Saturday, October 14, 2017

Simon Wren-Lewis — How Neoliberals weaponise the concept of an ideal market

As a result, I would tend to suggest a slightly different definition that seems to work quite well today. The definition would be:
neoliberalism is a political strategy promoting the interests of big money that utilises the economist’s ideal of a free market to promote and extend market activity and remove all ‘interference’ in the market than conflicts with these interests.
This replaces a definition based on following an idea (the author’s market neoliberalism), by one of interests promoting an idea so long as it suits those interests.

This alternative definition seems to fit two cases I have used in the past to question more conventional ideas. Large banks benefit hugely from an implicit subsidy provided by the state (being bailed out when things go wrong), but neoliberals do not worry too much about this form of state interference in the market (whereas economists do). Regulations on the other hand they do complain about. It is a very selective focus on market interference....
Classical economic liberalism aka laissez-faire and "market fundamentalism" advocated minimizing the role of government in markets. Neoliberalism advocates selective use of the political process to favor the interests of capital. Hence, neoliberals work to capture government, while classical economic liberals would limit government to the role of night watchman.

Mainly Macro
How Neoliberals weaponise the concept of an ideal market
Simon Wren-Lewis | Professor of Economics, Oxford University

1 comment:

AXEC / E.K-H said...

Proof of the inherent instability of the market economy
Comment on Simon Wren-Lewis on ‘How Neoliberals weaponise the concept of an ideal market’

The foundational tenet of economics is that the interaction of free markets tends, in principle, to produce an inherently stable optimal outcome with all factors fully employed or, with regard to labor, at worst ‘naturally’ unemployed.

This tenet has NEVER been proven. General Equilibrium Theory is known to be a methodological disaster and economics is known to be in need of a paradigm shift: “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al.)

As a result, economic policy guidance in ALL variants between outer right-wing and outer left-wing has no sound scientific foundations since 200+ years. It can be proved that the market economy is inherently unstable.

Economics is a system science. Accordingly, the correct approach is not microfoundations but macrofoundations.#1 The elementary version of the objective, systemic, behavior-free, macrofounded employment equation is shown on Wikimedia:

From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (the Greek letter rho stands for ratio).
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

Item (i) and (ii) cover the familiar arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the macroeconomic price mechanism. Fact is that overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R and vice versa. This is the OPPOSITE of what microfounded economics teaches.

“We economists have all learned, and many of us teach, that the remedy for excess supply in any market is a reduction in price. If this is prevented by combinations in restraint of trade or by government regulations, then those impediments to competition should be removed.” (Tobin)

This is false: a reduction of the average wage rate W in the situation of unemployment INCREASES unemployment. In general terms: at the heart of the market economy is a positive feedback loop, i.e. the very OPPOSITE of what is required for a self-stabilizing system.

The lethal methodological blunder of the microfounded market theory consists in the Fallacy of Composition, i.e. the illegitimate generalization of truths that hold for one firm/market onto the economy as a whole.

The free market system is neither efficient, nor self-correcting, nor stable. Neoliberalism has no sound scientific foundations.

Egmont Kakarot-Handtke

#1 New Economic Thinking: the 10 crucial points