Akerlof agrees

And now just after writing the below, I find myself reading George Akerlof's 2006 AEA presidential address, where he argues, more or less, that the whole problem with modern macroeconomics is the assumption that only economic arguments enter into utility functions. Bring in norms, and it's goodbye to the permanent income hypothesis, Modigliani-Miller, Ricardian equivalence, and the rest of it, and back to where positive, empirical, pluralistic macro left off in the '70s.

(The problem of preferences that include non-economic arguments is also the subject of Amrtya Sen's article The Impossibility of a Paretian Liberal, which John Holbo so catastrophically misunderstood last year.)

Different angle of approach, same destination, seems to me.

Why do recessions matter?

There’s a tendency, and not only among economists, to describe the costs of downturns like the Great Recession in terms of foregone output. (It’s Okun gaps versus Harberger triangles.) And as far as it goes, it’s true. Less coffee and clothes and cars are being produced than would be, if the Lords of Finance hadn’t crashed the economy. But if, as this kind of talk implicitly assumes, the effect of economic life on wellbeing were just through the quantity of goods and services available – if the recession were a problem mainly for car consumers rather than car producers, coffee drinkers rather than coffee growers – it’s hard to see why anyone would care. So the US GDP fell in 2009 – all the way back to its level in 2006. Were we miserable then? This, by the way, was the point of Robert Lucas' notorious 2003 AEA presidential address, where he claimed that the problem of macroeconomics was solved. He didn’t mean there were no more recessions, just that they didn’t matter since their magnitude was small compared with long-term growth – which, as far as measured output goes, is true, and of the Great Recession too. If he was wrong, his liberal critics are wrong as well.

The tendency to reduce economic questions to the aggregate output of goods and services (plus perhaps the quantity of labor input, as a cost) isn’t limited to recessions. You can find the same thing in the also right-as-far-as-it-goes Stern Review on global warming. Tote up the costs in foregone output of climate change, tote up the costs of doing something about it, and compare to see if burning up the planet is a good idea, or not. The problem is, even the upper range of the costs -- 14 percent of world GDP -- is equivalent to just a few years' economic growth. So, again, who cares? I wonder if anyone has tried to do a similar analysis for World War II. They’d no doubt find that policymakers in the 30s should have been indifferent between averting the war, and increasing long-term growth by two or three tenths of a percent.

It’s tempting – to progressives too – to talk as though there’s a single score to measure economic outcomes. But no, this approach won’t do. Recessions are not important (just; really, hardly at all) because of output foregone. Unemployment is not just a reduction in your lifetime income. Indeed, for rich countries especially, long-term growth in output and income is not even a well-defined quantity. The main cost of unemployment is not the goods the unemployed workers aren’t producing. Indeed, as Keynes (and others) pointed out long ago, for many of the unemployed the disutility of labor is negative – there’s a net gain paying people to work, even if they produce nothing.

The real cost of unemployment is the unemployment itself. In part, this is about the loss of income – not the small reduction in aggregate lifetime income, but the large reduction in current income for those whose lose their jobs. The proportion of people without secure access to food, housing and other necessities is a much better measure of the economic costs of recession than the fall in GDP. But even this is the smaller part of the cost of unemployment. The most important thing about work, under capitalism, isn’t that it produces goods and provides an income, but that it is the carrier of self-worth, status and social power. For most of us, our work is our main bond with society at large; surveys agree with practical experience that losing a job is among the more important events in peoples’ lives. ("Individuals in the British Household Panel Survey commonly report employment-related events as major life events but none report that one of the most important things that happened to them in the past year is that they stopped shopping at Sainsburys and started going to Tescos.") Persistent unemployment breaks social bonds, with profound effects that don’t show up in the aggregates.

We all know people who’ve been out of work for a while. Even if they are in no danger of hunger or homelessness, it’s corrosive. The get depressed; they stop socializing; they describe themselves as failures. I’ve just been reading a bit about unemployment in the 1930s. Here’s what happened in Marienthal, an Austrian village where the majority of the population became unemployed after town’s major employer, a textile factory, shut down in 1930:

Isolation was deepened by a decline in newspaper subscriptions. Subscriptions to the Social Democratic paper, which contained intellectual discussions as well as news, dropped by 60 percent. This was not entirely a matter of money, because the paper had a cheaper subscription rate for unemployed workers… Politics, like other leisure activities, should have benefited from the increased availability of time. But this advantage was heavily outweighed by an increase in apathy that reduced all forms of recreational activity. Library usage also declined; both the number of borrowers and the number of books checked out by each borrower fell. … One striking aspect of this lethargy was the fate of a park that had become a focal point of village life. In more prosperous times, villagers sat on its benches and walked on its paths on Sundays, and the grass and shrubs were neatly tended. In the depression, despite the increase in leisure time, the park fell rapidly into disuse and disrepair.

Or again, the testimony of an unemployed worker in 1930s London: “You feel like you’re no good, if you know what I mean. … It isn’t the hard work of tramping about so much, although that is bad enough. It’s the hopelessness of every step you take when you go in search of a job you know isn’t there.”

We’re already seeing some of this today. If unemployment stays near 10 percent for years, as, absent a change in policy, it likely will, we’ll see much more. We'll see a wide swathe of people cut off from the world, apathetic and discouraged, with no recognized place in society. We'll see increasing stress on families and neighborhoods as they have to take up the role of an overstretched safety net. And quite possibly, if it goes on long enough, we'll see a turn away from democracy. These are profound social changes that have only a tenuous connection with how long it takes GDP to return to trend.

We should remember, at least, what the classic political thinkers knew, what Hannah Arendt knew, when she wrote that "a competition between America and Russia with regard to production and standards of living ... may be very interesting in many respects... There is only one question this outcome, whatever it may be, will never be able to decide, and that is which form of government is better." Once past a threshold of sufficiency (which we have long passed) aggregate output and income have nothing to do with the good life. What matters is freedom and dignity, our chances to develop our inner capacities and our relationships with those around us. And that’s what mass unemployment erodes.

The King Street puzzle

Ever since I moved back to Northampton, I've been baffled by how sharply bounded the urban part of this town is. Downtown there's a few blocks of dense, busy, pedestrian-friendly, expensive and, ok (I've come to terms with my bougieness) charming and enjoyable city streets, all solid three and four-story mixed-use brick buildings and sidewalks that, on a warm summer weekend, can't accommodate the crowds. And then turn down King St., and you're looking at parking lots, gas stations, empty lots, fast food places, more empty parking lots, and no one on the sidewalk at all.

There's got to be a reason for this.

So why doesn't Northampton's successful downtown grow? It can't be that unused parking is the highest and best use of land two blocks from one of the most successful commercial districts in Western Mass. As Atrios regularly and, rightly points out, land-use rules mostly make small-town downtowns like Northampton's illegal to build today. But what are the specific legal obstacles here? Parking requirements? Zoning that prohibits mixed use? Floor-area ratio limits? People love downtown Northampton. Business loves downtown Northampton. Why can't we have more downtown?

Turns out I'm not the only one wondering. Here is a proposal from the Northampton Chamber of Commerce to revise the zoning code for King St. And it looks like a step, if a small step, in the right direction.

For the Central Business Zone (which runs up to Trumbull St., for local folks), the Chamber wants to remove parking requirements; allow mixed uses by right; increase maximum building height from 55' to 65'; eliminate the 5% open space requirement; and eliminate the minimum rear setback. All of this seems right.

Hard to say how important these specific regulations are in inhibiting dense urban development on King St. To be honest, as soon as one starts exploring this stuff in any detail, it's hard not to be struck by how brutally complicated it all is. But the Chamber is clearly pulling in the right direction, which I suspect would not have been the case not that many years ago. The interesting question, now, will be who pulls the other way.

Dumenil on Marx

[This past Febuary, a few of us were lucky enough to take part in a discussion of the structure of Capital led by Gerard Dumenil. I just unearthed my notes; for the sake of posterity, here they are.]

Marx’s method

Marx moves from the concrete, to the abstract, and back to concrete. Concrete reality is unitary, but concepts are necessarily partial. So the definitions of particualr concepts don’t matter except insofar as they form part of a particular science.

Marx’s work contains several, at least partially independent systems of concepts. So for instance alienation is not part of the system of concepts, or science, constituted by value, capital, profit, etc.

Capital begins with the commondity, builds via money to value, and then builds to capital.

The error of idealism is to confuse the production of theoory with the exposition of theory; the latter builds up logicallly from the simplest concepts, while the former cannot. Exposition can follow a deductive method, but the original development of theory cannot.

The three volumes of Capital

Volume I is of course finished, Volume II is also largely finished, but Volume III is not.

Capital is value in a movement of self-expansion. It is necessary, but basically indeterminate, to give one of these eleements priority in exposition.

The commodity is the unity of use- and exchange-value, or of utility and value.

Volume II is accounting. Volume I is explaining the class anture of capital. That’s why Marx begins with the self-expansion of capital, rather than the movement (circuit) of capital, even though either is equally acceptable logically.

In a sense Volume I is all about unemployment. But it’s just as much about exploitation, and about technical-organizational change. It ends with primitive accumulation for political rather than scientific reasons – he wants to conclude with a topic that allows for a harsh condemnation of capitalism.

Volume II then is the “movement” part of value in movement of self-expansion. Each “atom” of value moves through various forms, from money, to commodity, to the productive process, to different commodities, back to money – the familiar M-C-P-C’-M’. Volume II is really providing a form of accounting: the distribution of value among its various forms is like the asset side of a balance sheet.

Together the discussion of circulation and the reproduction schemes articualt both aspects – movement and self-expansion. The reproduction schemes imagine all the circuits taking place together, in sync. The three sectors – I, constant capital; II, wage goods; and III, luxuries – correspond to the three forms of valorization – c, v and s. (Marx recognized the concept of national income before it was widely understood.)

In Volume III the different conponents that have been described separately are integrated into a picture of the cpitalist process as a whole. Marx is no longer discussing basic concepts, but mechanisms. In some sense, the section on the Law of Capitalist Accumulation could better have gone here.

Now we no longer assume prices are proportional to values, but introduce prices of production. (Probably not the best name to have used.) The mechanism governing prices of production is that excess supply of a good produces lower prices in the short run; lower output (Marx doesn’t emphasize this, but it is key); and less investment in that industry. In the long run, as this process equalizes profit rates across industries, market prices come into line with prices of production.

Crises

Marx’s theory of crises does not rely on disproportions, in fact he criticizes Ricardo for his focus on them. There really is no theory of short-run crises in Marx.

(The Labor Theory of Value: What happens with long-run prices that are not proportionate to values? Marx should not have spoken of the “transformation” of values into prices.)

The tendency of the Rate of Profit to Fall is fundamentally about the character of innovations – capital-saving innovations are rare. Increased competition is the result, not the cause, of the falling rate of profit. (Here we are at the limits of Marx’s analysis.) Historically there have been two main periods of declining profits, the late 19^th century and the 1970s. The profit squeeze is part of the story of the 1970s fall – maybe one-third. An explanation based on intensified international competition, as in Brenner, is absolute bullshit. [Dumenil’s words.]

Finance

Only industrial capital makes the full circuit described above. Commercial capital is limited to the “commodity-handling” and “money-handling” parts of the circuit. All labor in these circuits is unproductive labor. Cases like transportation are tricky and can be placed in either circuit.

Interest-bearing capital: this embodies the division between active and inactive capitalists. If the analysis in Volume II corresponds to the asset side of a balance sheet, the analysis of interest-bearing capital corresponds to the liability side, that is, how capital comes into the firm, how the firm is financed. (In Marx’s terms interest-bearing capital includes shares as well as debt.) The active capitalist has the chracter of an owner but also of a worker, pays self a wage. Eventually the active capitalist disappears and is replaced by a salaried manager: this was a very prescient observation by Marx.

Banking capital: Banks become adminstrators of interest-bearing capital, while remaining one of the main embodiments of commercial capital. So financial institutions have two aspects: on the one hand, they carry out a specific commercial function, but on the other they are the representatives of the capoitalist class in general.

Fictitious capital: This is not value in the movement of self-expansion. All interest-bearing capital is fictitious. Securities issued by corporations are “less fictitious” since they finance productive capital, but they are still not capital, because (1) that would be double-counting [with the productive capital they finance], and (2) their value may fluctuate independently. In any case, we should not fetishize the concept of fictitious capital.

The question of how much of the income of the financial sector comes through fictious capital is superficial. Remember, banks are partly one industry among others, but partly the carriers of the status and claims of the capitalist class as a whole. (Over time capital ownership is becoming more collective.) Big financial institutions are the police of capitalism, enforcing capitalist logic on the management of firms. If the capitalist class loses control of finance, it loses control of the productive process.

Consider the highest-income 0.1% of the population [in the United States], with incomes of at least $2 million per year. Half of their income takes the form of wages. (Not e however that a larger fraction of capital income than wage income is probably hidden, so the real share of wages may be smaller.) It is as if some part of claims on profits are shifting away from traditional forms of interest-bearing capital, and toward positions within financial institutions. But it is not as simple as saying that the highest wages are really profits or rents. The important point isn’t simply that wages are high, but that they come from control over production.

Those who get the most “profit-like” wage income as executive salaries, bonuses, etc., are in the same families that own financial assets – the relationship [between the financial and “traditional” parts of the capitalist class] is now a love affair, not a conflict.

The 1970s saw a revolt of the money capitalists, with new discipline imposed on managers, using the language of corproate governance, “shareholder value,” etc. This was very successful – of course top managers were happy to go along in the US. Managers in Europe and Japan were more reluctant. So in the US all those ideas of managerialism, “soulful corporation,” and so on, seemed to disappear. But this shift did not really extend to the inner workings of the firm – production is organized more than ever by professional managers. The difference is that managers no longer think of themselves as standing between owners and the popular classes. This earlier conception had been the result of a history of class struggle.

The business cycle

Marx’s theory of the business cycle is not found in any one section or chapter. It’s not a theory of disproportion, of the misallocation of capital between sectors.

In Marx, a recession is a sudden contraction of activity. There are five phases of the cycle; one is overproduction, which requires a definition of “over” – relative to what? In Volume III, overproduction is over with respect to the supply of labor. This is what produces a short-run fall in the profit rate. In general, there are two short-term mechanisms producing recessions: wages and interest rates. One or both rises in expansions and encroaches on profits. This produces contractions, although how is not explicit in Marx.

The phrase that the “ultimate ground of crises is the restricted consumption of the masses” sounds like a story of insufficient aggregate demand. But this is not what marx has in mind. As he says in Volume II, wages usually peak just before a crash.

Marx supposes the typical cycle to be ten years long, but this is a vague gneeralization without any sophisticated reasoning behind it. This may be connected to technological factors, but the idea that a lack of real investment opportunities leads to excessive financial investment is total bullshit. [Again, GD’s phrase.]

Stability and instability

Volume III has a clear story about competition: If profits are higher in one sector, there will be investment there; if the output of a sector can’t be sold, prices will be cut. This can be modeled. It is difficult, but not impossible, to produce Marx’s results. Stability requires some reaction to imbalances, but not too much.

The second question, is what determines the overall size of the economy?

Imbalances between supply and demand in the goods market are dealt with by quantity (as well as price) adjustments. This “direct control of quantities” is present in Ricardo and of course Keynes but not Marx. Control of quantities makes it easier to get convergence in the model.

The overall size of the economy is determined by the supply of credit. Credit creation is procyclical but the money supply is counercyclical.

(Kalecki’s model needs a credit mechanism to allow investment to vary independently. It doesn’t have it – Kalecki never considered money.)

We [D&L, not Marx] speak of proportions and dimensions. Proportion is investment abd relative prices between industries. Dimension is the overall size of the economy, the growth path. To model capitalism, we need to have stability of proportion and instability of dimension. Capitalism remains at the frontier of stability of dimension.

(The price mechanism is slower than the quantity mechanism.)

Inventories grow – if the quantity adjustment is too large there is an increase in inventories elsewhere that ouweighs the decrease at the first firm. The short-run dynamics are somewhat Keynesian. The development of the credit system creates the possibility of greater instability of dimension. This in turn invites more active control by the authorities.

Take a simple two-factor model. Innovation is local – new technologies are similar to old ones. Innovation is random in the neighborhood of existing technologies. If an innovation raises the profit rate, it is adopted. In addition, Marx believes it is easier to innovate by raising the proportion of capital – technological change is biased in a capital-using direction.

Hortatory

You need to understand mechanisms.

You need a global perspective. You need to know history. You need to be an activist. We absolutely need to get rid of the capitalist classes. You need to get some political culture. Don’t become stupid writing a dissertation.

Do not attempt to derive concrete developments from abstract laws of value. Do not fall into idealism. If you’ve only read Capital you know nothing about the contemporary crisis.

You need to explain what’s going on. This is not the end of history. Your research agenda will be determined by what happens next.

Still, there are some principles: We live in a class society, classes are not going to disappear tomorrow. The basic marxist framework is not absolute, it may evolve, but it still applies.

When you are told that your dissertation is too broad, listen with only one ear.