Wednesday, September 10, 2014

How to build roads without destroying the Earth



And one more from Bloomberg:

The human race faces a huge quandary: The economic growth required to support increasing living standards around the globe will, if we continue with current practices, inevitably put the planet under extreme and unsustainable stress. The case of road construction shows how the process might be managed -- and how difficult it will be to do so.

Global population and economic activity won’t keep growing as they have since the Industrial Revolution. If they did, the ever-accelerating path would lead to absurd infinities somewhere around 2050 or 2060. Growth will hit natural limits well before then: We'll either destroy our environment, or we'll learn to act very differently. As the late computer visionary James Martin wrote in his book "The Meaning of the 21st Century," what's needed is a revolution in skills and means for managing the consequences of our explosive technological growth so people can keep improving their well-being while also preserving the planet.

Consider the relatively simple challenge of building roads. Humans have already laid some 30 million miles of roadways and are on course to build about 20 million miles more by 2050, a 60 percent increase in 40 years. Almost all will be built in developing nations and regions of huge biodiversity. New routes are today penetrating many of the world’s most precious surviving wildernesses, including the Amazon, New Guinea, Siberia and the Congo Basin.

This activity is a perfectly understandable response to human needs. Industry is seeking valuable resources such as timber or oil, farmers are clearing new land for crops, governments are trying to make transportation and trade easier. Unfortunately, there's far too little coordinated effort to reduce the environmental impact. As a result, wildlife habitats will suffer huge losses and ecosystems will be destroyed, ultimately undermining Earth's capacity to support human life as well.

New research by a group of environmental scientists suggests that better coordination could go a long way toward avoiding this disaster. The key is that vast tracts of settled land, where ecological damage is already significant and probably irreversible, still aren't very productive. Better access to fertilizers and modern farming technologies would greatly boost the productivity of such areas, thereby reducing the need for development in more sensitive areas.

The researchers have produced a global map showing places on Earth where new roads or road upgrades could have big human benefits, and others where little benefit would be expected despite large environmental costs. If countries worked together, such information could be used to guide road building over the coming decades, helping to preserve the fragile biosphere without compromising beneficial economic growth.

Such a global zoning plan would allow building to take place in an intelligent way. Inevitably, of course, it would also mean that some local interests would have to give way to global demands. Governments, individuals and firms would sometimes be constrained by the needs of the greater whole. That's what coordination implies, and it's what we need if we're going to preserve our world and still boost agriculture to meet the global demand for food, which will likely double by 2050.

Will it happen? The prognosis is not good. Politicians are too focused on the next election -- and often too corrupt or beholden to local economic interests -- to think globally and for the long term. For many conservatives and libertarians, any step toward even minimal global governance seems to produce near hysteria, even when it's obviously beneficial. Markets aren’t likely to help much, either: Research has shown that they're not good at reflecting the costs and benefits of events that might happen 10 or more years in the future. Humans are naturally inclined toward inaction in the face of great uncertainty.

The challenge is the same for handling the biggest looming problems of global growth such as climate change and water supply. Instead of turning inward and closing off, humans need to cooperate and coordinate on an unprecedented scale. In essence, we're in a race to learn fast enough to avert our own demise. If we want to win, we'll have to change strategy soon.


Economics beyond shocks??




Place a lit cigarette in an ashtray in a closed room where the air is perfectly still. As everyone knows, the smoke will rise, but not in a simple regular flow; the rising flow is unstable, begins to wobble, and then breaks out into a tangled mess -- turbulence. You don't need any outside cause or shock to the rising smoke to make it happen.

Economies do highly irregular things too, as a rule, going through repeated booms and busts, and yet economists seem quite hesitant to see such fluctuations as the result of similar natural instability. In recent decades, at least, they seem to have greatly preferred the idea that fluctuations around average growth must be caused by "shocks" to the economy of some kind. Noah Smith recently gave a nice summary of  the Real Business Cycle theory of Kydland and Prescott, which Prescott and colleagues are still pushing today:

Here’s how recessions work. Sometimes, scientists and engineers invent less new stuff than normal. Fewer new inventions this year mean fewer new inventions next year, too. Anticipating this, companies invest less, and they also cut workers' wages. When wages go down, workers decide to take a vacation instead of work. Voila -- a recession!

Actually, I’m kidding. I don’t think this is how recessions work at all. But the theory I just described is a real macroeconomic theory. It came out in 1982, and its name is the Real Business Cycle model. In 2004, its creators, Edward Prescott and Finn Kydland, won a Nobel Prize for their work. The theory inspired a generation of researchers, and became the dominant theory in certain places, such as the University of Minnesota.

You might be forgiven for thinking that Real Business Cycle theory, or RBC for short, doesn’t deserve its moniker. Just as the Holy Roman Empire was none of the above, RBC theory doesn’t seem to have much to do with business or cycles, and for that matter doesn’t sound particularly real. Most people think that recessions are caused by asset-price crashes, by disturbances in the financial sector, or by Federal Reserve tightening of the money supply.

RBC says we’re all wrong about that. The financial sector, RBC adherents claim, isn't important. Asset prices crash because people see a recession coming ahead of time and act accordingly. And the Fed, according to Prescott in a recent interview, has no more effect on the economy than a rain dance has on rain. In fact, RBC is really sort of a giant null hypothesis -- a claim that the phenomenon known as the business cycle is just an illusion, and that recessions are the normal, smooth functioning of an efficient economy.

In Bloomberg, I've written about some new work that puts this RBC theory into a very new light. It suggests, in fact, that theories of this basic class, if examined more closely, actually predict the existence of inherent instabilities in economies. Specifically, if you relax even slightly some of the heroic assumptions usually employed in such theories -- regarding agents' perfect rational foresight, or the ability of firms to adjust their output instantaneously to changing economic conditions -- then these models become unstable, so that large recessions will happen even without any external shocks, simply because of coordination failures within the economy.

More people should know about this work, which is the result of a serious collaboration between some physicists AND economists. Full text of the Bloomberg piece below:

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Economists still don't know what makes it happen. An economy thrives for years, and then suddenly, without warning, falls into a hole. Unemployment soars until somehow, sooner or later, growth resumes. Every economy on the planet has experienced these painful, mysterious and apparently unavoidable slumps.

Among academics, the most popular theory is the Big Shock, which has many variations. In this view, you get a recession when some big thing like an oil crisis whacks the economy, causing a corresponding reaction. Conservative economists assume individuals and businesses will react in the best and most rational possible way, creating an optimal economic response, so the government shouldn't get involved. Others take the less extreme view that governments and central banks, acting wisely, can intervene to help an economy recover.

A few economists instead prefer what you might call the amplification theory. They suggest that interactions between different parts of an economy might make it possible for even tiny shocks to have big consequences, much as a spark in a parched forest can trigger a vast fire. A small downturn for an auto manufacturer might hurt its suppliers, undermining their ability to supply other auto makers and creating a growing cascade of distress. The cause is less the shock and more the links that amplify it.

For most economists, that's the end of the discussion: Recessions are either the result of big shocks, or of small shocks with amplification. They ignore a third possibility: that an economy might sometimes get seriously out of shape with no shock at all. The omission is odd, because this way of thinking was quite common in economics some 50 years ago.

Fortunately, a group of economists and physicists is reviving the old “no shocks” idea. Interestingly, they start with a mathematical model of the economy built by Big Shock theorists -- specifically, the so-called Real Business Cycle model, which still garners lots of attention from economists. Like many mainstream economic models, it assumes that individuals and businesses make perfectly rational, optimal decisions, which lead the economy to a stable economic equilibrium. The new research then makes some adjustments to this picture: It assumes that individuals, rather than having perfect foresight when predicting future prices, sometimes make small errors. The result is radically different. The interactions of firms and individuals now create an ongoing turbulence with sporadic recessions arising from a natural lack of coordination, without any shocks at all.

The researchers go on to show that if you make the model more realistic along any of a number of dimensions -- firms taking a little time to adjust their production to new levels, for example, rather than doing so instantaneously -- you always end up with an inherently unstable economy. The conclusion is pretty much the opposite of what the Real Business Cycle theory's creators originally intended. They wanted to defend the notion that markets work perfectly, not to entertain the possibility that recessions might reflect an inability of markets to coordinate supply and demand. Their own model actually destroys that hope.

It's an amusing and ironic outcome, with implications beyond recessions. For years, many economists have argued that their assumptions of perfect rationality, self-interest and equilibrium are merely convenient elements in valuable thought experiments; they learn about the real world despite the manifestly false assumptions. That position now looks completely indefensible. It looks more as if Big Shock theorists are worried that relaxing their assumptions will lead to some very different and very inconvenient conclusions.

This isn't to say that we know for sure what really causes big recessions. Big shocks, little shocks and inherent instability may all play a role. It will take some honest science to figure that out.  


Make people be nice!!



I've been quite lazy recently and haven't managed any posts. I haven't even managed to post several things I've written for Bloomberg. Jeez. So, catch up time.

First, I encourage everyone to watch this great TED talk by British comedian Tony Hawkes. It's inspiring. He makes a crazy proposal for a maximum income scheme; it's crazy but also really different and creative. He doesn't want to limit rich people or tear them down, but to help them do even better, and to help everyone else in the process. It's an idea of how we could set up institutions so that people work hard to be nice and to do socially beneficial things.

I wrote about this for Bloomberg here, but full text follows also below. I'm sure this isn't exactly the RIGHT idea, but there's a nub of something really cool here. It would be great if ideas like this were actually discussed in real policy circles:

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Concern about rising wealth and income inequality has generated all kinds of solutions, often focused on improving the lot of the people at the bottom with measures such as minimum wages. But instead of putting a floor on what people get, why not put a ceiling on how much they get to keep?

The idea of a cap on income sounds crazy, and most economists find it unthinkable -- as evidenced by the cries of incredulity Oxford professor Simon Wren-Lewis recently elicited when he brought up the idea in an academic discussion. The obvious response is that anything of the kind would automatically kill economic creativity by destroying the wealth incentive that drives entrepreneurs to start new businesses.

But is this really true? Or does this way of thinking merely lack imagination? Maybe there's a clever way to design an income cap that wouldn't deter business at all.

One idea comes, unexpectedly, from Tony Hawks, a British comedian and writer. Hawks is best known for his best-seller "Round Ireland With a Fridge," a recounting of his effort to win a 100-pound drunken bet by hitchhiking around the circumference of Ireland with a medium-sized refrigerator (he did it). He later wrote another book, "Playing the Moldovans at Tennis," about his quest to track down, play and beat each of the members of the Moldovan soccer team one-on-one at tennis (he did that, too).

The poverty Hawks encountered in Moldova, though, made him rethink the value of the wealth and fame he had achieved. He decided to donate 50 percent of the royalties from his second book to a trust fund for beneficial projects in the country. A few years later, after the money had paid for a new care center in Chisinau for children with cerebral palsy, Hawks had an epiphany.

“I met the children and their parents, saw their smiles,” he recalls, “and the experience really enriched my life. I now actually feel good about myself. Undoubtedly, I feel happier since I did this.”
Hawks's realization that doing good could prove far more valuable to him than the foregone 50 percent of his royalties led to an idea: an income cap that would apply to money but not to wealth in the broadest sense.

Suppose that people, after paying ordinary income taxes, would be allowed to keep up to, say, $500,000 of their income, then would be obliged to give away the rest to the charities of their choice -- or, if they like, to a charity of their own design and creation. Such a policy would encourage a rapid proliferation of philanthropic organizations competing to attract the money -- much like the amassing of financial wealth has fueled the money-management industry. More people would be able to find jobs doing good things, and society would benefit from their efforts and resources.

The wealthy, too, would benefit. Many studies have shown that the more money one has, the less happiness one derives from each added dollar of income. This may explain why many of the super-wealthy, such as Warren Buffett and Bill Gates, ultimately turn to philanthropy -- making yet more money matters little to them in comparison with what they can get back by helping others.

With Hawks's income cap policy, the wealthy would end up competing not just to earn the most money, but also to outdo others in making wise and useful gifts to the best charities, or to start and manage charities reflecting their values. A virtuous circle would be created. The philanthropic activity generated by such a policy might significantly reduce the need for many taxpayer-funded government programs, reducing the need for income taxes.

The idea actually resonates quite well with the spirit of capitalism. Huge taxes on the rich don't work: They naturally breed resentment and stifle creativity. Governments are often very bad at redistributing the money efficiently. Besides, people shouldn't be punished for working hard and being successful. They should be rewarded and encouraged.

People care about more than money, and our policies should harness this fact in a smart way. Hawks has at least the nub of a very good idea. It might not be the ultimate answer, but it has the seeds of something very clever in it. We need to work harder at imagining what might be possible with policies that encourage the better parts of human nature, rather than merely channel people toward gaining as much wealth as possible.

As a result, they might be happier.


Monday, August 11, 2014

Arrow-Debreu Derangement Syndrome




Imagine you had never read any textbook economics, or studied any academic research papers. You didn't know the THEORIES of economics, especially in their mathematical form. But suppose you did know some mathematics, and were also generally well informed about the realities and complexities of real world economies. Now, suppose a demon sat you down and made you read and study the famous theorems concerning the existence of a competitive economic equilibrium as developed in the 1950s by Ken Arrow and Gerard Debreu. What would you think?

My belief is that you would quickly conclude that these theorems probably held little or no importance for understanding any real world economic system. If the demon tried to tell you that these theorems were at the very core of today's theoretical approach to (much of) economics, you'd think he or she was joking. If the demon insisted, you'd suspect you were dealing with an insane demon; and if you discovered the demon was right, you suspect the economics profession of being deranged. At least I would...

I've never yet been able to understand why the economics profession was/is so impressed by the Arrow-Debreu results. They establish that in an extremely abstract model of an economy, there exists a unique equilibrium with certain properties. The assumptions required to obtain the result make this economy utterly unlike anything in the real world. In effect, it tells us nothing at all. So why pay any attention to it? The attention, I suspect, must come from some prior fascination with the idea of competitive equilibrium, and a desire to see the world through that lens, a desire that is more powerful than the desire to understand the real world itself. This fascination really does hold a kind of deranging power over economic theorists, so powerful that they lose the ability to think in even minimally logical terms; they fail to distinguish necessary from sufficient conditions, and manage to overlook the issue of the stability of equilibria.

I just came across this old post from Yves Smith which makes the point rather nicely:


The scientific pretenses of economics got a considerable boost in 1953, with the publication of what is arguably the most influential work in the economics literature, a paper by Kenneth Arrow and GĂ©rard Debreu (both later Nobel Prize winners), the so-called Arrow-Debreu theorem. Many see this proof as confirmation of Adam Smith’s invisible hand. It demonstrates what Walras sought through his successive auction process of tâtonnement, that there is a set of prices at which all goods can be bought and sold at a particular point in time.42 Recall that the shorthand for this outcome is that “markets clear,” or that there is a “market clearing price,” leaving no buyers with unfilled orders or vendors with unsold goods.

However, the conditions of the Arrow-Debreu theorem are highly restrictive. For instance, Arrow and Debreu assume perfectly competitive markets (allbuyers and sellers have perfect information, no buyer or seller is big enough to influence prices), and separate markets for different locations (butter in Chicago is a different market than butter in Sydney). So far, this isn’t all that unusual a set of requirements in econ-land.

But then we get to the doozies. The authors further assume forward markets (meaning you can not only buy butter now, but contract to buy or sell butter in Singapore for two and a half years from now) for every commodity and every contingent market for every time period in all places, meaning till the end of time! In other words, you could hedge anything, such as the odds you will be ten minutes late to your 4:00 P.M.meeting three weeks from Tuesday. And everyone has perfect foreknowledge of all future periods. In other words, you know everything your unborn descendants six generations from now will be up to.

In other words, the model bears perilous little resemblance to any world of commerce we will ever see. What follows from Arrow-Debreu is absolutely nothing: Arrow-Debreu leaves you just as in the dark about whether markets clear in real life as you were before reading Arrow-Debreu.

And remember, this paper is celebrated as one of the crowning achievements of economics.


Tuesday, July 29, 2014

Economic imperialism -- its pernicious effects in law



I've written before about the insidious stupidity of relying on simple minded economic cost-benefit calculations when thinking about complex issues such as climate change, trade policy and the like. The calculation gives the illusion of hard-headed quantitative analysis, unbiased by emotion, yet such calculations almost always make sweeping assumptions about what things get counted as costs or benefits and what things do not. There is often nothing scientific in the exercise at all.

I'm not alone in finding this troubling.

Economists in practice spend a lot of time thinking about market failures and how to prevent them, and they derive much of their policy advice from this recipe. Such analyses inevitably tap into the analytical machinery for welfare analysis (which, I admit, I find hard to take at all seriously, but that's another story) and consider how some policy intervention, by removing obstacles to possible exchanges in the market, can improve welfare and economic efficiency. The trouble is, as economists Daron Acemoglu and James Robinson pointed out  a while ago, is that the conceptual framework used in such analyses often simply dismisses as irrelevant other non-economic impacts of such policies, even though these may have huge societal ramifications. Here's how they described one example (I'm selecting some text here from an earlier post):


Faced with a trade union exercising monopoly power and raising the wages of its members, many economists would advocate removing or limiting the union’s ability to exercise this monopoly power, and this is certainly the right policy in some circumstances. But unions do not just influence the way the labor market functions; they also have important implications for the political system. Historically, unions have played a key role in the creation of democracy in many parts of the world, particularly in western Europe; they have founded, funded, and supported political parties, such as the Labour Party in Britain or the Social Democratic parties of Scandinavia, which have had large effects on public policy and on the extent of taxation and income red istribution, often balancing the political power of established business interests and political elites. Because the higher wages that unions generate for their members are one of the main reasons why people join unions, reducing their market power is likely to foster de-unionization. But this may, by further strengthening groups and interests that were already dominant in society, also change the political equilibrium in a direction involving greater effifi ciency losses. This case illustrates a more general conclusion, which is the heart of our argument: even when it is possible, removing a market failure need not improve the allocation of resources because of its effect on future political equilibria. To understand whether it is likely to do so, one must look at the political consequences of a policy—it is not sufficient to just focus on the economic costs and benefits.

The paper goes on to analyze this problem in much greater generality, looking at the push to privatization in Russia, and the drive to deregulate financial markets over the past three decades in Western nations, and how both led to huge shifts in the wealth and political power of different social groups. In both cases, much of the intellectual groundwork for making these changes came from analyses that were ridiculously oversimplified and carried out with considerable disregard for the larger complexity of society.

On the same topic, here's a must read article at Salon.com by Ted Hamilton, a Harvard Law student, decrying the stultifying effects of the "law and economics" movement on the teaching of law. One of the most pervasive effects is the rise of the concept of economic "efficiency" in analyzing and judging the relative merits of different legal structures. The result, as Hamilton describes it, is the systematic narrowing of thinking and stamping out of any imaginative or creative analysis in law:

Since September, I’ve been encouraged to think about the law less as a journey toward justice and more as a means for distributing resources. In Civil Procedure, we examined the wisdom of allowing average people to bring lawsuits based on the overall court costs involved. And in Property, the problem of whether to permit the building of a cement plant in a residential neighborhood turned on the national industry’s need for cement. In nearly every discussion of a given law or a proposed policy, the first question was feasibility, and the second (or third) was justice. “Feasibility” means financial soundness. Financial soundness requires measurement. So in order to measure and mete out our resources, legal questions grasp for the harsh insights of computation.

According to this oddly constrained worldview, the legal system is just another (and comparatively imperfect) means for achieving “wealth maximization.” We want a “bigger pie,” so the incessantly repeated metaphor goes, and law is merely about deciding which yeast works best. The impassioned cris de coeurs of Blackstone, Cardozo or Sotomayor notwithstanding, “the life of the law” is not, to paraphrase another luminary, “experience” — it’s accounting. If only we would spend less time with the romantic and messy concepts that have beguiled the likes of Holmes and Brandeis for millennia, so the thinking goes, we might actually be able to make things work.

In the obvious — and obviously ideological — corollary to all this, law school has tried to convince me that it’s not lawyers or judges that should decide the hard questions of law: It’s economists. The white knights of the 21st century legal academy, economists are uniquely equipped, so they claim, to furnish us wishy-washy idealists with the quantitative rigor to perform the difficult, and consummately serious, analysis that policy and politics require.

In other words, society is a problem. And legal economics is here to solve it.

The law and economics movement, born at the University of Chicago in the 1970s, gave birth to this type of thinking and now enjoys unquestioned academic supremacy over the more prevaricating methods of legal realism, critical legal studies and legal formalism. Law and economics’ doyen Richard Posner, a professor at Chicago, Seventh Circuit judge and famous advocate of all things market-oriented, is the most cited legal academic of the 20th century. Ronald Coase’s “The Problem of Social Cost,” which reduces debate over legal rules to the calculation of transaction costs, is the most cited legal article. Passions have cooled somewhat since the raucous debate in the ’80s and ’90s over law and economics’ takeover of the legal academy — which was aided in no small part by generous donations from private, free market-promoting foundations — but that’s just because the movement’s methods have become part of the background. No other approach to adjudication dominates class discussion to such an extent, or shapes the way in which cases are selected and read.

The economic analysis of law, then, has become the standard against which other approaches are measured. And even if many professors still believe that cost-benefit analysis, with its incessant focus on data and calculation, brandishes empiricism the way Descartes brandished self-reflection (read: with excessive faith in a promising but limited approach), only a cantankerous cynic would argue that it’s all hogwash.

But that’s not to say there isn’t much to pause over.

Here’s a typical example: Legal economists generally assess the value of a resource — land, loans, even lives — by how much someone is willing to pay for it. This makes sense at a very basic level: The sandwich is worth $8 because you won’t pay $9 but you’ll pay more than $7. But how effectively can dollars capture worth when people have different abilities to pay? It seems a bit obtuse to claim that the owner “willing” to pay $200,000 for her home values it less than the developer  “willing” — read: able — to spend $1 million. And that’s just marketable assets. What about more elusive “resources”? How do we price, say, the happiness of children? (Don’t worry: economists have tried.)

Here’s another example: Economic analysis evaluates environmental regulations according to the net social value of restricting industrial activity versus the activity’s economic value absent regulation. Even beyond the difficulties of measuring such things, how do we decide where to draw the line between what “counts” as value in such a calculation and what doesn’t? When dealing with something as resistant to quantification as a wild stream, this puzzle has no end. Is the stream only valuable to those who live by it? To those who live in it? What about those who hear stories about it, or who would drink from it in 90 years, or the painters who might never see it? Does their value “count”?

... we need to consider economic thinking’s ideological and imaginative effects. ... Simply put, our social life is much more than a pie-eating contest. Our shared resources are meant to serve our shared ideals, not vice versa. Yes: a rising tide might sometimes lift all ships, and we need to enjoy our bread before we can enjoy our rights. But the two biggest specters on our communal horizon, climate change and inequality, demonstrate where a singleminded obsession with economic growth can lead us. Taking care of ourselves and our planet means much more than taking care of our wallets.

In an era crying out for radical thinking and radical solutions, we can ill afford the strictures of the cost-benefit mindset. The complete immersion of our legal class into this language of economics has a corrosive effect on its imaginations, leaving our lawyers unequipped to think outside the box. A singleminded pursuit of efficiency loses sight of the inherent messiness of society and the legal rules that grapple with it. By reducing everything to entries in a formula and by seeing human behavior as limited to “rational pursuit of maximum value,” law and economics conjures up a version of the self-interested and self-destructive world that we now inhabit.

After all, when we concede that our society’s legal life is essentially about growing the economy, it becomes very hard to argue against leaving the tough decisions of rule design and market legislation to the growth experts and wealth maximizers. Not surprisingly, those folks have lately turned out to be expert mostly at maximizing their own wealth and that of their friends, while minimizing the wealth, and the happiness, of everybody else — those less willing, because less able, to pay for their share of our resources.

Three years of law school spent evaluating society according to the metric of transaction costs will inevitably produce lawyers less attuned to the more ephemeral, and more essential, considerations — the kind that could actually inspire the reforms and revolutions we need. A law school acculturation process whereby the hard facts of economic analysis are constantly if implicitly vaunted over the less determinate methods of ethical reasoning necessarily generates attorneys more sympathetic to those who traffic in the material of such analysis — namely, bankers, hedge fund managers, and their similarly-educated regulators — and it’s just such economic essentialists who are overrepresented in the ranks of the enemies of social change.
 
Read the whole thing here (h/t Mitch Julis)

Gattopardo economics



Thomas Palley has written an interesting and provocative working paper on "Gattopardo economics" -- his phrase for recent efforts to paper over the fundamental failings of mainstream economic theory by making superficial changes, thereby leaving the main structures intact. Such efforts seek "change that keeps things the same... Gattopardo economics makes change more difficult because it deceives people into thinking change has taken place. By masquerading as change, it crowds-out space for real change."

The name comes from the novel Il Gattopardo (The Leopard) by Giuseppe Tomasi di Lampedusa, about class conflict in Sicily in the 1860s. In the novel, the aristocracy engineers change of a sort that deflects the real threat to their power and leaves them still in charge. 

I don't know if Palley's account of the causes of the financial crisis and subsequent stagnation is definitely correct, but it rings true to me. It was the end result of broad financial de-regulation, coupled with relentless downward pressure on ordinary wages over the past few decades driven by globalization. This set the stage for a three decade credit bubble which ultimately burst. The part I'm not sure about is his claim that stagnant growth now is due to a lack of aggregate demand linked to soaring wealth inequality. Sounds plausible. Anyway, here's his closing summary. The whole paper is worth a read:


The structural Keynesian account of the economic crisis makes clear the role of mainstream economists and the neoliberal paradigm in creating the crisis. Scratch any side of the neoliberal policy box and you quickly find the ideas of mainstream economists. Corporate globalization was justified by appeal to economists’ comparative
advantage theory of free trade. The labor market flexibility agenda was justified by economists’ claims that unions and the minimum wage cause unemployment. The retreat from full employment was justified by the Friedman’s theory of the natural rate of unemployment which implied central banks should focus on low inflation as they cannot permanently affect unemployment. The attack on government and regulation was supported by Chicago School claims that costs of market failure are small relative the costs of government failure and policy induced market distortions. Government was also charged with diminishing freedom and paving “the road to serfdom”, so that freedom was best served by a minimalist government or night watchman state. Financial deregulation was justified by claims it would produce a free lunch by increasing efficiency of resource allocation.

After the financial crisis of 2008 many Keynesian economists hoped there would be profound change of theory within the economics profession. The profession stood discredited owing to its complete failure to anticipate the crisis, whereas Keynesian economists had anticipated the crisis and also showed how neoliberal economics contributed to it. However, change has been minimal.

That should not surprise anyone. Neoliberal economics supports the economic and political interests of powerful elites, and those elites have reason to defend it and block change. Even if only sub-consciously, professional economists also have a private (utility maximizing) interest in maintaining neoliberal ideas to the extent that they are intellectually invested in those ideas and their careers have been built on them.

Society is now engaged in a war of ideas, the outcome of which will greatly influence the future. That is because how we explain the crisis will influence the direction of future economic policy. Gattopardo economics is one of the mechanisms for blocking intellectual change. It works by muddying the water and appearing to offer change when in fact it keeps everything the same. That is why it is so important to expose gattopardo economics.

Tuesday, July 22, 2014

A weed you can eat...




The thing you see above is a plant called Amaranth (this is Palmer Amaranth, one of many species). It's a superweed -- resistant to the ubiquitous and powerful herbicide Round Up -- and in many parts of the US an immense pain to farmers growing corn, soybean or cotton. They're spending millions to keep it from spreading in their fields, and not being too successful.

Now for the irony -- this plant is also completely edible and highly nutritious. It's been eaten for thousands of years around the world. Now farmers are trying to eradicate it in many cases so they can keep producing the cheap high-fructose corn syrup on which the soda and fast food and processed food industry depends. The very fuel of widespread obesity.

Talk about unintended consequences. You have to chuckle, really. More at Bloomberg.