Noam Chomsky On Neoliberalism: It’s Market For You But State Power For Me

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Radio Open Source has a nice intervew of Noam Chomsky by Christopher Lydon where they discuss neoliberalism among other things.  Audio, transcript.

What is neoliberalism?

This question is asked frequently, especially by those who deny that such a thing exists (not the interviewer of course!). In my experience, those who deny it the most are the most neoliberal. At any rate—although I’ll try to describe what it is—it’s not important to get the definition right. Isn’t the creation of the Euro Area without a central government neoliberalism?

In the above interview, Chomksy is faced with this question:

CL: You famously said about neoliberalism that it’s not new, and it’s not liberal. Do you want to define it for people who just landed from Mars?

NC: Well, it’s a kind of a mixture. The rhetoric is free market, individual choice and so on. That’s the rhetoric. The reality is rather different. It’s individualism and market for you but state power for me. So take a look, say, at the actual institutions like the World Trade Organization or NAFTA, what are called the “free trade agreements.” The media calls them “free trade agreements.” They’re not free trade agreements. They’re investor rights agreements. They’re highly protectionist. They provide unprecedented protection backed by state power for major conglomerates like the pharmaceutical industry, media conglomerates, others.

That’s quite accurate, although Chomsky didn’t take the effort to define it but just described it as it is.

A lot of people try to distinguish neoliberalism and the New Consensus of economics. It’s certainly true that you can find examples of economists who believe in neoclassical economics or the new consensus or whatever you call it but don’t exactly advocate policies of neoliberalism. But, I’ll just categorize them as being deceived by economists. Orthodox economics is neoliberalism, except for minor differences. The former is an academic subject built to defend the latter, which is a political ideology. New Consesus Economics exists in academia because neoliberals and conservatives in political positions award them. Neoliberals then quote their research to defend policies.

Neoliberalism is based on three extremely damaging ideas of neoclassical economics: free trade, tight fiscal policy and the production function.

After the economic and financial crisis, it’s true that economists have conceded that fiscal policy has strong positive effects. Yet, it’s situational in most occasions. When a neoliberal party is in power, they might advocate fiscal expansion, at least make it look like they’re doing it. Also, although they sound as if they are unorthodox about it, they’ll rarely concede that they had a different position before the crisis. They’ll make it look like they have always believed their current positions since their undergraduate days. They’ll also pander to people who might want to hear otherwise. So they have different public and private positions. In other words, doublespeak about fiscal policy is the hallmark of a neoliberal.

But although economists have shifted their positions on fiscal policy—at least when it suits them—their voice about free trade has grown stronger. It is here that Chomsky’s point about “market for you but state power for me” appears the most illuminating. Rich nations are rich due to their success in international trade and they try to impose it on poor nations by hook or crook. This requires the cooperation of governments because agreements are negotiated by governments. Poor nations generally are sceptical about economists’ narratives but are arm-twisted by governments of rich nations and there is an establishment around the government which pushes such things both directly and indirectly by controlling the narrative (or control of opinion and manufacturing consent, as Chomsky might say).

Another aspect about neoliberalism is the politics around wages. As Thomas Palley says,

With regard to income distribution, neoliberalism asserts that factors of production—labor and capital—get paid what they are worth. This is accomplished through the supply and demand process, whereby payment depends on a factor’s relative scarcity (supply) and its productivity (which affects demand).

The theoretical basis for this is the narrative build in neoclassical economics using the notion of a production function and marginalism. Reality check: In the late 70s and early 80s, orthodox economists promoted government policies of high interest rates and this created unemployment and led to drastic weakening of labour unions. They were also weakened by laws. Again, markets for you but state power for me.

To quote Chomsky again from the interview,

[neoliberalism’s] crucial principle is undermining mechanisms of social solidarity and mutual support and popular engagement in determining policy.

What Is Equilibrium?

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The new paper by Gennaro Zezza and Michalis Nikiforos for the Levy Institute, surveying the literature on stock-flow consistent models has a discussion on the concept of equilibrium:

In the short run, “equilibrium” is reached through price adjustments in financial markets, while output adjustments guarantee that overall saving is equal to investment. However, such “equilibrium” is not a state of rest, since the expectations that drive expenditure and portfolio decisions may not be fulfilled, and/or the end-of-period level for at least one stock in the economy is not at its target level, so that such discrepancies influence decisions in the next period.

In theoretical SFC models, the long-run equilibrium is defined as the state where the stock-flow ratios are stable. In other words, the stocks and the flows grow at the same rate. The system converges towards that equilibrium with a sequence of short-run equilibria, and thus follows the Kaleckian dictum that “the long-run trend is but a slowly changing component of a chain of short-run situations; it has no independent entity” (Kalecki 1971: 165). The adjustment takes place because stocks and stock-flow ratios are relevant for the decisions of the agents of the economy. If stocks did not feed back into flows, the model may generate ever-increasing (or decreasing) stock-flow ratios: a result that might be stock-flow consistent, but at the same time unendurable. The convergence towards the long-run equilibrium also depends on more conventional hypotheses regarding the parameters of the model.

So equilibrium is a state where stock-flow ratios are stable.

Of course equilibrium just means that and doesn’t automatically translate to full employment, for example. One can imagine stock-flow ratios such as public debt/gdp, private debt/gdp may converge to some level such as 80%, 50% respectively but with unemployment at, say, 5%.

Also, it’s worth mentioning—especially in open economies—there is in general no automatic/market mechanism which guarantees that stock-flow norms are converging to some stable ratios.

Let me offer an alternative viewpoint for the short run.

In the short run, there’s really no concept of equilibrium because there is no heavenly Walrasian auctioneer in most markets. As pointed out by Nicholas Kaldor, there are dealers who are both buyers and sellers simultaneously. Dealers quote bid/ask prices and the quantities they are willing to buy or sell. Since there is a mismatch in demand and supply of “outside buyers” and “outside sellers”, dealers accumulate inventories or stocks. Dealers make a business out of the bid-ask spread. In non-financial markets, the terminology is slightly different. You won’t find a board with bid/ask prices at a car dealer, but the concept is similar. Here even the producer has inventories in the goods market. In the services market, whatever is demanded is supplied (or put in queue or refused if capacity is reached).

So there’s no equilibrium to be reached in the short-run. It’s always in disequilibrium. Sometimes neoclassical authors make it look like accounting identities are violated in disequilibrium and satisfied in equilibrium arranged by the Walrasian auctioneer. But in SFC models, it’s illogical to have such a thing. Accounting identities must always be respected. At all times, between all time periods, even infinitesimally small.

In real life, especially because of complications of the open economy, there is no such thing as an equilibrium or a tendency to move toward any equilibrium via market forces.

Still, the concept of equilibrium is useful even in SFC models. One can start with a state with a stable stock-flow ratios and then study what happens if some parameter or some exogenous variable is changed or a set of them are changed simultaneously. The dynamics may or may not reach equilibrium in the long run but we can study what happens in the traverse.

Noam Chomsky On His New Book, Neoliberalism And More In An Interview With Amy Goodman

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Recently, Amy Goodman of Democracy Now interviewed Noam Chomsky with an audience at Cambridge, Massachusetts. Chomsky has a new book, Requiem For The American Dream: The 10 Principles Of Concentration Of Wealth & Power.

The ten principles are:

  1. Reducing democracy
  2. Shaping ideology
  3. Redesigning the economy
  4. Shift the burden on the poor and the middle classes
  5. Attack the solidarity of the people
  6. Let special interests run the regulators
  7. Engineer election results
  8. Use fear and power of the state to keep the rabble in line
  9. Manufacture consent
  10. Marginalize the population

I loved the line about neoliberalism:

So, the neoliberal programs were basically taking off right around 1980. It escalated—started a little with the late Carter, escalated under Reagan, went on more under Clinton and so on. 2007 was the peak of supposed success. This is right before the crash. A lot of euphoria among economists, political analysts about the great achievements of neoclassical economics, of the great moderation, you know, the neoliberal programs, a dismantling of regulations—all these great successes, 2007. What was happening to American working people at that time? In 2007, wages, real wages, were lower than they had been in 1979 when the experiment took off. In fact, for the majority of the population, it’s a period of stagnation or decline. Benefits have declined.

You can read more on the same from the transcript in the website or see the video.

Jeremy Spoke In Class Today

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King Jeremy the wicked 🤩

Jeremy Corbyn spoke today in central London about the Manchester attack and Labour’s plan for addressing terrorism.

In this brilliant speech, Corbyn talks about how the West’s foreign policy is responsible for terrorism. Corbyn said:

Many experts, including professionals in our intelligence and security services have pointed to the connections between wars our government has supported or fought in other countries, such as Libya, and terrorism here at home.

That assessment in no way reduces the guilt of those who attack our children. Those terrorists will forever be reviled and implacably held to account for their actions.

But an informed understanding of the causes of terrorism is an essential part of an effective response that will protect the security of our people, that fights rather than fuels terrorism.

Protecting this country requires us to be both strong against terrorism and strong against the causes of terrorism. The blame is with the terrorists, but if we are to protect our people we must be honest about what threatens our security.

The transcript is on Labour’s website. You can see the full video on Jeremy Corbyn’s Facebook page.

Among the world leaders, Jeremy Corbyn is one of the few to say this. Nobody is ready to admit that the West’s intervention in the Middle East has led to so many problems for the world and has been counterproductive to say the least.

If you’ve missed my previous post, you can check for a link of a discussion featuring Edward Snowden, Glenn Greenwald and Noam Chomsky on this. Another great writing is by John Schwarz of The Intercept, on the denial about the United States’ government’s role in the world, written earlier this year.

A good analysis of Manchester is by Max Blumenthal for Alternet, here. In that he shows how the Libyan intervention led to a rise in jihadism which had close connection to the Manchester suicide bombing.

Of course, none of this doesn’t mean that this is the only factor responsible for global terrorism. But via deceit, western governments and the media has prevented this main reason from being discussed. It’s good that Jeremy Corbyn has pushed this in public debates.

Some Interesting Links On Politics

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John Pilger recently wrote an excellent article, Getting Julian Assange: An Untold Story, about Julian Assange on his website. The article was endorsed by Assange himself on Twitter. It tells the story about how Julian Assange has been made a political prisoner. The article was written in response to the closing of an investigation against him by Sweden. Although this is positive, the United Kingdom police has declared that it will still arrest Assange if he steps out of the Ecuadorian embassy in London.

Chelsea Manning was released from prison on May 17, after Barack Obama reduced her punishment. Glenn Greenwald put up a fantastic article on The Intercept telling us how she is one of the biggest heroes of our generation. Greenwald says:

Ever since Chelsea Manning was revealed as the whistleblower responsible for one of the most important journalistic archives in history, her heroism has been manifest. She was the classic leaker of conscience, someone who went at the age of 20 to fight in the Iraq War believing it was noble, only to discover the dark reality not only of that war but of the U.S. government’s actions in the world generally: war crimes, indiscriminate slaughter, complicity with high-level official corruption, and systematic deceit of the public.

The recent terrorist attack in Manchester has again raised the question about what the root causes of terrorism are. There was a conversation last year between Edward Snowden, Noam Chomsky and Glenn Greenwald on this. The discussion—although titled, A Discussion On Privacy—has an interesting digression on terrorism. The YouTube video with the link to that part of the discussion is here. It’s far from the lazy explanation usually given, i.e., religion.

Link

Stock-Flow Consistent Models: A Survey

There’s a new paper by Gennaro Zezza and Michalis Nikiforos for the Levy Institute.

Abstract:

The stock-flow consistent (SFC) modeling approach, grounded in the pioneering work of Wynne Godley and James Tobin in the 1970s, has been adopted by a growing number of researchers in macroeconomics, especially after the publication of Godley and Lavoie (2007), which provided a general framework for the analysis of whole economic systems, and the recognition that macroeconomic models integrating real markets with flow-of-funds analysis had been particularly successful in predicting the Great Recession of 2007–9. We introduce the general features of the SFC approach for a closed economy, showing how the core model has been extended to address issues such as financialization and income distribution. We next discuss the implications of the approach for models of open economies and compare the methodologies adopted in developing SFC empirical models for whole countries. We review the contributions where the SFC approach is being adopted as the macroeconomic closure of microeconomic agent-based models, and how the SFC approach is at the core of new research in ecological macroeconomics. Finally, we discuss the appropriateness of the name “stock-flow consistent” for the class of models we survey.

[The title is the link]

Two Hundred Years Of Ricardian Trade Theory

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Ingrid Kvangraven has a nice article, 200 Years of Ricardian Trade Theory: How Is This Still A Thing? on the blog, Developing Economics. In that, she asks how “the observation of persistent imbalances (and recurring debt crises in the deficit countries) appears to have little impact on the popularity of Ricardo’s theory.”

It’s a nice article going into details about the assumptions of the trade theory, but let me just add another perspective. New Consensus Economics is based on the assumption about the magic of prices and market forces acting to resolve imbalances. Government “intervention” (a loaded word), supposedly spoils this magic and economists are trained to think that this is the reason for crisis. So a New Consensus economist doesn’t find this to be contradictory. “Hey government, why did you interfere with the workings of the market”, an economist is likely to say.

The role of the government in this model is mainly about law and order and is supposed to balance its books. Whenever a crisis arises, economists tend to blame “fiscal profligacy” and recommend contraction of fiscal policy and “economic reforms”.

Of course, since the financial crisis started about ten years back, economists have conceded that they have been wrong about several things. Fiscal policy is one major area where this is so. But the “learned intuition” is so deeply ingrained and ramified into every corner of their minds—borrowing words from Keynes—that it is difficult for them to escape old ideas.

It’s unfortunate that Keynes didn’t stress much about this problem, which is huge. In his GT, he did have a chapter on mercantilism and discussed how the mercantilists behaved the way they behaved because of their distrust in the role of market forces in resolving imbalances. Keynes also had a plan called the Keynes Plan, before the Bretton Woods established. Keynes proposes a fine on creditor nations as well (page 23-24):

from page 23 of IMF’s document on Keynes’ Plan

Usually one only hears of this in Post-Keynesian literature but this was not all. He also proposed other responsibilities for creditors:

from page 24 of IMF’s document on Keynes’ Plan

Of course, the idea of a Bancor sounds crazy because of its similarity to the Euro. The trouble with the Euro is that there is no central government with large fiscal powers, such as in a federation like the United States. Bancor would need a world government. Nonetheless, we can still embrace Keynes’ genius that creditors should take responsibility in the rules of the game and reject Bancor. So apart from the principle of effective demand, this is one of Keynes’ biggest contribution to the history of humankind—that creditor nations have a responsibility.

Unfortunately, the world is still stuck with Ricardo’s ideas!

Link

Levy Institute’s Strategic Analysis On The US Economy

Michalis Nikiforos and Gennaro Zezza of the Levy Economics Institute Of Bard College have published their strategic analysis report for the U.S. economy.

They discussion two scenarios — baseline scenario and scenario 1. Growth in either scenario is low. The authors argue that while equity markets have risen in recent times on expectations of a fiscal stimulus, it is unlikely. In scenario 1, it’s assumed that equity markets fall and this leads to a fall in private expenditure relative to income and this causes a fall in growth by 2020 and a rise in the budget deficit to 8.3% because of it.

It looks more likely that the Trump administration isn’t going to relax fiscal policy. Donald Trump had promised in his campaign to reduce taxes for even the middle class but is now saying that it’s dependent on numbers in the Republican healthcare plan.

At any rate, the report has a chart showing how tight fiscal policy has been since the recession. This is how real government expenditure changed after the crisis. The red line is the current recovery (2009Q2-) and other colours are for previous recoveries post recession trough.

Source: Levy Institute

[the title is the link]

Link

INET Interview With Anwar Shaikh On His Work

Recently, Institute For New Economic Thinking (INET), interviewed Anwar Shaikh in their New York office. It’s like a short autobiography of his work and his life and a background to his book, Capitalism: Competition, Conflict, Crises. Shaikh starts off describing his personal background and what led to him ask the questions he asks. He then talks about his work, from the humbug production function to the theory of international trade to the responsibilities of the heterodox.

An interesting story is about his association with Joan Robinson while writing the paper on the production function. Shaikh tells us that he was at Columbia University at the time and the professors there told him, “Joan Robinson is not an economist”!

[the header of this article is the link to the INET page which has the video and a brief description]

The Paradox Of Costs And Other Macro Paradoxes

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In the last post, Effective Demand And The Labour Market, I argued how the effect of raising minimum wages on employment is straightforward—it’s beneficial. This seems contradictory to the “intuition”—which it is not really, it’s learning to think like an economist—which suggests that raising wages will lead to unemployment.

Economists have been struggling to find answers to analysis which do not find empirical support. But they needn’t, as explanations are already available. You just need to take the Keynesian principle of effective demand more seriously.

Keynes highlighted the paradox of thrift — reduction in the propensity to consume (or rise in the propensity to save) leads to a fall in output. This goes against intuition, which considers saving as only positive. Of course the solution is to not promote a policy in which consumers spend like crazy. So fiscal policy has to be relaxed if consumers want to save a lot.

And there are other paradoxes such as the paradox of costs, which is related to the discussion on wages, profits, output and employment in the previous post. Here’s a table from Marc Lavoie’s fantastic book, Post-Keynesian Economics: New Foundations.

Marc Lavoie’s list of macro paradoxes

Intuition derived out of learning New Consensus Economics will lead one to believe that raising real wages will lead to a fall in profit rates. Michal Kalecki highlighted that this isn’t the case. As Marc Lavoie says, “what seems reasonable for a single individual or nation leads to unintended consequences or even to irrational collective behaviour when all individuals act in a similar way.”

Further, Marc Lavoie says:

The paradox of costs, in its static version, says that a decrease in real wages will not raise the profits of firms and will instead lead to a fall in the rate of employment. This was explained by Kalecki in a Polish paper first written in 1939, where he concluded that ‘one of the main features of the capitalist system is the fact that what is to the advantage of a single entrepreneur does not necessarily benefit all entrepreneurs as a class’. Its dynamic version has been proposed by Robert Rowthorn. It says that rising real wages (relative to productivity) can generate higher profit rates. This flies in the face of a microeconomic analysis that would demonstrate that lower profit margins generate lower profit rates. But if higher real wages generate higher aggregate consumption, higher sales, higher rates of capacity utilization and hence higher investment expenditures, profit rates will be driven up.

So while it may be beneficial to an individual firm to reduce wages and get a higher profit rate, it will be the reverse if everyone tries to do it.

For a fantastic discussion of these paradoxes, refer to the book Post-Keynesian Economics: New Foundations. Chapter 1 can be accessed for free at the publisher’s website.