SimpleDon
Veteran Member
That list to me is either rather incomplete or based on incomplete information. Rather than go through each one, I give 4 examples.And your cynicism in this regards is based on a misunderstanding of neoclassical economics. Neoclassical economics does not stress that growth is supply lead. It does not stress that growth is supply or demand lead: it realizes both are necessary. In order to more production over time, there needs to be
My whole contention is that our current mainstream economics, neoclassical synthesis economics, is not intended to describe the economy that we have but to make the case for a governmentless free market economy that could exist. And to also make the case that the economy is still supply side lead, that economic growth begins with investment, and that supply, capital, is still a limited resource that in turn limits the potential of the economy.
Why is this the current, mainstream economics, when it is so wrong?
A cynic would say that it is because neoclassical economics stresses the importance of the rich and the investor class and fans their egos. And the rich hire the economists and the rich fund the chairs of economics and economics research in the universities. I am such a cynic.
1) more productive capacity (i.e. supply), and
2) more ability to purchase (i.e. supply and demand), and
3) more desire to purchase (i.e. more demand).
Moreover, there is nothing inherent in neoclassical economics that makes it application more favorable to the rich or to the poor. Neoclassical economics is a set of tools that are useful in analyzing the world. The results of the use of tools depends more on how the ends the tools are used for and how the tools are used not the tools themselves.
My cynicism was for the way that neoclassical economics was resurrected from a well deserved death in the 1930's because it is supply lead. I don't want to repeat the history of the school but it drew much the same criticisms from the very start that I am repeating here.
The tools that were developed by neoclassical economics include,
- Supply and demand setting prices through barter type bidding.
- Prices driven down to the marginal product costs of production.
- General Equilibrium.
- Natural interest rate.
- Money and debt are neutral in the economy, they don't impact the economy.
- Money creation is external to the economy by the government.
- Inflation is caused by the government issuing too much money by the interest rate not equaling the natural interest rate.
- Wages are set by supply and demand for labor.
- A regular production function that proves that profits are the natural wages of investment.
- The economy is inherently stable.
- The economy is self-regulating.
None of these are true.
1) "General Equilibrium" is specific model and also a general method of tracing a change in one market through other markets. Denying that the latter is not true is simply false. You may disagree with the specific tracing or method of tracing, but it is undeniable that there are discernible ripple effects.
2) "Money creation is external to the economy by the gov't" is also incomplete. Some types of monetary creation are external, some types are not - something explicitly recognized by neoclassical economics.
3) The concept of a natural rate of interest predates neoclassical economics.
4) "A regular production function that proves profits are the natural wages of investment" misrepresents the role of a production function in economic theory. It does not prove anything: it is a tool to analyze the distribution of rewards from production.
I believe you have a rather incomplete understanding of neoclassical economics, and of the role of economic theory in economic analysis. Tools that are used improperly tend to give poor results. That doesn't mean that neoclassical economic theory is good or bad. It means that properly used, it can give useful insights.
You complain that my five word bullet points are incomplete. Then when I go into detail no one reads them, complaining about my wall of words.
Some general observations about your post.
I am talking about the neoclassical economics of Marshall. It is this discredited school of economics that was resurrected to form part of our wealth friendly, supply side lead economics, of today, the neoclassical synthesis school of economics. Which is what you are defending, our current, mainstream economics. The economics that you learned in college. I agree that the synthesis economics is better than Marshall's neoclassical economics. It is a synthesis of Marshall's and Keynesian economics. My point is that the problems with the synthesis comes largely from Marshall's neoclassical economics.
I am talking about macroeconomics, the economics of the whole economy. You seem to be concerned with microeconomics, the economics affecting individual agents. Marshall didn't fully realize the difference between the macroeconomy and the microeconomy. Even the modern neoclassical economics believes that there is little difference between the macro- and the micro, taking the idea that the macroeconomy is nothing but the microeconomy multiplied by 330 million for the US, for each business and individual in the economy.
But the macroeconomy does react differently to changes than the many microeconomies do collectively. The surest way to see this is to see all of the economic paradoxes that we have discovered. Most of them are concerned with this difference between how the whole economy reacts verses how the individual acts.
| Higher savings rates results in lower savings in the economy. Holism: before or during economic crises - or - More savings means less money to save. Keynes, 1936 |
| Higher real wages lead to higher profits. Kalecki, 1969 |
| Government deficits result in larger private savings. Kalecki, 1971 |
| Stability is destabilizing. Minsky, 1975 |
| Efforts by individuals to pay down debt can result in higher leverages. I. Fisher, 1933 |
| Efforts to become more liquid transforms liquid assets into illiquid assets. Dow, 1987 |
| Hedging of individual risk increases overall risk. Wojnllower, 1980 |
| Lower wages lead to slower growth despite all countries being profit-led. Blecker, 1989 |
[td="align:center,width:120"]Paradox of thrift
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[td="align:center,width:120"]Paradox of costs
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[td="align:center,width:120"]Paradox of public debt
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[td="align:center,width:120"]Paradox of tranquility
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[td="align:center,width:120"]Paradox of debt
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[td="align:center,width:120"]Paradox of liquidity
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[td="align:center,width:120"]Paradox of risk
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[td="align:center,width:120"]Paradox of profit lead demand
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All of these are readily observed in the economy. None of them are explained by microeconomic principles.
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Specific comments.
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Specific comments.
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General Equilibrium, for example, is not a model tracing changes in one market to another one, it is the idea that supply and demand setting prices in the whole economy made up of many different markets imposes an equilibrium on the whole economy. That on aggregate demand in the whole economy is the same downward sloping regular (mathematically) curve that it is true for an individual product and that aggregate supply is likewise an upward sloping curve on aggregate. That this combination means that the economy is always going to return to the same equilibrium after a disruption on its own. Walisian equilibrium. (maybe misspelled.)
And that this equilibrium is characterized by full employment and full utilization of production capacity. That the economy is ergodic. (I don't know if this word is in common use outside of engineering and physics. I can wait while you look it up.) You can see that this is a necessary precondition for the existence of the self-regulating free market.
Contrast Marshall's neoclassical economics, initially adopted by the synthesis economics but now partially abandoned, idea of a General Equilibrium with the view of Keynesian economics. That while the economy does tend to equilibrium, after all we are talking about human beings who ultimately prefer order over chaos here, there are many different equilibriums that can be reached. That the economy is non-ergodic. That we can have a high unemployment and a low capacity utilization equilibrium, the Great Moderation, for example. (It is important to point out that while it is common for economists to use the word "unemployment" what they really mean is the labor participation rate, the percentage of the labor force that is working.)
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Money and debt, money creation.
Neoclassical economics ignores the influence of money and debt. They believe, and this carried over into the synthesis economics, that money casts a veil over the barter nature of the economy. And that debt doesn't matter because for every borrower there is a lender so across the whole economy the net effect is nil.
Is there any question of how our mainstream synthesis economists completely failed to foresee the Great Financial Crisis and Recession? In fact, their models, based on General Equilibrium by the way, didn't allow for the kind of financial crisis that triggered it because the financial sector is self-regulating in the model and incapable of the stupidity that it turned out that they were more than capable of. That the crisis was inevitable because of the idiocy of the policies that were the result of the application of your presumed to be benign neoclassical economic tools.
Marshall is off of the hook on the question of money creation, he only knew the gold standard, and had no reason question what money was. But modern, neoclassical synthesis economists should know better because the evidence is staring them in the face.
Modern Keynesian economics recognizes that we have a monetized economy that behaves differently than if it was a barter economy. And that money creation is internal to the economy and always has been. It is not just that Keynesians reject the rather strange notion that somehow the government is external to the economy. It is because all of the money creation in the economy is created by either public or private debt.
The consensus economists, another name for the synthesis economics, will explain clearly and correctly how our so-called fiat money system works by fractional reserve banking and then in the very next statement deny the obvious meaning of it, that our money is largely created by banks making loans and that the money created comes out of thin air. That it is what we can buy with the money that gives it value and that this has been the way that it has always been. That the gold standard was nothing more than a flawed fiat money system, that the gold didn't give inherent value to the money, rather that the value of the money inflated the value of the gold.
In fact, debt is now and always has been the basis of the money, even before the very concept of money existed. That primitive tribal people depended on gifting. If you needed something from another member of the tribe, you expressed the admiration for the item and the owner would give it to you as a gift, but with the unspoken understanding that it creates an obligation for you to reciprocate by giving a gift sometimes in the future. In other words, a debt was created.
This gifting behavior has been observed in virtually every primitive people studied by anthropologists. It is a behavior reported in virtually every indigenous tribes encountered through history. But its significance to economics has only been realized for the last thirty years or so. But not by the consensus economists, it is the Rubicon that can't be crossed.
Why is it the Rubicon of the consensus economics? Step back a bit to earlier where I said that Marshall's discredited neoclassical economics was resurrected from the intellectual waste bin of history to counter Keynesian economics, because the Keynesian economics is so distasteful to the wealthy?
It wasn't just because Marshall's neoclassical economics is supply side lead. It is because the whole point of Marshall's neoclassical economics is that the economy can operate better independently of the government. That there can be a self-organizing, self-regulating free market. Now except for a few true believers, the Koch brothers maybe, the wealthy realize very well that this is a crock of sh*t, why else would they spend so much time and money trying to gain control of the government if it is not needed? The wealthy want you and all of the economists to believe this crock of sh*t so that the wealthy can take control of the government and to use its power over and control of the economy to further enrich the already rich. Essentially what has been happening for the last thirty five years.
And Marshall's entire theory supporting the free market hinges on one thing, that the 100% natural, organic economy is based on barter.
That supply and demand set prices independently of the producer by the bartering in the market. Supply and demand drives the price down to the cost to produce the marginal product, the most efficient producers are forced therefore to produce the maximum number of products that they can driving less efficient producers out of business.
This results in the greatest degree of social justice that is possible. The workers earn exactly what their labor is worth in the market. The owner of the most efficient businesses earn the highest profits. Profits that have to be paid to the investors because profits are a regular cost of production of a product. The less efficient producer is out of business, allowing the more efficient businesses to recycle his assets and to employ his workers in more efficient endeavors, where they will earn the higher social justice wages and profits.
But look what happens to scenario above if bartering isn't the basis of the economy and the money, if debt is.
Consider ancient Greece. They based their exchange economy on oxen and temple goods, the sacrificial offerings to their gods. This seems strange to modern ears until you are told that the Greek economy was organized and regulated by the priests of the temple.
This measure of value based on oxen is strange to modern man. What did they do, lead the oxen to the store to barter and then to the butcher to make change? Of course not. The priests established a detailed table of values. For example, and I don't know for sure, say a pound of bread was worth 1 hundredth of an oxen or one sixteenth of a sacrificial spit.
All of the goods commonly traded were assigned relative values. And if you were a farmer who raised grain the temple would issue you tally sticks or some other script representing the value of your crop and of the value of your debt to the temple that you will have to pay in grain when you harvest your crops. You would use the tally sticks or other script to purchase the products that you need. The merchant would use the sticks that you give him to reduce his debt to the temple. A perfectly serviceable system that we see through out the early civilizations. The English used tally sticks well into the 18th century for taxes.
But not only is debt the basis of the money and the economy, prices aren't arrived at by barter, they are fixed prices. And as far from a free market as you can get the market is wholly dependent on a pseudo government and bank, the temple, as a trusted third party in the exchange.
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What else? A regular production production function establishing profits as a recognized cost of production.
Every modern neoclassical production function that I have ever seen has included "K," capital, as part of the function. Even the simplest with only labor and capital. Maybe you can point me to some that don't include "K."
Maybe you believe that it is unfair of me to substitute profits for capital in the functions? But what is the representative of labor if not the cost of the wages? How is this different than assuming profits for the cost of the capital?
Anyway, this is once again, is not the way that the world works. Supply and demand doesn't drive the price of a product down to the marginal product cost including a maximum socially justified profit. Prices are set by the producer including a desired profit, the price set is based on the average cost to produce the products. The profit ends up being the residual, the revenue from sales of all of the products sold minus all of the costs to produce the products.
It is that simple.
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Keynesian economics says that the government must be an active participant in the economy. That the market economy is non-ergodic and it can become mired in many different, undesirable equilibriums. That it is up to the government to push the economy to full employment and highest possible production utilization. That history doesn't repeat itself in economics simply because it rewards invention, both good and bad. That in economics there is no long term anything, only short term responses strung together. That capitalism unduly favors some classes over others and its up to the government to redress the balance. A nice way of saying that the government must redistribute incomes.
All of this is counter to modern neoclassical economics. And to the desires of the wealthy. But it is exactly what we see when we look at the economy. Do you believe that the economy always returns to a full employment equilibrium? Or does it rather become mired in an undesirable equilibrium.
The neoclassical synthesis economists now say that the economy only tends to General Equilibrium, in the long term, but admit that the Keynesians are right about the economy becoming mired in many different equilibriums in the short term. Isn't that admitting that the Keynesians are right, that there is no long term for General Equilibrium to produce full employment?
And doesn't assigning the full employment, General Equilibrium to a long term that we never reach destroy the case for a self-regulating free market and support one for government intervention?
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If you are going to continue to argue that modern neoclassical synthesis economics is neutral in questions of boosting either the rich or the poor, I think that you will have a huge problem with maintaining that stance considering neoliberal economics, Reaganomics, Thatcherism or supply side economics. Do you consider this to be also neutral?
It is in my estimation it is heavily biased to the rich at the cost of everyone else. This is not an unintended consequence of the neoliberal economic policies, it was the way that the proponents of neoliberal economics said that it would work, that they would intentionally boost the incomes of the well to do by presumably suppressing the wages of everyone else. There is no other way, is there?
And if we did this, according to them, investments would be increased, more production facilities would be built providing lots of new, good jobs and spreading joy and happiness to everyone and prosperity for all.
This is pure supply side lead, neoclassical economics. And it is still the dominate economic policy that we are under to this day. It is what the Republicans to a man and women push today. Tax cuts for the rich to boost investment.
But there is absolutely no evidence that all of the money that has been directed to the rich has boosted investments and done anything but to increase profits and the incomes of the rich. A conservative estimate is that 20 trillion dollars that would have been paid in wages under the old, largely Keynesian, demand boosting policies instead were directed to profits, the incomes of the rich and to the wealth of the already wealthy.
About half of the money is sitting in Treasury bills that were issued to finance the federal debt resulting from the tax cuts made to put more money into the hands of the rich to spur investments. If anyone can explain this to me I will listen. But it seems to be crazy to me and counter productive. The other half of the money has been put into the stock markets, which doesn't boost real business investments, put into building various asset bubbles like the one in residential real estate that caused the Great Recession, or into off shore banks to avoid taxes.
In the economy we have seen reduced business investment and reduced growth compared to the Keynesian economy of the post World War II economy.
The neoliberal apologists here have fallen back on some rather poor arguments. Such as claiming that the measurements used are faulty and presumably investments have boomed and jobs have grown and we are all much better off than we were before. That no one realizes it because the economic measurements for GDP and inflation are faulty. It is a poor workman who blames their tools.
Others have argued that we don't know what would have happened if the previous Keynesian demand side policies had been continued so we can't judge if the supply side economic policies have failed. All I can say is yes, we do. In the last thirty five years we have had two respites from the lowering of taxes on the very rich and the raising of taxes on everyone else. In the middle 1990's when Clinton raised taxes and after the Great Financial Crisis and Recession when Obama did. Both periods were followed by increased business investment and high growth.
Others have suggested that some unknown and apparently unknowable factor in the economy prevented supply side economics from fulfilling its promise of higher business investment and higher growth. The wealthy are willing to keep trying until works.
And maybe my favorite, that we are no longer operating our economy under the supply side economic principles because marginal tax rates have been raised since Reagan left office and that over the last thirty five years both Democratic and Republican administrations have continued to write regulations. Of course, these are easy to answer, the marginal tax rates have gone both up and down but are still today less than one half of what they were when Reagan took office. And the fact that both Democratic and Republican administrations have continued to write regulations is nothing more than proof that the regulations are needed.
All four arguments do nothing more than to tell me that the people who are making them are in no position to be passing judgment on anything to do with economics. They have no interest in economics beyond justifying the policies that they want to impose. When it doesn't support the policies that they want, they quickly abandon the economics, not the policies.
Reduced investment and growth is exactly what Keynesian economics predicts for boosting the incomes of the rich and reducing wages for everyone else. But it is not sufficient to be right. Economists are better off if they are wrong but embrace serious income inequality that favors the already rich. Like your favored neoclassical synthesis economics.