On 2011/05/09 09:10 AM, Max Sawicky wrote: > BDL's occasional screeds against selected Marxists are more of an > embarrassment to him than anyone else
http://delong.typepad.com/sdj/2009/02/department-of-huh-in-praise-of-neoclassical-economics-department.html Department of "Huh?": In Praise of Neoclassical Economics Why neoclassical economics is an absolutely wonderful thing: Exhibit 1: David Harvey: ...EXCERPT FROM HARVEY ON THE CRISIS... Ronald Reagan might say: under such a huge pile of *(@^ there must be an argument somewhere. I really have my doubts. After ten extremely dense paragraphs of--what can I call it? I can't call what David Harvey does pointless intellectual masturbation because what David Harvey does does not feel good at all--we finally come to the suggestion of a shadow of an argument: The problem for the United States... is... chronic indebtedness to the rest of the world... [which] poses an economic limitation upon the size of the extra deficit.... [T]he funding of any extra deficit is contingent upon the willingness of other powers... to lend. On both counts, the economic stimulus available to the United States will almost certainly be neither large enough nor sustained enough to be up to the task of reflating the economy... And we can see that here we have an internationalized version of Fama's Fallacy. If we forced Harvey to actually construct on argument here, he might be able to: he might say that deficit financing means that the U.S. government borrow from somewhere, that Americans don't have the savings to finance deficit spending, and that foreigners' willingness to buy U.S. Treasury bonds is tapped out because of massive borrowing earlier in this decade. And it is at this point that we draw on neoclassical economics to save us--specifically, John Hicks (1937), "Mr. Keynes and the Classics," the fons et origo of the neoclassical synthesis. Hicks's IS curve gives us a menu of combinations of levels of production and interest rates at which private investment spending and public deficit spending are financed out of the flow of savings. When the level of production is higher, private savings are higher--and thus the combination of private investent and deficit that can be financed is bigger. When the level of production is lower, private savings are lower--and thus the combination of private investment and deficit that can be financed is lower. Any level of deficit can be financed if the interest rate is such that the deficit plus the private investment spending equals the savings that come out of the incomes generated by the corresponding level of output. The question is thus not can government deficit spending be financed--for it can--the question is at what interest rate will financial markets finance that deficit spending. That then tells us what level of economic activity it will support. Harvey cannot say that the debt overhang means that the U.S. government cannot borrow. He must be saying that the debt overhang means that the U.S. government can only borrow at a very high interest rate that will crowd out private investment and household wealth-supported consumption spending and leave the level of production unaffected or little affected.[1] It could happen. Crowding-out is real. Is it likely to happen? Well, if it were going to happen we would have seen the interest rates on U.S. long-term government bonds spiking upwards to scarily-high levels as the stimulus bill moves through the congress and its chances of final passage grow. Did we? No. High long-term interest rates on U.S. Treasury bonds are simply not a concern right now: Path Finder The point is general. People who say that the stimulus won't work are relying--whether they know it or not--on one of two channels. Either they believe that resources are in short enough supply that increased nominal spending will not increase real spending because it will be eaten up by inflation, or they believe that financial markets are such that the increased supply of bonds produced by deficit spending will push bond prices down and interest rates up enough to crowd out exports and investment spending roughly dollar-for-dollar. Both of these claims are empirical claims. And both of them are completely without support in the present conjuncture. If we forced Harvey to turn his... um... into an argument we would see that the argument he would be making does not hold together. But, of course, we cannot say that Harvey's argument does not hold together because he does not make one. He doesn't understand Keynes, probably never read Hicks, does not understand Friedman, and I'm sure has never heard of Patinkin or Tobin or Modigliani. Yet somehow he thinks he has standing to make judgments as to the likely success of Keynesian policy moves. It is a great mystery. [1] Actually, Harvey can--and does--say any damned foolish thing he pleases. The proper form of the argument is: "if we assume that Harvey intends to make any sense, he must be attempting to say..." *** (Rebuttal from David: http://davidharvey.org/2009/02/exhibit-a-the-arrogance-of-the-neoclassical-economists/ ) The real mystery here is the arrogance of the economists in the face of a catastrophic situation. I would have thought that in a profession dominated by neoclassical and increasingly neoliberal theory these last thirty years, that there might have appeared at least some sliver of humility. They have collectively provided us with no guidance on how to avoid the current mess and now, when faced with a crisis, they can only say, as Marx long ago presciently noted, that things would not be so if the economy only performed according to their textbooks. Maybe it is time to revise if not change the textbooks. The charge that I have neither read nor understood DeLong’s canonical writings is the usual technocratic hubris deployed by economists when they have nothing to say. I might as well reply that DeLong has neither read nor understood his Marx (I have a remedial course on line) and in any case I don’t see why I should go back to Friedman rather than to Galbraith, Hicks rather than Joan Robinson and why it is that he presumes that Dobb, Sweezy, Glyn, Itoh and Morishima have nothing to say of relevance to our current difficulties because neoclassical economics is a God-given truth beyond contestation? I did once upon a time make the mistake of studying Sraffa somewhat carefully. His sophisticated mathematical proof (as yet never refuted, in spite of the best efforts of people like Peter Newman) that all of neoclassical theory is based on a tautology I found all too persuasive. Why bother with a theory that proves what it assumes to be true? At the heart of the controversy lies the question of how to value capital assets independently of market prices and since our contemporary difficulties rest on the problem of how to value paper claims to capital assets held by banks in the absence of a market, I would have thought some re-visitation of the so-called “capital controversy” of the 1970s is in order. At the time I concluded (possibly erroneously) that Joan Robinson had the better of the argument against Samuelson but that the Cambridge (Mass) neoclassicals then merely decided to ignore the problem and go on with their theorizing as if nothing had happened. But now look at the mess! Of course, when theory is not invoked then a bit of casual empiricism about the current low and seemingly stable rate of return on long-term treasuries is thrown into the hopper as proof of my economic ignorance. I did tacitly address the problem of what happens down the road if the Chinese and other Asian countries turn inwards and find better things to do with their money than lend to the United States. A run on the dollar would indeed imply some of the dire consequences that DeLong outlines and the question then arises as to the likelihood of that. The United States has the power of seigneurage over the world’s reserve currency and is using that power up to the hilt right now and the rest of the world has little choice except to go along. The last time the US did this in the late 1960s, to fund a war and to deal with domestic unrest, this led to collapse of the Bretton Woods system and the grand stagflation of the 1970s. I am not saying this history will be repeated but I do want to emphasize that short-run moves have longer-term consequences (well before that long term in which “we are all dead” as Keynes famously remarked). What I was concerned about, a topic which DeLong totally ignores, is the likely uneven geographical impacts and responses to the crisis conditions and the degree to which this accelerates the scenario depicted in the NIC report. The export oriented development model that has dominated in East Asia is in deep trouble. Exports are falling dramatically and unemployment rates are soaring in South Korea, Taiwan, Indonesia and China and the likelihood of massive movements of class struggle (a category that neoclassicals will have nothing to do with but which has been demonstrably and empirically of huge historical importance even in the United States) is very much on the cards. Maoist movements are rife in India, the unrest throughout Latin America is promoting all manner of political adjustments and reports of widespread unrest in China are proliferating. If the Chinese and other East Asian powers find themselves forced to abandon the Export-Industrialization model (which is now failing catastrophically) and to go to something like an Import-Substitution strategy (which was by no means as unsuccessful as it is usually depicted when practiced in the 1960s in Latin America) and a development of their internal markets (almost certainly coupled with internal repression of dissidence), then they will not have the money to lend to the US. The track of long-term treasury interest rates may go the way of the housing market data in just a couple of years (if not months). My main point about the current US stimulus package is that it is too small to do the job (I am surely not alone in saying that) and that it is poorly targeted towards tax cuts rather than real stimuli for political and ideological reasons. The distinction between white elephants and real stimuli is also important and unless coupled with a real strategy (e.g. a radical transformation in urbanization patterns and ways of life) the stimuli will merely cover deferred maintenance on infrastructures rather than point to anything new. The result is a policy blockage that prevents the US from taking advantage of what may be a brief window of continued financial hegemony to bring its own economy around. I am not the only one to say our situation is all too reminiscent of Japan in the 1990s. But in our case we cannot afford a lost decade precisely because the rest of the world is bound to adjust rapidly in ways that are unlikely to be advantageous to the United States. An internal Keynesian project is far more feasible in China but this then entails a radical re-orientation of the Chinese economy towards the rest of the world. To this must be added that a turn to protectionism is politically very much on the cards. Even some economists now recognize that the Ricardian doctrine of comparative advantage does not work and that gains from free trade are inevitably asymmetrical. Theoretically and politically the attempt of states to protect themselves at the expense of others becomes more likely. The break up of global capitalism into competing and warring factions is entirely possible and while the horrible history of the 1930s won’t necessarily be repeated either, we should at least be cognizant of the dangers. I may not be an expert neoclassical economist but I am a first rate student of geopolitics and geoeconomics, fields of study totally foreign, apparently to DeLong. These are dangerous times and I would have thought the definition of fair and unbiased to which DeLong subscribes might go somewhat further than that given by Bill O’Reilly. What is needed is generous critique, the taking of whatever is positive in competing accounts and a real struggle to come to terms with ways we might better proceed. It will be hard enough to save capitalism from the capitalists but the real tragedy here is that the real message from DeLong’s commentary is that we need also to save capitalism from the economists. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
