We fought the law, and we won (with the help of some other laws and good lawyers)

Twelve years ago I was arrested on New Zealand Parliament Grounds during a protest, along with 74 others. It was my first year of uni. A bunch of us later sued the government for arbitrary arrest and false imprisonment. This year Beggs v Attorney General finally reached a conclusion with a settlement offer. (It’s in my name by accident of alphabetical order.) I banked the cheque today. A formal apology is apparently on the way. Cheers to Tony Ellis who saw it all through, after defending us for free, for this and for generally inspiring fear and loathing in the hearts of cops and Crown prosecutors over the years. Also to Tony Shaw and everyone else who worked on the case.

It was in the news back in July. This post at Public Address gives the history of the case, and its headline is a hilarious pun.

Choleric Economic Man

Recessions are part of human nature, says Reserve Bank Governor Glenn Stevens [pdf]:

No country has managed to eliminate the business cycle. No country ever will, because the cycle is driven by human psychology, which finds expression in financial behaviour as well as ‘real’ behaviour. We are seemingly just made – ‘hardwired’, as some would put it – in a way that makes us prone to bouts of optimism and pessimism. Occasionally, we are prone to periods of myopic disregard for risk followed, in short order, by an almost complete unwillingness to accept risk. [p. 2]

‘Behavioural finance’ is one of the new big things in economics. It ditches the assumption of rationality but keeps the methodological individualism. 

Better explanations for booms and busts ditch the methodological individualism, and it follows from that that psychological states don’t matter so much. Rationality we can actually keep, but (1) bureaucratic rather than personal rationality, (2) embodied in a variety of fundamentally different kinds of institution, and (3) bearing in mind that ‘rationality’ does not mean ‘omniscience’ and certainly not ‘knowledge of the future’. (The last might go without saying, but the term has slipped a long way in economic theory.)

DeLong wrong on Kalecki

Kalecki: The mockery I can take. But this?

Brad DeLong damns Kalecki with praise:

I WAS EXPECTING A 6% PRODUCTIVITY GROWTH QUARTER, BUT THIS IS RIDICULOUS!!!

Productivity increased 9.5 percent in the nonfarm business sector during the third quarter of 2009 as unit labor costs fell 5.2 percent (seasonally adjusted annual rates). In manufacturing, productivity increased 13.6 percent while unit labor costs fell 7.1 percent…

Back in the 1930s there was a Polish Marxist economist, Michel Kalecki, who argued that recessions were functional for the ruling class and for capitalism because they created excess supply of labor, forced workers to work harder to keep their jobs, and so produced a rise in the rate of relative surplus-value.

For thirty years, ever since I got into this business, I have been mocking Michel Kalecki. I have been pointing out that recessions see a much sharper fall in profits than in wages. I have been saying that the pace of work slows in recessions–that employers are more concerned with keeping valuable employees in their value chains than using a temporary high level of unemployment to squeeze greater work effort out of their workers.

I don’t think that I can mock Michel Kalecki any more, ever again.

Well I don’t think DeLong knows much about Kalecki.

In Kalecki’s general model of the business cycle, gross profits fall in recessions just as the pre-3Q-2009 DeLong would have expected them to, because investment and hence total demand declines. The effect on profit and wage shares depends on how much total output and employment fluctuates alongside it, and in fact, on how much labour businesses keep (under)employed – exactly the reason DeLong gives for the worldview he maintained before 3rd-quarter 2009 data came along and shattered it.

In “Distribution of National Income” (1956) Kalecki writes that the wage share excluding salaries “does not seem to show marked cyclical fluctuations”. [p. 66 in his 1971 'Selected Essays' book] But once salaries are included, “the ‘real’ wage and salary bill… can be expected to fluctuate less during the course of the cycle than the ‘real’ gross income of the private sector.” [pp. 75-76] Therefore, the wage+salary share increases in a recession. He gives theoretical reasons – mainly that salaried workers’ employment and pay does not vary so much with output – and runs a regression on US data 1929-41 to back it up. This is exactly the opposite of deLong’s representation.

Kalecki does not use the Marxian value terminology, so DeLong’s use of ‘relative surplus value’ is odd.

DeLong seems to be vaguely remembering and mashing into Kalecki’s business cycle theory his infamous 1943 essay “Political aspects of full employment”, although here too Kalecki clearly argues that less-than-full employment is bad for profits: “It is true that profits would be higher under a regime of full employment than they are on average under laissez-faire; and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices…” [p. 141]

But full employment was likely to meet political opposition from ‘business leaders’ and ‘captains of industry’ (he also never says ‘capital’ or ‘the ruling class’) because of (i) ideological prejudice against Government deficit spending and (ii) any expansion of public investment “which may foreshadow the intrusion of the state into the new spheres of economic activity” [p. 142], and (iii) dislike of the social and political consequences of greater working class confidence that comes with full employment. ‘Rentiers’ would have an additional reason: the erosion of their wealth from more rapid inflation. Kalecki thus predicted a political alliance between rentiers and the intellectual representatives of big industry, “and they would probably find more than one economist to declare that the situation was manifestly unsound.” [p. 144]

DeLong’s account of Kalecki’s views is thus completely misleading. But there’s some wholesale inventories data out today that might just make him rethink everything he thought he knew about Joan Robinson.

All that is solid melts into liquidity (and then sometimes freezes)

What follows is a descendant of the paper I presented at Historical Materialism in London about a year ago. It’s an attempt to introduce a post-Keynesian conception of liquidity into Marx’s theory of credit-money. It has gone through a few versions. After the conference I was invited to present a longer version as a seminar at SOAS to a bunch of post-Keynesians, including the eminent Victoria Chick, Emeritus Professor of Economics at the University of London, whose work I love and draw in the paper. I reworked it quite a bit: at HM I was explaining what I thought Marxian economics can get from Keynes, this time I reversed it to explain what Marx does that Keynes doesn’t. Back in Sydney I reworked it again to turn it into a thesis chapter, which is why you see references to other chapters, etc. I have been meaning to clean it up and submit one version or another to a journal at some point, but thesis has taken over. I’m putting it up here now because what it deals with came up in conversation over at Duncan Law’s blog.

Commodity money, state money, capitalist money

5306. If there should not be currency to settle the transactions at the clearing house, the only next alternative which I can see is to meet together, and to make our payments in first-class bills, bills upon the Treasury, and Messrs Smith, Payne, and so forth.’ — ‘5307. Then, if the government failed to supply you with a circulating medium, you would create one for yourselves? — What can we do? The public come in, and take the circulating medium out of our hands; it does not exist.’ — ‘5308. You would only then do in London what they do in Manchester every day of the week? — Yes.’

- Chapman, a banker, testifies before the Bank Acts Committee in 1857, quoted in Marx [1981: 671]

In some respects, Marx and Keynes appear at opposite poles of monetary theory. Marx is the theorist of commodity-money, for whom “the money-form is merely the reflection thrown upon a single commodity by the relations between all other commodities” [Marx, 1976: 184], and “gold confronts the other commodities as money only because it previously confronted them as a commodity” [ibid: 162]. Keynes, on the other hand, is patron saint of modern cartalists, writing that “the Age of Chartalist or State Money was reached when the State claimed the right to declare what thing should answer as money to the current money-of-account – when it claimed the right not only to enforce the dictionary but also to write the dictionary.” [Keynes, 1930: 5] Commodity-money versus state-money: this disagreement does indeed stem from deeper, fundamental differences of vision regarding the place of the state within capitalism.

It Came from the Desert

Sydney does a good apocalypse. Our first Spring in Sydney, a plague of Bogong moths arrived, darkened the sky, coated the balcony for several days, then went back to their migration, though we kept finding stragglers for weeks. Today was much weirder.

The Art of War by Sun Tzu AND The Communist Manifesto by Karl Marx

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The Art of War by Sun Tzu AND The Communist Manifesto by Karl Marx

Social democratic utopianism and capitalist realism

This is an essay I wrote for a local newsletter. It’s fairly long and I thought about breaking it up across a few posts, but what the hell…

King Dork

‘Social democracy’ means a lot of different things to different people, and its meanings have slipped around over the decades. Once upon a time it could be synonymous with socialism; nowadays it is a title claimed by the most moderate governments and some of the drippiest Third Way intellectuals of the ‘centre-left’. Further left, it still works as a rallying point for more radical energies. In the past, a definition of the social democratic project might have been something like ‘the project of reforming capitalism in the interests of the working class’. That is broad enough to cover a fair spectrum of radicalism, but still distinguishes it from liberal reform projects.

Nowadays, however, self-proclaimed social democrats are much more likely to speak for people in general, rather than a class, though perhaps with special reference to those from ’socio-economically disadvantaged backgrounds’, women, and ethnic minorities. Environmental concerns are likely to be central, with the likes of Clive Hamilton and David McKnight arguing explicitly against a preoccupation with ‘deprivation’ or class. It is now more difficult to draw a line between social democracy and liberalism. Though spectrum of radicalism remains, today’s social democrats might be defined broadly in terms of a desire to ‘restrain the market’, though often enough they are at pains to emphasise their understanding of the efficiency of the market in its proper place.

Our illustrious prime minister channels this rhetoric, writing in his February Monthly essay of “that particular brand of free-market fundamentalism, extreme capitalism and excessive greed which became the economic orthodoxy of our time.” [p.20] “Not for the first time in history,” he goes on to say,

the international challenge for social democrats is to save capitalism from itself: to recognise the great strengths of open, competitive markets while rejecting the extreme capitalism and unrestrained greed that have perverted so much of the global financial system in recent times… The second challenge for social democrats is not to throw the baby out with the bathwater… Social democracy’s continuing philosophical claim to political legitimacy is its capacity to balance the private and the public, profit and wages, the market and the state. That philosophy once again speaks with clarity and cogency to the challenges of our time. [pp. 20-21]

Whether Rudd can speak for social democracy is a question we’ll come back to. In any case, in that essay he gives a pretty good impression of a real social democrat. He, or whatever aide pulled the thing together, knew the buttons to push. And the fact that this stuff was said publicly by the prime minister seems to many a sign the the ideological wind has changed. If Rudd is a virtuosic opportunist – and that is a prerequisite for the job – until a few months before it had been more opportune for him to describe himself again and again as an ‘economic conservative’. But the global financial crisis apparently showed that economic rationalism, or neoliberalism, or whatever you want to call it, was rubbish. To quote the learned leader again:

The time has come, off the back of the current crisis, to proclaim that the great neo-liberal experiment of the past 30 years has failed, that the emperor has no clothes. Neo-liberalism, and the free-market fundamentalism it has produced, has been revealed as little more than personal greed dressed up as an economic philosophy… Others have argued that we are seeing a more fundamental regime change: the third in postwar history, starting with the Keynesian model, from the 1940s to the ’70s; the neo-liberal ascendancy, from 1978 to 2008; followed by a new regime, which is currently being shaped… [S]eismic changes are underway, fault lines yielding to fractures which in time may yield to even deeper tectonic shifts. Neither governments nor the peoples they represent any longer have confidence in an unregulated system of extreme capitalism. [pp. 25, 29]

That the ALP was in power for much of the period of ‘neoliberal ascendancy’ is inconvenient for Rudd’s claim that “the political home of neo-liberalism in Australia is, of course, the Liberal Party itself” [p. 27]. (Hawke and Keating, he claims, were ‘economic modernisers’, not neoliberals.) But it’s not necessarily a problem for the broader argument: social democrats who kept the faith through all those years in the wilderness can explain Labor’s apostasy in terms of its own ideological slide. Labor moved with the zeitgeist; partly because it was enthusiastically taken in, like Keating, and partly out of electoral necessity, because the media was taken in. Now the zeitgeist moves back.

The new old economics

The Economist has a feature this week on “the state of economics” in the wake of the crisis. It’s worth a read as an overview of the PR battle between schools of thought within the mainstream.

The likes of Krugman and deLong are undoubtedly in the ascendancy. As I suggested a few months ago, I think we should see this as the victory of a rational technocratic economics over an ideological conservative economics. While these guys are more pleasant and more fun to read than the so-called ‘freshwater’ economists, it is not an especially ‘progressive’ or ‘left’ economics.

The line of both Krugman and William Buiter that the last 30 years of economics have been a dead end dates the wrong turn to the 1970s. Their cut-off point would, I think, come between Friedman and Lucas. The mistake was ‘rational expectations’ and ‘new classical economics’, which basically completely reject Keynes – uncertainty, historical time instead of general equilibrium, and the non-neutrality of money – and return to pre-Keynesian orthodoxy on a more mathematically sophisticated basis.

Friedman’s version of the quantity theory was also a mistake, though that is hardly news. His politics may be gauche. But the Friedman of the ‘natural rate of unemployment’ and the ‘expectations-adjusted Phillips curve’ was not at all a mistake for the technocrats. In fact he represents the apogee of the technocratic neoclassical-Keynesian synthesis rather than a rejection of it. DeLong in particular has been quite explicit about this, arguing that “Friedman completed Keynes” . (For more detail see his “The Triumph of Monetarism?” in the Journal of Economic Perspectives, Winter, 2000.)

The shifting of mainstream economics and policy back towards neoclassical-Keynesianism well predates the crisis. In fact, as I’ve argued before, it never really stopped dominating macropolicy-oriented economics, as opposed to academic economics or microeconomic policy. You can see the basic argument that macroeconomics had it basically right around 1971 or so, for example, in this 1999 paper from the Reserve Bank of Australia:

By the 1990s, however, the intellectual framework for analysing inflation had come full circle. The framework of the 1990s had much in common with the  one enunciated in the 1971 ‘Inflation’ paper. The intervening years had led to some refinement of the analysis, but the expectations-augmented Phillips curve had returned and once again was at centre-stage. [p. 40]

What we’re seeing now is an opportunistic reconsolidation of its academic and public reputation against ‘new classical’ holdouts.

The rediscovery of the specifically financial side of Keynes may be genuinely new. That The Economist quotes Paul Davidson  and calls Minsky a “neglected prophet”, is an interesting sign. Both are post-Keynesians, well out of the mainstream. Post-Keynesian economics, incidentally, has very little to be embarrassed about by the crisis, since it has analysed finance in a realistic way all along.

(The term ‘post-Keynesian’, confusingly, refers to Keynes purists who set themselves against the ‘bastard Keynesianism’ of the post-war period, also incorporating a great deal of Marxian influence, thanks to Robinson, Kalecki and Sraffa. Davidson’s relatively conservative as these guys go, while Minsky comes out of the Marx-inflected side, and I hear they didn’t get on well after Minsky gave Davidson’s magnum opus a critical review.)

1.5 Conclusion

Alright, having so much trouble fitting all my material on inflation theory into a couple of thousand words, so I’ve decided to make it a whole new chapter. The upside is that this chapter is finished! The downside is that all the chapter references above are now wrong! Here’s the summary of the chapter as a whole. You may notice some subtle differences of emphasis from the body of the chapter, in point #4 in particular; that’s partly thanks to the helpful discussions in the comments here. Eventually I’ll rework the earlier sections a little, correspondingly. But in general, I’m pretty happy with this chapter. Hopefully the next one will come faster.

A draft thesis section. This is a draft of an unfinished document, please don’t quote without getting in touch first. Quoting in blogs is fine.

Previous section / Next section

In this chapter I have set out my approach to understanding economic policy and its historical development within the broader social structure of capitalism. To summarise:

1. Economic policy exists at the boundary between two relatively independent systems, the state and the economy. These two systems are only relatively independent, because each is necessary to the other’s reproduction, and they are not even institutionally separate, in that, for example, the economic system depends everywhere on a system of laws and their enforcement, while state activities involve the use of money and wage-labour.
2. The capitalist state has historically evolved certain structures and processes which deal with dysfunctions in the economic system, and thus modified the way in which the two structures reproduce themselves as a whole. Two fields in which state involvement has been especially important are the reproduction of labour-power and the management of money. This evolution can be understood in more-or-less functionalist terms, though it is of course driven by conscious political activity – within legislative, executive and judicial structures – focused on solving specific ‘problems’, which dysfunctions appear as politically. This is definitely not to say the process is driven by a singular state subject.
3. However, in the course of the Great Depression and the Second World War, something like a unified strategic actor in the field of economic policy emerged (though the unity is of course contingent and can break down). It was unified partly on the basis of new macroeconomic theory which posited it as such an actor, calling for a rational and combined use of certain state structures which had already developed independently within the economic system for other reasons. It involved especially the use of state budgets (fiscal policy), central banking (monetary policy) and arbitration system (wages policy) as instruments.
4. The work of Jan Tinbergen on economic policy illustrates well the ‘point of view’ from the ’subjectivity’ of economic policy. The economic system appears as a problem to be solved – in fact, even abstractly represented as a system of equations. However, the contradictions of the system – especially those arising from the conflicting aims of classes and other groups with the social power to pursue them – mean that it may lack a solution. Contradictions can reappear at a policy level, with instruments torn in different directions. This can motivate policy attempts to restructure its own apparatus and to reshape the economic system itself to attack the social power bases of the groups in pursuit of functionality. Meanwhile, groups themselves are actively seeking to improve their own strategic position. This may include attempts to use political power to restrain or direct policy itself. However, the fact that policy has come to be held responsible for the functionality of the system as a whole places powerful selective pressures on political possibilities.
5. My use of this conception of economic policy to explain the development of counter-inflation policy in Australia between 1945 and 1985 is in sharp contrast to the standard neoclassical ‘new macroeconomic consensus’s’ narrative of its own emergence, as essentially the triumph of correct views over error. Here I briefly pointed to some problems in the standard narrative, and signalled some aspects of my own story, which will be expanded upon in the coming chapters.

Laughing last

In a review of Martin Wolf’s Fixing Global Finance Alex Callinicos takes a detour to gloat a little at Leo Panitch, who he had debated on political economy and imperialism just before this whole crisis thing broke out.

But plotting the course of a crisis that has undergone such dramatic twists and turns is a hazardous business even for those not intellectually imprisoned in the theoretical assumptions of neoclassical economics. For example, Leo Panitch and Martijn Konings, introducing a valuable collection of essays written from a broadly Marxist perspective about finance and American imperialism and published last autumn, rather unwisely expressed “some scepticism” about “strong claims concerning the disastrous outcome of the current liquidity crunch for the global system of finance and America’s position in it”. They add, “The main upshot of the current situation is that the American state finds itself with a peculiar and unanticipated problem of imperial management”. I think it’s fair to say the problem lies a bit deeper than one of “imperial management”.

It seems Panitch and Konings might have felt a little remorse of their own, since their (edited) book, American Empire and the Political Economy of Global Finance, published last year, is already getting a second edition.

But it’s unfortunate if Callinicos and others are taking the crisis as a vindication of the idea they were defending through those debates earlier in the decade, that capitalism’s still suffering from the aftereffects of the 1970s crisis and an associated decline in the profit rate. Panitch, with collaborators Sam Gindin and Martijn Konings, has had the stronger argument throughout. It’s never been simply that there would be no crisis, but only that Marxists should think twice before leaping to the ‘imminent crisis’ conclusion, that we don’t have special economic forecasting powers, and that always harping on imminent crisis and/or continual stagnation distracts from other criticisms and strategies, not to mention the continuing dynamism of capitalism.

Here’s a piece from 2002 from Panitch and Gindin on the topic, which I’ve posted before. Calling into question Monthly Review’s familiar diagnosis of everlasting stagnation and prognosis of imminent financial crisis, it still stands up pretty well even in the midst of an actual financial crisis. (Did Monthly Review predict it? How ‘imminent’ is ‘imminent’?)

To its credit, the ISJ has followed a policy of seeking out and publishing pieces critical of its own editors’ lines, which is how the Panitch-Callinicos debate started, after all. Another critical highlight, which addresses pretty well this idea of permanent stagnation since the 1970s, is this piece from last year by the excellent Jim Kincaid.