For the unit 7 discussion, please read your fellow students’ book reviews and comment there on at least one of the them.  Please make it a substantive comment or query.

Since the industrial revolution, battles over political economy and economic systems have effectively divided society into 3 groups:  workers, capitalists, and government.  It has largely been assumed that the interests of workers and capitalists were opposed to each other.  Government, on the other hand, has been the entirely up for grabs.  Does government become the tool of workers and take over the major businesses (the socialist approach)?  Or does government become the tool of the capitalists to protect wealth and property (the neo-liberal/Hayekian approach)?  Or does government itself become a corps of technocrats that strive to strike a balance between workers and capitalists and focus their joint efforts on mutually beneficial programs (the Keynesian approach)?

There may be another alternative.  Who says that the workers and the capitalists (the owners of the business) must necessarily be separate groups?  Here’s a video that explores this alternative where workers own the business or the customers own the business (coops).

Question: What do you think? Will or could worker-owned businesses or customer-owned businesses become a major, significant part of our economic system in the future? How might changes in technology or culture either support or prevent such a development? Would such a development be desirable? Tell us.

This post is a reprint of a post from Econproph.com.

A very interesting video by an Irish economist explaining how the current reduce government spending (“austerity”) approach to the Eurozone debt and currency crisis is doomed to fail. It is doomed because cutting government spending in a recession only makes the recession worse, which in turn, reduces tax collections which then makes the government deficits worse not better.  But not only is the austerity approach all wrong to solving the debt crisis, it carries very significant risk of social upheaval.  (hat tip to Philip Pilkington and New Economic Perspectives).

 

Now I’ll offer one pre-emptive comment.  Critics of the arguments McWilliams makes often claim that either government spending isn’t really effective, that somehow only private investment spending will stimulate an economy.  Or, the critics claim that any resources the government puts into use through spending actually detract from the economy by denying those resources to some supposedly better, privately chosen use. Both of these criticism fail.  We are clearly discussing a situation in which there are excess, unused economic resources in the economy.  In plain language:  there’s high unemployment and people are out of work.  The criticisms are all based on an idea called “crowding out”.  For crowding out to occur, the economy must be at full employment – the opposite of being in a recession.

I want you to consider the longer run ramifications of the current austerity policies in Greece and the other peripheral Eurozone countries.  Where does this all lead?  Can Europe hold?  Will the insistence on budget cuts to pay banks result in revolts? Could it topple democratic governments or even democracy itself?  What do you think? What’s your reaction to David McWilliams little talk?

One of the central themes of the “Commanding Heights” video series was that markets and freedom or democracy go hand-in-hand.  The phenomenon we call “globalization” in the last 20-25 years is really a loosening of restrictions on capital. Financial capital (money and financial assets) have become increasingly free to flow quickly and instantly across international borders to wherever the owners/managers of that financial capital see the greatest opportunity for short-term profit.  Money invested in country A today and easily be moved to country B tomorrow – and perhaps back the same day depending on the movements of financial markets.  This freedom provides the owners of capital, investors and banks, enormous power at the expense of what used to be government power.  If a government doesn’t provide the an environment attractive to the banks and investors, they go elsewhere. Capital’s power comes from the plausible threat to leave a country if it is deemed unsuitable.

It takes both labor and capital to produce.  But while the globalization phenomenon has increased the power and freedom of capital, labor has not experienced an equal increase in power and freedom.  Labor is not mobile. Immigration/emigration is highly restricted. There are huge barriers to labor finding more suitable markets. Labor’s power to change the government is limited to the ballot box, a slow and uncertain process.

Some analysts have argued that this power imbalance has led capital to actually prefer totalitarian regimes to democratic systems. The following is an excerpt from a post I wrote on my econproph.com blog in March 2011.  Follow the link to read the whole post.  I even suggest following the link in the post to a video.  Then comment here on whether you agee or not, and why. Also, do you think this phenomenon is holding back Africa from development?

Do Markets Like Totalitarian Governments?    March 4, 2011

Food for thought.  We’ve been bombarded with messages for at least 20 years about how markets and democracy have triumphed. Central planning is dead.  Further we’re constantly told that democracy is “on the march” and totalitarian governments can’t survive.  The … Continue reading →

The video series Commanding Heights presents a particular viewpoint.  Economists call that viewpoint a “neo-liberal” or “neo-classical” economic view.  In the video series, economic growth and liberty are seen as reaching a “low point” in the late 1970’s but turning around with the Thatcher-Reagan “revolution” that led to neo-liberal deregulation and free capital flows between nations.

Not everybody agrees with the video series. Here I have copied a post here from Professor Brad DeLong of Univ. Cal. Berkeley that takes a different view.  Delong quotes extensively from Noah Smith.

Tracking the Forward March of Human Liberty…

From my perspective the nadir of human liberty in the twentieth century comes in the first half of the 1930s. Thereafter we have a long march–a march that was fastest in the North Atlantic from 1942 to 1975 or so, and that has continued (albeit at a slower pace) since then. But Milton Friedman thought not. And now it turns out that a surprisingly large number of people think not, even today.

With Friedman I think I understand. He was curiously blind to racism, sexism, etc.–and to the importance of their decline. As I see it, he saw only the failures of social democratic regulation (transportation, professional practice, nimbyism, drug war, etc.) and none of the successes (telecommunications, federalization of food and drug regulation, finance, etc.) and none of the places where society in 1980 was still underregulated (pollution, medical insurance, etc.). From my perspective, Friedman had a touching but naive faith in the bona fides, competence, and benevolence of his political masters. And he had a great overestimation of how successful the policies he believed in–stable money stock growth, deregulation, “starve the beast” through low taxes–would turn out to be.

With people today I don’t understand. I really don’t see a rationale for believing today that 1980 was in any sense a nadir of human liberty–a point well down the Road to Serfdom–or for believing that the progress of human liberty has been materially more rapid after 1980 than it was in the 50 years before.

Noah Smith performs the public good of picking up the litter with respect to John Cochrane:

Noahpinion: A standard intellectual-Republican narrative of history: John Cochrane has a new post up in which he discusses the historical importance of Milton Friedman’s book Free to Choose…. The first half of the post is a discussion of the difference between negative and positive rights, with which I largely (but not completely) agree. But the second half consists of a reading of events since 1980 with which I take a number of exceptions….

1980 was an inflection point for the advance of freedom…! Yes, some of the Friedmans’ dark worries did not pan out. Why not? Because people read the book! The Friedmans were fighting against the “tide of history.” And turned it back…

[Cochrane’s] appears to me to be a very standard intellectual Republican narrative of recent history; if you surveyed registered Republicans with postgraduate degrees, and then took an  average of their responses, it seems like you might get something like this. Now, standard narratives are not necessarily wrong. But this narrative happens to be one about which my feelings are quite mixed…. I agree about China. I basically agree about India (though where did Keynes support a “license raj”??). I agree about the Cold War and the spread of democracy. I agree about inflation. None of these positive developments should be forgotten or ignored.

But there are some points with which I strongly disagree. Let me address these:

1. “[1980] was the end of stagnation in the US and UK.” What? Really?? What about the Bush years? You know, the 8 years when the inflation-adjusted stock market did worse than in the 1970s, income stagnated, and GDP growth underperformed past booms, all despite massive tax cuts and substantial deregulation?
2. “The economic and political ills of the 1970s seem to be returning.” Really? Inflation?? No. I know there are some people who believe that a fiscally induced hyperinflation is just around the corner, but that is pure speculation…
3. “US and UK inflation — the result of mindless “stimulus”” Really?? But budget deficits were low in the 1970s, and only exploded in the Reagan years (and again in the Bush years). And most economists believe that the 70s inflation was caused by loose monetary policy (and possibly oil shocks), not by fiscal policy.

Basically, in 2000, this Republican narrative was looking pretty good – though not entirely thanks to Republicans. Bill Clinton seemed to have proven that market liberalism did not require exploding deficits and exploding inequality (the ills of the Reagan years) in order to create prosperity. But then came the Bush years, and America doubled down on the Milton Friedman program with more tax cuts, more deregulation, more privatization. And income stagnated, stocks stagnated, and growth was lackluster, while debt and inequality resumed the explosive growth of the Reagan years. By the eve of the financial crisis, the Republican narrative was looking pretty shopworn…

I would quibble with one point. I would say that it was not the Republican narrative of ever-more deregulation, ever-greater tax cuts, ever-higher degrees of inequality, and ever-larger structural deficits that looked good as of 2000. I would say it was, rather, the Clinton narrative of smart neoliberalism: using market incentives and mechanisms to achieve social democratic goals.

Paul Krugman piles on. Many hands make light work:

Reaganite Delusions: The great era of US economic growth was the postwar generation; even during the good years of the 90s we didn’t achieve comparable growth, and overall, the post-Reagan era was marked by slower growth than the equivalent period of time pre-Reagan. And I haven’t even gotten into the income distribution thing.

All of which makes me wonder: what goes on in these peoples’ minds? Do they never even think of actually looking at the numbers, because they know that Reagan ushered in a great boom? Inquiring minds (which they obviously don’t have) want to know.

I will leave the discussion of negative and positive liberty to the trained professionals in the field–but I would say that if you have not listened very closely on these issues to Amartya Sen, you should not claim to be an economist.

On the data issues… I am thinking, increasingly, that what is going on is a combination of selection by right-wing funding sources for complaisant intellectuals, of subservience to whatever their political masters set forth as the party line (individual mandate as a conservative responsibility principle, anybody?), and is at some level a simple lack of work ethic: people unwilling to open up their web browsers to look at the data, people unwilling to do their homework, and people unwilling to take even small steps to see whether their prejudices meet the test when marked to market. It is, after all, very hard not to notice that for America’s lower, working, and middle classes, the economic stagnation in real compensation per hour that started in the early 1970s did not magically come to an end on January 21, 1981 but has–alas!–continued (with a short interruption in the Clinton years) to this day.

That is really hard to miss.

After you’ve viewed The Commanding Heights video, part I as assigned for Unit 2, give some thought to the ideas expressed in the video relative to the Great Recession/Crash of 2007-2009.

A note:  technically the recession only lasted from December 2007 until June 2009 but that is because economists define a recession as “a decline” in economic activity – in other words a recession is when an economy is getting smaller or worse.  (see my blog post “Economists are speechless” for clarification) The period since 2009 has been marked by very, very slow growth, but still it’s positive growth.  Therefore the economy still hasn’t recovered to what it was before the recession.

How do you see the events described in the video as leading up to the Great Recession and Financial Crisis of 2007-09 that we are still recovering from?  What have you heard in arguments regarding the bank bailouts, GM/Chrysler bankruptcy/restructuring, or the debates over U.S. government budgets & stimulus that is an echo of the video?  What’s different today?

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