Tag Archives: joan robinson

Never Trust An Economist

“Never trust an economist, including myself”, says Ha-Joon Chang in this wonderful video titled, Economics Is For Everyone.

Ha-Joon Chang

click the picture to see the video on YouTube.

Ha-Joon Chang is definitely sounding like Joan Robinson. In a lecture in Delhi in 1955, she said:

The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.

More from her in this post Joan Robinson On Economists

The World Needs A Kaldorian Response

Dani Rodrik has a new article, The Abdication Of The Left written for Project Syndicate. He says:

The good news is that the intellectual vacuum on the left is being filled, and there is no longer any reason to believe in the tyranny of “no alternatives.” Politicians on the left have less and less reason not to draw on “respectable” academic firepower in economics.

Consider just a few examples: Anat Admati and Simon Johnson have advocated radical banking reforms; Thomas Piketty and Tony Atkinson have proposed a rich menu of policies to deal with inequality at the national level; Mariana Mazzucato and Ha-Joon Chang have written insightfully on how to deploy the public sector to foster inclusive innovation; Joseph Stiglitz and José Antonio Ocampo have proposed global reforms; Brad DeLong, Jeffrey Sachs, and Lawrence Summers (the very same!) have argued for long-term public investment in infrastructure and the green economy. There are enough elements here for building a programmatic economic response from the left.

This is fine, but it wouldn’t be enough to solve the world’s problems because the world as a whole is balance-of-payments constrained as most individual nations are. What is needed is a coordinated response at the international level – a concerted action.

In his 1984 book Causes Of Growth And Stagnation In The World Economy, Nicholas Kaldor wrote:

I should like to end this series of lectures by suggesting the outline of a world-wide agreement on the necessary policies for recovery. The programme could be summed up under four main heads:

  1. The first is coordinated fiscal action including a set of consistent balance of payments targets and “full employment” budgets.If this does not prove to be politically feasible, it is inevitable that the growth of unemployment will sooner or later force governments to take measures that would make it necessary for them to expand demand without being frustrated by the inevitable balance of payments consequence of expanding their economies relative to their trading partners. This means that there needs to be some form of restriction that would limit the increase in “competitive” imports to some target ratio in relation to exports. Trade liberalisation, which played such an important part in the rapid economic progress during the years of expansion, becomes a serious obstacle to economic recovery in the case of prolonged stagnation due to the inability of countries to achieve a coordinated set of policies. But, given a proper recognition of the problem, that under conditions of unrestricted free trade the actual volume of production and trade may in fact be considerably less than under some system of regulated trade – a system which relates the volume of imports in manufactures from a particular group of countries, such as the members of the EEC, to some mutually agreed ratio to the exports of individual members to the rest of the group – there is no reason why full employment should not be restored through policies of expansion, preferably directed by the expansion of State investment. This coordinated action by all countries, instead of isolated actions by each country, is the first and most important requirement of recovery.

At present all countries have fairly large deficits in the general government budget, but these are largely the consequence of the low level of activity. On a “full employment” basis they would show a highly restrictive picture – they would show surpluses and not deficits. Contrary to appearances, the requirement of stability is for expansionary budgets with lower taxes and higher expenditure, and not further fiscal restriction (as is advocated, for example, by M. de Larosiere of the International Monetary Fund).

Before the crisis, the economics profession believed in two orthodoxies:

  1. crude version of Monetarism, which treats the stock of money as exogenous and also claims that fiscal policy is impotent.
  2. free trade.

While policy response following the 2008 crisis have made economists realize that the first orthodoxy is wrong, they are yet to realize the orthodoxy of the second. As Joan Robinson said in her 1973 article, The Need For A Reconsideration Of The Theory Of International Trade, “there is no branch of economics in which there is a wider gap between orthodox doctrine and actual problems than in the theory of international trade”. The recent consensus of the economics profession on the debate about the UK EU referendum highlights it. Instead of the invisible hand, we need a visible hand, i.e., a coordination at the international level. The leftist response as highlighted by Dani Rodrik are welcome but still leave the problem open. So one needs both this and a world-wide fiscal expansion with balance-of-payments targets.


Kalecki And Keynes, Part 2

Continuing from the previous post, Kalecki And Keynes …

The General Theory of Employment, Interest and Money was published in January, 1936.

Meanwhile, … , Michal Kalecki had found the same solution.

His book, Essays in the Theory of Business Cycles, published in Polish in 1933, clearly states the principle of effective demand in mathematical form. At the same time he was already exploring the implications of the analysis for the problem of a country’s balance of trade, along the same lines that I followed in drawing riders from the General Theory in essays published in 1937.

The version of his theory set out in prose (published in ‘Polska Gospodarcza’ No. 43, X, 1935) could very well be used today as an introduction to the theory of employment.

He opens by attacking the orthodox theory at the most vital point – the view that unemployment could be reduced  by cutting money wage rates. And he shows (a point that Keynesians came to much later, and under his influence) that , of monopolistic influences prevent prices from falling when wage costs are lowered, the situation is still worse, because reduced purchasing power causes a fall in sales on consumption goods …

Michal Kalecki’s claim to priority of publication is indisputable.

– Joan Robinson, Kalecki And Keynes in Essays In Honour Of Michal Kalecki, 1964. 

Kalecki And Keynes

Michal Kalecki swam into my ken just after the publication of the General Theory of Employment, Interest and Money, in 1936. The small group who had been working with Maynard Keynes during the gestation of the book understood what it was about, but amongst the public as a whole it was still a mystery. Kalecki, however, knew it all. He had taken a year’s leave from the institute where he was working in Warsaw to write the theory of employment but Keynes’ book came out, and got all the glory. Michal never made any claim for himself and I made it my business to blow his trumpet for him, but most of the profession (including Keynes) just thought that I was being kind to a lame duck. Only since the publication of his essays written in Polish from 1933 to 1935 has it been generally recognized that he had already worked out all the essentials of what became known as Keynes’ theory (Selected Essays on the Dynamics of the Capitalist Economy, Cambridge University Press, 1971). He showed that it is investment, not private saving, that brings about capital accumulation; that a government deficit, in a slump, will increase employment; that cutting wages only makes the slump worse; that the rate of interest depends upon supply and demand of the stock of money, not on the flow of saving, and that it is the forward-looking expectation of profits that induces firms to accumulate.

The question of glory did not seem to me to be important. As Michal was the first to admit, his ideas would have taken a long time to establish while with Keynes they burst upon the world as a revolution. But I was deeply impressed by the fact that two thinkers of such different background and habits of thought could arrive at the same diagnosis of the economic situation. Logic is the same for everybody; the same logical structure, if it is not fudged, can support quite different ideologies, but for most social scientists ideology leaks into the logic and corrupts it.

In the natural sciences, it is common enough for the same discovery to come almost simultaneously from two independent sources. The general development of a subject throws up a new problem and two equally original minds find the same answer, which turns out to be validated by further work. In the history of economic thought, the case of the discovery of the theory of employment by Keynes and Kalecki is unique.

– Joan Robinson in PORTRAIT: Michal Kalecki, Challenge, Vol. 20, No. 5, November/December, 1977, pp. 67-69, http://www.jstor.org/stable/40719591

The Full Employment Assumption

Before I begin, Brian Romanchuk has written a reply to my previous post. Highly likely you have seen it, but if you haven’t check it out. I will reply soon but for now I want to tackle neoclassicals economists’ dubious claims.

The background for readers not having seen recent debates is that Paul Krugman has launched a vicious attack claiming that it is not possible for the U.S. economy to grow at 5.3%. His analysis is just some random averaging of numbers more than anything else. In my argument, it doesn’t matter if it is Bernie Sanders or someone. The question is just about possibilities. The question is: is 5.3% possible in the next four US presidential years?

First, 5.3% over four years is about 23%.

The United States doesn’t have full employment. A lot of people are working part time and many others are discouraged from work. So cannot the U.S. government boost domestic demand and raise real GDP by 23% in four years?

Of course, it can do it.

But the debate has been hijacked by debating purely about productivity. Here’s Noah Smith for example:

Noah Smith On Productivity

So neoclassical economists are making it look as if it is only a matter of rise in productivity.

(Update: Smith has written an article for Bloomberg here)

I am going to argue that productivity is really a sideshow.

Why does productivity matter? If there is full employment and no additions to the labour force, production can only rise if productivity rise. This is purely a matter of definitions and not a causal statement. In fact, the causality is from production to productivity and not the other way round. But if there isn’t full employment, production can rise even if there is no rise in productivity. It’s just about more people who were not employed before, producing more stuff. In addition a lot are also joining the labour force for the first time. So production can rise without productivity rising.

Now with high unemployment and people working part time and people discouraged from looking for work, it is entirely possible that almost the whole of 23% is purely attributed to this.

Think Okun’s Law.

So productivity rises is really a sideshow here. But it’s good if it rises. But it’s sad that the debate is centred around productivity rises.

In summary 23% can be reached by

  1. Rise in production attributable to no rise in productivity
  2. Rise in productivity. (Caused by the rise in production itself).

The debate is centred around the point 2. This is not surprising. Neoclassical models are built assuming full employment, so an economist is simply trained to think of point 2 and not think about point 1 at all. As Joan Robinson would say:

Before ever he [a student] does ask, he has become a professor, and so sloppy habits of thought are handed on from one generation to the next.

Free Trade? Heterodox Dissent

One of the most important message of this blog is that “free trade” is quite devastating to economies. In a recent article Economists Actually Agree on This: The Wisdom of Free Trade for The New York Times, Greg Mankiw once again pushes for free trade and also mentions that there is consensus in the profession.

Many of heterodox economists dissent on the issue of free trade. In this post, I will provide two examples: Joan Robinson and Wynne Godley.

Mankiw says:

Economists are famous for disagreeing with one another, and indeed, seminars in economics departments are known for their vociferous debate. But economists reach near unanimity on some topics, including international trade.

In the article, Mankiw tries to show among other things how free trade is the opposite of Mercantilism. Joan Robinson explained in her 1977 essay What Are The Questions? how foreign trade is important and that free trade is a subtle form of mercantilism.

According to Robinson:

A surplus of exports is advantageous, first of all, in connection with the short-period problem of effective demand. A surplus of value of exports over value of imports represents “foreign investment.” An increase in it has an employment and multiplier effect. Any increase in activity at home is liable to increase imports so that a boost to income and employment from an increase in the flow of home investment is partly offset by a reduction in foreign investment. A boost due to increasing exports or production of home substitutes for imports (when there is sufficient slack in the economy) does not reduce home investment, but creates conditions favorable to raising it. Thus, an export surplus is a more powerful stimulus to income than home investment.

In the beggar-my-neighbor scramble for trade during the great slump, every country was desparately trying to export its own unemployment. Every country had to join in, for any one that attempted to maintain employment without protecting its balance of trade (through tariffs, subsidies, depreciation, etc.) would have been beggared by the others.

From a long-run point of view, export-led growth is the basis of success. A country that has a competitive advantage in industrial production can maintain a high level of home investment, without fear of being checked by a balance-of-payments crisis. Capital accumulation and technical improvements then progressively enhance its competitive advantage. Employment is high and real-wage rates rising so that “labor trouble” is kept at bay. Its financial position is strong. If it prefers an extra rise of home consumption to acquiring foreign assets, it can allow its exchange rate to appreciate and turn the terms of trade in its own favor. In all these respects, a country in a weak competitive position suffers the corresponding disadvantages.

When Ricardo set out the case against protection, he was supporting British economic interests. Free trade ruined Portuguese industry. Free trade for others is in the interests of the strongest competitor in world markets, and a sufficiently strong competitor has no need for protection at home. Free trade doctrine, in practice, is a more subtle form of Mercantilism. When Britain was the workshop of the world, universal free trade suited her interests. When (with the aid of protection) rival industries developed in Germany and the United States, she was still able to preserve free trade for her own exports in the Empire. The historical tradition of attachment to free trade doctrine is so strong in England that even now, in her weakness, the idea of protectionism is considered shocking.

[emphasis: mine]

According to her colleague Wynne Godley, dissenting against free trade was one of the most important reasons for his dissent against the profession. In his short autobiography written in 2001 for A Biographical Dictionary Of Dissenting Economists (Edward Elgar book site), Godley says:

There are two aspects (in particular) of the work of the CEPG [Cambridge Economic Policy Group] which put its members into a category which may he termed ‘dissenting’. The first – a matter mainly of concern to the modelling fraternity and academic econometricians – was the unconventional view we took about how to construct and use an econometric model. Thus we attached prime importance to what may be termed ‘model architecture’ by which I mean that the underlying accounting was coherent, without any ‘dustbin’ equations or sectors; everything came from somewhere and went somewhere. Our view, by which I still stand, was that model architecture in this sense takes priority over parameter estimation; I am even prepared to conjecture that a properly a ‘architected’ model will deliver much the same results over a wide range of parameter estimates, particularly if the model is used for the simulation of medium- or long-term scenarios. Furthermore our use of the model was unconventional in that we treated it, not as something which would generate accurate forecasts of what would actually happen, but as a tool that informed our minds as to a great many possible outcomes conditional on a wide range of alternative assumptions both about exogenous variables and about parameter values. In using our model in this way we were greatly assisted by Cripps’s programming expertise, which permitted us to work with a speed and flexibility not generally available at that time. I should add that econometrics, as usually defined, played (advisedly) a relatively minor role in our work.

The second, and more egregious, respect in which we became a ‘dissident’ group was that, as a result of trying to think through the possible ways in which Britain’s net export demand might be improved, we entertained the possibility that international trade should be, in some sense, ‘managed’. There might, we argued, be no way in which the adverse trends could be reversed other than some form of control of imports. Our argument (see for instance Cripps, 1978; Cripps and Godley, 1978) was never one in favour of protectionism as normally understood – that is, the selective and unilateral protection of relatively failing industries under conditions of general stagnation. On the contrary, we were most careful to lay down conditions under which the management of trade would benefit not only our own country (without making its industry less efficient) but would also increase the level of trade and output in the rest of the world. The two basic principles were, first, that trade management should reduce import propensities without ever reducing imports themselves (in total) below what they otherwise would have been; and, second, that ‘protection’ should be as minimally selective as possible (for example, through the use of market mechanisms such as auction quotas) so that industrial inefficiency would not be sponsored.

I was surprised by the hostility with which our ideas about trade were received. It seemed to me at the time, and still seems to me, that the arguments actually used against us (at their most coherent by Maurice Scott et al., 1980) did not, in practice, rest on a well-articulated theoretical position but on very special assumptions about behavioural relationships and international political responses. (I have, to the best of my ability, answered these particular points in Christodoulakis and Godley, 1987.)

The ‘dissident’ argument in favour of managed trade is well summarized in Kaldor (1980), where he points out that the modern theory of international trade is based on the assumption that all production takes place according to the conditions described by the neoclassical production function, with constant returns to scale. Kaldor postulated instead, and he was surely right to do so, that the principle of circular and cumulative causation leads (through dynamically increasing returns) to a process, not of convergence, but of polarization between successful and unsuccessful economies in which success in competitive performance feeds on itself and losers become immiserated by trade.

The above quote is interesting from another perspective: it explains Godley’s views about modeling, policy, “forecasting” etc.

The Writings Of Joan Robinson

Maria Cristina Marcuzzo has a bibliography of Joan Robinson at her website. The scan is from a 7-volume set published by Palgrave Macmillan titled Joan Robinson: Writings on Economics. An earlier version appeared in the book The Economics Of Joan Robinson edited by Maria Cristina Marcuzzo, Luigi L. Pasinetti and Alessandro Roncaglia (Google Books link)

Joan Violet Robinson

(photography via NPG, London)

What a great writer. I was re-reading an article The Second Crisis Of Economic Theory (1972) and two passages caught my attention this time:

To understand how disconcerting the slump was it is necessary to recall the atmosphere of the times. For fifty years before 1914 the established economists of various schools had all been preaching one doctrine, with great self-confidence and pomposity – the doctrine of laissez faire, the beneficial effects of the free play of market forces. In the English-speaking world, in particular, free trade and balanced budgets were all that was required of government policy. Economic equilibrium would always establish itself. These doctrines were still dominant in the 1920’s.

That’s quite like talks about the “great moderation” before the current crisis.

And while discussion economic problems of nations …

These problems arise in the economies that boast of their wealth. Perhaps they can afford the luxury of an economics profession that builds intricate theories in the air that have no contact with reality. But this luxury is too expensive for the so-called developing world where the doctrines of laissez faire and the free play of market forces are exported along with armaments to keep them from looking for any way out of their infinitely more grievous situation.

Nice Thomas Palley Interview

Here’s a nice Tom Palley interview from yesterday with Erin Ade for the program Boom Bust where he touches on various economic issues of recent years for the United States and consequently for the rest of the world such as the global race to the bottom.

(h/t Matias Vernengo):

The interview points out the different meaning of what Keynesianism is and ought to be. In particular, it talks of the word stagnation and Palley points out that this phrase is not new and only recently have Paul Krugman and Larry Summers realized the importance of it.

As you may be aware, Joan Robinson used the phrase Bastard Keynesianism to describe the Samuelson et. al.

Incidentally, just today I read Joan Robinson’s article Full Employment And Inflation (originally a lecture from 1958 and published in her Collected Economic Papers, Vol II) where she talks of stagnation:

Formerly economic theory drew a very flattering picture of the private-enterprise system. It was depicted as a beautiful machine with delicately-balanced interacting parts and with a self-righting mechanism that ensured that it kept itself in balance. Full employment of labour was regarded as a normal state of affairs and stability in the value of money taken for granted. Equilibrium in international trade only required the abolition of tariffs and the maintenance of the gold standard. Any departure of actual developments from the ideal equilibrium  was regarded as due to frictions which the operation of the machine would overcome by itself, or were attributed to the stupid interference of governments which were often foolish enough to depart from the strict rule of laisser-faire. 

All this was shattered by experience in the inter-war period of massive unemployment and chronic crisis. A new theory was formulated by Keynes in place of the discredited orthodoxy. He showed that there is, in fact, no self-righting mechanism in a laisser-faire system. Periodic crises and chronic stagnation are quite natural and to be expected in an unregulated system, and the maintenance of full employment requires a strong and active government policy.

The Bastard Keynesians on the other hand, in the guise of “Keynesianism” simply ignore all this and in fact their views are quite the same as Robinson talks of in the first paragraph of the above quote. Of course in recent times, economists such as Krugman have changed a bit but finally their view of the world is still Samuelsonian or Pigouvian (in spite of the fact that Krugman did a mea culpa recently on this).

Joan Robinson On Economists

I managed to get hold of Joan Robinson’s article Marx, Marshall And Keynes, published by the Delhi School of Economics as Occasional Paper No. 9 in 1955 based on lectures given by her at the School and republished in her Collected Economic Papers, Volume II.

It is an interesting essay on economists in general via analysing the ideas of Marx, Marshall and Keynes. So here are some gems.

From Introduction (page iv):

… Analysis dealing with actual events encounters the difficulty that the answers to economic problems are only political questions. With politics, enters ideological prejudice. As Gunnar Myrdal has pointed out, the very choice of questions to discuss is an expression of ideology; yet I believe that economic analysis, though it cannot help containing an element of propaganda, yet can be scientific as well. This question is discussed in the first paper,  ‘Marx, Marshall and Keynes’.

I have always aimed to make my own prejudices sufficiently obvious to allow a reader, while studying the argument, to discount them as he thinks fit, though of course, this generally leads a reader of opposite prejudices to reject the argument in advance …

From the main essay (pages 3-5):

… Economic doctrines always come to us propaganda. This is bound up with the very nature of the subject and to pretend that it is not so in the name of ‘pure science’ is a very unscientific refusal to accept the facts.

The element of propaganda is inherent in the subject because it is concerned with policy. It would be of no interest if it were not. If you want a subject that is worth pursuing for its intrinsic appeal without any view to consequences you would not be attending a lecture on economics. You would be, say, doing pure mathematics or studying the behaviour of birds.

The once orthodox laisser-faire theory evaded the issue by trying to show that there is no problem about choosing policies. Let everyone pursue self-interest and free competition will ensure the maximum benefit for everyone. This obviously cannot apply where any over-all organization is necessary …

… Economic theory, in its scientific aspect, is concerned with showing how a particular set of rules of the game operates, but in doing so it cannot help them appear in a favourable or unfavourable light to the people who are playing the game. Even if a writer can school himself to perfect detachment he is still making propaganda, for his readers have interested views …

… This element of propaganda enters into even the most severly technical details of the subject. It cannot fail to be present when the broad issue of the system as a whole is under discussion …

… The description and the evaluation cannot be separated, and to pretend that we are not interested in the evaluation is mere self-deception.

In the section ‘Ideas and Ideology’, Robinson says:

We must admit that every economic doctrine that is not trivial formalism contains political judgments. But it is the greatest possible folly to choose the doctrines that we want to accept by their political content. It is folly to reject a piece of analysis because we do not agree with the political judgement of the economist who puts it forward. Unfortunately, this approach to economics is very prevalent …

… To learn from the economists regarded as scientists it is necessary to separate what is valid in their description of the system from the propaganda that they make, overtly or unconsciously, each for his own ideology. The best way to separate out scientific ideas from ideology is to stand the ideology on its head and see how the ideas look the other way up. If they disintegrate with the ideology, they have no validity on their own. If they make sense as a description of reality, then there is something to be learned from them, whether we like the ideology or not.

In the section ‘The Great Contradictions’ she says:

It is foolish to refuse to learn from the ideas of an economist whose ideology we dislike. It is equally unwise to rely upon the theories of one whose ideology we approve …

… In short, no economic theory gives us ready-made answers. Any theory that we follow blindly will lead us astray. To make good use of an economic theory we must first sort out the relations of the propagandist and the scientific elements in it, then by checking with experience, see how far the scientific element appears convincing, and finally recombine it with our own political views. The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.


Joan Robinson - Collected Economic Papers, Volume II

New Book By Felipe And McCombie

The production function has been a powerful instrument of miseducation.

– Joan Robinson (1953–54), The Production Function and the Theory of Capital, Review of Economic Studies, vol. 21(2), pp. 81–106. (jstor)

… that is how Jesus Felipe and John McCombie begin their new book The Aggregate Production Function and the Measurement of Technical Change.

I have observed that although neoclassical economists use the aggregate production function heavily, even those who do not learn it somehow err and assume it implicitly somewhere in their analysis. This book I believe is a rewriting of both authors’ work in this area collecting various papers written in many places — critiquing the very “foundation” of neoclassical economics.

From the publisher’s site for the book:

‘This is an extremely important and long-awaited book. The authors provide a cogent guide to all that is wrong with the theory and empirical applications of the discredited notion of an aggregate production function. Their critique has devastating implications for orthodox macroeconomics.’ – Anwar Shaikh, New School for Social Research, US

h/t Matias Vernengo