After decades of rightwing dominance, a transatlantic movement of leftwing economists is building a practical alternative to neoliberalism....
The new leftwing economics wants to see the redistribution of economic power, so that it is held by everyone – just as political power is held by everyone in a healthy democracy…
The new economists’ enormously ambitious project means transforming the relationship between capitalism and the state; between workers and employers; between the local and global economy; and between those with economic assets and those without. “Economic power and control must rest more equally,” declared a report last year by the New Economics Foundation (NEF), a radical London thinktank that has acted as an incubator for many of the new movement’s members and ideas....Addressing asymmetric economic power.
Earlier in the week I was in Britain. Walking around the streets of Brighton, for example, was a stark reminder of how a wealthy nation can leave large numbers of people behind in terms of material well-being, opportunity and, if you study the faces of the people, hope. I am used to seeing poverty and mental illness on the streets of the US cities but in Brighton, England it very visible now as Britain has struggled under the yoke of austerity. Swathes of people living from day to day without hope under the current policy structures, damaging themselves through visible alcohol and substance abuse, cold from lack of shelter and adequate clothing, and the rest of it. And then a little diversion around the City area of London, where the overcoats the men wear cost upwards of £2,000 and the faces are full of intent. Two worlds really. I was thinking about those recent experiences when I read the latest release from the IMF (September 20, 2017) – Growth That Reaches Everyone: Facts, Factors, Tools. Their analysis continues the slow move of the IMF to acknowledging, not only the reality the world faces, but also, by implication, the massive costs that this institution has inflicted on poor people around the world.Recreating Dickensian times.
Information is the basis for our economic and financial decisions. As buyers, we collect information about products before entering into a transaction. As investors, the same goes for information about firms seeking our funds. This is information that sellers and fund-seeking firms typically have. But, when it is too difficult or too costly to collect information, markets function poorly or not at all.
This form of asymmetric information―where two parties to a potential transaction have unequal knowledge―is a particularly serious hindrance to the operation of financial markets. If, for some reason, conditions suddenly make the information asymmetry worse, the consequences can be catastrophic. In a recent post, we described how in August 2007, a sequence of events led financial intermediaries to suddenly question the quality of some securities that many of their counterparties already owned. Not being able to tell safe from unsafe, investors and institutions withdrew from lending. As credit evaporated, many potential transactions stopped taking place all at once.
Economists use the term adverse selection to describe the problem of distinguishing a good feature from a bad feature when one party to a transaction has more information than the other party. The degree of adverse selection depends on how costly it is for the uninformed actor to observe the hidden attributes of a product or counterparty. When key characteristics are sufficiently expensive to discern, adverse selection can make an otherwise healthy market disappear.
The term “adverse selection” comes from the fact that, when the hidden attributes are costly to observe, the quality of the products on offer or of the potential parties to a transaction deteriorates; that is, the pool becomes adverse relative to the full universe of goods (or counterparties) available.
In this primer, we examine three examples of adverse selection: (1) used cars; (2) health insurance; and (3) private finance. We use these examples to highlight mechanisms for addressing the problem....Money and Banking
Economists have been sounding the alarm about this trend for a while now. John Kwoka, an economist at Northeastern University, has literally written the book on the follies of the modern age of antitrust. In a new report, he shows how much more complacent the government has gotten toward oligopolies. The government still doesn’t tend to let a single company dominate any industry, but it’s usually fine with just five or six. Kwoka traces the change in attitudes to the rise of the so-called Chicago school approach to antitrust policy:Bloomberg View
The theorem shows -- in a highly abstract model -- that producers and consumers can match their desires perfectly, given a particular set of prices....
... it worked only in a perfect world, far removed from the one humans actually inhabit....
This perversion isn’t Arrow’s fault. He merely helped to prove a mathematical theorem, and was no blind advocate for markets. Indeed, he actually thought the theorem illustrated the limitations of capitalism, and he was prescient in understanding how economic inequality might come to impair the workings of democratic government.
Perhaps it would be best to use his own words: “In a system where virtually all resources are available for a price, economic power can be translated into political power by channels too obvious for mention. In a capitalist society, economic power is very unequally distributed, and hence democratic government is inevitably something of a sham.”As I have been saying, capitalism (economic liberalism) is antithetical to democracy (political liberalism).
My instinctive entry point into economics is through business....
Economics as it exists today in its mainstream form is of no use whatever to anyone seeking to understand the reality of business. Our extant theories of the firm are failures in that they attempt to see the world through a neoclassical lens whilst that lens obscures anything remotely real from view in an effort to retain the equilibrating perfection of the closed system envisaged by Walras. The contradiction between the pursuit of equilibrium explanations and the open ended nature of the real world defeats neoclassicism at the starting gate and dooms it to subsequent nonsensical irrelevance....
In this context I have to attribute a great honor to the Arrow-Debreu effort to complete the Walrasian episode. Arrow-Debreu deserves our constant indebtedness. It shows, definitively, how the Walrasian tradition cannot be an explanation for a real economy. It achieves completion by imposing such horrendously, and obviously, unreal constraints on itself that it proves Walras wrong. It is thus great science. It is the falsification of a tradition shown to be worthless.
On another matter: mainstream economists have never adequately, in my opinion, responded to Coase’s challenge of 1937. He asked simply: if markets do what classical economists and their followers say they do, why do firms exist? They ought not. That they do suggests something is very wrong at the heart of orthodox thinking. So I add the ‘Coase conundrum’ to Arrow-Debreu as adding weight to the critique. Mainstream economics is alchemy....
Asymmetrical information is another challenge to orthodoxy that is too often ignored. Information about things is patchy in the real world. Very patchy. It is non-existent with regard to the medium and long term future. Yet this never deters the neoclassical theorists. They march along as if asymmetry was an inconvenience that can be assumed away for simplicity’s sake, rather than a dagger in the heart of their work....
Uncertainty and complexity characterize the real world. Certainty and simplicity characterize neoclassical economics. Hence it irrelevance. It is complicated though, as Arrow-Debreu shows. It has to be. Its epicycles weigh it down. But no amount of clever formalism can turn unreality into reality, just as lead is pretty tough to turn into gold. This doesn’t mean that neoclassical economist aren’t very bright. They are. They have to be to to tend to those epicycles. Newton, after all, spent more time on alchemy than on recognizable physics. No indeed, they are very bright. Just wrong.Real-World Economics Review Blog
"The substitution of labor for capital or vice versa tells us that neither if fundamental. The energy and skill are. Energy and knowledge deployed to order resources for subsequent disordering. That’s the economic process."Is he forgetting that capital goods are also produced by labor? Labor is basic until capital goods can produce capital goods and innovate while doing so. That level of AI is still in the dream stage of development, and even then it seems that knowledge workers will still be required in the Age of Artificial Intelligence.
