Posts from — December 2009

Through our professor Erik Reinert, the authors at Evolution-Revolution have recently been exposed to an old Norwegian economist by the name of Torkel H. Aschehoug. Although he died a little more than a hundred years ago, his economics – and especially his approach to economics – remain highly relevant today. As opposed to presenting a single theory or logical system as proven and true, his work is characterized by broad inclusiveness. Firmly rooted in the history of economic thought, he consistently presents the work of several different schools of thought when dealing with economic questons, as if creating a “smorgasbord” of economics for the critical reader to pick and taste from. In the first edition of his 2400-page magnum opus, Socialøkonomik (Economics), written during the last years of his life, he cites almost 900 different economists, and more than a thousand in the second. He examines the work of different and disagreeing economists critically – often pointing out weak points in the various theories presented – but refrains from canonizing any one as indisputable and true. Rather, his epistemology is founded on the attitude that objectivity is achieved by viewing a particular question from as many different angles as possible. Above the age of 80, the old conservative eagerly read new and critical writings, constantly revising his manuscripts in order to include and reflect upon new and interesting directions taken in economics.

This “Smorgarbord Approach” to economics is radically different from what is the norm in mainstream economics today. In the latter, theory tend to be presented without reference to their origin or author – implying a timelessness and irrefutability far beyond what most of it deserves. And while some academic conflics are laid out, the vast majority of mainstream economics is not presented as the view of a particular school of thought – the Neoclassical one – in conflict with other schools, but rather as established truth. More importantly, its epistemological foundations suffer from an increased emphasis on the ability of new theory to be derived from particular mathematical methods and fit within the established axiomatic framework. Importantly, while there may be furious disagreements within the school, the theories of the various belligerents tend to be based on very similar methods and theoretical foundations. Still, empirical work within the mainstream has to some extent helped it stay more relevant and connected to reality. It has also tended to produce conclusions less consistent with established theory. However, econometric research also suffers from the fact that it largely emanates from a single school of thought, with biases and holy ghosts like any academic school of thought is bound to suffer from. There are always endless questions of what to control for and how to define variables, and as my econometrics professor at William & Mary tellingly taught his students: “If in doubt, we go with the theory.” – a rather dubious doctrine from a Popperian perspective.

I am not amongst those that think the methods, models, and theories of the Neoclassical school are devoid of value and relevance – far from it. I do, however, think that it is extremely damaging for Economics as well as the quality of work in the Neoclassical school that the latter is a de-facto “academic monopolist”. Neoclassical economists are right in their claim that structural monopolies tend to stifle both innovation and product quality – the same is true in academic research. Comparative advantage also applies – while Neoclassical economics may have a comparative advantage in dealing with some economic issues, other schools have a comparative advantage in areas that have been strongly dominated by the mainstream. Development economics is one field where this is particularly true, financial macroeconomics and (in)stability is another.

It is time for a return to a much more diverse Smorgasbord. As any nutritionist can tell you, a varied diet is key to good health. Even broccoli is unhealthy if you eat nothing but it.

By Stephan Andreas Jensen

While writing the last post I came over this by Paul Krugman:

“I should also mention that you don’t need to go back to Tobin 1975 to see serious academic analysis of the issue. Gautti Eggertson at the NY Fed has been doing yeoman work on all of this, for example here.”

Implying, to me at least, that there should be some intrinsic value to the freshness of the analysis. I concur that something new might well be more relevant, but then its the relevancy that makes it better and not the novelty. It is not at all given that the newest is the most relevant; it depends. 

I would much rather follow the somewhat impossible advise of Vicor Niederhoffer in his “The Education of a Speculator”, that you should only read books that are at least a hundred years old; it is first when they are still deemed valuable after so long that they have proven their real worth and quality.

- Jørund Holterud Aarsnes

The argument is simple;  in times of distress wage reductions will lead to a decrease of aggregate demand, reducing sales in turn decreasing demand for labor and wages.  One has a vicious circle of decreasing wealth and employment.

Some industries where wages / prices are very flexible are particularly vulnerable to this dynamic, agriculture being one. In the great depression farmers where hit particularly hard, prices collapsed and many defaulted on their mortgages. The goal of Franklin D. Roosevelt’s Farm Strategy And The Agricultural Adjustment Act of 1936 was precisely to stabilize agricultural prices and reestablish the purchasing power of the farmers. 

The common notion among economists, is exactly the opposite, that lower wages will increase employment. This sounds logical and is probably most often true, but its important to understand that the dynamics of economics are ever-changing and no universal laws can be made. By looking at – not only – the supply-side of the economy, but also at the demand-side, one realizes that if there is no one to buy your goods it doesn’t matter how cheap you produce them. This follows the reasoning of Henry Ford who argued that the role of a good industrialist was to set wages as high as possible and that all of his workers should afford a Ford Model – T. He reasoned that without demand, there is nothing to sell.

For more on this  see “On the Consequences of Nominal Wage Flexibility” at Economist’s View

- Jørund Holterud Aarsnes

The Chicago Tribune reports that several top donors to the Obama campaign are beginning to grumble about not getting enough face time with the President and top members of the cabinet. Apparently, both Bush and Clinton were much better at keeping in touch with their benefactors, and regularly spent time socializing with them at a.o. the White House and Camp David. Big contributors are also complaining that it is more difficult for them to get appointed to prestigious positions in the administration than they expected.

Obama has come under a lot more scrutiny than presidents in recent years for alleged links to special interest groups and worse. Hopefully, he deserves it far less than his predecessors. Major donors are not so happy though; according to million-dollar contributor Chris Korge, “If they do have any connection … it is very limited as far as the fun stuff is concerned.”

By Stephan Andreas Jensen

Aftenposten reports, that Nortura, the farmer-controlled cooperative that has a de facto monopoly on meat and egg distribution in Norway, is in trouble; prices are regulated and have to be adjusted in such a manner that everything produced is sold, but at the highest possible price. This has led to 2.3 million metric tons of beef being stored in warehouses around Norway, which is close to the government regulated maximum of 2.5 million.

Action is needed, and the econometric modellers at Nortura expect that a price decrease of 2 Norwegian kroner combined with decreased production next year, will ensure that storages don’t exceed government limits. FrP, the populist party that wants do deregulate the agricultural market, is not impressed, and points out that one can buy beef across the border to Sweden for half the price. Today, in parliament, the agriculture minister has to explain why a price reduction of 2 kroner will be sufficient. Good times.

- Jørund Holterud Aarsnes

The Wall Street Journal reports today that the United States Federal Government is dwarfing private investors in providing venture capital for new high-tech startups – in particular in “clean technology”. Predictably, many (Americans) are worried that this is another step in the direction of a socialist United States. This is worrying too much.  There are abundant examples of governments successfully investing in industry – especially “infant industry” – in non-socialist countries with weaker constitutional safeguards than the U.S. If anything, it is a much more sensible way to do stimulate the economy during a recession than having people paint lamp-posts or pick leaves.

More importantly, the surge of public investments into high-tech business is probably very good for the private sector, both in the long and short run. Already, private venture capitalists are eager to invest in companies that receive loans or equity investments from the government. This, of course, can simply be attributed to the fact that more access to capital and concessionary interest rates should make lower risks and higher returns more likely. However, the much more significant effect – especially over time – is the establishment of strong intrasectoral networks that are necessary for any advanced industry to flourish. Such networks – prominent examples are Silicon Valley and (until recently) the car manufacturing clusters around Detroit – allow for specialized production knowledge to be developed and disseminated, specialized suppliers and consumers to gain sufficient economies of scale, and for consumers to “learn” new products; all necessary ingredients for dynamic economic growth. Notably, a high degree of geographic concentration is not always necessary, but a fairly large number of firms and a significant industry size is.

The network dynamic also highlights a particular reason why it may be appropriate for taxpayers to be venture capitalists. Because many of the benefits of venture capital investments – such as new innovations or other “network benefits” as outlined above – are external to individual firms and investors, but still benefit the economy as a whole, VC investment incentives are in some ways more symmetrical with those of taxpayers than private VC firms.

Of course, the establishment of strong dynamic intrasectoral networks can and has many a time been achieved without government intervention. However, it has not been achieved without plentiful financing – plentiful financing clearly not available in the wake of a financial crisis, especially for small firms. When the Federal Government is able and willing to make the necessary investments, why not be pragmatic rather than paranoid and let it? If anything, in five or ten years the U.S. might just find that they paid off.

By Stephan Andreas Jensen

Perhaps not, but this article by The Guardian is interesting even if the claims made by UN Office on Drugs and Crime are only half-true.

By Stephan Andreas Jensen

According to Reuters, a new stock exchange is at the center of booming economic growth in the Somalian coastal town of Haradheere. Lack of government interference in the region has allowed a highly profitable piracy sector to appear as an engine of economic development, turning the former fishing village into a bustling boomtown. A local ex-pirate named Mohammed, tells Reuters that “Four months ago, during the monsoon rains, we decided to set up this stock exchange. We started with 15 ‘maritime companies’ and now we are hosting 72. Ten of them have so far been successful at hijacking,” Mohammed said.”The shares are open to all and everybody can take part, whether personally at sea or on land by providing cash, weapons or useful materials … we’ve made piracy a community activity.”

The mention of weapons is of particular interest. Although Somalia is a one of the poorest countries in the world, it is awash with weapons – and these weapons are often the by far most valuable assets many Somalians possess. Through the piracy exchange, poor Somalians can make a return on these assets – without raiding their own countryside. For example, the Reuters article mentions a young woman who invested a rocket-propelled grenade launcher she received in alimony when she divorced her ex-husband – and made a $75 000 return on that investment in a little over a month. In a strange way, piracy is contributing to capital flows from rich to poor countries, as well as increased internal stability in Somalia.

The exchange also claims to be attracting foreign investments – FDI, if you will – in particular from the Somalian diaspora community. This is ironic. If true, it is not unlikely that western governments such as that of my native Norway indirectly are contributing to piracy financing through a.o. welfare payments – while at the same time paying for naval forces to fight the same very same pirates that are attracting investments.

The economic growth surrounding the Somalian piracy sector is extremely interesting for several reasons. Firstly, it is an example of how self-organizing economic systems coupled with rapid economic growth can appear under conditions of extreme laissez-faire in a basically ungoverned area. With little “external” interference, quasi-free markets allow productive resources to efficiently flow to sectors where returns are highest, and institutional mechanisms – such as the Haradheere stock exchange – “spontaneously” develop to grease the wheels of economic growth.

The Somalian Piracy sector is also interesting because it shows so clearly that the kind of growth described above can be – qualitatively speaking – utterly perverted and hollow. In particular, it can be totally unrelated to production. In the case of the pirates mentioned here, the high returns on investment and the resulting economic growth is actually a result of sabotage of production.

These qualitative features are obvious in the Somalian case because they are so extreme. However, there is little reason to believe that economic growth fueled by piracy is the only type which may be qualitatively undesirable. Speculative housing bubbles, for instance, come to mind. Perhaps qualitative aspects of economic growth should be paid more attention to in general, both in rich and poor countries.

By Stephan Andreas Jensen

The word economics stems from the Greek oikonomia, or simply put: household management. Historically, economists in the English tradition have dealt with how we can allocate the scarce resources we possess as efficiently as possible. The philosopher Adam Smith pointed out how increased division of labor, until an optimal point, will increase welfare. Later, David Ricardo, developed his theory of comparative advantage, explaining how trade can make both trading partners better off. 

What is striking, is that they were writing their works in Britain in the middle of the industrial revolution, not commenting on how innovation and technological development was forever changing the dynamics of growth, enabling an escape from the Malthusian trap (at least so far). In ancient Greece, where technological and economic development from generation to generation was minimal, it may have made perfect sense to mainly focus on efficient allocation of current resources. Luckily, we hardly live in ancient Greece.

Arguably the Soviet Union did not allocate its economic resources very effectively, but it was the lack of innovation that brought it down. Similarly, China is arguably wasting a large portion of its domestic product because of inefficient allocation, but this does not matter very much when yearly growth rates have been more than 10 percent the last decade as technology and innovation is absorbed from abroad. Efficient allocation is only truly important in an equilibrial steady state. We here at Evolution-Revolution have yet to find one off the blackboard, and strongly believe that understanding the dynamics that propel the economy into the unknown should be at the core of economics, rather than optimizing a static economy that only exists in the abstract.

- Jørund Holterud Aarsnes