kind of barrier, I think. Economics is subject to a great deal of scornful criticism from the amateur laity (such as my own lovely self), as well as from gadfly and apostate economists. I don't think the mainstream of the profession likes to engage with this criticism much. There's a tendency to close ranks, and to defend the professional reputation of prominent members of Tribe Econ; if an economist is attacked by other economists, it will be for the partisan claims made in an op-ed written for popular consumption, and not for professional accomplishments. It's OK, somehow, for a Krugman or a Barro to take potshots at each other's popular opinion-writing about, say, Obama's stimulus; disagreements about the useful of technical and professional approaches and accomplishments are another thing.

Saturday, March 3, 2012


When I created this blog, I was having one of those super-caffeinated manic moments, when I could see an extensive outline for a critique of economics. Once I recovered, I immediately saw how far my vision had soared past not only my ability, but my ambition, and even my arrogance. I've since thought about using these pages to review some of the other critiques, floating out there -- particularly the ones written for a popular audience -- Steve Keen, Yves Smith, John Quiggin, etc., as well as some of the short bits spun out daily by various econ bloggers. Ability limits me; ambition fails me, too. Arrogance? I really do not care. But, as I stumble on, I find myself very angry, about the failure of economics to say anything coherent or useful. The more I understand of what economics has become, as an academic discipline and a college of science and a tool of popular discourse, the more angry I become. So, maybe, I will try to channel a bit of that anger, and see if it can supply the deficit of ability and ambition. At least, it may produce some useful or interesting rants. And, that's what blogging is for, no?