Economics

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Five Points for a Citizen Economics

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Budget time is really the only window where citizens are encouraged to engage in economic debate, and even then the space of time is too short and the range of topics up for debate too narrow to make much impact. When it ends, and for the other eleven months of the year, economics is the preserve of technocrats.

That is a serious problem. Economics is the discussion of how things in our society are produced and distributed. If you leave it to experts there is a big cost for democracy. Yet, while people feel comfortable engaging in debate about politics in the Middle East or presidential elections in the United States, there is a reticence to talk about economics.

Part of this is down to economics as a discipline, which has become increasingly remote from day-to-day life. The primacy of the market as a means to resolve problems has led to the rise of ‘market scientists’, who are seen as the authoritative voices on running an efficient economy. The language deployed by these experts is deliberately exclusive. Certainly they are unlikely to start explorations of economics with parables about pin factories, as Adam Smith did in The Wealth of Nations.

Yet they dominate economics discourse. When economics is discussed with any substance in the mainstream press market scientists from universities, think-tanks and finance houses are given free reign to make objective statements about the common good. Research by Julien Mercille has shown that between 2008 and 2012 77% of commentators on austerity were from elite institutions.

Another factor leading to the retreat of ordinary people from economic debate is the narrowing space for democracy in the economy. The democratic sphere only extends to areas where there is or could be public ownership. Outside of this decisions are made by private individuals or organisations. As wealth becomes concentrated in fewer hands, fewer economic decisions are made with public participation.

This has bred a cynicism about what can be achieved by discussing economics. With capital increasingly breaking free from taxation – and mobile enough to defeat strikes – people have come to accept that social problems can only be resolved by appealing to private individuals and organisations to solve problems profitably through the market. And so we are relegated in the economy from citizens to consumers.

This must be reversed if we are to build a politics in Ireland that can reclaim our society from the political establishment and the interests they serve. Joan Robinson, one of the great economists of the twentieth century, was once asked why people should study economics. She replied, “so that economists can’t fool you”. Implicit in this comment is the need for citizen economics.

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Consumerism and Equality

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The consumerism generated by capitalism throughout the  ‘Developed‘ or ‘Western’ World is a major obstacle to tackling climate change, the biggest problem facing mankind.  So the next question must be: why is capitalism still so widely accepted?   Why do workers in the ‘West’ vote overwhelmingly for pro-capitalist parties?

One of the less obvious features of capitalism is that by exponentially expanding its ‘free’ market into every corner of  life it puts a price on everything, and it thereby becomes a great social leveller: kings and lords, upper-class birthrights and privileges decline as possession of money, which by chance can be acquired by anyone, comes to measure everything.  As a result, other than the massive inequalities of money, we now live in a society with a level of personal equality that was unimaginable throughout  human history up to perhaps 40 years ago for gender, race, single mothers, LBGT, etc.  But crucially this equality drive of capitalism has always encouraged constantly growing agitation by workers for a just and equal economic share of their social production. They now see themselves as the social equals of their bosses, which causes desperate problems for capitalists.  Capitalism thereby lacks the acceptance of difference which earlier civilizations did, and which could last thousands of years in spite of vast degrees of inequality, class divisions, emperors, slavery, etc.

England’s history demonstrates this capitalist dilemma. In response to the rapidly growing agitation the capital-owning class must react, like any ruling class, in two ways: some groups are violently repressed and exploited; some are bribed to keep them loyal. Thus colonies were plundered by Imperialism to deliver ‘bribes’ to English workers (noted in England by Engels1 ) finally resulting in the compromise of social democracy.    For example while the famine was devastating Ireland massive amounts of food were exported under British army guard to Liverpool. Violence was used in the 1819  Peterloo massacre of protesters.  But when Chartist agitation for equality  grew towards 1850, this time instead of violence the Corn Laws were ended to allow imports of cheap food to quieten the agitation. It is clear that most wars fought during Hobsbawm‘s Age of Empire2  and continuing today were concerned with access to cheap labour,  food, raw materials, and later oil.  The home working class was comfortable enough to forgo  dangerous agitation, even gaining the vote over the years. But after 2 diverting world wars, which were much caused by imperial rivalry, in the 1970’s there arose further demands for economic equality by English workers (e.g. the miners strike) and also agitation by the colonies for their own liberty, for the equality of nations.  As there were no new colonies to invade Thatcher and others in the West had to find another source of wealth to answer this new agitation.

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Investment Remains the Key to a Real Recovery

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The Irish recession which began in the final quarter of 2007 is the most severe in the history of the state. GDP contracted by 12.1% in a little over two years ending in the 4th quarter of 2009. That slump is not over. The latest data shows that the economy still remains 3.4% below its pre-recession peak. In effect it is likely to take 5 years or more simply to recover the output that was lost in the slump.

Even then, the economy will remain way below its previous trend rate of growth. This is illustrated in Fig 1 below, which shows real GDP and real GNP from 1997 to the present. The average annual growth rate of the Irish economy from 1997 to 2007 was approximately 6%. Maintaining the trend rate of growth would have led the economy to be approximately 50% larger than it is currently, and there is a danger that this potential is lost permanently.

Fig.1 Medium-Term GDP & GNP

Fig.1 Medium-Term GDP & GNP

The causes of the slump are very clear. Over the entire period of the crisis the fall in investment more than accounts for the entirety of the decline in aggregate measures of output, either GDP or GNP. GDP in the 2nd quarter of 2014 is still €6.6bn below its late 2007 peak. Investment (Gross Fixed Capital Formation, GFCF) is €14.4bn below its peak. There are other compoents of GDP which have also failed to recover, notably personal consumption and government expenditure. But even taken together, their combined fall of €10.1bn is less than the fall in investment. The only component of GDP which has risen is net exports. The change in components of GDP is shown in Fig.2 below.

Fig.2 GDP & Components In the Slump. Source: CSO

Fig.2 GDP & Components In the Slump. Source: CSO

This data belies the notion that there is an ‘export-led recovery’ under way. Recorded net exports have grown very strongly, up €30.5bn over the period. But only one quarter of this or €7.4bn is a rise in the export of goods. A much larger statistical contribution has arisen from the decline in the imports of goods, down €14.6bn. As both investment and consumption have fallen, this simply suggests that both firms and households have been priced out of world markets by reduced purchasing power. The remainder of the rise in net exports is derived from international trade in services. These are particularly prone to the tax-induced flow of funds that plague the Irish economy and completely distort the economic data. There is little benefit from attempting to unravel them.

More importantly, it is clear that exports have not led a broad-based recovery at all. All the main domestic indicators of activity, consumption, government spending and investment are still far below their pre-recession peaks.

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China’s Economic Growth in the Light of the Findings of Modern Western Economic Research

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This article was originally posted on John’s blog Key Trends in Globalisation on the 2nd of September. 

Since 1978 China has seen the most rapid economic growth of any major country in world history, and the most rapid increase of living standards of any major economy. Furthermore, following the beginning of the international financial crisis, China far outperformed any other major economy – in the seven years from 2ndquarter 2007 to 2nd quarter 2014 China’s economy grew by 78% and the US by 8%. In a single generation China has gone from a ‘low income’ economy to the verge of achieving ‘high income’ status by World Bank criteria.

This unprecedented economic development is sometimes explained in terms of unique ‘Chinese characteristics’, but Western economic research over the last 30 years confirms that the reasons for China’s economic growth are rooted in universal economic processes. To be more precise, while the combination of global forces producing economic growth is unique in China, and produces unique ‘Chinese characteristics’, the forces propelling China’s growth operate throughout the world economy.

These modern advances in Western measurement and analysis of the causes of economic growth have major implications for China. Some economists in China have claimed that its very rapid growth is ‘aberrant’ and not in conformity with economic theory. Instead, supposedly China must switch from a growth pattern based on high investment and exports to one based on productivity, more precisely Total Factor Productivity (TFP), growth. Unfortunately such arguments are based on economic methods and concepts that are 30 years out of date and which have been formally replaced by the UN, US and OECD.

Modern economic methods show that growth in the world economy, therefore including China, is fundamentally driven by high levels of investment and by globalisation, which is division of labour on an international scale. The aim of this article, therefore, is to outline the results of the most advanced Western economic methods and their implications for China. First a brief characterisation of the scale of China’s economic achievement will be given, as this establishes the fundamental implications of this for economic theory, and then the implications of modern Western economic research for understanding China’s growth will be analysed. In particular, attention will be given to the formally registered advances of measurement and understanding of economic growth in general, by international economic agencies, and to the most comprehensive application of these to the study of China and Asia’s economic growth – Vu Minh Khuong’s masterpiece The Dynamics of Economic Growth: Policy Insights from Comparative Analyses in Asia.

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From Alpha 2 Omega Podcast #53: What’s Next? Part II

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This week we have part two of our discussion with Professor Peter Hudis, of Oakton Community College, about his book ‘Marx’s Concept of the Alternative to Capitalism’. The first part can be found here.

In this week’s show we talk about the Soviet experiment and the alienation of labour, the role of the state in a post-capitalist society, the Spanish revolution and the anarchist understanding of revolution, and the co-operative model as an alternative.

You can get the Professors book here.

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Deng Xiaoping – The World’s Greatest Economist

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This article was originally posted on John’s blog, Key Trends in Globalisation on the 23rd of August.
August 22, 2014 is the 110th anniversary of the birth of Deng Xiaoping. Numerous achievements would ensure Deng Xiaoping a major position in China’s history – his role in shaping the People’s Republic of China, his steadfastness during persecution in the Cultural Revolution, his extraordinarily balanced attitude even after return to power towards the development and recent history of China, his all-round role after 1978 in leading the country. But one ensures him a position among a tiny handful of people at the peak not only of Chinese but of world history. This was China’s extraordinary economic achievement after reforms began in 1978, and the decisive role this played not only in the improvement of the living standards of Chinese people but the country’s national rejuvenation. So great was the impact of this that it may objectively be said to have altered the situation not only of China but of the world.

China’s economic performance after the beginning of its 1978 reforms simply exceeded the experience of any other country in human history. To give only a partial list:

  • China achieved the most rapid growth in a major economy in world history.
  • China experienced the fastest growth of living standards of any major economy.
  • China lifted 620 million people out of internationally defined poverty.
  • Measured in internationally comparable prices, adjusted for inflation, the greatest increase in economic output in a single year in any country outside China was the U.S. in 1999, when it added US$567 billion, whereas in 2010 China added US$1,126 billion – twice as much.
  • During the beginning of China’s rapid growth, 22 percent of the world’s population was within its borders – seven times that of United States at the beginning of its own fast economic development.

Wholly implausibly, it is sometimes argued that this success was merely due to “pragmatism” and achieved without overall economic theories, concepts, or a leadership really understanding the subject (particularly with no knowledge of U.S. academic economics!). If true, then the study of economics should immediately be abandoned – if the greatest economic success in world history can be achieved without any understanding of the subject, then it is evidently of no practical value whatever.

In reality this argument is entirely specious. Deng Xiaoping’s approach to economic policy was certainly highly practical regarding application – the famous “it doesn’t matter if a cat is black or white provided it catches mice.” But it was extremely theoretical regarding foundations – as shown clearly in such works as In Everything We Do We Must Proceed from the Realities of the Primary Stage of Socialism, We Are Undertaking An Entirely New Endeavour, and Adhere to the Principle to Each According to his Work. Deng Xiaoping’s outstanding practical success was guided by a clearly defined theoretical underpinning, which can be understood particularly clearly in its historical context and in comparison with Western and other economists.

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From Alpha to Omega Podcast #052: What’s Next?

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This week I am delighted to welcome Professor Peter Hudis, of Oakton Community College, who has recently published his new book: ‘Marx’s Concept of the Alternative to Capitalism‘.

We discuss what Marx had to say about post-capitalist societies, and the reluctance of those on the left to talk about what it might actually look like.

We also talk of the theoretical reasons for the failure of the Soviet and Maoist projects, how abstract labour dominates our lives, and how not even the capitalists are in control of the current system.

You can find the Professors book here:http://www.haymarketbooks.org/pb/Marxs-Concept-of-the-Alternative-to-Capitalism

Enjoy!

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Why China Won’t Suffer a Western Type Financial Crisis

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This article originally appeared on John’s blog Key Trends in Globalisation on the 22nd of July.

Inaccurate articles sometimes appear claiming China faces a “severe debt crisis.” Factually these are easily refuted. Changyong Rhee, the IMF’s Asia and Pacific Department director, pointed out that China’s national and local government debt is only 53% of its GDP, compared to U.S. government debt which is roughly as big as GDP, or in Japan where government debt is 240% GDP. Foreign debt is 9% of China’s GDP – insignificant set against the world’s largest foreign exchange reserves.

Factually, it is therefore unsurprising that China’s predicted “Lehman” or “Minsky” moment, a financial collapse, invariably fails to occur. But there is another, even more fundamental, reason why China’s economy does not suffer severe financial crises of the type that struck the Western economies in 2008 or wracked the Eurozone. As this illustrates a way that China’s economic structure is superior to the West’s, it is worth analyzing.

Starting with fundamentals, the way the argument is constructed that China faces a “serious debt crisis” violates the most elementary accounting rule – more precisely that of double entry book keeping, which was invented in Italy “merely” eight centuries ago! This is that for every debit entry there has to be a credit one, and vice versa. Discussion of only of one side of a balance sheet without the other is financial nonsense. Claims, such as in the Financial Times, that the big story of 2014 is “the black cloud of debt hanging over China” are financially meaningless given they do not discuss assets to be set against debt.

To illustrate this elementary accounting principle, take a simple example. A company borrows $100 million at 5% interest, uses it to build houses, and sells them at 15% profit. To declare “there is a crisis – the company has a $100 million debt” is evidently nonsense. The company has debts of $100 million but assets of $115 million. It can repay $105 million and make $10 million profit – there is no “debt crisis” whatever. That its assets are greater than its debt illustrates why it is financially illiterate to discuss only debt without assets. A “balance sheet” is called that because it has two sides, not one.

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Trying to Learn from What Works

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This article was originally posted on Socialist Economic Bulletin on Sunday May the 4th.

Facts can be a very severe judge. Either economic structures, the models used to explain them and economic policies work, or they don’t. The factual verdict alone can determine who was right, what was successful, what economic system works best.

The chart below is reproduced from The Economist. It shows the change in the IMF’s own estimates and forecasts of the level of US and Chinese GDP. Previously the IMF’s projections were that China would surpass the US as the world’s largest economy in 2019. Its revised estimates are that this will now occur at the end of this year. From 2015 onwards, when anyone refers to the world’s largest economy this will be China, not the US.

Chart 1. IMF Estimates & Projections of US & China GDP, PPP $ trillions

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By any standards, this is a momentous economic event. The leading position in the world economy does not change with great frequency. The US surpassed China’s GDP at some time around 1890, having already overtaken Britain in in 1872. (The Financial Times is incorrect to place this earlier data as the key turning-point – it seems to have ignored China altogether).

In this sense the current reversal is a return to the norm. China’s economy, with a population of 1.3 billion people should be larger than the US. At the same, this higher population level means that per capita GDP is still much below countries like Britain or the US, although this gap too is narrowing rapidly.

As a result, it would be foolish to argue Britain should ‘copy’ China. Different geographies, different relationships with the world economy, different histories and different levels of current economic development would make that an impossibility.

But the Chinese economy has delivered exceptionally strong growth, and grown much more rapidly than the Western economies over a very prolonged period. In 30 years of the process of reform and opening up from 1978 to 2008 it has raised average living standards from the British level of the 15th century to the same as Britain in 1948. No doubt the advance since 2008 has been equally impressive (probably to something like the early 1960s in Britain).

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From Alpha to Omega Podcast: #048 Whither Underconsumptionism?

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This week we have the second part of our interview with Professor Andrew Kliman. We continue our discussion about his latest book – ‘The Failure of Capitalist Production’ – and in particular focus on Andrews critique of the Underconsumptionist Theory of Crisis, which is pretty dominant on the Marxist and non-Marxist left alike.

We hear how the empirical evidence sits squarely in the face of this theory, what role financialisation has actually played in the economy, and the similarities between Keynesianism and Underconsumptionism.

We also talk about the new book Andrew is working on, and just how impressed I am by how well Marx’s theories are able to explain the world around us today.

You can find the article for the New Left Project that Andrew mentions in the interview, critiquing Sam Gindin’s view of the crisis as financial, here.

And you can find Sam Gindins response to Andrew here.

Enjoy

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That Tory Recovery in Perspective

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This post was originally published on Socialist Economic Bulletin on Tuesday the 18th of March.

This week George Osborne will announce his latest Budget. The specific measures in this Budget were not published at the time of writing. But it is a fairly safe assumption that he will boast that the economy is on track, and that there is a recovery. This is simply an exercise in redefinition.

The economy grew by just 1.9% in 2013. This is following a period of historically slow growth, the deepest recession in living memory and the weakest recovery on record. Yet many commentators and not just explicit supporters of austerity seem to believe this means we are automatically on track for a genuine recovery with all that means for growing jobs, rising real pay and improving living standards.

Unfortunately both the celebrations and the optimism are misplaced. Of course this does not mean that the economy will never grow again. It is even possible that growth will be a little better in 2014 than it was in 2013. But after most recessions the economic rebound is usually fairly strong. After a very steep recession the recovery should be very strong. That is not the case currently.

Annual growth in GDP of just 1.9% in 2013 is the best since 2007. But that is really a measure of the crisis of the economy and how badly policy has failed.

Prior to the current crisis, in the 20 years to 2008 the average annual growth rate of GDP was a little under 3%. In the same 20 year period from 1988 to 2008 only 3 years have seen worse growth for the British economy than last year’s 1.9% and all of those were associated with the recession under the Tories in the early 1990s (the ERM crisis).

So, a growth rate associated in the past with crisis is now redefined as recovery and heralded as success. Crisis is redefined as success; stagnation is now growth.

Current growth rates also remain well below the previous trend. That means the gap between where we are and where could or should have been is actually getting wider. It would take many years of sustained growth above that 3% rate in order to close the gap between the actual level of GDP and its previous trend. No major forecasting body suggests anything like that is going to happen over the next few years. The chart below shows the trend growth of Britain’s GDP in from 1988 to 2008.

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From Alpha To Omega: #046 Engines, Entropy, and Value

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This weeks our guest is Dr. William Paul Cockshott, a reader in the Computer Science Department of Glasgow University. Paul was trained as an economist, then as a computer scientist, and he has made contributions to the fields of image compression, 3D television, and parallel compilers. He is also known for his work in applying econophysics to classical economics, the field of economic computability, and as the co-author of the book ‘Towards a new Socialism’, advocating for the more efficient and democratic planning of a complex economy.

In this show we discuss the origins of classical political economy, and how it was influenced by the rapid advances in the world of physics. We talk of the importance of Watt and his steam engine, the development of the theories of thermodynamics and entropy, and their importance in economy. The work of Babbage and Alan Turing also get a mention, as well as the human as universal robot. We also discuss the overwhelming empirical evidence for Marx’s Labor Theory of Value, why it is that it works, and the importance of the work of previous guest Prof. Gregory Chaitin in the modern factory. Oh yes, and some roman pottery, Chinese crossbows from the Qin Dynasty, and how difficult it is to fold your clothes.

Enjoy!

You can find his books, talks, and research on his website here:

http://www.dcs.gla.ac.uk/~wpc/reports/index.html

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From Alpha to Omega Podcast: #045 Dollar Hegemony

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This week our guest is Matias Vernengo.

Matias is an Associate Professor of Economics, at Bucknell University, and a former Senior Manager of Economic Research at the Central Bank of Argentina. He blogs regularly at his site Naked Keynesianism, as well as for Triple Crisis, and is currently the co-editor of the Review of Keynesian Economics.

We discuss a paper he recently co-authored with David Fields on the hegemonic role of the Dollar in the world economy.

We talk of the advantages of being the worlds reserve currency, the Bretton Woods agreement, Nixon closing the gold window, the Triffin Dilemma, threats to the dominance of the dollar in world trade, and the irrelevance of gold in today’s financial system.

You can find his excellent blog here.

The Triple Crisis blog here.

And the Review of Keynesian Economics Journal here.

You can also find the paper we discuss here.

Enjoy!

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