Real World Economics Review Out Now: positional vs MMT money, power narratives, viral neoliberalism, blundering equilibrium, teaching hetero 101 productivity, zero evidence free trade, de-externalising stress, Scottish currencies, GDP and Jayati Ghosh’s political economy of development

real world hetero economics 9-2022 Real World Economics Review

Two conceptions of the nature of money: clarifying differences between MMT and money theories sponsored by social positioning theory – by Tony Lawson

…”…unlike conceptions of the nature of money and money histories etc., the policy proposals associated with MMT, in their basics, do not rely essentially on the validity of (and so on MMT’s attachment to) the credit theory of money. Of course, if the credit theory is abandoned the details of the argument do, to repeat, warrant modification (to replace any idea that it is debt redemption [involving taxation] that is driving the process). But making this modification, as far as I can see, does not in itself undermine MMT’s more significant policy stances or assessments. If there is, then, a challenge by proponents of social positioning theory to advocates of MMT it is ultimately to their reliance on the credit theory of money, a reliance (inherited from the likes of Innes and Minsky) that, if prima facie problematic in various ways, is, to repeat, actually inessential to MMT’s current main policy concerns. Challenges aside, though, I hope I have succeeded in providing some greater clarity as to the nature and sources of the differences that do exist between the sorts of money notions and conceptualisations of monetary workings found within accounts sponsored by social positioning theory and those formulated or accepted as part of modern money theory. …” – read article here

How power shapes our thoughts – by Asad Zaman

Abstract: It is widely believed that human knowledge represents valuable information about the world we live in. Historical studies of Michel Foucault led to the striking conclusion that human knowledge cannot be separated from the power configurations governing society. In this paper, we study how economic theories are shaped by socio-political power – read article here

SARS-CoV-2: The Neoliberal Virus – by Imad A. Moosa

Abstract: The Coronavirus is neoliberal in origin, spread and consequences. It is neoliberal in origin because scientists have been telling us for a long time that profit-driven deforestation has forced pathogens out of their traditional domains. It is neoliberal in terms of spread because the proliferation of the virus was aided by market-based policies pursued by neoliberal governments and by years of privatisation of public healthcare establishments. And it is neoliberal in terms of consequences because it has attacked primarily the poor, underprivileged and vulnerable, and because it has enabled profiteering and aggravated inequality, poverty and food insecurity. The way forward is to move away from neoclassical economics and inject a dose of morality in the economic decision-making process.- read article here

The giant blunder at the heart of General Equilibrium Theory – by Philip George

Abstract – Proofs of general equilibrium crucially hinge on establishing the existence of an equilibrium price vector that makes excess demand in all markets equal to zero. This paper shows that the “price vector” is not a vector and that all proofs of general equilibrium are, therefore, invalid.

Conclusion – Debreu noted in his Nobel Prize lecture that the success of the mathematization of economic theory depended “on the fact that the commodity space has the structure of a real vector space”. We have shown that this is incorrect. The “price vector” is not a vector, and GET is therefore false. But we may go further and assert that not only was the proof incorrect, what was set out to be proved was not true in the first place. The real economy cannot be brought into equilibrium by adjusting prices. And indeed, the real economy is never in equilibrium. – read article here

A Three-Dimensional Production Possibility Frontier With Stress – by John Komlos

abstract: We introduce a three-dimensional production possibilities frontier, the third axis of which measures the amount of psychological stress being generated in the economy. Stress, a negative externality, is the body’s biological response to unpleasant external conditions. It is produced through countless pathways, much of it related directly or indirectly to financial pressure and insecurity. There is ample clinical evidence that mental illness has increased markedly in the U.S. We suggest that the same quantities of inputs can produce more or less output depending on the amount of stress experienced by the population. This crucial issue should be considered in the formulation of economic policy….”…

introduction: That homo economicus has no emotion is common knowledge. Hence, psychological stress is under the radar of most, though not all, economists (Akerlof 2020, Flèche and Layard 2017, Rabin 2013). However, the overwhelming evidence of the accumulation of stress around the globe but especially in the U.S. should induce economists to explore ways to introduce the concept into economic theory (Marchese 2022). We propose such an innovation for the production possibilities frontier (PPF). – read article here

John Komlos and the Seven Dwarfs – by Junaid B. Jahangir

Abstract – The neoclassical paradigm leaves students with the simplistic understanding that the contribution of essential workers is far less compared to that of CEOs and financial executives. This teaching is crystallized through principle 8, which associates living standards with productivity. The objective in this paper is to develop a renewed perspective by projecting the ideas of John Komlos through the song of the seven dwarves. Such an approach allows to retain student interest, make economic content relatable, and facilitate a nuanced understanding. The song lyrics help advance a renewed perspective that higher productivity does not always lead to higher living standards. …

… Keen (2011) seems to be a challenging textbook for ECON 101 students and appears to be more suitable as an intermediate level textbook that allows students to reflect upon the neoclassical viewpoint they would have studied in introductory courses. To a lesser extent, a similar critique could be leveled for Goodwin et al. (2019) and Schneider (2019). However, in terms of simplicity and heterodox engagement with the neoclassical paradigm, Komlos (2019) stands out. Indeed, Freeman (2019) notes that “it is primarily positioned as an alternative to introductory Econ 101 “principles” type textbooks”. Kesting (2021) adds that it offers a “critical running commentary” to mainstream neoclassical textbooks. Similarly, Balak (2021) adds that “it stays as close as possible to the traditional textbook structure” and that it best facilitates “a critical reflection upon the traditional theories”. His book is well-recognized, as it has a Wikipedia page, which indicates that it has been translated to five different languages including Chinese.1 Moreover, his book has been extensively reviewed in academic journals (Allen, 2019; Blackford, 2019; Cantillo, 2019; Foster, 2019; Burnazoglu and Ostermeijer, 2020; Coclanis, 2020; Jahangir, 2020; Tomer, 2020) apart from popular online platforms. Thus, for the purposes of this paper, Komlos’ work will be predominantly considered in drawing out a renewed perspective on P8 from the song of the seven dwarves in Section 6.

In offering his work, Komlos (2021) clearly tackles the issue of equating living standards with productivity by arguing that “output does not translate automatically into well-being or happiness” and that “we no longer need an ever-increasing quantity of goods”. Komlos (2019) mentions that from 1982 to 2016, productivity increased by 94% but compensation only increased by 40% in the U.S. (p. 112). Instead of blaming globalization or technological changes, he explains this weaker connection by arguing that “firms took advantage of their power and payed workers far less than what they were worth” (p. 112). He rejects marginal analysis that equates wages to the value of the marginal product of labour because both consumers and producers do not optimize but rather satisfice respectively through heuristic rules of thumb and markups in their decision making. Additionally, like Schneider (2019), he states that “it is impossible to measure individual productivity accurately”…”… – read article here

Jayati GhoshA Life in Development Economics and Political Economy: An interview with Jamie Morgan.

…”…Jayati: The problems of using national income expressed in Gross Domestic Product (GDP) are now widely recognized, in terms of the blindness to distributional issues and the inability to measure either the quality of life or the sustainability of any particular system of production, distribution and consumption. Despite these obvious limitations, however, it remains the most widely used indicator on any economy, and is generally the one that is tracked to determine both perceptions of national economic performance and policy orientations of most governments. This is unfortunate, because this obsession with GDP growth in itself, and independent of other markers of well-being, makes for policy decisions and outcomes. Because GDP in most countries captures only market transactions, it excludes a significant amount of production of goods and services for self or household consumption.

It makes market pricing the chief determinant of value, irrespective of the social value of any activity, which leads to massive undervaluation of what are now (especially post-pandemic) recognized as essential social services relating to the care economy. It correspondingly overvalues those activities, goods and services that are priced higher because of the oligopolistic structure of markets.

Jamie: You touch on this in your recent Real-World Economics Review article (Ghosh 2021a) using various examples…

Jayati: As I write in that article, a chaotic, polluting and unpleasant system of privatized urban transport involving a multiplicity of private and polluting vehicles on over-congested roads (as is common in many developing countries) typically generates more GDP than a safe, efficient and affordable system of public transport that reduces vehicular congestion and provides a more pleasant living and working environment.

Jamie: Herman Daly, for example, refers to these effects as “illth” rather than “wealth” and also notes the perversity of the metrics…

Jayati: Exactly. The depredations caused by climate change and other evidence of ecological damage are the result of unsustainable patterns of economic activity that are simply not adequately factored into national income, despite various attempts to incorporate them. Furthermore, where health services are more commercialized, the consequent increase in morbidity from pollution and mortality from vehicular accidents also raises GDP, because of the resulting (largely private) expenditure on health services, etc.

Jamie: And there are many such examples of how unwelcome trends can become sources of GDP growth once public services are privatized and commercialized. Social ills become measurable wealth: rising prison populations, an opioid crisis… But as you suggest more generally in your paper, paralleling a point various financialization theorists have made, GDP lacks adequate sensitivity to the nature of the sector whose values are measured…

Jayati: Yes, services GDP is particularly hard to evaluate, because of the wrong valuation (from a human and social welfare standpoint) of different types of services. Financial services are hugely overrewarded, at least partly because of the political and lobbying power of financial interests in
contemporary societies—and financial asset booms that reflect asset price changes then get reflected in increasing shares of financial services in national income, without any underlying real economic changes.

Jamie: So, inflated values, and transfers and wealth extraction (rents writ broadly) can appear to be wealth created by the financial sector?

Jayati: Yes absolutely! And meanwhile, as the Covid-19 pandemic has shown, care services that are crucially important for human welfare, for the survival of societies and the resilience of economies, are routinely undervalued, with much of this activity performed unpaid (largely by women) within households or in extremely underpaid form (Ghosh 2020b). This also has an impact on measures of productivity like GDP per worker, which is still the most widely used indicator of human progress, popular among economists of very different persuasion. The usefulness of this indicator is in serious doubt, because both the numerator (GDP) and the denominator (number of workers or labor time, which typically ignores the unpaid labour of women, for example) may be wrongly estimated—and even wrongly conceptualized. When relying on this aggregate measure to understand economic changes, we may therefore be missing or misinterpreting some of the actual economic processes under way

Jamie: So to put these points together, the heavy emphasis on GDP and the perversity of that metric are still proving counterproductive. An obsession with GDP distorts what it means for an economy to develop and for a society to prosper? The unintended consequences continue to be ecological and climate harms, as well as an absence of due attention to the services that really matter to us? This seems to imply the need for a more nuanced approach to what it means to develop… One might argue that your interest in imperialism places historic and structural issues to the fore. For example, unless one pays attention to structures and power it can be easy to miss how much the wealthy world takes from the rest. A recent paper by Jason Hickel, Dylan Sullivan and Huzaifa Zoomkawala contains some eye-watering statistics:

According to our primary method, which relies on exchange-rate differentials, we find that in the most recent year of data the global North (‘advanced economies’) appropriated from the South commodities worth $2.2 trillion in Northern prices — enough to end extreme poverty 15 times over. Over the whole period [since 1960], drain from the South totalled $62 trillion (constant 2011 dollars), or $152 trillion when accounting for lost growth. Appropriation through unequal exchange represents up to 7% of Northern GDP and 9% of Southern GDP. (Hickel et al. 2021).
Jayati: Globally, inequalities are as extreme as they were at the peak of Western imperialism in the early 20th century…”… – read article here

Free Trade Theory and Reality: How Economists Have Ignored Their Own Evidence for 100 Years – by Jeff Ferry

“For the last 90 years, the United States has pursued and advocated free trade. For the last 60 of those 90 years, American workers and other observers have watched America lose high paying jobs to imports and asked: can this really be good for the American economy? Professional economists have answered, virtually unanimously, that yes, it is good, due to something called the Law of Comparative Advantage.

They are wrong. Their free trade theory, based on the so-called Law of Comparative Advantage, does not work for the U.S. or for many other countries. We know this because dozens of economists have published studies of the empirical results of import penetration showing that the Law of Comparative Advantage, and the modern economic theory built around it is outmoded and inapplicable to high wage nations like the U.S. Indeed, it can actually worsen the performance of high wage nations. …”… read article here

The choice of currency and policies for an independent Scotland: A debate through the lenses of
different economic paradigms – by Alberto Paloni

This paper analyses three issues that are widely regarded as key policy decisions of an independent Scotland. The first is the choice of the exchange rate regime. The second is the policies that it may be necessary to adopt given that choice. The third is the characteristics of the transition period to an independent currency and its duration. The analysis, which is based only on economics theory, contrasts the standard orthodox approach to the Post Keynesian and Modern Money Theory frameworks. It shows that progressive policies can be underpinned by heterodox economics theory and, in particular, that the government in an independent Scotland can make choices that give it the policy space to pursue progressive domestic objectives. Whether these objectives are actually attained will naturally depend on the specific political circumstances at the time and on the government’s enlightened use of the available policy space, but this is outside the scope of the paper.

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