Introducing a New Economics

Alfred Marshall wrote in his Principles of Economics that “economic conditions are constantly changing, and each generation looks at its own problems in its own way” (1920, p. v.). Our generation is confronted with many problems including climate change, environmental damage, disruptive innovations, inequality, indebtedness, youth unemployment, besides a health care crisis. At the center of these problems, however, is the discipline of economics itself and economics education.

 

The mathematization of economics was done in the name of science, but in doing so, the mainstream of the academic community has renounced its claim to studying the actual economy. In this respect, it is worth remembering  Keynes’ critique of  the behaviour of pofessional economists at his time since his words are more valuable  than ever,

For professional economists…were apparently unmoved by the lack of correspondence between the results of their theory and the facts of observation;– a discrepancy which the ordinary man has not failed to observe, with the result of his growing unwillingness to accord to economists that measure of respect which he gives to other…scientists whose theoretical results are confirmed by observation when they are applied to the facts (Keynes, 1936, The General Theory of Employment)

Since the French students’ petition in 2001, several books have been written on how to teach pluralist economics, including John Groenewegen’s Teaching Pluralism in Economics (2007); Edward Fullbrook’s Pluralist Economics (2009); Jack Reardon’s Handbook of Pluralist Economics Education (2009),  and the WEA Conference book The economics curriculum: towards a radical reformulation (2014), among other relevant contributions.  To spread the discussion on how to implement pluralism in the classroom,  the International Journal of Pluralism and Economics Education  and the WEA Pedagogy Blog have been launched. And several global organizations- the Association of Heterodox Economics and the International Confederation of Associations for Pluralism in Economics, for example, have emphasized the need for pluralism.

 

Considering this background, the publication of  Introducing a New Economics: Pluralist, Sustainable & Progressive (Pluto Press, 2017) is welcome.

The authors  – Jack Reardon, Maria Alejandra Madi and Molly S. Catto – demand that the real world should be brought back into the classroom in order to most effectively confront current crises. Indeed, with a firm commitment to theoretical, methodological, and disciplinary pluralism, the authors challenge the institutional education hegemony head on. They believe that economics must play a central role in not only conceptualizing the problems of our generation but also in articulating solutions.

The textbook  Introducing a New Economics calls for a rejection of  the narrow curricula and the lack of intellectual diversity that characterize mainstream economics. The authors believe that economics must be re-conceptualized to focus on three elements:

• One, economics must comport with sustainability. As they explain in the text, many definitions of sustainability exist, nevertheless, a central element uniting the disparate definitions is an ethical concern for the future.
• Second, economics must become pluralist, which along with sustainability is another multi-faceted and complex word. Pluralism -understood as respect for different and opposing views- is necessary since there are myriad ways of conceptualizing problems and no one view has a monopoly of understanding.
• Third, economics must concern itself with justice. Our future is uncertain which requires an economics education that is open-minded and help students to conceptualize and design a more equitable economic system that can provision for all.

 

Visit Pluto Press webiste https://www.plutobooks.com/9780745334882/introducing-a-new-economics/

Advertisements

10th Anniversary of the Bearn Stearns collapse

Ten years ago, the collapse of the investment bank Bear Stearns marked a prelude of the 2008 global financial crisis. Founded in 1923, it became one of the world’s largest investment banks and its stock market capitalization was $20 billion in 2007. Extremely active in the hedge fund business, the funds High-Grade Structured-Credit Strategies Fund and Enhanced Leverage Fund owned $20 billion in collateralized debt obligations as of 2006. These derivatives, based on mortgage-backed securities, started losing value in September 2006 since housing prices began to fall.

In January 2008, Moody’s downgraded Bear Stearns’ mortgage-backed securities and this event put pressure on the bank’s  liquidity management. In March 2008, the Federal Reserve held its first emergency weekend meeting in 30 years and finally lent up to $30 billion to Chase to purchase Bear Stearns in order to avoid that the bankruptcy of other over-leveraged investment banks, such as Merrill Lynch and Lehman Brothers (Amadeo, 2018).

After Septmeber 2008, the financial crisis acquired a manifold character involving the socio-economic structures at worldwide level. Although the crisis was triggered in the financial sector, it marked the culmination of a long-term trend of financialisation of the economic system (Herman and Madi, 2018).

Throughout the last forty years, most governments around the world supported the long-run process of neo-liberal reforms that turned out to be characterised by the financialisation of the capitalist economy. In this historical scenario, monopoly-finance capital became increasingly dependent on bubbles that, both in credit and capital markets, proved to be globally the sources of endogenous financial fragility. This process was reinforced, in a vicious circle, by a distribution of income, wealth and power. By negatively influencing labor and working conditions, it rendered increasingly difficult for effective demand to reach (or even approach) the level of full employment. In response to this situation, banking and credit policies also supported by governments and supranational institutions were inducing consumers to expand their spending.

While public spending on social and infrastructural objectives was severely restricted, it expanded for sustaining the income and the demand of powerful groups. In this situation, corporate decision making was increasingly subordinated to speculative financial commitments. A financial conception of investment gained ground in the context where financial innovations aimed to achieve short-term profits with lower capital requirements. Managers and owners of firms privileged financial gains often based on speculative shifts of shareholder values. Changes in corporate ownership, through waves of mergers and acquisitions, created new business models where companies, while highly powerful and concentrated, turned out to be simply bundles of financial assets and liabilities to be traded. Hence, current corporate governance came to have the privilege of mobility, liquidity and short-term profits based on high levels of debt.

In the new millenium, a trend of high expansion of financial assets, while economic growth remains limited and sporadic, gave way to widespread unemployment, income gaps and less welfare. The same policies that obliterated social services and kept labor cheap favoured global enterprises and financial deepening. Besides, the onset of the new millennium represents a new age of democracy where democracy allows for election to office but not to power. These questions reflect on issues of current power, politics and economics in a social context where democratic institutions are being threatened (Madi, 2015).

Indeed, in contemporary capitalist societies, the global financial architecture favoured the expansion of financial assets, capital mobility and short-term investment decisions – increasingly subordinated to rules of portfolio risk management. In this scenario, changes in productive organisation were based on competitiveness and corporate governance criteria. Therefore, job instability and fragile conditions of social protection turned out to put pressure on the redefinition of survival strategies. As a result of the new trends in capital accumulation and production, workers turned out to redefine their skills, become informal entrepreneurs or migrate, among other examples of the current worldwide challenges to citizens. Considering this background, governments faced increasing challenges to support an ethically defensible approach to working conditions. While money is an end in itself social behaviours have mainly turned out to be guided by the profit motive. Consequently, social cohesion was reduced since groups of specific interests turned out to spread their actions and expectations in ways that are desirable to the interest group. Indeed, the outstanding conflicts between solidarity and particular interests revealed growing tensions between ethical values and individual principles in capitalist societies.

This situation poses a major challenge to economic theory and policy action. In fact, after ten years from the 2008, it is evident by now that not much changed in the “mainstream way” of addressing the economic crisis. The prevalent tendency has been to conceive the crisis as caused by an excess of imprudent speculation, with little questioning of the economic and institutional “fundaments” that paved the way to that course of events. Consequently, the policies addressing the crisis rarely went beyond short-term proposals. Indeed, the policy measures have been far from still solving the structural aspects of the crisis.

In the next decade: will a new reality of disruptive innovations in business and markets create higher levels of inequality within and among nations? Will massive investments in green technology lead the world toward a cleaner future? How can we assess the model of governance and development of China?

In short, how will we look back on 2018 a decade from now?

 

References

Amadeo, K. (2018) Bearn Stearns, Its Collapse, and Bailout. How a Bank That Survived the Depression Started the Great Recession, March 14. https://www.thebalance.com/bearn-stearns-collapse-and-bailout-3305613

Arestis, P. and Sawyer, M. (eds.) (2010) 21st Century Keynesian Economics. Annual Edition of International Papers in Political Economy. Houndmills, Basingstoke: Palgrave Macmillan.

Davidson, P. (2009) The Keynes Solution: The Path to Global Economic Prosperity. Basingstoke: Palgrave Macmillan.

Foster, W.T. and Catchings, W. (1926) The Dilemma of Thrift. Pollak Foundation for Economic Research.

Galbraith, J.K. (1958) The Affluent Society. New York: Mariner Books, second edition 1998.

Hansen, Alvin H. (1939), “Economic Progress and Declining Population Growth”, American Economic Review, 29(1): 1-15.

Harcourt, G. and Kriesler, P. (eds.) (2013) The Oxford Handbook of Post Keynesian Economics. Oxford: Oxford University Press.

Hermann, A. (2014a) “The Essays in Persuasion of John Maynard Keynes and Their Relevance for the Economic Problems of Today”. In Hölscher, J. and Klaes, M. (eds.) Keynes’s Economic Consequences of the Peace: A Reappraisal. London: Pickering and Chatto.

Hermann, A. (2015) The Systemic Nature of the Economic Crisis: The Perspectives of Heterodox Economics and Psychoanalysis. London and New York: Routledge.

Elinor Ostrom: Only Woman to Win Nobel Prize in Economics

Elinor Ostrom was born in the year of 1933 in California, United States. Almost tem years after getting her doctorate in Political Science (University of California), she became professor at the Indiana University Department of Political Science in 1974. Over her long academic career, her activities included extensive field experiences in underdeveloped countries and active participation in many professional associations, such as the American Political Science Association. She was awarded 12 honorary doctorates from universities around the world and three years before her death Elinor Ostrom and Oliver E. Williamson won the 2009 Nobel Prize in Economic Sciences. She was the only woman ever to win the Nobel  Prize in Economics.

Her approach to social and ecological systems highlights the complexity of natural and human systems. In her famous book, Governing the Commons: The Evolution of Institutions for Collective Action (1990), Elinor Ostrom focused on the capacity of people around the globe to create long-run resilient arrangements for protecting environmental resources. In particular, she studied how groups of people manage and preserve common-pool resources such as forests and water supplies. However, collective actions have not inevitably emerged in all groups of people. Ostrom defined common or common-pool resources as public goods with finite benefits. Therefore, common-pool resources can be potentially used beyond the limits of sustainability because of the lack of exclusion of users. This creates an incentive for increasing the rate of use of this resource above its physical or biological renewal. Besides, her research pointed out that common property is a kind of institutional arrangement that regulates ownership and responsibility.

Considering this framework, Ostrom developed a theoretical approach to the management of common-pool resources at local and global levels where polycentric systems of governance refer to build collective-actions. In this respect, she considered there is not one ideal governance regime, but a variety of regimes of governance that might include: rules of appropriation of  resources, rules of maintenance of resources, rules of monitoring and enforcement of the appropriation and obligation activities, rules for of conflict resolution,  besides the evaluation of the performance of the resource system and the strategies of participants to change previous rules. Indeed, the users of common-pool resource can work together to enhance the  sustainable governance of  their commons by collective action. Indeed, under her view, successful commons’ self-governance institutional arrangements depend on: the coherence between the resource environment and its self-government structure, the enforcement of rules through effective monitoring and sanctions, and the adoption of low-cost conflict resolution mechanisms.

According to Ostrom, adaptive governance is related to changing rules and enforcement mechanisms over time since institutional arrangements are able to cope with human and natural complex systems. As a result, citizens, governments, businessmen, and resource users  might deal with collective-action problems in diferente ways at diverse scales. When considering the relations between urban public policies and the commons, her latest works highlighted the challenges to collective-action in metropolitan areas where  citizens can less effectively articulate preferences, define problems and choice packages of urban public goods and services. Under her understading, the competition for contracts in urban goods and services might foster technological innovations and social co-production to find out new ways to face the social and environmental needs.

Indeed, Elinor Ostrom´s contribution adds to our understanding how collective actions and polycentric arrangements of governance  can influence economic outcomes, human behaviours  and institutions towards growing resilience and sustainability. In this attempt, she crossed traditional boundaries between political science and economics.

 

References.

Madi, M. A. ( 2017) Puralist Readings in Economics: key-concepts and policy tools for the 21st century. Bentham Publishers.

Engaging and debating monetary policy ideas at the WEA Discussion Forum

The WEA Online Conferences, designed by Edward Fullbrook and Grazia Ietto-Gillies, makes full use of the digital technologies in the pursuit of the commitments included in the World Economics Association Manifesto: plurality, reality and relevance, diversity, openness and ethical conduct.

The current WEA Conference Monetary Policy after the Global Crisis marks the tenth anniversary of the greatest recession after 1929-33. The aims of this conference include discussing key theoretical insights in order:

• To provide a framework for improving monetary policy practices.
• To review and advance knowledge on the recent financial crisis regarding the main challenges and prospects of central banking.
• To particularly survey and discuss the use of Divisia monetary aggregates and their potential role to address central bank challenges economic vulnerabilities.

Therefore, our main goal is to establish a global forum for confronting of the opposite views about

• the causes and consequences of the Great Crisis.
• the current challenges to central banking.
• the role of proper money aggregation in preventing of the future economic slowdowns.

In sum, the conference aims to survey and discuss the recent theoretical advances in monetary tools, goals and policies, along with the latest empirical research findings.  Indeed, this Conference will be one of the first which, in an extensive manner, tackles the problem of monetary aggregation after the Great crisis.

The WEA Online Conferences seek to also engage readers and commentators all around the world considering: (a) the variety of theoretical perspectives; (b) the range of human activities and issues which fall within the broad domain of economics; and (c) the study of the world’s diverse economies; (d) the increasing relevance of the adoption and use of online discussion forums.

Students, academics and professionals who are interested in  policy challenges can read the Key-note papers of Daniel L. Thornton, Rakesh Bissoondeeal and Jane Binner in addition to other interesting contributions organized in the following Conference Sessions:

• Divisia Monetary Aggregates and Contemporary Monetary Challenges
• Divisia Monetary Aggregates: Prospects and Future Research Potential
• Finance and Growth: Changes and Transformation

To visit the Discussion Forum works, click  http://monetarypolicy2018.weaconferences.net/papers/. 

Please first  register  to this OPEN ACCESS Conference in order to get your e-certificate!

http://monetarypolicy2018.weaconferences.net/register/

 The Discussion Forum closes on  March 15th. During the following weeks, we cordially invite you to visit the conference’s website, where you can read and download the conference papers, leave comments, and engage in discussion.

 

Keynes and econometrics

After the 1920s, the theoretical and methodological approach to economics deeply changed. Based on a criticism of Marshall’s work and legacy, a new generation of American and European economists developed Walras’ and Pareto’s mathematical economics. As a result of this trend, the Econometric Society was founded in 1930.

The constitutional assembly was held in  Cleveland, Ohio, during the annual joint meeting of the American Economic Association and the American Statistical Association. The Norwegian economist Ragnar Frisch played an important role in the Econometric Society that was founded to enhance studies based on the theoretical-quantitative and the empirical-quantitative approach to economic problems. In this way, the  founding fathers believed that  economic thinking could be as rigorous as the one that dominates the natural sciences.

At the 5th European Meeting of the Econometric Society, in 1935, Jan Tinbergen presented a paper on ‘A mathematical theory of business cycle policy’ that followed the Econometric Society’s guidelines. His causal explanation of the business cycle began with a priori economic-theoretical considerations about explanatory variables and then he proceeded to test a model.

In the late 1930s, John Maynard Keynes and other economists objected to this recent “mathematizing” approach. Keynes, as editor of the Economic Journal, wrote  a negative review of Tinbergen’s 1939 book A Method and its Application to Investment Activity. This book  presented an statistical testing of business cycle theories based on the application of the method of  multiple regression and  mathematical framing in the form of a specified model. At the core of Keynes’ concern lied the question of methodology. Recalling his own words:

Am I right in thinking that the method of multiple correlation analysis essentially depends on the economist having furnished, not merely a list of the significant causes, which is correct so far as it goes, but a complete list? For example, suppose three factors are taken into account, it is not enough that these should be in fact veræ causæ; there must be no other significant factor. If there is a further factor, not taken account of, then the method is not able to discover the relative quantitative importance of the first three. If so, this means that the method is only applicable where the economist is able to provide beforehand a correct and indubitably complete analysis of the significant factors. The method is one neither of discovery nor of criticism. It is a means of giving quantitative precision to what, in qualitative terms, we know already as the result of a complete theoretical analysis. (Keynes 1939: 560)

In this paragraph, it is clear that Keynes doubted the use of inductive methods of generalization and statistiicial inference to build economic theories because of the peculiarity of the economic systems characterized by:

• a low degree of homogeneity,
• a high degree of complexity
• the lack of stability through time.

Indeed, on behalf of the peculiarities of the economic systems, Keynes highlighted that econometrics turns out to be a method not of testing or of discovery, but of measurement of selected variables.

 

refeences

Keynes, J. M.,  Professor Tinbergen’s Method, The Economic Journal, Vol. 49, No. 195 (Sep., 1939), pp. 558-577. Published by: Blackwell Publishing for the Royal Economic Society. Stable URL: http://www.jstor.org/stable/2224838

Tinbergen, J. A Method and its Application to Investment Activity. Geneva: League of Nations, 1939.

Disruptive Technologies and Sustaintech Investments

On a global level, to achieve the 2˚C agreed upon during the Paris Agreement, a decrease in emissions of 40-70 percent (relative to 2010) should be obtained by 2050. According to Bloomberg New Energy Finance, 2017 global green investments exceeded 2016´s total of $287.5 billion. With strong government policy support, China has experienced a rapid increase in sustainable investments over the past several years and nowadays this country is the leader of global renewable investments. Besides, as of 2017, giant wind projects spread between the U.S., Mexico, U.K., Germany and Australia.

Considering the global market at the beginning of the 21st century, sustainable or green investments have gone through three stages—Envirotech, Cleantech and Sustaintech (2017 White Paper, Tsing Capital Strategy & Research Center).

First, the envirotech stage has been driven by environmental technology in addition to government policy and regulations. Envirotech investments have aimed to address traditional environmental issues, such as solid waste treatment, water treatmen and renewable energy.  Considering the related business models, the envirotech business has been characterized by capital intensive investments reliant on scaling up for competitive advantage.

After the emergence of the envirotech stage, cleantech investments have described those green investments driven by technological innovations and cost-reduction. Among other examples, we can highlight solar photovoltaics, electric vehicles, LEDs, batteries, semiconductors, and energy efficiency-related investments. The requirement of long research and development periods in cleantech business models has created high technical barriers for competitors.

The latest evolution of green investments has been defined as the sustaintech stage where digital and cloud based technologies are currently being applied to accelerate sustainable investments through the removal of environmental, energy and resource constraints. Venture Capital investments have successfully funded sustaintech companies  through the past several years, such as  Opower, Nest, Solarcity and Tesla. While Google acquired Nest for $3.2 billion in 2014, Oracle acquired Opower for $532 million in 2016.

Considering the new business models, sustaintech firms have shifted towards less capital intensive investments and the proliferation of disruptive technologies. Disruptive technologies are playing a key role in sustainable development such as the Internet of Things, Artificial Intelligence, Augmented Reality/Virtual Reality, Big Data, 3D Printing and Advanced Material.

• Internet of Things sensor technology are enhancing sustainability with regards to energy efficiency, water resources and transportation.
• Artificial Investment technology, satellite imagery, computational methods are being used to improve predictions to improve agriculture sustainability.
• Virtual Reality and Augmented Reality (AR/VR) technologies have shown signs of potential to transform business processes in a wide range of industries.
• Big Data has been oriented to optimize energy efficiency and to reduce the cost of clean technologies -related to solar panels and electric vehicles, for instance.
• 3D Printing technology can improve resource efficiency in manufacturing and increase the use of green materials.
• Advanced Materials technology can substitute non-renewable resources by recyclable and it can also enable efficiency in power devices

Indeed, $13.5 trillion in investments are needed in energy efficiency and low-carbon technologies up to 2030 to meet the Paris Agreement’s.  Considering the investment landscape, despite the new investment frontier, we are still far from this target. The case for climate action has never been stronger.

 

 

 

 

 

WTO, price crops and global hunger

Current food challenges involve issues ranging from land and food access to commodity price volatility, besides national and international regulation. Although the scope and intensity of these challenges vary according to the different economic and social situations of countries, the debate has been global.

Today, once again, these issues arise deep concerns on behalf of the 2017 WTO ministerial conference  that has just been closed, in Buenos Aires, Argentina. Indeed, the WTO has not seemed to enhance effective actions on long-standing proposals. Agriculture negotiations remain among the most important and challenging issues. These negotiations began in 2000 as part of the mandated “built-in agenda” agreed at the end of the 1986-1994 Uruguay Round and, then, they were incorporated into the Doha Round launched at the end of 2001.

The process of globalization of capital in agriculture and food production has shaped a global network of institutions that supplies the worldwide food markets. Contract farming and integrated supply chains are deeply transforming the structure of the agriculture and food industries and, as a result, they have put the local farm sector under high pressure. Further, the expansion of big investment projects, led by transnational companies and institutional investors, has expose small farmers to a situation of hunger and food insecurity by expelling them from the land where they live. In addition to these challenges, the biotech revolution and the introduction of genetically improved varieties of seeds have fostered structural changes.

While the agriculture and food systemic changes are linked to financial and trade flows – mainly profit-driven – international organizations and non-governmental organizations have shaped hunger reduction projects. More recently, for example poverty and hunger reduction targets have been included in the Millennium Development Goals (MDGs) of the United Nations Development Program (UNDP). In truth, hunger and poverty are correlated issues. They are primarily linked to land access, income distribution, employment and food prices, among other factors.

In this scenario, even with the global financial crisis, international prices for agricultural commodities remained substantially above historical averages. Some factors contributed to these high prices:  growth of the world’s population, growth of the Chinese GDP and the urbanization of China. As a result,  at the end of the 2000s, the FAO predicted the global challenge of “a decade of high food prices” and pointed out the need to increase food production.

Since 2014, global commodity crop prices have come back to pre-food-crisis levels. Indeed, the pre-crisis rising food prices turned out to draw investment into agriculture, mainly in the U.S., Brazil, Argentina, Ukraine, and other exporters of commodity crops, such as corn and soybeans. However, according to the Institute for Agriculture and Trade Policy (IATP), the American exports of corn, soybeans, wheat and cotton at prices has been characterized by significant “dumping margins”.

What seems relevant to recall is that the financialization of cop prices and their volatility are systemic challenges. On behalf of these challenges, there has been a global increase not only in the vulnerability of small farmers but also in the number of chronically hungry people – that amounts more than 800 million. Considering this background, after a decade of high prices, current low crop prices and dumped crops – without effective WTO proposals and actions – will drive the most vulnerable people even more into hunger and poverty.

References

FAO. The future of food and agriculture – Trends and challenges. 2017. Rome.

Institute for Agriculture and Trade Policy. Excessive Speculation in Agriculture Commodities: Selected Writings from 2008–2011. Ben Lilliston and Andrew Ranallo (Editors). IATP, 2011. Available on line at: http://www19.iadb.org/intal/intalcdi/PE/2011/08247.pdf.  Accessed 29 July 2016.

United Nations. The Millennium Development Goals Report 2012. Available on line at: http://www.un.org/millenniumgoals/pdf/MDG%20Report%202012.pdf. Accessed 20 April 2016.

WTO. 2017 Ministerial Conference. Agriculture. https://www.wto.org/english/thewto_e/minist_e/mc11_e/briefing_notes_e/bfagric_e.htm