Category Archives: Political Economy

How the Market Is Betraying Advanced Economies

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April 16,2016

How the Market Is Betraying Advanced Economies

Diane Coyle
coyle6_Michel StoupakNurPhoto via Getty Images_yellow vests

As lifestyles in the world’s developing economies improve drastically, many in the advanced economies are seeing their well being deteriorate – a trend that automation will only exacerbate. Without fundamental change in the framework of public policymaking, it is difficult to imagine a prosperous future in these societies.

 

CAMBRIDGE – Despite ever-improving conditions for millions of people around the world – documented by entities like the University of Oxford’s Our World in Data and highlighted by scholars like Steven Pinker – popular discontent is on the rise in many places. The reason is simple: whereas the first trend is being driven by low- and middle-income countries, the second is concentrated in high-income countries.

Apr 9, 2019 Joseph E. Stiglitz thinks it’s his attacks on the truth-seeking institutions that underpin economic prosperity.

Throughout the developed world, conditions for many workers are deteriorating, with no recovery in sight. Income inequality is near historic highs, wealth inequality is even higher, and economic insecurity is widespread.As the United Kingdom tears itself apart politically and constitutionally over Brexit, many of its citizens struggle with low-quality jobs, inadequate housing, and poverty so severe that they rely on food banks. France’s Yellow Vest protests have been hijacked by violent extremists, but they reflect real grievances about the growing challenge of maintaining living standards. In the United States, the Economic Report of the President touts the supposed elimination of poverty, but life expectancy does not decline in a prosperous country.In short, the post-World War II social contract in many of today’s developed economies is breaking down. And even more uncertainty and insecurity are on the way, as new technologies such as artificial intelligence and robotics take root.Though the pace and scope of the next wave of automation is impossible to predict with precision, the impact will be profound. Like other digital technologies, AI and robotics will boost the value of some skills while reducing the value of others. And, by , extensive algorithmic decision-making risks amplifying existing inequalities further.It is impossible to uninvent technology. But we should not fall into the trap of technological determinism. The forces that drive structural economic change are always refracted through policy decisions, which can help ensure that technological innovations contribute to a more prosperous future.

Given the depth of the transformation ahead, however, it is not just the policies themselves that must change, but the very framework on which they are based. This means abandoning the idea – which has shaped public policy for more than a generation – that the “market” must be the organizing principle for collective decision-making.

The market, in this sense, is an abstraction – one that has little to do with actual markets, which are social institutions as varied and multitudinous as Leo Tolstoy’s unhappy families. It embodies the assumption that, overall, we secure the best economic outcomes if producers compete to respond to the desires of individual consumers (in line with their purchasing power). And its performance is measured according to the number of contemporaneous exchanges taking place.This is to be the best metric. For one thing, it does not account for the depreciation of assets, from houses in California destroyed by wildfires to insect species at risk of extinction. It also fails to account for the fact that a growing proportion of exchanges in the digital economy involve “public goods,” consumption of which is non-rivalrous (the good can be shared by any number of people without being depleted).But there is an even more fundamental problem with assessing an economy’s welfare according to the satisfaction of individual choices. As the late William Baumol pointed out, if you assume that economic agents are independent, you will conclude that independent choices maximize their well being. This is circular reasoning.In fact, economic agents are not as independent as the conventional wisdom would have us believe. People’s consumption preferences are not discovered through introspection and then upheld permanently; they are shaped socially and change over time. In the age of social media “influencers,” this may be truer than ever, with turbocharged network effects amplifying the impact of one individual’s choices on others.Likewise, in production, there is far-reaching potential for economies of scope and scale – potential that grows even larger in high-tech domains. This means that one firm’s production decisions affect production by others in the same market.The conceptual underpinnings of policymaking need to be updated to reflect this economic reality. For starters, governments need to recognize that their decisions shape the structure of production, and develop strategies to support particular strengths in production (through innovation policies or procurement frameworks) or to address weaknesses (in areas such as skills). Economists like Dani Rodrik and have led the way in proposing ways to think about modern industrial strategy.Governments must also improve the opportunities available to those left behind in today’s fast-changing economy. This means ensuring that all citizens have access to quality public education, public transportation and broadband infrastructure, adequate health care, and decent housing. Such basic services are more important than income subsidies, because they are public goods, which the market – where decisions are made by aggregating individual demand – will not provide.The organization of millions of interdependent individuals in a technologically complex society will always be difficult to manage. With productivity flat-lining and public anger growing, it is clear that existing policies are not up to the challenge. Without a new approach, it is difficult to imagine a prosperous future for Western societies.

 

  • WmC Mantis  

    Is Diane Coyle trying to tell us that economic policymakers should be doing more to ensure a continually rising mean household quality of life? If so, she could have done it in fewer words.

 

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Who understands our times, Bernie or The Donald?

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April 13, 2019

Who understands our times, Bernie or The Donald?

by Fareed Zakaria.com

https://fareedzakaria.com/columns/2019/4/11/who-understands-our-times-bernie-or-the-donald

There are many explanations for Benjamin Netanyahu’s victory in this week’s election that have to do with Israel’s particular situation — its economic boom, stable security climate and the prime minister’s political talent. But he is also part of a much larger phenomenon: the continued strength of populist nationalism around the world — and the continued inability of left-of-center parties to respond to it.

Image result for BERNIE AND TRUMP

 

The case for populist nationalism goes something like this. It’s a nasty world out there. People are trying to take our jobs, undermine our security, move into our country. The cosmopolitan urban elites don’t care; they benefit from these forces. So we need a tough guy who will stand up for the nation and against the liberals in our midst.

In some variant or another, this is the argument made by Netanyahu, Vladimir Putin, Recep Tayyip Erdogan, Narendra Modi, Viktor Orban, Jaroslaw Kaczynski, Jair Bolsonaro, the Brexiteers — and, of course, President Trump.

In 1972, the philosopher Isaiah Berlin wrote that nationalism “expresses the inflamed desire of the insufficiently regarded to count for something among the cultures of the world.” He placed the roots of modern nationalism in Germany, a country obsessed with finding its place in the sun. But the sentiment — a kind of victim mentality — can be found in almost all modern variations, even among rich and powerful nations.

Look at Putin’s claim that Russia has been pushed around by the West since the Cold War, the Chinese obsession with their humiliation since the opium wars, the Israeli right’s complaint that the world is biased against Israel and Trump’s constant refrain that all foreigners — from Mexicans to Chinese to Europeans — take advantage of the United States. These leaders promise to rectify the situation and restore their countries’ proper standing in the world.

Trump’s embrace of the word “nationalism” illustrates the simultaneous attacks on domestic elites (with their politically correct language) and on perfidious foreigners. “We’re not supposed to use that word,” Trump said in October. “You know what I am? I’m a nationalist, okay? I’m a nationalist. Nationalist. Nothing wrong. Use that word. Use that word.”

When asked the next day what he meant by the term, Trump responded, “I love our country. And our country has taken second fiddle. . . . We’re giving all of our wealth, all of our money, to other countries. And then they don’t treat us properly.”

Netanyahu, for his part, has long argued that Israel deserves a much better “place among the nations,” a phrase that was the title of his 1993 book that argued for a robust Israeli nationalism that is aggressive and unapologetic. Though Israel’s strength and security have grown immeasurably, as its historical enemies — Saudi Arabia and Syria, among others — have either become buddies or basket cases, the argument that the world is against it has somehow persisted.

In fact, despite the pose of victim hood adopted by most of these populists, nationalism is probably the most widely held ideology in the world today. Which American politician today does not speak up for the United States? The real debate is whether nationalism should be informed and influenced by other values such as liberty and equality and, if these two sets of values conflict, which one should be preferred. That’s why the most ardent capitalists — from Friedrich Hayek to Milton Friedman — have always been in favor of globalization and economic freedom above nationalist protections and controls.

The danger for liberals is that they underestimate the power of these raw, emotional appeals. For centuries, liberals have assumed that nationalism was a kind of irrational attachment that would grow weaker as people became more rational, connected and worldly. In fact, Berlin wrote, like a twig that is bent in one direction and has to snap back, as globalization grew in its reach, nationalism would be the predictable backlash.

Populist nationalists understand the core appeal of their ideology. I recently asked a Bolsonaro supporter whether the Brazilian president’s economic policies (which are free-market-oriented and reformist) or his cultural nationalism was the key to his appeal. The supporter’s answer: Nationalism is the party’s core; the economics is simply about efficiency and growth.

Meanwhile, liberals in the United States still don’t seem to get it. The Democratic Party continues to think the solution to its woes is to keep moving leftward economically. This week, Sen. Bernie Sanders (I-Vt.) revealed his new Medicare-for-all plan, which was immediately co-sponsored by four other presidential candidates. The plan will probably require an additional $2 trillion to $3 trillion in annual tax revenue.At the same time, Trump tweets about the Democrats’ love of “open borders” and insists he will protect the country and enforce its laws. What if Trump understands the mood of our times better than Sanders?

(c) 2019, Washington Post Writers Group

 

Trump’s Most Worrisome Legacy

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April 13, 2019

stiglitz257_Win McNameeGetty Images_trump nielsen

Trump’s Most Worrisome Legacy

The US president’s attacks on America’s truth-seeking institutions jeopardize its continued prosperity and very ability to function as a democracy. As corporate giants capture the institutions that are supposed to protect ordinary citizens, a dystopia once imagined only by science fiction writers is emerging before our eyes.

NEW YORK – Kirstjen Nielsen’s forced resignation as US Secretary of Homeland Security is no reason to celebrate. Yes, she presided over the forced separation of families at the US border, notoriously housing young children in wire cages. But Nielsen’s departure is not likely to bring any improvement, as President Donald Trump wants to replace her with someone who will carry out his anti-immigrant policies even more ruthlessly.

Trump’s immigration policies are appalling in almost every aspect. And yet they may not be the worst feature of his administration. Indeed, identifying its foulest aspects has become a popular American parlor game. Yes, he has called immigrants criminals, rapists, and animals. But what about his deep misogyny or his boundless vulgarity and cruelty? Or his winking support of white supremacists? Or his withdrawal from the Paris climate accord, the Iran nuclear deal, and the Intermediate-Range Nuclear Forces Treaty? And, of course, there is his war on the environment, on health care, and on the rules-based international system.

This morbid game never ends, of course, because new contenders for the title emerge almost daily. Trump is a disrupting personality, and after he’s gone, we may well reflect on how such a deranged and morally challenged person could have been elected president of the world’s most powerful country in the first place.

But what concerns me most is Trump’s disruption of the institutions that are necessary for the functioning of society. Trump’s “MAGA” (Make America Great Again) agenda is, of course, not about restoring the moral leadership of the United States. It embodies and celebrates unbridled selfishness and self-absorption. MAGA is about economics. But that forces us to ask: what is the basis of America’s wealth?

Adam Smith tried to provide an answer in his classic 1776 book The Wealth of Nations. For centuries, Smith noted, standards of living had been stagnant; then, toward the end of the eighteenth century, incomes start to soar. WhySmith himself was a leading light of the great intellectual movement known as the Scottish Enlightenment. The questioning of established authority that followed the earlier Reformation in Europe forced society to ask: How do we know the truth? How can we learn about the world around us? And how can and should we organize our society?From the search for answers to these questions arose a new epistemology, based on the empiricism and skepticism of science, which came to prevail over the forces of religion, tradition, and superstition. Over time, universities and other research institutions were established to help us judge truth and discover the nature of our world. Much of what we take for granted today – from electricity, transistors, and computers to lasers, modern medicine, and smartphones – is the result of this new disposition, undergirded by basic scientific research (most of it financed by government).

The absence of royal or ecclesiastical authority to dictate how society should be organized to ensure that things worked out well, or as well as they could, meant that society had to figure it out for itself. But devising the institutions that would ensure society’s wellbeing was a more complicated matter than discovering the truths of nature. In general, one couldn’t conduct controlled experiments.

A close study of past experience could, however, be informative. One had to rely on reasoning and discourse – recognizing that no individual had a monopoly on our understandings of social organization. Out of this process emerged an appreciation that governance institutions based on the rule of law, due process, and checks and balances, and supported by foundational values like individual liberty and justice for all, are more likely to produce good and fair decisions. These institutions may not be perfect, but they have been designed so that it is more likely that flaws will be uncovered and eventually corrected.

That process of experimentation, learning, and adaptation, however, requires a commitment to ascertaining the truth. Americans owe much of their economic success to a rich set of truth-telling, truth-discovering, and truth-verifying institutions. Central among them are freedom of expression and independent media. Like all people, journalists are fallible; but, as part of a robust system of checks and balances on those in positions of power, they have traditionally provided an essential public good.Since Smith’s day, it has been shown that a nation’s wealth depends on the creativity and productivity of its people, which can be advanced only by embracing the spirit of scientific discovery and technological innovation. And it depends on steady improvements in social, political, and economic organization, discovered through reasoned public discourse.

The attack by Trump and his administration on every one of the pillars of American society – and his especially aggressive vilification of the country’s truth-seeking institutions – jeopardizes its continued prosperity and very ability to function as a democracy. Nor do there appear to be checks on corporate giants’ efforts to capture the institutions – the courts, legislatures, regulatory agencies, and major media outlets – that are supposed to prevent them from exploiting workers and consumers. A dystopia previously imagined only by science fiction writers is emerging before our eyes. It should give us chills to think of who “wins” in this world, and who or what we might become, just in the struggle to survive.

 

Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University and Chief Economist at the Roosevelt Institute. His latest book, People, Power, and Profits: Progressive Capitalism for an Age of Discontent, will be published in April.

Why Economics Must Get Broader Before It Gets Better

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March 9, 2019

Why Economics Must Get Broader Before It Gets Better

By Mohamed A. El-Erian

Even as the public’s skepticism toward their profession has grown, economists have continued to ignore increasingly obvious flaws in their analytical frameworks. A discipline long dominated by “high priests” must now adopt a more open mindset, or risk becoming irrelevant.

Image result for economists have failed

L-R: Stigltz- Hayek- Sowell-Keynes- Sen-Schwartz-Sachs- Friedman

NEW YORK – The economics profession took a beating after most of its leading practitioners failed to predict the 2008 global financial crisis, and it has been struggling to recover ever since. Not only were the years following the crash marked by unusually low, unequal growth; now we are witnessing a growing list of economic and financial phenomena that economists cannot readily explain.

Like Queen Elizabeth II, who famously asked in November 2008 why nobody had seen the crisis coming, many citizens have grown increasingly skeptical of economists’ ability to explain and predict economic developments, let alone offer sound guidance to policymakers. Some surveys rank economists among the least trusted professionals (after politicians, of course, whose trust economists have also lost).

A solid economic training is no longer regarded as a must-have for candidates for top positions in finance ministries and central banks. This marginalization has further weakened economists’ ability to inform and influence decision-making on issues that relate directly to their expertise (or what they would call their comparative and absolute advantage).

The profession owes its deteriorating reputation largely to excessive reliance on its own self-imposed orthodoxies. With more openness to interdisciplinary approaches and the broader use of existing analytical tools, particularly those offered by behavioral science and game theory, mainstream economics could start to overcome its shortcomings.Three recent developments underscore the urgency of this challenge. In the 12 months between the World Economic Forum’s 2018 and 2019 in Davos, those in attendance went from celebrating a synchronized global growth pickup to worrying about a synchronized . Notwithstanding the , neither the extent nor the speed of the change in consensus seems warranted by economic and financial developments, which suggests that economists may have misdiagnosed the initial conditions.

A second area of concern is monetary policy. Professional economists still have not spoken up clearly enough about the challenges facing the US Federal Reserve’s communication strategy, despite the fact that even slight misfires, such as occurred in the fourth quarter of last year, can trigger severe bouts of financial instability that threaten growth. Instead, they have simply continued to embrace the contemporary view that greater Fed transparency is always a good thing.

We have come a long way since the era of former Fed Chair Alan Greenspan’s “Fedspeak” (or, as he put it, “mumbling with great incoherence”). But that raises a new problem: illusionary precision. The Fed now follows every policy meeting with a release of statements, minutes, transcripts, blue-dot plots, and a press conference, signaling to markets a level of sophistication that is scarcely realistic in a world of fluidity and heightened uncertainty.

Rather than simply going along with the view that more is better, economists should be urging the Fed to adopt an approach more like that of the Bank of England, which emphasizes scenario analyses and fan charts. Economists could also be doing more to inform – and perhaps even influence – the Fed’s ongoing review of its policy frameworks and communications strategy. After all, the economics literature on asymmetrical information suggests that greater input from economists outside of the Fed is both appropriate and necessary for ensuring an optimal policy outcome.

A third area of concern is the Sino-American trade conflict, which is more controversial, owing to its political nature. So far, the vast majority of economists have trotted out the conventional argument that tariffs (real or threatened) are always bad for everyone. In doing so, they have ignored work from their own profession showing how the promised benefits of trade, while substantial, can be undermined by market and institutional imperfections. Those who wanted to make a productive contribution to the debate should have taken a more nuanced approach, applying to distinguish between the “what” and the “how” of trade warfare.

These are just three recent examples of how economists have dropped the ball. In addition, economists are struggling to explain recent productivity developments, the implications of rising inequality, the impact of persistently negative interest rates in the euro-zone, the longer-term effects of other unconventional monetary policy measures (amplified by the European Central Bank’s latest policy pivot), and the sudden slowdown in European growth. They also failed to foresee the Brexit saga and the political explosion of anger and alienation across the West in general.

None of this is a huge surprise, given the profession’s embrace of simplistic theoretical assumptions and excessive reliance on mathematical techniques that prize elegance over real-world applicability. Mainstream economics has placed far too much analytical emphasis on the equilibrium condition, while largely ignoring the importance of transitions and tipping points, not to mention multiple-equilibria scenarios. And the profession has routinely failed to account adequately for financial links, behavioral-science insights, and rapidly evolving secular and structural forces such as technological innovation, climate change, and the rise of China.

All of this should tell economists that there is plenty of room for improvement, and that they need to expand the scope of their analysis to take into account human interactions, distributional effects, financial-economic feedback mechanisms, and technological change. But this cannot just be about devising new analytical models within the field; economists also must incorporate insights from other disciplines that the profession has overlooked.

A discipline long dominated by “high priests” must now adopt a more open mindset. That means acknowledging and addressing unconscious biases, not least by making a concerted effort to improve inclusion and diversity within the field. It also means focusing more on inter-disciplinary approaches and distributional effects, and less on the purity of mathematical models, average conditions, and just the belly of distributions. Such structural changes will require more and better intellectual and institutional “safe zones,” so that analytical disruptions can be managed and channeled in productive directions.

Without significant adjustments, mainstream economics will remain two steps behind changing realities on the ground, and economists will be risking a further loss of credibility and influence. In an era of concern about climate change, political upheavals, and technological disruption, the shortcomings of mainstream economics must be addressed posthaste.

 

  • Rick Puglisi  

 

  • Michael Public  
  • Mike Robinson  

 

The AI Road to Serfdom?

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February 23, 2019

The AI Road to Serfdom?

by Robert Skidelsky

https://www.project-syndicate.org/commentary/automation-may-not-boost-worker-income-by-robert-skidelsky-2019-02

man robot

Estimates of job losses in the near future due to automation range from 9% to 47%, and jobs themselves are becoming ever more precarious. Should we trust the conventional economic narrative according to which machines inevitably raise workers’ living standards?

Estimates of job losses in the near future due to automation range from 9% to 47%, and jobs themselves are becoming ever more precarious. Yet automation also promises relief from most forms of enforced work, bringing closer to reality Aristotle’s extraordinary prediction that all needed work would one day be carried out by “mechanical slaves,” leaving humans free to live the “good life.” So the age-old question arises again: are machines a threat to humans or a means of emancipating them?

In principle, there need be no contradiction. Automating part of human labor should enable people to work less for more pay, as has been happening since the Industrial Revolution. Hours of work have fallen and real incomes have risen, even as the world’s population increased sevenfold, thanks to the increased productivity of machine-enhanced labor. In rich countries, productivity – output per hour worked – is 25 times higher than it was in 1831. The world has become steadily wealthier with fewer man-hours of work needed to produce that wealth.

Why should this benign process not continue? Where is the serpent in the garden? Most economists would say it is imaginary. People, like novice chess players, see only the first move, not the consequences of it. The first move is that workers in a particular sector are replaced by machines, like the Luddite weavers who lost their jobs to power looms in the nineteenth century. In David Ricardo’s chilling phrase, they become “redundant”.

.But what happens next? The price of clothes falls, because more can be produced at the same cost. So people can buy more clothes, and a greater variety of clothes, as well as other items they could not have afforded before. Jobs are created to meet the shift in demand, replacing the original jobs lost, and if productivity growth continues, hours of work can fall as well.

Notice that, in this rosy scenario, no trade unions, minimum wages, job protections, or schemes of redistribution are needed to raise workers’ real (inflation-adjusted) income. Rising wages are an automatic effect of the fall in the cost of goods. Provided there is no downward pressure on money wages from increased competition for work, the automatic effect of technological innovation is to raise the standard of living.

This is the famous argument of Friedrich Hayek against any attempt by governments or central banks to stabilize the price level. In any technologically progressive economy, prices should fall except in a few niche markets. Businessmen don’t need low inflation to expand production. They need only the prospect of more sales. “Dearness” of goods is a sign of technological stagnation.

But our chess novice raises two important questions: “If automation is not confined to a single industry, but spreads to others, won’t more and more jobs become redundant? And won’t the increased competition for the remaining jobs force down pay, offsetting and even reversing the gains from cheapness?”

Human beings, the economist replies, will not be replaced, but complemented. Automated systems, whether or not in robot form, will enhance, not destroy, the value of human work, just as a human plus a good computer can still beat the best computer at chess. Of course, humans will have to be “up-skilled.” This will take time, and it will need to be continuous. But once up-skilling is in train, there is no reason to expect any net loss of jobs. And because the value of the jobs will have been enhanced, real incomes will continue to rise. Rather than fearing the machines, humans should relax and enjoy the ride to a glorious future.

Besides, the economist will add, machines cannot replace many jobs requiring person-to-person contact, physical dexterity, or non-routine decision-making, at least not any time soon. So there will always be a place for humans in any future pattern of work.

Ignore for a moment, the horrendous costs involved in this wholesale re-direction of human work. The question is which jobs are most at risk in which sectors. According to MIT economist David Autor, automation will substitute for more routinized occupations and complement high-skill, non-routine jobs. Whereas the effects on low-skill jobs will remain relatively unaffected, medium-skill jobs will gradually disappear, while demand for high-skill jobs will rise. “Lovely jobs” at the top and “lousy jobs” at the bottom, as LSE economists Maarten Goos and Alan Manning described it. The frontier of technology stops at what is irreducibly human.

But a future patterned along the lines suggested by Autor has a disturbingly dystopian implication. It is easy to see why lovely human jobs will remain and become even more prized. Exceptional talent will always command a premium. But is it true that lousy jobs will be confined to those with minimal skills? How long will it take those headed for redundancy to up-skill sufficiently to complement the ever-improving machines? And, pending their up-skilling, won’t they swell the competition for lousy jobs? How many generations will have to be sacrificed to fulfil the promise of automation? Science fiction has raced ahead of economic analysis to imagine a future in which a tiny minority of rich rentiers enjoy the almost unlimited services of a minimally-paid majority.

The optimist says: leave it to the market to forge a new, superior equilibrium, as it always has. The pessimist says: without collective action to control the pace and type of innovation, a new serfdom beckons. But while the need for policy intervention to channel automation to human advantage is beyond question, the real serpent in the garden is philosophical and ethical blindness. “A society can be said to be decadent,” wrote the Czech philosopher Jan Patočka, “if it so functions as to encourage a decadent life, a life addicted to what is inhuman by its very nature.”

It is not human jobs that are at risk from the rise of the robots. It is humanity itself.

Image result for Robert Skidelsky,

Robert Skidelsky, Professor Emeritus of Political Economy at Warwick University and a fellow of the British Academy in history and economics, is a member of the British House of Lords. The author of a three-volume biography of John Maynard Keynes, he began his political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in the House of Lords, and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999.