Business strategies around long-run investment have varied over time. In General Theory (GT), John Maynard Keynes reinforces the analysis of the modifications in the structure of the capitalist class to explain the differences between entrepreneurs and investors in terms of the effects of their behaviour and decisions on capital accumulation. In Chapter 12 (GT), he establishes the difference between the old and the new business models. This historical approach shows that, in the old business model, there was an irrevocable commitment towards investment. Taking into account the new business model, the decisions about what amount and where to invest are no more an irrevocable commitment for investors and managers. Indeed, in the new business model, investors decide the volume of investment, but aggregate investment is not irrevocable since liquidity is the target.  This fact fosters macroeconomic instability in the economic system. As Keynes wrote:

Decisions to invest in private business of the old-fashioned type were, however, decisions largely irrevocable, not only for the community as a whole, but also for the individual. With the separation between ownership and management which prevails today and with the development of organized investment markets, a new factor of great importance has entered in, which sometimes facilitates investment, but sometimes adds greatly to the instability of the system” (Keynes, General Theory, 12, III).

And he added:

If I may be allowed to appropriate the term speculation for the activity of forecasting the psychology of the market, and the term enterprise for the activity of forecasting the prospective yield of assets over their whole life, it is by no means always the case that speculation predominates over enterprise. As the organisation of investment markets improves, the risk of the predominance of speculation does, however, increase” (Keynes, General Theory, 12, VI).

The historical changes in business have been related to qualitative transformations in capital accumulation and competition. Mainly after the 1970s, the changing practices in corporate finance fostered the growth of the participation of institutional investors, such as pension funds or private equity firms, in business management as relevant shareholders. The drive to increase the share-holders’ value and the incorporation of the managerial strata through share options has tended to postpone long-term investments. In addition, these practices have favoured mergers and acquisitions and fostered financial speculation.

After the middle 1990s, public policies and private strategies influenced the dimension and composition of balance sheets in different economic sectors. Among the main features:

  • The household sector has got increasingly indebted.
  • Corporations have moved to “surplus units” running financial surpluses that have been diverted towards the acquisition of financial assets instead of financing physical investments.
  • The balance sheets of mutual investment funds are now larger that before the global crisis with respect to the GDP and they have influenced the flows of investment in companies.

Considering the evolution of the business models since the 2000s, the strategies  of corporations and private equity funds have turned out to focus on short-term gains and the distribution of dividends to shareholders, that is to say, to investors. In other words,  the current business model can be apprehended as a form of governance that aims increasing short-term earnings by means of a “clash of rationalization”. In this context, competitiveness and productivity have been put together in the attempt to promote higher business performance.

In fact, the centralization of capital, through waves of mergers and acquisitions, created new challenges to business stability. Accordingly the OCDE, the current investment chain is complex due to cross-investments among institutional investors, increased complexity in equity market structure and trade practices, and an increase in outsourcing of ownership and asset management functions. In this scenario, the economic and social outcomes have involved a trend to ‘downsize and distribute’, that is to say, a trend to restructure, reduce costs and focus on short- term gains. In practice this has meant plants displacement and closures, changing employment and labour conditions, outsourcing jobs, besides the pressure on supply chain producers in the global markets.

As a result of current business strategies, investments that are fixed for society turn out to be liquid for investors. Today, the dominance of a culture based on short-term speculation has major implications that go far beyond the narrow confines of the financial markets.  The costs of this business model fall disproportionately on society because of the commitment to liquidity.  As Keynes warned,

“Thus the professional investor is forced to concern himself with the anticipation of impending changes, in the news or in the atmosphere, of the kind by which experience shows that the mass psychology of the market is most influenced. This is the inevitable result of investment markets organized with a view to so-called ‘liquidity’. Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of ‘liquid’ securities. It forgets that there is no such thing as liquidity of investment for the community as a whole” (Keynes, General Theory, 12, V).

If we WEA economists want to disseminate among our students these relevant changes in business models, then it would be interesting to include some of the following readings  mainly in micro and macroeconomic courses.

Berle, Adolf A., and Gardiner C. Means (1932), The Modern Corporation and Private Property, Macmillan.

Blair, Margaret M. (1995) Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century, Brookings Institution.

Crotty, J. (2002) “The effects of increased product market competition and changes in financial markets on the performance of nonfinancial corporations in the neoliberal era”. Working Paper Series, n. 44.  University of Massachusetts Amherst, Political Economy Research Institute,

Çelik, S. and Isaksson, M. (2013) “Institutional Investors as Owners: Who Are They and What Do They Do?”, OECD Corporate Governance Working Papers, No. 11, France: OECD Publishing. http://dx.doi.org/10.1787/5k3v1dvmfk42-en (accessed 10 October 2015)

Fligstein, N. (2001) The architecture of markets, New Jersey: Princeton University Press.

Jacoby, S. (2008)  Finance and Labor: Perspectives on Risk, Inequality and Democracy, Working Paper, Institute for Research on Labor and Employment, USA, California Digital Library.

Keynes, J. M. [1936 (1964)] The General Theory of Employment, Interest, and Money. New York: Harcourt Brace.

Lazonick, W. (2013) “From Innovation to Financialization: How Shareholder Value Ideology is Destroying the US Economy” , in Martin H. Wolfson and Gerald Epstein, eds., The Handbook of PoliticalEconomy of Financial Crises, Oxford University Press.

Lazonick, W. and O´Sullivan, M. (2000) “Maximizing shareholder value: a new ideology for corporate governance”, Economy and Society, 29 (1).

Seccareccia, M.  (2012) “Financialization and the transformation of commercial banking; understanding the recent Canadian experience before and during the international financial crisis”, Journal of Post Keynesian Economics, 35 (2): 277-300.

This post, 6th in a sequence about Re-Reading Keynes, continues to borrow heavily from Brian S. Ferguson, “Lectures on John Maynard Keynes’ General Theory of Employment, Interest and Money (1): Chapter One, Background and Historical Setting” University of Guelph Department of Economics and Finance Discussion Paper No. 2013-06. However the first three paragraphs are mine.

Distinguishing between ideologies and science:

Deduction: According to Lionel Robbins, economic theory uses an axiomatic deductive methodology, based on logical deduction from postulates which are “simple and indisputable facts of experience.” This means that there is no possibility of mistakes, and hence no possibility of learning from empirical evidence. If someone claims to have drawn a triangle where three angles do not sum to 180, we would not examine this triangle carefully to see if our law is empirically refuted. This is exactly the defining feature of an ideology – it does not waver in face of empirical evidence to the contrary.  For more details, see Economic Theory as Ideology. This is important because today we are still fighting the same battles, discussing the same questions, which were being discussed at the time of Keynes. Macroecconomics has been going backwards for decades, and there has been failure to learn from experience, due to the adoption of axiomatic-deductive methodology by economists

Induction: As opposed to this, scientific laws derived from induction are always falsifiable – the next experience may refute them. As a result, revisions are frequently necessary, as more and more experience comes in. The central insight of Kuhn is that scientific progress occurs via revolutions, which destroy one established way of looking at the world, and replace it with another. One of the key assertions of Polanyi is that when social change occurs, people devise theories to try to understand the new phenomena. These theories are often wrong, because lack of experience leads to misunderstandings. The ability to arrive at good theories depends crucially on the ability to revise theories in light of experience.

Learning from Experience: To understand economic events, we must study the wrong theories used by early theorists to understand these events, since responses to these events are shaped by these theories. To understand the impact of economic change, we must study both the (objective) events, and the (subjective) understanding of the events by leading theorists, since the response to the events will be shaped by the joint effects of the external objective circumstances and the internal subjective theories about these circumstances.

Flexibility of Keynes: Keynes had this ability par excellence. There are many anecdotes about how he was quick to change his mind, when confronted with empirical evidence to the contrary. In contrast, economists brought up on axiomatic-deductive methodology disregard conflicts with real world data to the extreme that Romer labeled “post-real.” Some of the ways that Keynes revised his theories in light of empirical evidence are discussed by Ferguson.

Keynesian Theories Developed in Light of Experience

“Hawtrey convinced Keynes that the analytical approach of the Treatise on Money was fundamentally wrong. In the Treatise, Keynes focused on the adjustment of prices to changes in economic conditions, with quantity adjustments being something of an add-on. Hawtrey convinced Keynes that the first thing firms do in response to a reduction in demand is not to cut prices, it is to cut output, with price adjustments following later. This ultimately led Keynes to the formulation in the General Theory in which prices are moved aside and the primary adjustment to changes in aggregate demand take the form of changes in aggregate output and employment.”

Many other instances of how Keynes took concrete practical details about the structure of the UK economy into account in formulating and revising his theories are cited by Ferguson. This is an important differentiating feature of Keynesian theory: it takes real world economic structures and experience into account, unlike conventional “post-real” economics.

Pre-War Prosperity in UK:  Ferguson quotes a long passage from Keynes’ Economic Consequences of Peace, idealizing the pre-war UK economy

What an extraordinary episode in the economic progress of man that age was which came to an end in August, 1914!  …(the poor were comfortable, and had the chance of escaping into) … the middle and upper classes, for whom life offered, at a low cost and with the least trouble, conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages.”

The post-war slump experienced by UK was more disturbing precisely because it seemed that there should be a way to get back to the pre-war prosperity.

Classical Views on Post-War Transition to Peacetime Economy:   As a war economy has to transition to producing peace-time goods, there will a temporary period of transition. How long the transition takes depends on the mix between financial capital and fixed capital utilized in production. Financial capital can easily be transferred, while large proportions of fixed capital would result in delays in transition to new post-war equilibrium.

Initially, as a classical economist, Keynes thought that a return to equilibrium would occur speedily. However, as the 1920’s progressed, unemployment remained high in UK, and Keynes started to have doubts about the classical views. He advocated government intervention to the Macmillan Committee formed to investigate the depressed economy of Britain, because he felt that classical equilibrium mechanisms were taking too long.  Classical economists considered unemployment as part of the business cycle, Keynes came to the conviction that a separate theory of employment was needed.

Puzzle of Long-term Persistent Unemployment:  From a historical perspective, unemployment in the first few years after the First World War was not unusually high: it was, in fact, not much higher, if at all, than its pre-War peaks. What was different after the war was the fact that it didn’t come back down again anything like as quickly as pre-War experience would have predicted. (See Figure below, taken from Ferguson); see also, Creating Full Employment

ukunemployment

Classical Explanations: non-Keynesian explanations can be provided for this:

One: was the presence of unemployment insurance, and strong unions. Labor was able to negotiate an eight hour work week with no reduction in wages. All of these increased labor costs substantially, and may have been the source of higher unemployment

Two: There was a post-war boom because of increased earnings and demand by the poorer segments of society. An inflationary boom began in 1919. The government was slow to respond, but raise the the bank rate to 7% 1921 (Keynes had recommended raising it to 10% and holding it there to stamp out inflationary pressures). What had not been anticipated was the extreme sensitivity of economic activity to the interest rate. The result of the 1921 tightening was not just the end of the post-War boom but a drop into recession. In brief, bad monetary policy was responsible.

Three: The return to the Gold Standard, at the pre-World War One parity in 1925. This made the pound overvalued, made British exports expensive, and imports cheap. This caused substantial harm to domestic industries, and led to deepening and prolonging the slump. Furthermore, to prevent outflows of gold, Britain had to raise interest rates, leading to tight money and low investment, contributing further to the slump. Arguably, British recovery dates from 1931, when Britain went off the Gold Standard, this time for good.

Concluding Remarks

Ferguson argues that what we now call a Keynesian model is an intermediate stage of Keynesian thinking as it evolved and does not capture later stages of Keynesian thought as described in the General Theory. We need to study GT in detail to understand the special features of the Keynesian model, which include a different theory of the labor market.

The homepage for this project is  Re-Reading Keynes.My author page on LinkedIn Index to my writings: AZPROJECTS.  My personal webpage: Transforming Knowledge.

roulettefinancePrior to the Global Financial Crisis (GFC 2007), many senior economists and policy makers expressed confidence that they had finally solved the problem of business cycles, booms and busts, that plagues capitalism. Because of this over-confidence, early warnings of a looming crisis by Nouriel Roubini, Ann Pettifor, Peter Schiff, Steven Keen, Dean Baker, and Raghuram Rajan, were ridiculed and dismissed. Even after the crisis, many economists thought this was a minor glitch, which would soon be remedied. Now however, while conventional economists continue to search for reasons for the mysterious stagnation besetting capitalistic economies, the weak and jobless recovery from the GFC has been labeled as an illusion and a false dawn by Schiff. Like him, deeper analysts are converging on the idea that the problems run deep, and that radical changes in the global financial architecture are required to solve current problems and prevent future crises.

For instance, consider Lord Mervyn King, the Governor of the Bank of England from 2003 to 2013. His experience at the heart of the global financial system led him to the conclusion that   “Of all the many ways of organising banking, the worst is the one we have today. … (can we) think our way through to a better outcome before the next generation is damaged by a future and bigger crisis?” Similarly, Minneapolis Federal Reserve President, Narayana Kocherlakota , after viewing the stark conflicts between the empirical evidence and the macroeconomic theories over the past ten years, writes the economists use “Toy Models” which do not work in face of the complexities of real life

There are two central elements which lie at the core of the fragility of the financial system. The first problem is credit-creation by banks. This means that when banks give loans, they create credit out of thin air. This ability enables corporate raiders to buy multi-billion dollar corporations without any money in their pockets using financial gimmicks. The second problem, closely related to the first one, is the use of interest instead of equity in the lending process. This means that banks can lend for mega-projects designed to fail, because they are guaranteed a return of their money regardless of outcomes. Bankers have successfully created the illusion that they are necessary, so that when borrowers can’t pay back outrageously risky loans, the government re-imburses the banks for their losses. Both of these problems at the heart of the financial system can be fixed, but the ability of high finance to create huge amounts of money at will gives the financiers ample resources to block any attempts at solving the problems. The 1% who benefit from this financial system have created a robust and resilient multidimensional system of defense to protect, preserve, and sustain the current fragile and crisis prone financial architecture. Using billions of dollars of funding, many different institutions, which include academia, media, think tanks, policy makers, regulators, politicians, and the military-corporate-industrial complex, have been co-opted by high finance. In an article entitled “It Takes a Village to Maintain a Dangerous Financial System,” Stanford professor Anat Admati describes how these different institutions work together to maintain and perpetuate the current financial system. In this article, I focus on the how economic theory itself has been captured by the top 1% and changed to serve their interests.

The role of economic theory should have been to clarify and expose the structure of the economic system, so that economists could understand it and make it work better for all. Instead, economic theory has been captured by the financiers and turned into a propaganda machine, which hides the realities of the system. Modern economics textbooks continue to teach myths which are overwhelmingly contradicted by the empirical evidence. In particular, they teach that the quantity of money and the levels of debt do not have any long run effects on the economy. They teach that consumers and businesses can accurately foresee that path of future prices, and of government policy, and plan purchases and investments accordingly. They teach that levels of inequality do not matter because wealth will trickle down. The distinction between needs and wants has been erased from the textbooks. Economists used to be concerned about rentiers – people who earn money without doing any work to deserve it. Current economics textbooks no longer mention the concept. Instead they teach that markets efficiently recognize and reward participants: if you make money, it means that you deserve to make money. This leads to the idea that the more wealthy you are, the greater is your contribution to society. When this myth is combined with the trickle-down myth, it leads to tax cuts for the rich advocated by Trump, and a guiding policy principle in the USA since the Reagan era. Small wonder that ex IMF Chief Economist Olivier Blanchard wrote that modern models used for conduct of monetary policy are based on “assumptions profoundly at odds with what we know about consumers and firms”.

Like Blanchard, economists who have contact with reality have come to recognize the deep flaws in the economic theories used for the conduct of monetary and fiscal policy around the globe. Highly respected economist Paul Romer, recently appointed Chief Economist at the World Bank, has created shock waves among economists by a trenchant critique entitled “The Trouble with Macroeconomics.”  He writes that for more than three decades, macroeconomics has gone backwards, losing knowledge instead of gaining it. Since banks, financiers, money, unemployment, debt, inequality, rentiers, and all other major drivers of the modern economy have been removed from the picture by economists, contemporary macroeconomic models  “attribute fluctuations in aggregate variables to imaginary causal forces .”  Romer notes that economists’ blatant disregard for facts in conflict with their imaginary theories is so extraordinary that it deserves its own label – he suggests “post-real”.   Even though there are formidable obstacles in the path from this imaginary post-real world of economists to reality, humanity urgently needs to find a way, if the bottom 99%, and the planet we live on, is to survive.

Originally published in Express Tribune, Dec 4, 2016. Related materials on the Global Financial Crisis. My author page on LinkedIn Index to my writings: AZPROJECTS. Closely related: Unlearning Economics. My personal webpage: Transforming Knowledge.

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

keynesgtFifth Post in a sequence on Re-Reading Keynes. 

Chapter 1 of General Theory is just one paragraph, displayed in full HERE

Briefly: Keynes writes that Classical Economics is a special case of his General Theory. Furthermore, the assumptions required for the special case do not hold for contemporary economic societies,”with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience”

The discussion below borrows extensively, without explicit point-by-point acknowledgement, from Brian S. Ferguson, “Lectures on John Maynard Keynes’ General Theory of Employment, Interest and Money (1): Chapter One, Background and Historical Setting” University of Guelph Department of Economics and Finance Discussion Paper No. 2013-06:

1.       RHETORIC: Keynes wishes to persuade fellow economists. Instead of saying that they are all wrong, blinkered idiots, he says that they are studying a special case, which he wishes to generalize. He also acknowledges that he was misled by the same errors, and creates common ground to enable dialog. He is also making a subliminal appeal to the hugely influential General Theory of Relativity published earlier by Einstein.

2.       INVENTION OF MACRO: The revolutionary contribution of Keynes is to study aggregates, instead of micro-level behavior. He is correctly labelled the inventor of macro-economics; prior to him, economists thought that the aggregate behavior would be obtained simply as a sum of the individual behaviors; there is no need to study macroeconomics separately. Parenthetically, it is this same position to which macro-economists retreated in the 70’s and 80’s with the development of DSGE model. Ferguson writes that:

Arguably, prior to the General Theory, most professional economists thought of the macroeconomy in a general equilibrium sense, as an aggregate of a large number of individual markets, and they assumed that the analysis of how individual markets behaved could be carried over pretty much unchanged to the collection of markets which constituted the economy as a whole. There was, it seemed, no need to think of the economy as anything other than the sum of its parts, and an understanding of how those parts worked was sufficient to understand how the economy as a whole worked. After the General Theory, that no longer held. Economists started to think in terms of aggregates.

3.       COMPLEX SYSTEMS: The flaws of this attempt to build macro on micro-foundations are still not well understood by modern economists due to the blinders of methodological individualism. These flaws include the failure to understand “Complexity Theory”, “Emergent Behaviors” and the influence of community and society on individual behavior. Basically, a complex system is one in which the behavior of the system as a whole cannot be inferred or deduced from the study of the individual parts, because it is the inter-relationships and linkages between the parts which create the system.  An extensive discussion of Keynes and complex systems is provided by John Foster, Why is Economics not a Complex Systems Science? Discussion Paper No. 336, December 2004, School of Economics, The University of Queensland. A brief quote from the abstract for the paper:

The macroeconomics of John Maynard Keynes is … an example of … (a) complex systems perspective on the economy. … the reasons why a complex systems perspective did not develop in the mainstream of economics in the 20th Century, despite the massive popularity of an economist like Keynes are discussed …

4.       MISUNDERSTANDING KEYNES: Very few read Keynes, and those who do fail to understand him for several reasons. Conceptual frameworks and background institutional structures (like the gold standard) are taken for granted and implicit in the analysis and discussion, but these have changed radically over time. In addition, “Keynes was inventing a new way of looking at the economy as a whole. He was struggling to develop concepts and invent terms, and many of the terms which he invented are not the ones we use today.” Because of this mis-understanding, revivals of Keynes (Like New Keynesians) often reject principles which Keynes considered central to his analysis, and accept propositions that Keynes firmly rejected.  Another reason for neglect of Keynes is the positivist reduction of scientific knowledge to binaries: true/false. What matters for a statement is whether or not it is relevant and valid for today, not whether or not Keynes said it, or what he meant. As Krugman puts it: Surely we don’t want to do economics via textual analysis of the masters. The questions one should ask about any economic approach are whether it helps us understand what’s going on, and whether it provides useful guidance for decisions. “So I don’t care whether Hicksian IS-LM is Keynesian in the sense that Keynes himself would have approved of it, and neither should you.” If theories have universal, time invariant, validity, then this would be a correct position. However, the basis premise of this re-reading of Keynes is that economic theories must be understood within their historical context.

5.       SAY’s LAW: The crucial issue under debate, tackled in the 2nd chapter of Keynes is: Can unemployment be reduced using fiscal policy and deficit financing? Keynes argues that it can, contrary to the view of classical that “unemployment” is not a problem – Supply and Demand for labor will equilibrate. Say’s Law holds so that the supply of labor will create the demand for it.

6.       CROWDING OUT: A crucial argument against Keynes is the Treasury View: Government investment will crowd out an equal amount of private investment. Government must borrow credit from the same market that private borrowers do. To the extent that Government succeeds in borrowing, private investors will fail in borrowing. This argument fails if the private sector expands the supply of credit in response to increased government demand for borrowing. Therefore the Treasury View is supplemented by two more pragmatic arguments. Second Treasury argument is based on extreme lags and inefficiencies in the governmental bureaucracies selection and launching of major public works projects. Such lags could mean that a intended counter-cyclical investment could be delayed so long as to become pro-cyclical.

7.       PRACTICAL PROBLEMS WITH PUBLIC WORKS: There were other practical, pragmatic aspects to the Treasury View, that governments cannot or should not spend their way out of a recession. To avoid the lags in fiscal policy, one needs “shovel-ready” projects to finance.  One of the most interesting quotes from Ferguson in this regard is:

cash-strapped local governments would cut back on their spending in response to increased central government spending in their areas. … Herbert Hoover, contrary to the image which he has acquired as a consequence of not being FDR, did not cut American federal government spending in response to the Depression, rather he increased it dramatically. … His first policy efforts involved spending federal money on shovel-ready public works projects, meaning projects which were already well into the planning stages and which needed only to have their commencement dates brought forward. In addition to finding that there weren’t anything like as many shovel-ready projects as he had hoped, Hoover found that state governments, whose own revenues were severely stressed by the Depression, responded to inflows of federal money by cutting their own relief spending, and moving to balance their budgets. (Many years later, officials from Franklin Roosevelt’s administration acknowledged that the bits of the New Deal which had actually worked were the bits they had simply taken over from Hoover. By then, though, Hoover’s reputation was pretty much beyond repair.)

8.       GOOD GOVERNANCE: Another very serious pragmatic Treasury concern was that Keynesian policy would lead to irresponsible excessive spending by politicians.

The need to keep the budget balanced had come to be accepted over the years by politicians as a matter of good governance. Treasury officials were concerned that if they accepted Keynes’ argument and gave politicians an excuse to spend in excess of revenue in some circumstances, the floodgates would burst and it would be impossible to prevent politicians from overspending under virtually all circumstances. The concern seems to have been that no matter what the circumstances, politicians would be able to come up for Keynesian reasons for deficit spending. In that fear, the Treasury officials seem to have been vindicated. As for staying on the Gold Standard the concern within the Treasury was similar: adherence to the rules of the Gold Standard was the best safeguard against unrestrained printing of money. (When Britain went off the Gold Standard for good in 1931, Sidney Webb, a member of a previous Labour party government, was reported to have lamented that when they had been in office nobody had told them that they were allowed to do that.)

Among the predecessors of Keynes, Ferguson writes that Keynes views were aligned with those of Malthus and against those of Ricardo on the following key dimensions:

9.       Against Comparative Statics: Keynes objected to Ricardian analysis on the grounds that it analyzed movements from one equilibrium state to another, without considering the disequilibrium transitional paths, and how long the transition would take. This is the context for his famous aphorism that in the long run we are all dead. He believed that studying transitional dynamics was more important than focusing on equilibrium conditions.

10.   Quick Movement to Equilibrium in Labor Markets:  Keynes objected strongly to Ricardian contentions that “labour markets worked efficiently and that wages would adjust quickly to restore equilibrium after a labour market shock.” This belief, widely held, was labeled “classical” by Keynes. Note that this belief is precisely what was resurrected by Lucas and the Chicago School, in their attack on Keynes.

This post covers about half of the Brian Ferguson article, which is about the “theoretical” context in which Keynes was writing. The second half is about the historical context, which we will cover in the next post. The homepage for this project is Keynes.

My author page on LinkedIn Index to my writings: AZPROJECTS. General Posts on Economics: Unlearning Economics. My personal webpage: Transforming Knowledge.

Concerns with social inclusion extend well beyond the purely economic account of justice, since economic inequality affects social cohesion and political stability. Moreover, economic inequality can have negative implications for economic growth and democratic institutions. As a welcome contribution to the literature on the subject, Eric Hobsbawm´s book,  Globalisation, Democracy and Terrorism, fosters further reflection and discussion on the complexity of the interactions among individuals, society and nation states in the context of globalisation.

Hobsbawm analyses three intertwined themes: the challenges to the continuity of American imperialism, the role of the territorial states and the future of citizenship. Throughout the book, the author provides a detailed comparison between the US empire and the British one. The worldwide historian believes, in truth, that the British Empire could only teach one lesson: the rejection of the attempt to maintain an eroding global position by relying on politico-military force. Deeply critical of the current American project of lasting global imperial hegemony, unprecedented in history, Hobsbawm expresses his hostility to imperialism and particularly to the recent record of armed interventions aimed to give support to the continuity of the American empire in an era of growing global violence and disorder.

As a matter of fact, it is not possible to establish a clear distinction between the times of “war” and “peace” at the start of the new century. Looking back to the 20th century, there has been no global authority able to control or settle armed disputes since the end of the Cold War. Although the territorial states remain the only effective authority, they have lost their traditional monopoly of armed force. Although resisting to express opinions on the future, Hobsbawm affirms

“A tentative forecast: war in the twenty- first century is not likely to be as murderous as it was in the twentieth. But armed violence, creating disproportionate suffering and loss, will remain omnipresent and endemic – occasionally epidemic- in a large part of the world. The prospect of a century of peace is remote.”

In the context of a multifaceted analysis of globalization, Hobsbawm explores the contemporary threatens related to individual freedom, control on individuals and insecurity in social interrelations. According to him, the transformations of political violence and the “war against terror”, since September 2001, are expressions of the recent overall changes in society. At the beginning of the 21st century, public security requires special efforts since current political institutions do not cope with the main task to maintain  public order.

The challenges to overcome the contemporary scenario of instability and inequalities reveal that the world increasingly seems to require supranational solutions to supranational or transnational problems. Nevertheless, there is no global authority to assume these political decisions. Recalling Hobsbawm, “The only effective actors are states”.

Indeed, all these questions reflect issues of current power, politics and economics in a social context where democratic institutions are being threatened. The actuality of the debate is undeniable.

 

References

Eric Hobsbawm. Globalisation, Democracy and Terrorism. London,  Abacus, 2007

Book Review, Eric Hobsbawm. Globalisation, Democracy and Terrorism, wirtten by Gonçalves, J. R. B.  an Madi, M. A. C , published in the International Journal of Green Economics.

 

from Express Tribune: Nov 20, 2016
ozymandias

Ever since Ibn-e-Khaldun laid the foundations, the rise and fall of civilisations has been a favourite theme among historians. British Historian Arnold Toynbee, stated that Ibn-e-Khaldun’s Muqaddimahwas “a philosophy of history which is undoubtedly the greatest work of its kind that has ever yet been created.” Since then, countless authors, including Toynbee, have written volumes presenting their theories about the rise and fall of nations. Just like human beings, nations too have life-cycles, passing from youth to maturity to old age and death. Among these authors, the analysis of sociologist Giovanni Arrighi appears especially pertinent today. Arrighi identifies systematic cycles of accumulation of wealth associated with different hegemonic centres of civilisation. These hegemons last for about a century and then collapse, leading to the emergence of a new hegemon. Arrighi forecast the collapse of the latest hegemon (the USA in the post-war period), and emergence of a new hegemony cantered on Asia and led by China. Given that the last four hegemons have been of European origin, this would be a radical shift. The election of Trump is just one among myriad manifest symptoms of a civilisation in decline. We may live to see the fulfilment of Arrighi’s predictions of the end of Western hegemony.

Toynbee, one of world’s most widely read, translated and discussed scholars, studied the rise and fall of 26 civilisations in his monumental multi-volume Study of History. The most recent and youngest among these is the Western civilisation that dominates the world today. As usual, Eurocentric historians have sung countless paeans to the never-ending list of the unique glories of the Western civilisation. A whole library of books attributes the rise of the West to the intelligence, character, race, scientific talents, creativity, imagination, work ethics, courage, as well as good governance, democracy, and other social and political virtues. Naturally, these Eurocentric accounts portray the East as the diametric opposite, lacking all of these virtues. The book Eight Eurocentric Historians by James Blaut debunks more than 30 such self-congratulatory explanations of the rise of Europe. The task of constructing a non-Eurocentric history remains the need of the time. In this essay, we offer an initial rough sketch.

Far from being unique, the rise of Europe repeats an age old pattern of young, energetic but poor and primitive tribes on the periphery, overcoming old decaying and rich civilisations. From a long term historical perspective, the past three centuries of European ascendance are just a flash in the pan. For comparison, Muslims ruled Andalus for more than six centuries, and created an extremely rich culture, based on tolerance for all religions and respect for all types of learning. In all dimensions of life, France was primitive compared to contemporary civilisations in China and the Islamic world. Charlemagne’s emissaries were dazzled by the splendour of Haroun al Rashid’s court, and the gifts they brought back were avidly imitated, and became models of Carolingian art.

Whereas civilisations over the globe in China, Persia, Turkey, India, Africa and Latin America had substantial amounts of peaceful contacts, with trade and transfer of knowledge, the European city-states were in a constant state of war with each other. These hostilities spilled over in the form of the crusades against their Muslim neighbours. The conquest of Jerusalem repeats the standard patterns of energetic, poor and primitive outsiders looting rich, luxurious and decadent centres of civilisation. When they took Jerusalem, the European victors indulged in a bloodbath, killing all men, women and children so that their horses were up to their knees in blood. In contrast, when Saladin took Jerusalem back, he provided ships to take European prisoners back to their home countries.

Historian Henri Pirenne noted that “Europe” was created by Islam; a collection of warring nations with different languages and cultures was ‘united’ only in their opposition to Islam. Despite these hostilities, Europeans were able to learn much from the advanced science, technology, and culture of the Muslims. However, an unfortunate outcome of this hostility was the complete suppression of the debt to the Muslims in European accounts. As Andalus lapsed into decadence and degeneration, the re-conquest of Islamic Spain handed to the Europeans a treasure trove of knowledge and technology far beyond their wildest imaginations. The Cordoba library was a wonder of the world, containing advanced knowledge of medicine, chemistry, physics, astronomy and mathematics from around the globe, and from all civilisations. However the Catholic Church created a huge barrier to deriving benefits from this treasure. They forced all remaining Muslims to convert to Christianity, on pain of torture and death, and created the Spanish Inquisition to root out all remnants of Islamic thought and philosophies. Borrowing from Islamic sources was considered heresy, and was a deadly offence. Among the many prosecuted for heresy, Alexander Scultetus was a close friend of Copernicus. Even though the heliocentric hypothesis of Copernicus is available from many previous sources, and his mathematical model is a carbon copy of one exposited by Ibn Shatir, Copernicus became known as a revolutionary because he could not openly acknowledge his tainted sources. A Byzantine Greek translation of Ibn Shatir’s work was available in the Vatican library, and Copernicus knew Greek. Many contemporaries of Copernicus were familiar with various Arabic astronomy texts; they imported them and read them directly from Arabic. Mercator was arrested by the Inquisition, and in grave danger of being tortured to death in a painful way. The famous “Mercator projection” was already used in Chinese star maps of the 10th century. The construction of Mercator’s map, critical to European navigation, needed precise trigonometric values—readily available from India. Fearful of the Inquisition, Mercator hid his pagan sources. Similarly, high officials of the church made other such “independent rediscoveries” by hiding their real sources.

This unfortunate concealment and suppression of sources of the European Enlightenment has had grave consequences. Knowledge apparently sprang full blown, like Athena from the forehead of Zeus, into Europe. Even careful historians like Max Weber were deceived into believing that Europeans were uniquely capable of rational and scientific thought. This myth about European knowledge is at the root of a thousand other myths we have swallowed as parts and parcels of a Eurocentric history.

More articles on this theme: Eurocentric History