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A relevant feature of the current crisis in economic knowledge is the recurrence of the  Ricardian Vice. Joseph A. Schumpeter coined this term in his book History of Economic Analysis when he criticized the habit assigned to Ricardo to represent the economy by a set of simplified assumptions and to use tautologies to develop practical economic solutions. Indeed, Schumpeter rejected the kind of economic thought that mainly favours deductive methods of inquiry – based on mathematical reasoning- because the  habit  known as the Ricardian Vice generates analytical unrealistic results that are irrelevant to solve the real-world economic problems.

Also Keynes warned that the understanding of the economic phenomena demands not only purely deductive reasoning, but also other methods of inquiry along with the  study of other fields of knowledge- such as History and Philosophy. In his own words:

The study of economics does not seem to require any specialised gifts of an unusually high order. Is it not, intellectually regarded, a very easy subject compared with the higher branches of philosophy and pure science? Yet good, or even competent, economists are the rarest of birds. An easy subject at which very few excel! The paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts. He must reach a high standard in several different directions and must combine talents not often found together. He must be mathematician, historian, statesman, philosopher – in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician.” (Keynes, Collected Writings, vol. X: Essays in Biography)

Today, Schumpeter’s and Keynes’s criticism could be certainly addressed to those economists whose beliefs ultimately privilege the deductive method of inquiry in Economics. Due to these beliefs,  mainstream economists favour the adoption of a nominalist bias. And as a consequence, the trouble is that the dialogue between economic theories and the economic reality turns out to be abandoned not only in academic research but also in the policy making process.

This dialogue is complex and should be considered in any attempt to build realistic economic theories, as Keynes warned. Indeed, the changing environment of real-world markets through time -that is irreversible-  refers to a certain degree of ontological indeterminacy that should be considered in realistic economic theories and in the study of Economics.

 

Throughout 2016, many countries around the world keep on competing for market share in high-wage, innovation-based industries. Indeed, these countries have turned to “innovation mercantilism” by imposing protectionist policies to expand domestic production and exports of high-tech goods and services.

In this setting, innovation mercantilist policies are being oriented to high-value tech sectors such as life sciences, renewable energy, computers and electronics, and Internet services. There are new “beggar-thy-neighbor” strategies adopted by nation-states, such as forcing companies to transfer the rights to their technology or forcing them to relocate their production, research and development (R&D), or data-storage activities. These strategies aim at   both replacing imports with domestic production or promoting exports.

At this respect, the 2016 Information Technology and Innovation Foundation annual report shows that:

  • China introduced a new cybersecurity law so as to impose local data-storage requirements, and forced intellectual property and source code disclosures.  This country also introduced new cloud-computing restrictions so as to exclude and prevent foreign firms from operating in the Chinese market.
  • Germany introduced forced local data-storage requirements as part of a new telecommunications data law.
  • Indonesia introduced forced local data-storage requirements for Internet-based content providers. The country also introduced a patent law amendment in order to force local production and technology transfers.
  • Russia introduced forced local data-storage requirements and encryption-key disclosure as part of a new telecommunications data law. The country also introduced new government procurement rules in order to ban the purchase of foreign software.
  • Turkey introduced a new data-protection law that, as a matter of fact, forced local data storage.
  • Vietnam introduced forced local data-storage requirements for Internet-based content providers. The country also introduced a new network-security law that forces disclose encryption keys and source codes a condition of market access.

New protectionist trends have also been observed in the United States. As of January 23, 2017, the new American president Donald Trump’s decided to remove the U.S. from the Trans-Pacific Partnership, or T.P.P. This decision signalizes that the United States are not willing to be permanently tied to East Asia, mainly a rising China, by free-trade strategies. Instead, it is believed that American workers would be protected against competition from low-wage countries, such as Vietnam and Malaysia, also parties to the trade deal.

As America looks inward to increase investment in manufacturing, to reduce the dependence on East Asia imports and to stimulate job creation, among other  domestic challenges, the outcomes of the revision of free-trade strategies will certainly carry out relevant geopolitical implications.

 

Much of the comments on the global financial and economic crisis have focused on the proximate causes and governance issues related to risk management, monetary policy and weak regulation. New political alignments allowed a process of global financial deregulations in the early 1970s. The political ascendancy of financial capital and extensive capital market liberalization, employment goals were abandoned in the economic policy agenda. Indeed,   price stabilization and “fiscal prudence” turned out to be the primary objectives of the economic policy. As a result, prior to the 2008 global crisis, inflation was low and close to official inflation target rates in the advanced economies. However, credit bubbles threaten the macroeconomic stability.

After the Global Crisis, academic economists and policy makers have actively participated in the debate on monetary policy in the United States and European Union. In the face of the outcomes of the crisis, central banks have dealt with a triple challenge

  • how to contain the crisis
  • how to prevent a recessionary downturn
  • how to avoid enhancing financial instability in the form of inflationary pressures or asset  and credit bubbles.

The Federal Reserve (Fed) and the European Central Bank (ECB) have faced major global financial challenges together. However, within their respective zones, they coped with their institutional set-up and governance guidelines.

After the bail-outs, their main concern is whether nominal interest rates really have a lower bound around zero per cent. After the crisis, central banks responded to the large fall in aggregate demand and the under- utilized productive resources by adjusting  the policy interest rates to, or very close to, zero. Indeed, these central banks have focused on lender-of-last-resort program extensions. The main question is: to what extent central banks can deal with huge levels of leverage, structural flaws of financial innovations (securitization, structured finance, and derivatives above all) and  lack of transparency in terms of  risk management?.

Central banks have shown that they can innovate and coordinate with other central banks on short notice when unprecedented situations of financial crisis arise. However, central banks cannot prevent financial crisis.  Considering the menace of deepening the recession, the outcome of the central banks’ management of  nominal interest rates is that  real interest rates may be (and may continue to be) negative.  Despite the evolution of nominal and real interests, big banks have restricted new lending operations because of credit and market risks. Indeed, big banks have enlarged the amount of cash in order to cope with their own losses more easily in the future.

In the 1930s, John Maynard Keynes said the liquidity trap was a period in which cash and bonds became perfect substitutes and, after the nominal interest rate has fallen to a very low level, liquidity-preference may become virtually absolute. In other words, it is difficult for central banks to reduce their policy interest rates much below zero as cash can be held as an alternative to negative interest rate bearing assets. Most people would prefer cash to holding a debt which yields. In this event the monetary authority would have lost effective control over the rate of interest.

The modern Keynesian literature emphasizes that, even if increasing the current money supply has no effect, monetary policy is far from ineffective at zero interest rates. What is important, however, is not the current money supply but managing expectations about the future nominal and real interest rates. Thus, recent research indicates that monetary policy is far from being ineffective at zero bound levels, but it worked mainly through expectations.

Therefore, the question is how very low or negative interest rates translate into improved growth rates (Hannoum, 2015).  It is worth remembering that central banks consider that the monetary stimulus could stimulate short-term growth through five main channels:

  • by boosting credit to the real economy
  • by lifting asset prices
  • by forcing investors towards riskier ones
  • by lowering the exchange rate
  • by attempting to avoid deflationary pressures.

Up to now, the monetary policy of prolonged very low or negative interest rates relies on the uncertain effectiveness of these transmission channels. However, potential serious consequences for central banks could emerge. here is the threaten that  monetary policy could become subordinated to the demands of the financial markets and to the public debt burdens.

Reference

Hannoun, H (2015) “Ultra-low or negative interest rates: What they mean for financial stability and growth”, BIS Speech at Eurofi High-Level Seminar, Riga

The DISCUSSION FORUM  is open access. http://foodandjustice2016.weaconferences.net/papers/

The purpose of the WEA Conference Food and Justice is to enhance a debate that could stimulate the articulation of various aspects of the relationship between food and justice.  Although the scope and intensity of these challenges vary according to the economic situation of countries, the debate has been global. Current food challenges involve issues ranging from food access to national and international regulation.

Food production has always been present in the economic debate because of the concern about population growth and demographic changes. In spite of the Malthusian concern, new methods of food production have emerged which allowed the increase in food supply. Technological changes, however, have not occurred uniformly throughout the world. Indeed, some countries have managed to expand their production and trade surpluses while situations of hunger remained a reality in many parts of the world.

In addition to technological factors in food production, other political and economic issues are involved in the access to food. In the 21st century, the scenario of changes in food production means that even with a larger supply of food, many people, mainly the poor ones, still live in a situation of starvation. In addition to the challenges in food access, other relevant issue is food waste. Actually, a large percentage of the world food production is lost throughout the different stages of production, transportation, processing and consumption. Indeed, among the current concerns, there is the need to search for actions that can reduce the food losses that could face the situation of hunger of millions of people.

The agriculture and food industries are part of the list of “global” sectors. Indeed, a global network of institutions supplies the worldwide food markets. In this scenario, one of the major outcomes of the expansion of the global supply chain is the changing role of the local farm sector under the pressure of international competition. Contract farming and integrated supply chains are deeply transforming the structure of the agriculture and food industries. Besides, the advance of the biotech revolution and the introduction of genetically improved varieties have also fostered structural changes in the global industry. These systemic changes are linked to financial and trade flows largely driven by the search for wider markets and less expensive sources of raw material.

This process of globalization of capital in food production arises other problems related to the growth of investments in big projects led by investment funds and transnational companies that purchase land in various parts of the world in order to increase global production. In truth, these investments often expose small farmers to a situation of hunger and food insecurity by expelling them from the land where they live.

We invite you to send your comments to the  posted papers. Join the discussion !

http://foodandjustice2016.weaconferences.net/papers/

Posted Papers 

Fast and integrated revision of agricultural risk management in Brazil

Diet Risks in Resource Rich Countries

Putting Social Justice First: The Case of Islamic Economics

The democratisation of access to land in Brazil between 2003-2015

Public procurement of family farming in Brazil

Food Sovereignty: A Strategy for Environmental Justice

What is Good to Eat? The Big Question of our Times

Technical Efficiency Analysis of Pineapple Production in the Eastern Region of Ghana: Data Envelopment Analysis (DEA) Approach

Cassava price volatility: evidence from Ghana

Land use conflict among vegetable farmers in Denu: Determinants, Causes and Consequences

Sustainable rural development index

The WEA CONFERENCE Food and Justice: Ideas for a new global food agenda? is now open.

The DISCUSSION FORUM  is open access. http://foodandjustice2016.weaconferences.net/papers/

The purpose of the Conference Food and Justice is to enhance a debate that could stimulate the articulation of various aspects of the relationship between food and justice.  Although the scope and intensity of these challenges vary according to the economic situation of countries, the debate has been global. Current food challenges involve issues ranging from food access to national and international regulation.

Food production has always been present in the economic debate because of the concern about population growth and demographic changes. In spite of the Malthusian concern, new methods of food production have emerged which allowed the increase in food supply. Technological changes, however, have not occurred uniformly throughout the world. Indeed, some countries have managed to expand their production and trade surpluses while situations of hunger remained a reality in many parts of the world.

In addition to technological factors in food production, other political and economic issues are involved in the access to food. In the 21st century, the scenario of changes in food production means that even with a larger supply of food, many people, mainly the poor ones, still live in a situation of starvation. In addition to the challenges in food access, other relevant issue is food waste. Actually, a large percentage of the world food production is lost throughout the different stages of production, transportation, processing and consumption. Indeed, among the current concerns, there is the need to search for actions that can reduce the food losses that could face the situation of hunger of millions of people.

The agriculture and food industries are part of the list of “global” sectors. Indeed, a global network of institutions supplies the worldwide food markets. In this scenario, one of the major outcomes of the expansion of the global supply chain is the changing role of the local farm sector under the pressure of international competition. Contract farming and integrated supply chains are deeply transforming the structure of the agriculture and food industries. Besides, the advance of the biotech revolution and the introduction of genetically improved varieties have also fostered structural changes in the global industry. These systemic changes are linked to financial and trade flows largely driven by the search for wider markets and less expensive sources of raw material.

This process of globalization of capital in food production arises other problems related to the growth of investments in big projects led by investment funds and transnational companies that purchase land in various parts of the world in order to increase global production. In truth, these investments often expose small farmers to a situation of hunger and food insecurity by expelling them from the land where they live.

We invite you to send your comments to the  posted papers. Join the discussion !

http://foodandjustice2016.weaconferences.net/papers/

Posted Papers 

Fast and integrated revision of agricultural risk management in Brazil

Diet Risks in Resource Rich Countries

Putting Social Justice First: The Case of Islamic Economics

The democratisation of access to land in Brazil between 2003-2015

Public procurement of family farming in Brazil

Food Sovereignty: A Strategy for Environmental Justice

What is Good to Eat? The Big Question of our Times

Technical Efficiency Analysis of Pineapple Production in the Eastern Region of Ghana: Data Envelopment Analysis (DEA) Approach

Cassava price volatility: evidence from Ghana

Land use conflict among vegetable farmers in Denu: Determinants, Causes and Consequences

Sustainable rural development index

Adam Smith (1723-1790) in his Wealth of Nations deals with the major drivers of the wealth of a country in an analysis that highlights the interrelations among capital, labour and the expansion of markets in the XVIII century. His contribution can be considered a reaction to Mercantilist practices in which protectionism played a decisive role to expand markets. Smith discusses the consequences of the division of labour, exemplifying this question from a pin factory which productivity increases as human beings work on specific tasks. According to Adam Smith, the division of labour has its origin in the propensity of human nature to exchange. Thus, individuals lead to society to well-being while pursuing the maximization of their own interests. Although labour specialization is a key factor for productivity growth, the division of labour could be limited by the extension of the market. In his opinion,  labour specialization paves the way for increased production and, therefore, the expansion of the market. In this sense, Smith defended the free operation of markets as a driver of economic growth.

David Ricardo (1772-1823), in his Principles of Political Economy and Taxation, discusses the factors that affect the prices of grain and the connections between land rent and profits. Considering the drivers of the wealth of nations, Ricardo turned out to develop an international trade theory based on comparative advantages that defends the specialization in goods produced at lower costs in a context of free markets. However, Ricardo was ideologically motivated to do so, primarily to prevent developing nations like Portugal from becoming developed and overtaking Great Britain. Ricardo believed that total production would generate an income to be divided into wages, profits and land rent. He returns to the theoretical discussion initiated by Adam Smith on the relative value of goods, their relationship with the amount of labour and advances on the distribution of income.

Karl Marx (1818-1883) makes a re-reading of the British classical economists, most notably David Ricardo and Adam Smith. Marx’s Capital presents an analysis of capitalist society, characterized as a social organization based on an exchange system and the division of labour. In the capitalist system, according to Marx, the free worker sells his labour force and  capital is a social relation.  The reality of the capital accumulation process, though, is that it is a double movement of production and valorisation. The accumulation process ordinarily produces both use-value and exchange-value.  Capitalists are less interested in the commodity-in-itself or the use-value of commodities, but, their interest, as the personification of capital,  relies on the expansion of value. Wealth creation is dependent labour power exploited to appropriate surplus value. To Marx, this is the source of profits.

 

Calssical Reading

Smith, Ricardo, Marx: Observations on the History of Economic Thought  by Claudio Napoleoni (1976)

The global scenario has restated the menace of deep depressions among the economic challenges. Indeed, in the current setting, the principles of corporate behaviour have reinforced the lack of commitment to long-run social and economic sustainability.

Looking backward, in the context of the 1930 Great Depression, John Maynard Keynes pointed out that the evolution of capital markets increases the risk of speculation and instability since these markets are mostly based upon conventions whose precariousness affects the rhythm of investment and employment. Keynes called attention to the fact that the capitalist system has endogenous mechanisms capable of destabilizing the levels of spending, income and employment. He suggested a reconsideration of the understanding of the relations among individuals, society and governments within the market where institutions and conventions could shape human behaviour. Aware of the need to overcome the concept of rationality that overwhelms the homo oeconomicus, his contribution enhances a more extended understanding of the entrepreneurs’ and investors’ behaviour, as well as of their strategies and decisions.

Following these ideas, the Keynesian approach to business dynamics enhanced a more fruitful apprehension of the real-world where the outcomes of the entrepreneurs’ and investor’s decisions are not submitted to stochastic behaviour, that is to say, they are not predictable. Indeed, the process of decision making is based on conventions. As uncertainty is present in all decisions, Keynes relied on the concepts of credibility and degree of confidence on a conventional judgment that is historically built within the markets. In a specific historical setting, the average opinion on future scenarios shapes a convention based on a precarious set of expectations about the behaviour of aggregate demand (consumption, investment, net exports, for example). The degree of confidence on this convention could affect the expected return on investment- the so called marginal efficiency of capital. He explained that the incentive for long-run expanding productive capacity is highly dependent on the state of confidence about the business environment. In his view, the trust in conventions has a social nature and impacts the path of entrepreneurial development. In Keynes’s view, trust is a conventional concept related to the level of confidence in the business environment, that is to say, in the legal, regulatory, macroeconomic and political setting that shape the evolution of the markets.

As a matter of fact, the environment of business changes and new elements might arise that affect investment decisions under conditions of uncertainty. In General Theory, chapter 12, Keynes focused the analysis on the long-term expectations associated. In his own words:
The state of long-term expectation, upon which our decisions are based, does not solely depend, therefore, on the most probable forecast we can make. It also depends on the confidence with which we make this forecast on how highly we rate the likelihood of our best forecast turning out quite wrong. If we expect large changes but are very uncertain as to what precise form these changes will take, then our confidence will be weak. The state of confidence, as they term it, is a matter to which practical men always pay the closest and most anxious attention. But economists have not analysed it carefully and have been content, as a rule, to discuss it in general terms. In particular it has not been made clear that its relevance to economic problems comes in through its important influence on the schedule of the marginal efficiency of capital. There are not two separate factors affecting the rate of investment, namely, the schedule of the marginal efficiency of capital and the state of confidence. The state of confidence is relevant because it is one of the major factors determining the former, which is the same thing as the investment demand-schedule” (Keynes, General Theory, 12, II).

As Keynes warned, the influence of capital markets reinforces the conflicts between business strategies that favour short-run profits, on one side, and those strategies that favour long-run  investment decisions, on the other.  This idea is extremely important today, since the global reorganization of markets has been overwhelmed by the financial logic of investment. Within this framework, the corporations’ strategies have turned out to focus on short-term profits and the distribution of dividends to shareholders, that is to say, to investors.

Over the last two decades, the leveraged buyout business model of private equity firms, as the main agent for mergers, has fed a broader process of increased financialization of corporate behaviour. It is relevant to apprehend this recent business trend since private equity firms have been responsible for the employment standards of tens of millions of workers worldwide. While private equity firms have become important in many economic sectors, the experience of workers and trade unions arises deep concerns because of job losses, reduction in payment conditions and entitlements (including retirement incomes), besides the displacement of business and persons.

Recalling Minskly, in contemporary capitalism,  corporate behaviour and business instability need to be analysed in a framework where the role of finance is outstanding. Corporate behaviour has been increasingly subordinated to financial commitments and, therefore, finance determines the pace of investment and employment.