Ideological Rigidity — The Image of Regulations

Read more about The Regulators movement  here: image credit.

The below quote — treating corporations as a conspiracy against the public — is a good example of ideological rigidity, to be found in all corners of political pretence. 

A valid criticism of free market mystique is contaminated by allegations, against regulatory regimes in civil societies, that are made false by egregrious overgeneralisation, omission of evidence of substantial concern for social issues in regulation, as well as the widespread incidence of uncalled-for political tutelage by outsiders in regulatory determinations.

Part of the problem: if you want to keep society protected against unreasonable regulation you must subject it to political competition, which, in turn, produces opportunities for special interests to garner favours at the expense of other special interests and the public at large.

Compared to a social order with strong and open political competition, both 

(i) strictly private arrangements, and 

(ii) a totalitarian state 

engender 

(i) no better, and even 

(ii) considerably less effective regulatory performance — with 

(ad i) complaints among particptants, say on industry level, in self-regulatory regimes about "regime uncertainty" and other forms of regulatory malfunction being no less intense than in more open regimes, and 

(ad ii) totalitarian states producing massive regulatory overkill, for instance by militarising the economy for the sake of total power and ideological radicalism.

The term “regulation” is framed from the viewpoint of corporations and other businesses. From their viewpoint, “regulations” are limitations on their freedom to do whatever they want no matter who it harms. But from the public’s viewpoint, a regulation is a protection against harm done by unscrupulous corporations seeking to maximize profit at the cost of harm to the public....

The source

Economic Knowledge (2) — Public Debt Ratio & Deficit, Living Standard & Wage-Share in GDP

Image credit.

Continued from here.

I have tried to figure out the following two questions from Bill Mitchell's most recent quizz:

1. If the inflation rate is steady and the central bank maintains a constant nominal interest rate, then under current institutional arrangements where governments match deficit spending with debt issuance to the private sector, the public debt ratio may fall even if the government deficit doubles (say, from 2 to 4 per cent of GDP).

True or False?

My answer: True.

Brief explanation of my answer:  

Government deficits may have a stimulating effect on the economy. In principle, therefore, it is conceivable that even an increaseing government deficit may bring about such improvement of economic activity as to expand GDP to a larger extent than public debt, thereby actually causing a diminuition in the ratio of public debt to GDP.

2. The neo-liberal era has been characterised by a declining wage share in national income in many nations. This means that the real living standards of workers have been systematically eroded in these nations.

True or False?

My answer: False.

Brief explanation of my answer:

This is a treacherous question. For at least two reasons. If standards of living fall, this is likely to be accompanied by a falling wage share in GDP. Also historically, this is what has happened, not least over the last 30 years, in many of the world's richer countries.

But a strictly analytical approach to the question should reveal that it is in principle absolutely possible for the standard of living of workers to rise while the wage share in national income declines—I suppose, contemporary China is a case in point, and post-millenium Germany, for that matter. If participation of wage earners in productivity growth is sufficient to enhance real wages, their standard of living will increase, even when the wage share in national income may fall compared to the share of non-wages.

--- 

I shall deal with the third question (in this weekend's edition of Bill Mitchell's quizz) in a separate post. 

Continued here.

A Lit-up World — 4,000 Years of Economic Growth in Seven Minutes

Image credit.

Writes David Kestenbaum, prefacing the transcript of a panel exchange at npr: 

You can trace 4,000 years of economic growth through the history of light. The ways we got from a candle, made from of animal fat, to the LED lights we have today tell a lot about our modern economy.

...

ISRAEL: So at 3 P.M on September 4th [1882], Edison flicked on the switch here at JP Morgan's office.

GOLDSTEIN: And what happened?

ISRAEL: It went on...

...

ISRAEL: ...and as did lights all over the district. About a square mile of Lower Manhattan suddenly was lit by electricity.

GOLDSTEIN: To light a square mile of Lower Manhattan, Edison needed a whole financial system. He needed patents, a way to protect his ideas so no one would steal them. He needed a company, a way a bunch of different investors could come together and risk money - a lot of money - to build a power plant and lay wires so you could try this crazy thing, light without fire. Edison came along at a time when all this financial machinery - patents, corporations, banks - was in place.

KESTENBAUM: So the Babylonians worked a day to get 10 minutes of light.

GOLDSTEIN: Four thousand years later, in the 19th century with kerosene lamps, a day's labor got you five hours of light.

KESTENBAUM: By the time Bill Nordhaus does his light study in the 1990s, if you work a day, how many hours of light do you get?

NORDHAUS: Maybe 20,000.

KESTENBAUM: Twenty thousand hours?

...

NORDHAUS: Twenty thousand hours, yeah. Not bad.

The source.

Abba P. Lerner (1903-1982) [3] — Functional Public Finance

Image credit.

"Mr. Lerner, how many times do I have to remind you that you cannot run a government on transparent humbug?" — Keynes to Lerner according to Paul Baran.

Times have changed, I may add, the newest innovations in politics seem to have overcome that difficulty.

Continued from here.

Lerner will probably be remembered best for his clarification and extension of Keynesian theory and policy. Keynes himself was not always ready to keep up with him. In 1943 Lerner published an article, "Functional Finance and the Federal Debt," that announced a new approach to fiscal policy. (The subject was further developed in his Economics of Control and the Economics of Employment.) He noted that conventional fiscal wisdom was based on the principles and morals of good household management: don't spend what you don't have— a tacit reminder that the words "economy" and "economics" are etymologically derived from oikos, the Greek word for household.

Lerner, however, picking up on the summary Keynesian prescription of deficit spending, argued that governments should not be concerned with conventional morality but rather should consider only the results of their actions. The aim of government spending and taxing, he said, should be to hold the economy's total spending at a level compatible with and conducive to full employment at current prices— in other words, no unemployment and no inflation.

In doing this the government should not be concerned with deficits or debt. Second, the government should borrow or repay only insofar as it wants to change the proportions in which the public holds securities or money. Changing this proportion will raise or lower interest rates and hence discourage or promote investment and credit purchasing. If the only question, then, was how to finance a deficit, Lerner advocated printing money. Third, the government should put money into circulation or withdraw (and destroy) it as needed to effect the results called for by the first two principles.

Source: here and here.

Abba P. Lerner (1903-1982) [2] — Optimality

Image credit.

Continued from here.

The most controversial aspect of Lerner's book was his discussion of distributional optimality: What distribution of income would maximize happiness (aggregate satisfaction)? As Lerner had recognized but set aside in his article of 1934 ("We cannot here go into the problems connected with optimum distribution"), Pareto optimality was compatible with any and all distributions of income, however skewed. The principle seems intuitively unjust. In The Economics of Control, Lerner posed the question: What income distribution would maximize the sum of individual satisfactions if (1) the size of income were independent of its distribution; (2) the ability to experience satisfaction were independent of distribution; and (3) the ability to experience satisfaction were unknown, that is, if utility functions differed in ways unknown, so that ignorance was symmetric? 

His answer: if we assume there is diminishing marginal utility (that satisfaction decreases with growing consumption of any good or service) and that a move away from equality is as likely to increase as to diminish aggregate satisfaction, society's overall satisfaction will be highest if income is equal for all.

This argument, needless to say, became a subject of sharp debate, in which logical proofs alternated with comparisons of abstract values and psychological attitudes. Was the sum of individual utilities a proper measure of social welfare? Was satisfaction a function of absolute income or relative as well? Is equality of result inherently good or does it reward some more and some less than they deserve? And if it does the latter, that is, misallocate reward, does such misallocation reduce the social pie? Do incentives matter? And even if there are some distributions that are more productive than others, who is to say what they are and how to bring them about, much more convince people of their productivity and fairness? The kind of demonstration provided by Lerner is testimony to the power of economics to pose questions clearly, specify conditions, and generate answers within these constraints, but testimony also to the limitations of such reasoning as constraints are relaxed and complications introduced.

Source: here and here.

Continued here.

Abba P. Lerner (1903-1982) [1] — Facts and Likings

Image credit.

Abba Lerner wrote his first book

in the context of a gathering debate on the effectiveness of capitalism as an economic and social system, especially by comparison with a hypothetical socialist alternative. (It is always hard to argue against utopia.) Lerner was on the socialist side, but his economic analyses gave little comfort to his spiritual and intellectual comrades. His heart may have been in the right place, but he never let his heart rule his head. As a result, he preferred efficiency to orthodoxy, competition and freedom to state monopoly and dictation. Not that he thought private enterprise intrinsically superior: that had to be tested in the marketplace, and both private and public sectors should be free to prove their worth. (Ironically, Lenin had had fewer doubts on the subject. He thought that to let even one village grocer subsist would be to invite the return of capitalism.

In anticipation of this contest between public and private, Lerner devoted a series of articles to those principles that should govern socialist planners and economic managers and enable them to duplicate the advantages of a free, competitive market. He then worked these into his first major book, The Economics of Control—Principles of Welfare Economics (1944). The book is written as a kind of owner's/ user's manual for a command economy, but it is much more than that, as the subtitle indicates. It is a study of the character and conditions of optimality, presented in clear,simple, nonmathematical prose. (That probably cost it with the experts, who were moving increasingly to mathematization of argument.) It begins with the exchange economy and moves on to production, with special reference to the problems posed by indivisibility of factors. From there it takes up such matters as efficient allocation in the short and long run, rent, economic surplus, taxation and fiscal policy, investment, international trade and finance, and—a gloss on Keynesian analysis—the thorny link between unemployment and inflation. Scitovsky's appreciation of this ambitious work will serve to situate it in the history of economic thought: ''By comparing Lerner's book to Pigou's Economics of Welfare (1920), one realizes how narrow and one-sided was Pigou's interpretation of that term, and what enormous progress was made in one generation. Had Lerner written his Economics of Control fully footnoted with a complete set of references, one would also realize the magnitude of his own contribution to that progress" (1984, p. 1553).

Continued here.

Source: here and here.

Too Rich to See the Errors

Image credit.

One of the paradoxical triumphs of capitalism is its ability to make people so rich as to become insensitive to errors. In this way, a system more zweckrational / rational than any previous form of human society affords space for massive irrationality.

What deserves more investigation is the Gleichschaltung of public opinion in Germany - with virtually no opposition over decades in a range of issues that are intrinsically of a rationally decidable nature, amenable to factual inspection and scientific investigation. Possibly related to it: the disappearance of traditional political strands such a conservatism and liberalism in favour of regresive leftism under the aegis of green anti-capitalism and green pseudo environmentalism.

Why has that exercise been so incredibly successful—the long march through the institutions ("der lange Marsch durch die Institutionen") by which the German totalitarian left of the 1960s promised to conquer Germany? 

Energiewende ("energy turn", perhaps to be interprted as analogous to a phrase such as the "linguistic turn" in philosophy, a reorientation toward a new paradigm) denotes German efforts to operate the national system of energy provision on the basis of so-called renewable energy sources.

It is rather dangerous—indeed an occasion for quick and radical ostracism—in Germany to point to cultural continuities that involve the Third Reich, as German Vergangenheitbewältigung ("dealing with the Nazi past") is largely an exercise in condemning (with full enlightened hindsight) rather than comprehending (the complusions and seductions of) the shameful past; deviation from the crude schemes of Vergangenheitsbewältigung is liable to be submerged in emotional revulsion—often in the form of rash accusations to be equating rather than comparing (certain aspects of) present conditions and the Nazi past.

The exceptional emotive force of certain green topics is one such continuity: Take the 1920s and 1930s meme of "Volk ohne Raum" ("a people denied its natural space ( =  unencumbered nature)"). The idea that nature as we require it for our survival is being threatened, continues to be a dominant theme in the German mind. 

I remember, in the early 1960s, long before anyone would have considered something like the green party to be thinkable, how in school, via the media, as well as by my parents I was sternly instructed as to the sorry state of nature and man's sinful proclivity to destroy the environment. 

Industry was referred to as the chief culprit, and the term that would settle any discussion was "Chemie" (meaning "chemistry", but also "the chemical industry")—a magical expression in Germany, utter it and anyone knows without further explanation, let alone proof, that a calamitous sin against nature is involved.

The Euro System — A Short Lease of Life

Image credit.

I've been saying this for quite some time.

“I am not certain there will be a European Union in which to have negotiations… The one thing I would do in 2017 is short the euro. I think it is a currency that is not only in demise, but has a real problem and could in fact collapse in the coming year or year and a half.”

Origins of Central Banking

Image credit.

Matias Vernengo quotes Adam Smith on

the reasons for which the early public banks were created. Adam Smith discussed that in his magnum opus. From the Wealth of Nations:

“The currency of a great state, such as France or England, generally consists almost entirely of its own coin. Should this currency, therefore, be at any time worn, clipt, or otherwise degraded below its standard value, the state by a reformation of its coin can effectually re-establish its currency. But the currency of a small state, such as Genoa or Hamburg, can seldom consist altogether in its own coin, but must be made up, in a great measure, of the coins of all the neighbouring states with which its inhabitants have a continual intercourse. Such a state, therefore, by reforming its coin, will not always be able to reform its currency… In order to remedy the inconvenience to which this disadvantageous exchange must have subjected their merchants, such small states, when they began to attend to the interest of trade, have frequently enacted, that foreign bills of exchange of a certain value should be paid not in common currency, but by an order upon, or by a transfer in the books of a certain bank, established upon the credit, and under the protection of the state; this bank being always obliged to pay, in good and true money, exactly according to the standard of the state. The banks of Venice, Genoa, Amsterdam, Hamburg, and Nuremberg, seem to have been all originally established with this view, though some of them may have afterwards been made subservient to other purposes.” (WN, Book IV, chapter III)

The creation of a stable unit of account, which was essential for international trade, seems to be central for their creation. Proof of the importance of foreign exchange for this small, trade oriented, states is that this banks had a monopoly on foreign exchange clearing. In a sense, to guarantee the unit of account, and, as a result trade, was essential for government revenue which was to a great extent tied to the fortunes of foreign trade. In some sense, this preoccupation with a stable of unit of account is not unrelated to the function as a fiscal agent of the state.

The source.

Église Saints-Pierre-et-Paul, Wissembourg, France

Image credit.

Ich wollte heute eine Tagestour nach Wissembourg in Frankreich machen, liege aber seit gestern Abend mit Erkältung danieder. Aufgeschoben ist nicht aufgehoben. Ich möchte mich vor allem mit Sankt Peter-und-Paul beschäftigen, einer Kirche, teils im romanischen, teils im gotischen Stil erbaut, die es mir schon immer angetan hat. Offenbar nicht nur mir, wie man diesem wunderlich zu lesenden, alten Text entnehmen kann:

Image credit.

„Das Closter Weissenburg Sanct Benedicten Ordens ist der mächtigsten und ältesten Clöszters eines in Teutschland gewesen; wird unter die vier Abteyen des Römischen Reichs gezahlt, ward gebauen in dem Elsass an dem Berg Vogeseo in der Reichsstatt Weissenburg bey dem Fluss die Lautter genannt, welche mitten durch die Staat fleusst, an einem lustigen Ort des Bistumbs; die Alten haben es Witzenburg oder der Weisheit Burg genannt, dieweil die Münch solches Closters jederzeit in guter Lehr gehalten worden.“

Theological Economics — Analytical Framework as Universal Worldview

Image credit.

I am afraid, I used to believe in the equilibrium concept of economically constituted freedom described below until about four years ago. 

By studying the conditions of liberty, eventually I discovered that a free society is by nature a highly politicised organism. I began to realise that economic activities too are inevitably of a politicised nature, regulated and conditioned by power relations and laws etc. that are shaped by human ambition, persuasion and interaction, and collective products such as habits and conventions, all of which being causally prior to and more fundamental than economic action as captured by purely economic models.

Both Hayek and Friedman saw themselves as participants in a battle of ideas against encroaching socialism. In their hands, an analytical framework became a universal worldview: Economics 101 became economism. Economism is the belief that basic economics lessons can explain all social phenomena — that people, companies, and markets behave according to the abstract, two-dimensional illustrations of an Economics 101 textbook. Ideally, students should learn that the competitive market model is just that — a model, which by definition abstracts from the real world. According to the rhetoric of economics, however, the lessons of Economics 101 can be transplanted directly into the real world. The central idea that free markets generate the greatest possible economic well-being for society becomes a universal framework for understanding and answering any policy question.

Economism may not accurately describe reality, but its reduction of complex phenomena to simple concepts was a major asset in the battle of ideas. The political landscape of the United States after World War II was dominated by the shadow of the New Deal and the idea that the government could and should play a major role in managing the economy. Businesses that opposed intrusive regulations and wealthy individuals who feared higher taxes needed an intellectual counterweight to the New Deal, a conceptual framework that explained why an activist government was bad not just for their profits and their pocketbooks, but for society as a whole. Economism filled that need....

I have always been critical of neoclassical and modern equilibrium economics. I only wonder why this scepticism has not made me much earlier doubt the ideological generalisation of the free market model.

As the mantra of free markets, small government, and lower taxes became more popular with voters, Democrats adapted by also paying homage to competitive markets. It was Bill Clinton who said, "The era of big government is over." And Barack Obama’s signature health-care-reform program is centered on the idea of using (regulated) market competition to expand access to health insurance.…

Economism is the reduction of social reality not just to Economics 101, but to just one Economics 101 lesson: the model of a competitive market driven by supply and demand.

If we were to redesign Economics 101, what would it look like? One possibility is to begin not with abstract models, but with the real world. How do companies use technology to produce goods, and how are those companies organized? How are products and services distributed, and how do manufacturers, intermediaries, and retailers set prices? How are wages determined — not in the theoretical model, but in real life? What factors determine the set of opportunities available to different people on different parts of the planet?...

The source.

Die Zentralbank (11) — Geld-Multiplikator

Image credit.

Fortgesetzt von hier.

Zur Erinnerung: wir befassen uns mit den Prozessen, aufgrund deren die Zentralbank in der Lage ist, den Geldschöpfungsprozess anzuregen. Manche behaupten sogar, dass die Zentralbank diesen Prozess ziemlich exakt steuern kann — inwiefern es zutrifft, dass die Zentralbank die Geldmenge aufgrund der hier erläuterten Eingriffe und ihrer Folgewirkungen präzise zu steuern vermag, dazu werden wir uns in späteren Posts äußern.

I.

Vereinfachen wir das Bild ein wenig. Wir nehmen an, dass der Kreditnehmer Stuhlgang den ihm von Bank A (jetzt First Bank) genehmigten Kreditbetrag in Höhe von $ 100.000 an einen einzigen Empfänger überträgt — statt an mehrere: nämlich an die Firma American Steel, die eine Bankverbindung bei der Second Bank (siehe im Schaubild) unterhält.

Die American Steel bekommt also $ 100.000 — die Kreditsumme, die Firma Stuhlgang von First Bank erhalten hatte — auf ihrem Konto bei der Second Bank gutgeschrieben. Eine Verbindlichkeit von der Second Bank gegenüber ihrem Kunden American Steel.

Für Second Bank bedeutet dieser Zugang auf dem Einlagenkonto ihres Kunden American Steel, dass sich ihre Bank-Reserven bei der Zentralbank um $ 100.000 erhöht haben (Schaubild 17.7. A).

Denn der Geldtransfer von First Bank zu Second Bank findet so statt, dass die Reserven von First Bank bei der Zentralbank auf das Reserve-Konto von Second Bank bei der Zentralbank übertragen werden. Das Reserve-Konto der First Bank wird um $ 100.000 belastet, während der gleiche Betrag dem Reserve-Konto der Second Bank gutgeschrieben wird. Die Reserven der involvierten Banken bei der Zentralbank werden also unter den Banken verschoben.

Reserven und Zahlungsverkehr

Um also am Zahlungsverkehr teilnehmen zu können, müssen Banken über Reserve-Guthaben bei der Zentralbank verfügen, mit denen sie Forderungen, die von anderen Banken gegen sie bestehen, begleichen können. Denn in einem komplexen Bankensystem tauschen die Banken jeden Tag zahllose Forderungen untereinander aus. Einige Kunden von Bank B haben Geld zu bekommen von einigen Kunden der Bank A; andere Kunden der Bank A haben Geld zu bekommen von Kunden der Bank B. Diese Forderungen werden gegeneinander aufgerechnet, so dass zu einem bestimmten Zeitpunkt — z.B. am Ende des Geschäftstags oder einmal im Monat oder ... — ein Abschluss-Saldo zur Begleichung fällig wird. Dieser Saldo kann so ausfallen, dass Bank A einen bestimmten Betrag an Bank B überweisen muss, also eigene Bank-Reserven an diese Bank zu übertragen hat. 

Damit eine Bank jederzeit dazu in der Lage ist, Forderungen aus dem Zahlungsverkehr mit anderen Banken zu begleichen, kann es sein, dass Banken von sich aus einen gewissen Bestand an Reserven bei der Zentralbank unterhalten — wenn die vorgehaltenen Reserven nicht von der Zentralbank zwingend gefordert werden, spricht man von Überschuss-Reserven. 

Aber es ist eben auch möglich, dass die Zentralbank von jeder Bank einen Mindestbetrag an Reserven verlangt: die so genannten Mindestreserven.

Von diesem Fall gehen wir in unserem Beispiel nun aus. Die Zentralbank verlangt von jeder Bank Mindestreserven in Höhe von, sagen wir, 10% der Kunden-Einlagen bei dieser Bank — diese Einlagen sind ja Forderungen der Kunden gegenüber der Bank, die die Kunden geltend machen können à la "das ist mein Geld auf meinem Einlage-Konto bei dir, bitte zahle es an X. aus".

Grundsätzlich und zum besseren Verständnis des nachstehenden Beispiels: Mindestreserven (gesetzlich vorgeschrieben oder aus kaufmännischer Vorsicht freiwillig vorgesehen) haben ursprünglich und auch weiterhin (neben anderen Gründen) die Aufgabe, die (in Form von Einlagen bei den Banken bestehenden) Aktiva der Bank-Kunden zu schützen, insbesondere indem sie einen reibungslosen Zahlungsverkehr (gegenseitiges Verrechnen dieser Aktiva zwischen Kunden unterschiedlicher Banken und der gleichen Bank) gewährleisten (es sind immer genügend Bank-Reserven vorhanden, um die gewünschten Verrechnungen anstandslos vorzunehmen). Das erklärt warum im nachfolgenden Beispiel, die Kredite, die aufgrund von eingehenden Einlagen ausgereicht werden, mit Mindestreserven unterlegt/belegt sind, nicht aber der erste Kredit der First Bank. Dieser beruht auf Bank-Reserven, die durch einen Aktiv-Tausch "Wertpapiere(-im-Besitz-der-Bank)-gegen-Reserven" entstanden sind, und somit keine Verbindlichkeit der First Bank gegenüber Einlegern darstellt.

II.

Wenn nun von First Bank $ 100.000 an neuen Reserven auf das Zentralbank-Konto von Second Bank übertragen worden sind — zur Begleichung der von American Steel an Firma Stuhlgang ausgestellten Rechnung —, stellt sich nun auch Second Bank die Frage: was machen wir mit diesen Reserven? Denn die Reserven, die sie erhalten hat, pflegen keinen nennenswerten Zinsertrag abzuwerfen, indes der Kunde, dem dieses Geld gutgeschrieben worden ist, einen gewissen Zins für sein Guthaben verlangt. Kurzum: wie können die eingegangen Reserven eingesetzt werden, so dass die Bank mit ihnen einen passablen Netto-Ertrag erwirtschaften kann / kein Geld verliert, relativ oder absolut.

Second Bank wird versuchen, die bei ihr auf ihrem Zentralbank-Konto neu eingegangen Bank-Reserven auszuleihen, um sich Zinseinnahmen (in ausreichender Höhe) aus diesem Kredit-Engagement zu sichern.

Doch bei einem Mindestreserve-Satz von 10% ( =  $ 100.000  x  0.1  =  $ 10.000), können nur $ 90.000 ( =  $ 100.000  -  $ 10.000) ausgeliehen werden. 

"Nur" ist gut. Immerhin lässt sich ein neuer Kredit (Geld, das es bisher nicht gab) in Höhe von 90% der eingegangen Reserven in den Wirtschaftskreislauf einspeisen.

Nun nehmen wir wieder an, dass die Kreditsumme vollständig an einen einzigen Empfänger ausgezahlt / überwiesen wird, der ein Konto bei Third Bank unterhält.

Third Bank hat das gleiche Bestreben wie Second Bank — sie möchte einen befriedigenden Ertrag auf die neu hinzugekommenen Reserven erwirtschaften. Zu diesem Zweck leiht auch sie den freien (nicht durch Mindestsatz gesperrten) Teil dieser Reserven zu einem auskömmlichen Zinssatz aus: Von den $ 90.000 sind also 10% Mindestreserve ($ 90.000  x  0.1  =  $ 9.000) abzuziehen, so dass $ 81.000 ( =  $ 90.000  -  $ 9.000) zur Kreditvergabe bereitstehen. 

Dieser Prozess kann sich solange fortpflanzen bis einfach keine Bank-Reserven zur Kreditvergabe mehr übrig geblieben sind.

Schauen wir uns einmal an, wie weit sich jetzt schon das Kreditvolumen, das Einlagenvolumen und letztlich die Geldmenge — angestoßen durch einen Wertpapier-Kauf der Zentralbank — im Banken-System ausgeweitet haben:

Der Kauf von Wertpapieren im Wert von $ 100.000 durch die Zentralbank hat neue Einlagen bei Second Bank ($ 100.000) und Third Bank ($ 90.000) in Höhe von insgesamt $ 190.000 erzeugt.

Gleichzeitig sind aufgrund dieses Multiplikator-Prozesses neue (bisher nicht bestehende, neues Geld in die Wirtschaft einspeisende) Kredite auf den Weg gebracht worden, zuerst durch First Bank ($ 100.000), dann durch Second Bank ($ 90.000) und schließlich durch Third Bank ($ 81.000), also ist insgesamt neues Geld in Höhe von $ 271.000 erschaffen worden. Aber der Prozess ist noch nicht zu ende.

Rekapitulieren wir den Prozess, der dazu führt, das das Volumen an Einlagen und das in der Wirtschaft zirkulierende (mittels Krediten dort eingespeiste) Geld sich ausweiten:

Die $ 100.000, die First Bank ihrem Kunden Stuhlgang als Kredit ausgereicht hat, sind bei Second Bank als Einlagen (auf dem Konto von American Steel) gelandet. Second Bank leiht unter Abzug von 10% Mindestreserven $ 90.000 dieser Einlagen als neuen Kredit an einen ihr kreditwürdig erscheinenden Kreditnehmer aus. Dieser Kreditbetrag in Höhe von $ 90.000 geht bei Third Bank als Einlage (eines ihrer Kunden) ein, die unter Abzug von 10% Mindestreserven in Form eines Kredits in Höhe von $ 81.000 an einen neuen Kreditnehmer ausgereicht wird. Bis dahin sind also infolge einer Intervention der Zentralbank (durch Wertpapierkauf) in das Bank-System insgesamt

$ 100.000 + $ 90.000 + $81.000 = $ 271.000 

an neu geschaffenen Krediten, neuem Geld, das in die Wirtschaft fließt, und

$ 100.000 + $ 90.000 = $ 190.000

an neu geschaffenen Einlagen

erzeugt worden. 

Wenn der Kredit der Third Bank bei der Fourth Bank eingeht, erhöht sich die Summe der neu geschaffenen Einlagen entsprechend, und es ist (nun für Fourth Bank) möglich, einen weiteren Kredit unter Abzug der Mindestreserve auszureichen, und so weiter und so weiter.

Fortgesetzt hier.

Germany Breaking the EU Rules

Image credit.

Lara Merling reminds us:

In one of Donald Trump’s rants, he claimed the reason why there are so many German cars in the U.S. is that their automakers do not behave fairly. The German economy’s prompt response was that “the U.S. just needs to build better cars.” However, this time, probably without even realizing it, Donald Trump was on to something – Germany’s currency setup does give it unfair trade advantages.

While China is commonly accused of currency manipulation to provide cheap exports, the IMF has recently decided the renminbi (RMB) is no longer undervalued and added it in its reserve currency basket, along with other major currencies. However, an IMF analysis of Germany’s currency found “an undervaluation of 5-15 percent” for the Euro in the case of Germany. Thus for Germany, the Euro has a significantly lower value than a solely German currency would have.

Since the Euro was introduced, Germany has become an export powerhouse. This is not because after 2000 the quality of German goods has improved, but rather because as a member of the Eurozone, Germany had the opportunity to boost its exports with policies that allowed it to maintain an undervalued currency.

Germany and France are the largest Eurozone economies. Prior to joining the Eurozone, both countries had modest trade surpluses.

Image credit.

In the above figure we can see how following the implementation of the Euro, the trade balances of Germany and France completely diverged. The French moved to having a persistent trade deficit (importing more than they export), while Germany’s surplus exploded (exporting much more than they import). After a brief decline in the surplus in the immediate aftermath of the crisis, it is now again on the rise.

In the early 2000s Germany undertook several national policies to artificially hold wages down. These measures were seen as a success for Germany globally. By being part of the Eurozone and holding down wages, the Germans could export at extremely competitive prices globally. Had they not been part of the Eurozone, their currency would have appreciated, and they would not have the same advantages.

In the aftermath of the European debt crisis, Germany took a tough stance on struggling debtor countries. Under German leadership, the European Commission imposed draconic austerity measures on countries such as Greece to punish them for spending irresponsibly. Spearheaded by Germany, The EU (along with the IMF) offered a bailout to Greece so that it could pay the German and French banks it owed money to.

This bailout came with strict conditions for the Greek government that was forced to impose harsh austerity. The promise was that if the government cut its spending, the increased market confidence would help the economy recover. As a member of the Eurozone, Greece had very limited monetary policy tools it could use. Currency devaluation was no longer an option, the country was stuck with a currency that was too strong for its economy.

Meanwhile Germany prospered and enjoyed the perks of an undervalued currency. Being able to supply German goods at relatively low prices, Germany’s exports flourished. At the same time, Greeks, and other countries at the periphery of the union, were only left with the choice to face a strong internal devaluation, which meant letting unemployment explode and wages collapse until they become attractive destinations for investment.

Germany consistently broke the rules of the currency area, without ever being punished. When it first broke the deficit limits agreed upon by Eurozone members in 2003, the European Commission turned a blind eye. Germany is often considered to have set an example for other EU nations by practicing sound finance, and having a growing, healthy economy.

Greece, on the other hand is blamed for spending too much on social services, and many of its problems are blamed on being a welfare state. When you compare the actual numbers, however, Greece’s average social spending is much less than that of Germany. Between 1998 and 2005, Greece spent an average of 19 percent of GDP, while Germany spent as much as 26 percent.

To address these vast differences in the trade patterns of the EU nations, the European Commission introduced the so-called “six-pack” in 2011. These regulations introduced procedures to address “Macroeconomic Imbalances.” However, as found in the Commission’s country report “Germany has made limited progress in addressing the 2014 country-specific recommendations.”

Germany’s trade competitiveness comes at the price of making other members of the Eurozone less competitive. This is something that Germany needs to be aware of when responding to the problems other economies are facing. Currently Germany is demanding punishments for countries whose have few policy tools available to stimulate growth as Eurozone members. 

However, Germany should keep in mind that the Euro is preventing the currency adjustments that would take away its trade competitiveness. Without a struggling EU periphery, there wouldn’t be a flourishing Germany.

The source.

Chopin Polonaise in A flat Major, Op.53

Image credit.

Enjoy.

And more.

Image credit.

Chartres, again:

Image credit.

Manufacturing Today

Image credit.

David Deming has this challenging conclusion to offer:

Automation is a long-run problem that demands a long-run solution. Convincing manufacturing companies to keep — or bring back — jobs, one company at a time, is not going to restore the millions of jobs that have been lost to technological change. We must reorient educational institutions and job training around “human” skills that are difficult to automate. These skills include creativity, complex problem-solving, and the ability to work with others in fluid, team-based settings. 

Make sure to read the entire short but substantial post: Will Manufacturing Jobs Come Back?

I also like these propositions by Mike Norma—which I find challenging because I am not sure whether these are just nice words or insights of great depth:

But the structural problems that global society and the global economy face owing to technological innovation will require creative solutions that can only be addressed by out of the box thinking. The whole concept of "work" and "jobs" needs to be revisited as the world embarks on the Information Age, the Knowledge Society and the Third and Fourth Industrial Revolution that are happening simultaneously owing to technological innovation.

What Deming doesn't consider is distributing the increased opportunity for leisure owing to technological innovation and the reduced need for labor. This could be accomplished by longer time spent in education and earlier retirement by providing public funding as a social dividend. Leisure has long been the basis for culture. Increased distributed leisure can be expected to generate unprecedented cultural benefits.

The economy, including technology, is the material life-support system of a society. Culture is the spiritual foundation of a society. Leisure waters the root of culture by nourishing the human spirit.

The source.

Keynesian Flavours

Image credit.

Below, I am excerpting an excellent post by "Lord Keynes" on the different flavours of Keynesianism that have developed, arguably, since the late 1950s. I would tend to agree that the Neoclassical Synthesis Keynesians and the New Keynesians are deviating to such an extent from the spirit of Keynes's work that they cannot be credibly regraded as Keynesians.

The early bastardisation of Keynesian doctrine (Joan Robinson) is signficiant in explaining the victory of neoclassical thinking in the policy debate, as it has unfolded since the late 1970s, especially the merging of "progressive" economics with and its subordination under the neoclassical approach, and the consequential "neoliberalisation" of large parts of the left, especially the politically effective cohorts, except those who have given up economics altogether, replacing it with a green mythology denouncing rational economic conduct in a modern industrialised world.

I shall confine my brief comments to (I.) pointing to the anti-open-border position held by progressives in the Keynesian tradition, and (II.) explaining the three axioms whose rejection demarcates Keynesians from those only Keynesian by name.

I.

Writes "Lord Keynes":

The Old Left before the 1960s was, generally speaking, strongly opposed to Third World mass immigration. Open borders and mass immigration are very much part of free market capitalism, and, if anything, the “authentic” (if there is such a thing) non-Marxist socialist or Social Democratic attitude to open borders and unchecked mass immigration should be opposition to it, not support for it. 

II.

Now, more on different claims to being the rightful heirs to Keynes. From a Post-Keynesian perspective, the illegtimate "heirs" remain wedded to classical and neoclassical economics in adhering to three axioms that Keynes had rejected:

(1) the gross substitution axiom — which wrongly, from a Keynesian point of view, implies that all commodities are perfect substitutes for one another in a sense that makes it possible to equilibrate supply and demand so as to attain an optimal equilibrium no matter what kind of tradable objects are involved, including money, or near-money assets. But the increased demand for money type of assets cannot absord the employment lost in areas of production economically damaged by lower demand, notably demand diverted to liquidity-ensuring assets ( = money and near-money).

(2) the neutrality of money axiom — which wrongly, from a Keynesian point of view, implies that money cannot act as an economic factor sui generis, and, in particular, become a means that upsets the equilibriating process or ensures suboptimal equilibria such as an equilibrium at high levels of unemployment.

(3) the axiom of an ergodic economic world — which wrongly, from a Keynesian point of view, implies that the future can be correctely prognosticated from data recording the past and the present. Keynes world is non-ergodic, i.e. uncertain with respect to future events. The future is (in large measure and vital aspects) not probabilistic, it cannot be deduced from probabilities based on recorded history.

Writes "Lord Keynes":

 (1) The post-WWII Neoclassical Synthesis Keynesians (= Neo-Keynesians / hydraulic Keynesians / bastard Keynesians / Hicksian Keynesians).
In the aftermath of the Second World War, American economics was reformed by number of economists who were influenced by Keynes. However, partly in the environment of McCarthyism and partly through their own re-interpretation of Keynes (as well as the role of the Canadian economist Robert Bryce in spreading a flawed understanding of Keynes’ theories in the US), Paul Samuelson and Robert M. Solow diluted Keynes’s work by joining it with neoclassical economics (Davidson 2010: 247). Lorie Tarshis, the Canadian student of Keynes, had written a fairly good textbook summary of Keynes’s General Theory for American universities in the 1940s, but the book was attacked by conservatives who regarded it as inspired by communism, and in particular William F. Buckley denounced the book in his God and Man at Yale (1951). Consequently, a version of Keynesianism that used neoclassical microeconomics to justify general Keynesian macroeconomic policies was adopted as the orthodoxy in America, principally through the work of Paul Samuelson and Robert M. Solow, as well as the IS/LM model of the British neoclassical John Hicks (who worked at Oxford university). Hicks, Solow and Samuelson were influenced by neoclassical Walrasian general equilibrium theory.

Paul Samuelson coined the expression “neoclassical synthesis” to refer to the new theory that blended Keynesianism with neoclassical microeconomics. The “neoclassical synthesis Keynesians” assumed that involuntary unemployment was only due to inflexible wages and prices, and accepted the three neoclassical axioms of (1) neutral money, (2) gross substitution and (3) the ergodicity of the future, contrary to Keynes’s General Theory. Because of its departure from Keynes’s ideas, Joan Robinson labelled the neoclassical synthesis as “bastard Keynesianism” (Lodewijks 2003: 25; for the history of Keynesian policy in the US, see Turgeon 1996). This largely American version of Keynesianism was therefore open to theoretical attacks by monetarists and New Classicals in the 1970s, and today there are not many neoclassical synthesis Keynesians left.

Owing to their flawed neoclassical theory, the neoclassical synthesis Keynesians had difficulties explaining and dealing with stagflation, and were discredited in the 1970s. Many morphed into “New Keynesians,” and those who did not (e.g., James Tobin) came to be called “Old Keynesians.” Some well known neoclassical synthesis Keynesians were John R. Hicks (1904–1989), Frank Hahn, Abba P. Lerner, William J. Baumol, Franco Modigliani, Paul A. Samuelson, Robert Eisner, Walter W. Heller and Robert M. Solow. Notably, John R. Hicks actually renounced the IS-LM model (and the neoclassical synthesis) in the early 1980s and came to associate himself with the Post Keynesian school (Hicks 1980–1981).

(2) New Keynesians.
The New Keynesians emerged in the 1980s and are even further from Keynes’ theory than the neoclassical synthesis Keynesians. New Keynesians are one of the two main schools of mainstream macroeconomics today. The “new macroeconomic consensus” is essentially a mix of New Classical and New Keynesian theory, but the “Keynesianism” of the latter is so watered down that it hardly even deserves that name. In the wake of the monetarist and New Classical assault on neoclassical synthesis Keynesianism, New Keynesianism emerged by providing a more consistent neoclassical microeconomic foundation for Keynesian macroeconomics. New Keynesians are essentially neoclassicals who believe that monetary intervention is the main instrument of economic policy, although there are different strands of opinion within New Keynesian analysis, most notably that of Joseph Stiglitz (King 2002: 239). Some have recognised the usefulness of fiscal policy, but others are actually sceptical about fiscal intervention (Snowdon and Vane 2005: 364). For example, in some modern “New Keynesian” textbooks, one finds a loanable funds theory, Say’s law, opposition to budget deficits (on the grounds that they crowd out private investment and produce higher interest rates), the quantity theory of money, monetarist inflation targeting, and no discussion of aggregate demand – a complete and utter travesty of Keynes’s thinking (Lodewijks 2003: 29).

New Keynesians use rational expectations and assume that the cause of involuntary unemployment is sticky prices and wages, but also assume neutral money in the long run and Say’s law as well (King 2002: 233–239). Prominent New Keynesian include Joseph E. Stiglitz, Olivier Blanchard, John B. Taylor, David H. Romer, Christina D. Romer, Bradford DeLong, and N. Gregory Mankiw. Paul Krugman is a New Keynesian, but the question of how far Krugman has deviated from New Keynesianism or Neoclassical Synthesis Keynesianism is controversial.

(3) Post Keynesians.
Post Keynesians are the true heirs to Keynes and have built upon his work. The forebears of the Post Keynesian school were the Cambridge associates and students of Keynes who rejected the neoclassical synthesis. These were Joan Robinson (1903–1983), Richard F. Kahn (1905–1989), E. Austin G. Robinson (1897-1993), and Nicholas Kaldor (1908–1986). After WWII, Cambridge Keynesianism and Post Keynesianism were influential in the UK, Canada, continental Europe, and Australia (King 2002: 141–159), but went into decline after 1980, as neoclassical economics once again became mainstream economic theory. It should be noted that both the Sraffians (or Neo-Ricardians) and Kaleckians emerged as economic schools strongly associated with Post Keynesianism after 1945, but today they are usually excluded from the school, and certainly from the “narrow tent” definition of Post Keynesianism as advocated by Paul Davidson (Davidson 2003–2004: 247–248).

Paul Davidson (2003-2004: 251) dates the emergence of Post Keynesianism as a distinct school to the publication of Sidney Weintraub’s book An Approach to the Theory of Income Distribution (1958). Post Keynesians emphasise Keynes’ principle of effective demand and the fundamental role that liquidity preference plays in market economies. Post Keynesians also reject the three axioms of neoclassical economics, which are as follows:

(1) the gross substitution axiom;

(2) the neutrality of money axiom, and

(3) the axiom of an ergodic economic world.

None of these axioms is correct. They are simply not an accurate description of the real world characteristics of modern capitalist economies. In reality, money is never neutral, non-reproducible financial assets are not gross substitutes for commodities, and we face a fundamentally non-ergodic future.

Post Keynesians also emphasise liquidity preference theory and its role in causing involuntary unemployment. The essence of this is that increasing demand for liquid assets (money and financial assets) will not lead to demand for goods and services. Shifts in liquidity preference can cause long-run involuntary unemployment, since, in the face of fundamental uncertainty about the future, investment in commodity production can become unstable (Barkley Rosser 2001: 560).

The source.