Monday, October 10, 2011

Steve Keen Launches the Second Edition of Debunking Economics

This event happened at University College (London), with talks by Ann Pettifor and Steve Keen himself. The video has somewhat poor audio quality (turn the volume up!). Debunking Economics (even in the first edition) is an excellent book, with a very useful Post Keynesian critique of the new consensus macroeconomics.

19 comments:

  1. It's a brilliant lecture and well worth the time investment - particularly as Steve calls for economics departments to be occupied and the incumbents thrown out.

    Ann mentions the English Post-Keynesian view on the exchange system - capital controls and pegs which is at odds with the MMT view of a free float.

    Have you done anything on the English view "that exchange rates should be consciously managed, like money wage rates, by a system of fixed but adjustable pegs intended to maintain
    relative purchasing power parity."

    vs the MMT view that exchange rates should just float and foreign hoarding simply accommodated?

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  2. If the MMTers really believe in free floating exchange rates (with no discretion to intervene), it seems very strange to me (but perhaps they are in fact supporters of discretionary interventions, in some cases).

    One immediate problem that would require intervention is the so-called "Dutch disease" - when you have some lucrative commodity export (like oil or minerals) that attracts lots of foreign capital (via the capital account) to your real or financial asset markets, driving your exhcange rate too high, and crippling your other manufacturing/export industries.

    That requires remedial foreign exhange rate intervention.

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  3. "Have you done anything on the English view "that exchange rates should be consciously managed ... etc."

    It is not really an "English" view. I would say it is a standard Post Keyensian view.

    Despite this, I would also say that the differences between MMT and PK economics are just arguments "within the family", so to speak.

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  4. "Arguments within the family", you say? That's what Paul Samuelson said of disputes within the economics profession back in the 1950ies to the public. Hopefully for your school of thought's own sake, this schism can be contained just enough.

    P.S. Will you eventually make a full-length review of Adam Smith's "The Theory of Moral Sentiments" or "An Inquiry into the Nature and Causes of the Wealth of Nations" here one day, Lord Keynes?

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  5. I'll definitely write a post on Adam Smith at some stage. There are many interesting angles on Smith, of course.

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  6. Good to hear. An intellectual biography of Adam Smith you might want to read is "Adam Smith: An Enlightened Life" by Nicholas Phillipson.

    http://www.amazon.com/Adam-Smith-Enlightened-Walpole-Eighteenth-C/dp/0300169272/

    Also, I believe Lord Skidelsky and Dr. Phillipson shared a mutual realization that both of their biographical subjects (Keynes and Smith) had a lot in common at the London School of Economics.

    http://www.youtube.com/watch?v=kraBLXWrE2Y

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  7. LK, could you do a post on the 'Dutch Disease'? I'm getting confused about the effect you're claiming of capital account surpluses on international exchange rates.

    Why is this limited to commodity exports (i'm assuming you're using commodity to mean raw materials, etc.)

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  8. "Why is this limited to commodity exports "

    I don't suppose it has to be limited to commodity exports, but usually when economists talk about the Dutch Disease they think of lucrative exports like oil, energy, minerals.

    The UK suffered from the Dutch Disease in the 1970s early/1980s when North sea oil was discovered and exploited (although Thatcher's disastrous monetarist experiement didn't help either).

    Norway was avoided the "Dutch Disease".

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  9. One immediate problem that would require intervention is the so-called "Dutch disease" - when you have some lucrative commodity export (like oil or minerals) that attracts lots of foreign capital (via the capital account) to your real or financial asset markets, driving your exhcange rate too high, and crippling your other manufacturing/export industries.

    "Too high" presumes that central planners can know what's "just right", which presumes equilibrium can be reached by the central planners, on the necessary basis of lack of knowledge, subjective expectations, and fundamental uncertainty. That's ludicrous.

    If a country's exchange rate increases on account of an influx of capital, thus "crippling" exporters who were previously benefited by a lower exchange rate, then those previously employed by exporters must find something else to do given that the country is now more attractive for foreign capital. Just because laissez-faire will result in a required change to the productive structure, which might be accompanies by temporary isolated unemployment, that doesn't mean central planners can or should "intervene" to stop the innovation. If a country becomes more attractive to foreign capital, then those who were previously employed by exporters can find new employment in the industries that are receiving an influx of new capital.

    Just because a change in technology and economics might cause a needed re-allocation of employment, is no reason to fight against it, any more than the introduction of the auto-mobile is no reason to fight against temporary unemployment generated by a reduction in the size of the horse and buggy industry.

    Your worldview punishes innocent people (consumers, importers, and exporters who utilize imported factors of production) in order to protect inefficient exporters previously benefited by a low exchange rate from having to improve their production process. Your worldview is straight up protectionist mercantilism.

    That requires remedial foreign exhange rate intervention.

    And thus crippling importers, and even exporters who utilize imported factors of production, as well as punishing consumers who now have to pay higher prices for importing goods from abroad. Epic failure.

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  10. I'll definitely write a post on Adam Smith at some stage. There are many interesting angles on Smith, of course.

    I can't wait to see you mangle yet another economist's arguments and positions.

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  11. "If a country becomes more attractive to foreign capital, then those who were previously employed by exporters can find new employment in the industries that are receiving an influx of new capital."

    The capital inflows involved in this sort of thing are usually just to asset purchases on secondary markets, not foreign direct investment. You're assuming that there would in fact be sufficient capital goods investment.

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  12. "Your worldview punishes innocent people (consumers, importers, and exporters who utilize imported factors of production) in order to protect inefficient exporters previously benefited by a low exchange rate from having to improve their production process."

    It's curious that people made unemployed by a high exchange rate owing to foreigners wishing to make fast buck by bidding up, say, your nation's financial asset prices aren't considered "innocent" in your world view.

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  13. The UK suffered from the Dutch Disease in the 1970s early/1980s when North sea oil was discovered and exploited (although Thatcher's disastrous monetarist experiement didn't help either).

    The "Dutch Disease" is really just a reallocation of labor and resources towards the oil/energy/mineral exporting industries, and given economic resources are scarce, it means labor and resources must come from other sectors of the economy, thus requiring temporary unemployment and idle resources, while the price system puts forces on resource owners to change.

    This is healthy and should not be attacked with vicious central planning that punishes innocent importers, punishes innocent exporters who utilize imported factors, and punishes consumers who have to pay higher prices for imported goods.

    Trade protectionism does not work.

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  14. "The "Dutch Disease" is really just a reallocation of labor and resources towards the oil/energy/mineral exporting industries, and given economic resources are scarce, it means labor and resources must come from other sectors of the economy,"

    That effect is negligible:

    "A resource boom will affect this economy in two ways. In the "resource movement effect", the resource boom will increase the demand for labor, which will cause production to shift toward the booming sector, away from the lagging sector. This shift in labor from the lagging sector to the booming sector is called direct-deindustrialization. However, this effect can be negligible, since the hydrocarbon and mineral sectors generally employ few people."

    http://en.wikipedia.org/wiki/Dutch_disease

    The major effect I have in mind is when foreign capital inflows are directed to asset markets, bidding up asset prices, creating a bubble economy, driving the exchange rate higher.

    Of course, to the extent that foreign direct investment occurs, its effect will be to create new productive structure and hence supply of goods.

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  15. The capital inflows involved in this sort of thing are usually just to asset purchases on secondary markets, not foreign direct investment.

    Hahaha, you keep using that ridiculous backstop excuse. As long as you can point to anything that would in any way stimulate the "secondary financial asset markets", that is enough for you to deny economic science, and coordination.

    No, the capital inflows that are the product of oil/energy/mineral discoveries do actually go into capital investment in those industries. A country that discovers oil for example, which attracts foreign capital as a result, won't result in a scenario where all that happens is that foreigners pay higher prices for local stocks and bonds. That's ridiculously crude.

    You're assuming that there would in fact be sufficient capital goods investment.

    No, I am not presuming anything other than the original premises of the "Dutch Disease" argument. What is "sufficient" will be up to the coordination process of investors and consumers.

    You're assuming that there would be sufficient knowledge, and sufficiently accurate subjective expectations, and sufficient overcoming of fundamental uncertainty, if monopoly counterfeiters were to just print and spend money haphazardly on their own valued goals, rather than the valued goals of those taking part in voluntary exchange.

    If there is a growth in capital investment on account of oil/energy/mineral discovery, which is a premise implicit in the "Dutch Disease" doctrine, then because resources are scarce, it will require a movement of capital away from other sectors. Whatever capital is invested in the oil/energy/mineral industry, that results in a higher currency exchange rate, will enable the whole country to buy up more capital from abroad with their higher purchasing power currency.

    And, even if the influx of investment in the oil/energy/mineral industries is not matched by a corresponding rise in investment in every other sector, then all that has happened is that scarce resources have been placed into their most highly valued use. It is violating the law of scarcity for you to claim that a rise in capital investment in the oil/energy/mineral industries, which requires capital and labor to be redirected away from other sectors, must be accompanied by a rise in capital and labor in those other sectors!

    It would be like claiming that the introduction of the auto-mobile, and the necessary redirection of capital and labor away from other industries, like horse and buggy production, must be accompanied by a rise in the number of horses and horseshoe making laborers, or else "it is justified for central planners to punish consumers, importers, and exporters who utilize imported factors of production, in order to protect the industries that are no longer as highly valued."

    The problem of insufficient capital is ubiquitous in the whole economy. Capital is scarce.

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  16. That effect is negligible:

    "A resource boom will affect this economy in two ways. In the "resource movement effect", the resource boom will increase the demand for labor, which will cause production to shift toward the booming sector, away from the lagging sector. This shift in labor from the lagging sector to the booming sector is called direct-deindustrialization. However, this effect can be negligible, since the hydrocarbon and mineral sectors generally employ few people."


    It's not necessary that the rise in production of minerals must utilize all the temporarily unemployed workers from other industries as the exchange rate increase, before it is correct to conclude that the central planners ought not punish innocent consumers, importers, and exporters who utilize foreign factors of production.

    If an increased exchange rate results in a decline in employment in exporting industries, then because the currency is more valuable, investors can import more factors of production from abroad in previously unforeseen and unanticipated projects, and they can hire newly released labor to utilize those new means of production in new production processes.

    Your worldview does not allow for innovation and new production processes. Your worldview is nothing but using government force to keep whatever production processes stagnant and unchanging. If one industry becomes less valuable relative to other industries, because of an oil discovery, then your worldview presumes infinite resources availability and calls for depreciating the currency in order to protect those areas of the economic system no longer as highly valued, which punishes innocent importers, exporters who utilize imported factors, and of course the consumers who have to pay higher prices for imports.

    Once the inflation is attenuated in the economy, and prices again adjust, then the same resource and labor allocation on account of the oil discovery will again be necessary, because the new relative values of real goods is what matters. The exchange rate just reveals the new relative marginal utilities of goods locally versus goods from abroad. Fighting it with inflation is counter-productive.

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  17. The major effect I have in mind is when foreign capital inflows are directed to asset markets, bidding up asset prices, creating a bubble economy, driving the exchange rate higher.

    Bubbles do not form on the basis of an increased currency exchange rate. They form on the basis of credit expansion.

    An increased exchange rate brought about by an increased influx of capital, provided the investments are financed by real savings, won't generate a bubble, precisely because the real resources from elsewhere are made available to facilitate the increased oil/energy/mineral exporting industries.

    As long as increases in investment in oil production are matched by a fall in investment elsewhere (which will happen in the absence of exchange rate manipulation on the part of central planners), then there will be no discoordination that requires future correction. The corrections are made as fast as they are capable of being made, on the basis of the price system forcing resource owners to change their economic patterns.

    If the local currency value increases, then local investors can buy up more capital from elsewhere, and hire labor to utilize that capital.

    An increased local exchange rate brought about by an influx of capital investment in the "diseased" sector is a GOOD thing. An increase in local investment financed by real savings increases productivity.

    Of course, to the extent that foreign direct investment occurs, its effect will be to create new productive structure and hence supply of goods.

    This is what will occur if investment is financed by real savings, and not credit expansion. With credit expansion, what happens is that as more capital gets invested in the oil/energy/mineral industries, it will make capital more scarce elsewhere, thus decreasing the amount of nominal investment elsewhere, thus increasing the rates of profit elsewhere. This will then raise interest rates and borrowing costs elsewhere. That rise in profit and interest elsewhere will put forces into motion that coordinate relative investments between the new industries and the old industries.

    If too much or too little capital gets redirected, then it will show up in the relative rates of profit, and cause losses to whoever redirects too much, and will cause others to not earn profits and not accumulate capital if they redirect too little.

    What credit expansion does is temporarily lower borrowing costs of all types and maturities, and this will prevent investors from knowing how much capital to redirect away from other sectors. They can't know because the rates of profit and interest are not reflected by the individual market actor's new marginal utility scales, and new economic requirements and technology, but rather the whims of central planners who are subject to fundamental uncertainty and subjective expectations in their desperate attempt to stagnate the economy and prevent labor and resources from being re-allocated from other industries.

    When an influx of investment takes place in oil/energy/mineral industries on the basis of credit expansion, it prevents the release of resources and labor from other sectors that are needed to complete the new projects started. Investors invest as if capital is plentiful, on account of low borrowing costs, but in reality capital is not as plentiful.

    Post Keynesians lack an ability to comprehend the law of scarcity. That is the only explanation for their desire to expand both the oil/energy/mineral industry, as well as all the old investment projects, as if resources don't need to be re-allocated, as if resources appear out of thin air, as if they are not scarce.

    You're not worried about bubbles. You're worried about central planners losing control over where capital and labor are to go, because the voluntary market process will otherwise take over.

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  18. "Bubbles do not form on the basis of an increased currency exchange rate.

    Red herring. I said bubbles can form when foreign money enters your country and is used to bid up asset prices.

    They form on the basis of credit expansion

    "Credit expansion" is not a necessary condition, though obviously it will make a bubble worse. Foreign money inflows are sufficient to cause bubbles. Even if you had a 100% reserve banking world of commodity money, bubbles could result if commodity money flooded into a country by its capital account.

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  19. If the MMTers really believe in free floating exchange rates (with no discretion to intervene), it seems very strange to me (but perhaps they are in fact supporters of discretionary interventions, in some cases).

    One immediate problem that would require intervention is the so-called "Dutch disease" - when you have some lucrative commodity export (like oil or minerals) that attracts lots of foreign capital (via the capital account) to your real or financial asset markets, driving your exchange rate too high, and crippling your other manufacturing/export industries.

    That requires remedial foreign exchange rate intervention.


    The remedial foreign exchange rate intervention would be implicit - in the government spending required to maintain full employment, the money-printing to offset the foreign savings. Ceteris paribus, a strong currency is always a benefit, because the state can create it at will. The natural effect of the increased spending would be to devalue the currency & resolve the "problem". Keynes said "take care of full employment, and the budget will take care of itself". Take care of employment, have people do useful work at good wages, and everything else takes care of itself too.

    Bill Mitchell has recently written about controlling, by making them illegal, purely financially speculative, destabilizing flows.

    Personally, if the choice were between completely laissez-faire floating & currency management of the usual kind, which involves wrecking your own economy in order to support a higher exchange rate - why? - I'd go with laissez-faire. The benefits from managing the currency of a state practicing functional finance are quite marginal, and attainable in other ways. At worst the central bank should go bargain-hunting if the currency is crazily high.

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