Free Capital as Anti-Democracy

That deterministic herald of creative destruction, globalization, was held in check by political barriers, namely capital controls, for the better part of the twentieth century.  Incidentally, this age of capital controls aligned more or less exactly with the age of shared growth we now call the Golden Age of Capitalism.  (an aside: it’s a sad irony of history that much of what is remembered as the achievements of capitalism are actually the achievements of not-capitalism).

But now this mainstay of globalization has resumed its inexorable march, except in India and China and a few other countries that have managed to rapidly develop, and capital controls have mostly given way to unrestricted short-term capital flows.  And just as political conditions once allowed for control of capital, now capital controls political conditions.

Take the following story:

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Why We Must Pay Attention to Rojava

One of the many characteristics of the economic orthodoxy is a tendentious relationship with the sphere it considers ‘non-economic’. The dominant strategies seem to be either to attempt to tame them with the amoral brutality of rational choice, or to ignore them (no matter how glaring their importance). It’s an ironic position- a far cry from the spirit of Adam Smith, their purported godfather, who sought to understand capitalism only because it was a revolutionary, newly emergent social order. The events of the last four years in Rojava may well be the first sapling of something truly new. If not, it is not for lack of ambition, effort or bravery on the part of Kurdish Syrians. And yet, we economists (along with too much of the media) have all but ignored it, and at our peril.

Despite the fact that Sinam Muhamed, the co-president of the People’s Council for Western Kurdistan, who spoke Monday at the CUNY Graduate Center spent the bulk of her speaking time explaining the political situation in Rojava, she was careful not to exclude economics. Most notably, she proclaimed that Rojava aimed to implement an “economic system based on morality.” This is a striking statement in a field in which luminaries such as Paul Krugman proclaim the amorality of economics with some degree of pride. By way of concrete example, Muhamed mentions that agriculture in Rojava- destroyed by the Al-Nusra Front, long before the current conflict with ISIS began- has recently seen a resurgence through the use of agricultural cooperatives. These cooperatives have rapidly become the dominant form of agricultural production in Rojava, and the cooperative model is spreading past the agricultural sector. Muhamed noted the present role of private enterprise in Rojava as well, but added that laws are in place to prevent “profit in the face of suffering,” the immorality of which she seems to take as given and unquestioned.

Muhamed warns us not to ignore the context of conflict and reconstruction in which Rojava is situated, and not to project dreams of a utopian social order onto the resistance there. Nonetheless, the relative success of Rojava cannot be ignored. 200,000 refugees from the rest of Syria have arrived in Rojava over the past four years. 197,000 have been housed. The reconstruction of Kobanê is well under way, and Muhamed aims for it to be an “ideal city,” and a “living symbol of resistance.” David Harvey, also speaking at the event, noted that on a recent trip to southern Chile, the local Mapuche liberation movement spoke in glowing terms of the developments in Rojava. A successful resistance movement in the face of inhumanity is one thing, but, lest we forget, the social experiment in Rojava began long before ISIS coalesced as a force. It is not merely a case of there being no capitalists in foxholes. Similarly, the relative success of areas of Syria under Kurdish control, as well as the emerging global contagion of the Rojava model imply that, although it is indeed a resistance movement, it is also far more than that. It represents a truly emergent social order that any social theorist would be loath to ignore.

Nonetheless, we cannot pay attention only because the situation is academically interesting. The fight against ISIS is as Muhamed notes “a fight for humanity against barbarity, a fight that is beyond ethnicity, gender or ideology.” If we are to regain a semblance of morality in our field, I see no better place to begin.

Simple Model of Adverse Real Effects of Inflation

Eduardo Bastian of the Federal University of Rio de Janeiro and NSSR’s own Mark Setterfield presented their paper this Tuesday on a simple model of the adverse real affects of inflation.  The paper was presented as an impetus to the post-Keynesian camp to recognize adverse inflationary effects. Their model combines an extended form of a conflicting claims theory of inflation with Kaleckian growth theory in a way that incorporates—in ideological contradistinction with the other influences—Milton Friedman’s view of adverse inflationary effects.

The conflicting claims theory of inflation would apply in situations where both workers and capitalists exercise their bargaining power and allocate a greater portion of the national product to themselves. In this scenario, once one party claims a greater share of income, the other party, if they still have adequate bargaining power, will just give themselves additional income to catch up. Unionized workers demand higher wages, but colluding producers pair this with higher prices. Relative income shares do not swing too drastically, and inflation occurs instead. The version of the theory utilized in this model has this retaliatory feedback loop recurring until one party, probably the workers, loses their ability to bargain, and the inflation spiral halts.

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Experimental Evidence of Sunspot Bank Runs

For all the adoration that the gold standard gets from radical libertarians, currency is surely more stable without it. On the gold standard, currency crises were so regular that social scientists and philosophers came up with all sorts of theories to explain them. Some of them were really weird.

Among the weirdest was the sunspot theory of bank runs. Through several blind leaps of conjecture, William Stanley Jevons connected the occurrence of sunspots as having an (unproven) effect on crop yields which, in turn affects farmers’ debt from seed to harvest.

Later Arthur Pigou and later John Maynard Keynes used the phrase to describe sudden shifts in financial markets not based on changes in the fundamentals. A fluke. A panic. A sunspot. A bankrun.

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Argentina’s Response To Its Debt Crisis

This past Tuesday at the New School, her Excellency Dr. Cecilia Nahón, Argentina’s Ambassador to the United States, delivered an interesting discourse on Argentina’s debt crisis and the policies undertaken to reconstruct the debt. The talk on Argentina’s Response To Its Debt Crisis was of immense importance and relevant to the current Eurozone debt crises, particularly the Greek sovereign debt crisis.

Argentina is the third largest economy in Latin America, a G20 member, with abundant natural resources, strong agricultural and industrial sectors and a highly educated workforce. The country made international headlines in July 2014 when it defaulted on its debt for the second time in 13 years. The Argentine debt crisis is such an important part of the country’s history that a special museum dedicated to its debt opened in 2005 called the Museum of Foreign Debt. I know this may seem unusual, but it is true – the museum is located at the University of Buenos Aires and it showcases photographs of Carlos Saúl Menem (Argentina’s president from 1989 to 1999), photocopies of old currencies, which were frequently changed by the Argentine’s Central Bank, black holes in the museum walls and other artistic objects displayed as painful reminder of the debt consequences. Argentina’s current financial woes have its origins in the 1998-2002 Argentine depression. To understand the relevance of Argentina’s policy response to sustainable debt we look at the country’s historical economic trends. During the 1990s Argentina was the poster child for Neoliberal policies – implementing reforms such as credit liberalization, deregulation of the financial sector and labor market, deindustrialization and an almost complete liberalization of trade. The Convertibility regime, which was adopted to eliminate the country’s high inflation, was another policy reform adopted, that established fixed peso-dollar parity (1 peso = 1 US dollar). However, the real exchange rate was over-valued, which implied that the central bank guided by public policies was forced to sustain this fictitious exchange rate. This created a never-ending need for foreign currency that gave the country an incentive to import rather than export. Consequently, Argentina experienced huge trade deficits that in turn caused the interest rates on investors’ payments to accelerate. The monetary reform was considerably successful at the beginning, but over that period unemployment grew reaching its peak of 19.12% in 1996 and GDP growth was not sufficient to sustain economic growth. Argentina faced difficulties securing dollars to pay its growing debt, which peaked at 180% of GDP, and the Convertibility exchange policy ultimately failed. At the end of 2001, Argentina could no longer meet its obligations to creditors and it defaulted to $82bn of foreign bonds. According to Dr. Cecilia Nahón, Argentina not only defaulted to its creditors but it also defaulted on its people, healthcare and social security systems.

After the collapse of the Argentine government, Argentina changed its course of policy and adapted a “virtuous circle” policy that was based on two principles, debt restructuring and economic growth. The debt was restructured in 2005 and 2010, in 2005 government managed to restructure the debt with a 65% haircut on the $82bn and in 2010 with a 93% haircut. The 2005 debt restructuring was the issuance of GDP linked bond, which is now used in Greece and Ukraine. The idea behind this bond is that if the country’s real GDP grows more than its base level, bondholders would get paid a return in proportion to the country’s GDP, in addition to the amortization. With this new debt deal, Argentina was able to meet its debt obligations, and in 2006, two years ahead of its maturity, Argentina paid IMF $9.5bn. A move that according to Dr. Cecilia Nahón, was very important to the re-establishment of Argentina’s economic independence.

In 2010, a new debt-exchange deal was made and accepted by 93% of the debt holders. While the majority of the bondholders accepted a haircut on their debt, the 7% of the bondholders decided to hold on to the old securities and to press for better terms. These bondholders, a U.S. hedge fund group labeled as “vulture” funds, have been demanding full payment plus interest and penalties, totaling an approximately 1,600% ROI. This group of “vulture” funds purchased bonds in the secondary market for a fraction of their face value and has since gained US court backing to claim full repayment. The ruling of U.S. Judge Thomas Griesa has ordered Argentina to pay the U.S. hedge fund groups before it can pay the majority of its creditors and has permitted the U.S. hedge fund to cease some of Argentina’s assets. According to Dr. Cecilia Nahón, the vulture funds ceased an Argentine flagship for two months in Ghana and other assets, but were later released because the Foreign Sovereign Immunities Act protects the country’s assets. The legal case of the vulture funds is based on the “pari passu” clause, a common bond clause, that guarantees equal treatment for investors. Argentina’s argument is that they have been treating all bondholders equally and the bonds purchased by the vulture funds were not the original bonds therefore; these bondholders did not lend money to Argentina but have been profiting from the country’s debt crisis by finding loopholes in the international financial market regulations. Meanwhile, Argentina has continued to pay the 93% of its creditors and it argues that if the country would meet the hedge funds payment demand, Argentina would be unable to pay the 97% of creditors. For the Argentine government paying the vulture funds the desired amount would mean undermining the country’s debt restructuring efforts and its credibility for future creditors. Argentina has consistently refused to comply with the U.S. judge ruling to pay the “vulture” funds, which has resulted in a long-standing legal dispute between Argentina and the U.S. hedge fund. As a result, in July 2014, Argentina was forced to default for the second time in 13 years.

So, what can we learn from the Argentine debt crises? Argentina’s experience with debt crisis over the last decades may shed some light for other countries facing big burdens of debt on how to manage sovereign-debt restructuring. The question of how to reduce debt to levels that are sustainable and promote economic growth is more pressing than ever. By restructuring its debt, Argentina’s real economy debt change in percentage point was -17% during the 2007-2014, where as other members of the G20 such as Ireland and Greece experienced high levels of debt-to-GDP ratio post the Great Recession period, 172% and 103% respectively. By reconstructing its debt Argentina was able to grow its economy and decrease levels of unemployment. What this tells us is that, if managed properly, debt restructuring is necessary for countries to get back on their feet. Furthermore, for a debt-restructuring process to result in a sustainable debt load, it must be based on an economy that grows thanks to strong internal market and international financial market regulations. The current system puts excessive faith in markets regulating themselves that are centered on financial liberalization, the results of which we have all seen: recurring financial crises, unsustainable debt, governments defaults, and high levels of poverty. So, while Argentina’s financial troubles are by far over, there is optimism. Just recently, the UN General Assembly adopted a new global framework for sovereign debt restructuring giving nations the right to seek protection from creditors. Inspired by the Argentina’s debt crisis, the new global framework on sovereign debt restructuring is described as the “basic principles” to improve the global financial system. Supported by 136 countries, the resolution is intended to promote economic growth and social and economic stability. Although, the resolution consists of a set of nine basic principles and does not go as far as proposing a conclusive legal framework, it is nonetheless the beginning of the establishment of the legal framework for debt restructuring at the international level that will allow countries to solve their debt problems without defaulting.

Was Marx Right After All? No, he was wrong…again.

This past Tuesday I had the chance to attend a lecture by Simon Head organized by the New School economics department and SCEPA. Head’s presentation had an interestingly bold question to answer that I am sure attracted most of the audience, myself included. Was Marx Right After All?

Simon Head is a Senior Fellow at the Institute for Public Knowledge at NYU, a Senior Member of St Antony’s College, Oxford, Director of Programs at the New York Review of Books Foundation, and a contributor to The Review. His latest book “Mindless: Why Smarter Machines are Making Dumber Humans” has received media attention, and Simon himself has been interviewed by the New York Times. In it Head promotes the idea that modern technological devices are used by the services industry in order to optimize production, without caring about the dehumanizing effect caused by such process. This of course had an influence in his evaluation of Marx’s predictions.

The lecture started with Simon distinguishing between two routes one might take in order to evaluate the historical performance of Marxism. The first one, was simply to study the history of the Soviet Union and the Chinese Revolution. This route, he argued, was filled with a terrible human loss that derived from the atrocities committed by these regimes. The second route, he identified with the role the Social Democratic Party of Germany had in the process of industrialization that the country went through years before the First World War. Germany’s industrialization was remarkably different than England’s, the latter being the primary “input” from which Marx developed his analysis of the capitalist mode of production.

England’s industrialization, in contrast to Germany’s according to Simon, was characterized by extremely precarious working conditions. This was used by Marx to emphasize some aspects that he considered inherent to capitalism itself, namely the alienation of the proletariat, the incapacity of man to self-realize itself, and the horrible living conditions. Germany’s industrialization on the contrary saw an active role of the Social Democratic Party, which, according to Simon, was determinant in the rise of the German welfare state. This distinct processes of evolution become important once they are considered related Marx’s prediction of the eventual fall of the system as a whole.

In this context, the rise of the welfare state is a countertendency that emerges from what Marxist called the superstructure. Simon emphasized a couple of times that the construction of the welfare state (he also used the example of the U.S.) are motivated through political pressure. Therefore, the causal relation no longer goes from the material base (the economy) to the ideological and political structure, but in turn we have something akin to a hermeneutic loop, both of them depend from and affect each other. Due to this it is possible to realize why Marx’s apocalyptic prediction never came to be. However, there is nothing to fear for us who like gloomy predictions about the future, since (and this is how he wraps it all up with his book) the services sector of the economy presents some of the characteristics Marx identified in the 19th century industrial sector of England. Thus, it serves as a force that pushes the system towards its intended path of destruction.

Despite all of this, at the end of this story Marx is still wrong, which is an answer that no longer surprises me given the current state of economic science. However, I have some problems with how we reach such a conclusion. First of all, the idea that the superstructure can have effects on the material base was already present in Marxist thought. Mao, realized this and that motivated him to put forward the Cultural Revolution. The reason for this lies in the normative nature of economics. As human beings theorize about their economic relations (economics) and reenact such thoughts during their social life (economy) the superstructure has influence on the material base (See Warren Samuels (1988)). However, the question now must center itself on the degree of influence it can perform.

This brings me to a comment of one of our own NSSR economics students during the talk regarding global value chains. Despite the rise of adequate working conditions in first world countries, big firms have sought a cheap labor force in poor countries. In order to guarantee a pool of cheap labor, there is a tendency to push neoliberal reforms in these countries, which are in turn not compatible with a welfare state. This brings forward something that my professors like to emphasize: capitalism is a profit-driven system, and one way to increase profits (broadly speaking) is to reduce wages.

Was Marx Right After All? I don’t know, but as long as we perform analysis only looking at the so called “developed economies” we might never find out.

Global Development Goals: If at All, Why, When and How?

Last week, the “Sustainable Development Goals” (SDGs) were launched at the UN in New York. This is the outcome of two years of consultations, lobbying, and debate about what the “post-2015” agenda should look like. The assumption has been that the Millennium Development Goals (MDGs) were a huge success and that we, therefore, must proceed with a new round. Unfortunately, this assumption is not backed by empirical evidence.

While the SDG debates have been raging, New School Professor Sanjay Reddy and I have been asking ourselves why goals should be adopted at all. What function, if any, might they serve, and under what conditions could they do so successfully? Quite striking is the fact that  systematic efforts to answer these seemingly elementary questions have been absent.
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Workers, Women and Revolution: From Inequality to Solidarity

This past Tuesday, Julie Matthaei came to deliver a talk on her paper “Workers, Women and Revolution: From Inequality to Solidarity” at the New School. I was lucky enough to have seen her present it before at the ASSA conference in January. Because of the wealth of information contained in the paper as well as the differences in venue, it was by no means a mere reprise.

Matthaei is a pioneer in the area of feminist economics helping to formulate patriarchy as an economic system inextricably linked with the system of capitalist exploitation. After signing an open letter alongside 600 prominent economists in support of raising the minimum wage, she was red-baited in a full page ad in the New York Times by the restaurant industry funded Employment Policies Institute. The ad’s reference to her as a “Marxist feminist anti-racist ecological economist” might have seemed like a smear if it weren’t something she proudly put on the front page of her website. She was initially flabbergasted by the ad, but her colleagues convinced her it was an opportunity to push for alternative economic perspectives to austerity economics.

The paper itself documents the development in the Union for Radical Political Economics (URPE) with regards to embracing critical race and gender theory as properly economic theories. When URPE began in 1968, it was – like the academy as a whole – pretty white and male. Alongside the dawning of the second wave feminist movement, the women members of URPE established a women’s caucus that decided to push for more women on the steering committee and the editorial board of the URPE journal Review of Radical Political Economics. When the proposal was voted down by the business meeting, the women on the caucus all walked out in protest followed by the rest of the women in the room, many who were the wives and partners of male economists in URPE. The business meeting consequently reversed their decision and the women rejoined.

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Life and Death of the European Minotaur

I wrote this short piece for the Spanish newspaper Diagonal  on July 10th, five days after the Greek referendum. This is a rough translation – the version in Spanish can be found here.

“One cannot have democracy and gold standard at the same time,” Barry Eichengreen reminded us while analyzing the collapse of the gold standard, the fixed exchange rate regime in place just 100 years ago. The gold standard was nothing else than the sterling standard, safely founded on the constant and great economic surpluses the hegemonic power, Great Britain, obtained through its colonial empire. That monetary system imposed an ironclad fiscal discipline: if a country imported more that what it exported due to the high prices of its produce, it would run into a trade deficit. This would inevitably trigger a debt crisis, which could only be adjusted by lowering the wages of the working class, often below subsistence level. As such, the very stability of the gold standard was based on the structural repression of European workers and colonial subjects, who were not organized to resist such periodical devaluations. When workers and colonial subjects fought for European countries to become mass democracies, the gold standard, Eichengreen concludes, was doomed.

It is a cliché to say so but it is the case: as Marx said, history repeats itself, first as a tragedy, then as a farce. In the current farce, Great Britain’s role is played by Germany, while the gold standard is played by the euro, instituted at the beginning of the nineties under the triumphant ideology of that time, neoliberal capitalism. Under the euro, just like one hundred years ago, deficit-running governments could no longer devalue their currencies but to obey fiscal discipline “carrying out the necessary structural reforms” in Eurocratic jargon, that is, repressing wages and dismantling social benefits. The first workers to suffer Eurocratic austerity were, ironically, the Germans, with the harsh Schröder Hartz IV reforms in the 2000s: tough wage repression, epitomized by the rise of precarious mini-jobs, translated into succulent corporate profits. It is an economic law, Varoufakis reminds us in spite of Schäuble: such surpluses would have its complementary converse in southern European deficits, inevitably unleashing credit bubbles (of the private kind in Spain and Ireland; public in Italy and Greece) like tsunamis due to the peculiar financial architecture of the euro. Who mediated these enormous inflows of European money in the South so irresponsibly, obtaining uncontestable political power in the process? In Greece it was what Varoufakis called “the triangle of sin”, an unholy alliance of oligarchs between bankers, developers and media, in which we should include politicians (and the regional cajas de ahorros, in the Spanish case). It is no coincidence that these interest groups are the most “pro-European”, defending the Yes in the late Greek referendum: they are the ones who can lose the most.

The 2008 Wall Street meltdown involved the unilateral default of many debts to German banks, who had become hugely and irresponsibly exposed to the US housing bubble: for instance, Deutsche Bank owned 10% of the empty houses of Baltimore and other US cities. In this adverse context, the flow of international credit froze and the first to suffer it is, obviously, the weakest link in the financial architecture of the euro: the Greek government, which by the end of 2010 declared itself unable to repay its debts to its creditors, mainly German and French banks (and, by extension, its savers) and institutional funds (like insurance companies and pension funds). A contagion effect is feared regarding other southern European economies, explaining the tremendous fluctuations in the prices of its sovereign bonds.

The European financial system -above all, Franco-German- seems in danger and needs to be rescued: between 2011 and 2012 the European Central Bank would lend a trillion of euros at 1% to European banks (above all, Spanish and Italian banks) in order to let credit flow, yet without success. At the same time, indebted countries would be used as SPV-like financial instruments in order to repay European debt: in these bailouts (Ireland, 85 bn; Portugal, 79 bn; Spain, 100 bn), European taxpayers would lend them in order to pay to private creditors, while indebted countries would contribute the interests. Thus, out of the 284 bn dollars Greece received since 2010, only 8% reached the Greek population. In exchange, these countries would be forced to cut their deficits via wage repression, privatization and dismantlement of the welfare state, depressing internal demand and plunging the south of Europe in a deep economic recession. At a huge human cost (which in Spain involved evicting half a million of families, but leaving the national oligarchies unscathed), the troika calculated that the indebted government would be soon able to reach primary surpluses in order to repay its debts, something that most economists soon acknowledged to be completely unfeasible.

What would happen instead is to turn the skyrocketing Greek debt, now most of it in the hands of European taxpayers, into completely unpayable. A classical case of socialization of losses, but this time as an undercover bank bailout: only in this way and appealing chauvinistically to national stereotypes like lazy and spendthrift southern Europeans, the troika could disguise the harsh reality to their own electorates: facing the umpteenth structural crisis of capitalism, their politicians and bankers had cheated them. However, the peculiar management of the European crisis, led by a ECB without a democratic mandate, has recently translated into constant capital flight, but in the reverse direction than the 2000s, unleashing a debt bubble in the north (in particular, Denmark, Norway, and Netherlands) and depoliticizing their electorates, just as it happened in southern Europe during the boom.

Now that private creditors are no longer exposed to a Greek default, a Grexit is increasingly more feasible. This time, contagion is no longer economic through the yield spread, but political: European elites have demonstrated that they have no problems imposing massive suffering on the population via currency union. Southern Europeans contemplate now a choice between submission and democracy. Thus, in the dilemma between democracy and the euro that Eichengreen evokes, Spain and other southern European countries may ultimately choose democracy. But, lest we repeat Marx’s farce once again, this time it entails carrying out authentic “structural reforms”, that is: to get rid of our national “triangles of sin”.

How to Justify Teaching the Worst of Economics to Non-Economists

miracle-at-blackboardBeing an Economics PhD student in a heterodox department gives me the privilege of taking courses in a range of different schools of thought within the discipline. In the Economics department, most of us take the stance that it is imperative to understand the mainstream in order to criticize them effectively. We go to great lengths to learn about the nuances of Neo-classical Economics, general equilibrium theory, and New-Keynesian Economics. Meanwhile, we also have full courses devoted to non-mainstream approaches, such as Post-Keynesian and Marxian Economics. We are aware of the ideological underpinnings of a lot of mainstream theory, and many of us see this as a motivation to challenge the discipline.

Now, the difficulty arises when we are to teach one introductory course in ‘Economics’ to non-economists and we know that this is likely to shape their outlook on Economics as a discipline. How much time do you then devote to mainstream models, the criticism of mainstream models, and alternative models?  Continue reading How to Justify Teaching the Worst of Economics to Non-Economists