Economics

Abolishing the 'tampon tax' is a politically-motivated response to special pleading

Published by Anonymous (not verified) on Fri, 12/10/2018 - 8:27am in

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Economics

One issue is that toilet paper is subject to GST despite being a hygiene product.

We don’t need tax to fund the NHS, but we may increase taxes because we do

Published by Anonymous (not verified) on Thu, 11/10/2018 - 7:15pm in

Tax Justice UK has issued a new report this morning:

As they say of it:

The World We Want is a new report that sets out how the government could find the £20 billion a year extra it has promised for the NHS by raising taxes on wealth.

The suggestions are summarised in this pie chart:

The premise of the report is that:

And whilst I am on the one hand delighted that Tax Justice UK is challenging the right wing on these issues  I admit that I am also quite conflicted by what it is saying.

The simple reality is that the premise of the report is wrong. The way to fund £20bn of extra healthcare spending is for the government to create the necessary funding for that purpose. And it can do this at any moment. The fact is that tax does not precede spend. It is always, and inevitably, true that spend precedes tax.  In that case the hypothesis that extra tax must be raised before the NHS can be funded is incorrect. What actually happens is that if the government spends an extra £20 billion into the economy, and increases GDP directly as a result (because government spending is part of GDP, because it creates wealth) then  the government can, if it so wishes, claim back some, all, or even more of that spend in tax  if it so wishes,  with the possibility that it might claim back more than is even spent being made possible by multiplier effects, which are quite high in the case of NHS expenditure.

What it is important to stress though is that the reason to make that claim back by way of tax would not be to fund the NHS.  That would make no sense at all, because the NHS would have already been funded: the expenditure does that. So the reclamation of that spend by taxation has to be for some other purpose. It may be to control inflation. It may be to reduce inequality i.e. taxing those with more than others simply for social purpose. Or it could be as part of the policy to control carbon use. And it may be for the delivery of some other government policy. But the funding of the NHS will not actually come into the equation. That problem is solved the moment the government decides to create the money to make the payment to provide the additional resources the NHS requires,  as it may at any time because all money creation is ultimately under its control.

And I also stress that the government could choose not to tax and still not run a deficit: ignoring the fact that QE  could fund all current deficits with ease is just technically wrong  now that we know that it is possible.

Putting all this together, what Tax Justice UK is arguing, in my opinion, is that if  £20 billion of additional expenditure on the NHS is required, and if the government insists that this should not change its overall deficit, then socially appropriate choices have to be made on the taxes that will be used to recover the expenditure made and the program that they have laid out appears to be one that is entirely socially appropriate.  I can support it for that reason,  but I  have also to say that the time is coming when the tax justice movement has to recognise the realities of the economics of spend and tax.

Paul Romer’s endogenous growth theory — a very short introduction

Published by Anonymous (not verified) on Thu, 11/10/2018 - 6:38am in

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MMT and pluralism in economics

Published by Anonymous (not verified) on Thu, 11/10/2018 - 5:34am in

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Economics

I am recording some promotional videos in London today for Macmillan Higher Education who will publish our forthcoming textbook – Macroeconomics on March 11, 2019. These will be the first of many short videos to support the teaching program outlined in the textbook. At last Friday’s very successful launch of the – Gower Initiative for Modern Money Studies (GIMMS) – I was asked a question at the end of the first formal workshop I presented, which I was unable to answer due to time constraints. The question went something like – “What do you think of the movements to instill pluralism into the teaching of economics?” The corollary was whether our forthcoming textbook adopts a ‘pluralist’ approach. The question implied that ‘pluralism’ was a desirable characteristic for a macroeconomics course to feature. In this blog post I discuss this question. It outlines what I might have said by way of answer to that question. But, given the medium, in a lot more detail than I would have provided at the actual event. Generally, we adopt a ‘pluralist’ approach. But it all depends on what we mean by that term. What we do not do is privilege the mainstream macroeconomics in any way. Too often, those who call for ‘pluralism’ in economics think it is appropriate to force students to learn swathes of the mainstream theory and practice as if it is knowledge. They think this is somehow a liberal approach to learning. Our view is that learning is about knowledge accumulation. Universities are not places where ‘fake knowledge’ should be disseminated. That is what propaganda is about.

The International Confederation of Associations for Pluralism in Economics (ICAPE), which was founded in 1993, “a consortium of over 30 groups in economics working cooperatively to maintain diversity and innovation in methods, approaches, policy analyses, and higher education in the profession”.

It considers “pluralism and intellectual progress” to be “complements” and “that each tradition of thought (Austrian, feminist, old and new institutionalist, Marxian, neoclassical, Post Keynesian, Sraffian, etc.) adds something unique and valuable to economic scholarship”.

By implication, they consider ‘pluralism’ to consist of a:

1. “a multiplicity of approaches to the scientific analysis of economic activity”.

2. “tolerant communication among different approaches”.

The Wikipedia page – Pluralism in economics – says that it is:

… a campaign to change the teaching and research in economics towards more openness in its approaches, topics and standpoints it considers …

Pluralism encourages the inclusion of a wide variety of neoclassical and heterodox economic theories—including classical, Post-Keynesian, institutional, ecological, evolutionary, feminist, Marxist, and Austrian economics,

In 1992, there was an advertisement placed in the May edition of the American Economic Review, one of the bulwark publications of orthodox economics (published by the American Economics Association).

The advertisement – entitled a “Plea for a Pluralistic and Rigorous Economics” – was signed by 44 economists and read:

We the undersigned are concerned with the threat to economic science posed by intellectual monopoly. Economists today enforce a monopoly of method or core assumptions, often defended on no better ground than it constitutes the ‘mainstream.’ Economists will advocate free competition, but will not practice it in the marketplace of ideas.

Consequently, we call for a new spirit of pluralism in economics, involving critical conversation and tolerant communication between different approaches. Such pluralism should not undermine the standards of rigor; an economics that requires itself to face all the arguments will be a more, not a less, rigorous science.

We believe that the new pluralism should be reflected in the character of scientific debate, in the range of contributions in its journals, and in the training and hiring of economists.

As time passed, student movements – such as the “autisme-économie” petition in France (2000) and the “Opening Up Economics” petition from PhD students at Cambridge, UK (2001) – formed to advocate ‘pluralism’.

The so-called ‘Cambridge 27’ call was representative:

We are not arguing against mainstream methods, but believe in a pluralism of methods and approaches justified by debate. Pluralism as a default implies that alternative economic work is not simply tolerated, but that the material and social conditions for its flourishing are met, to the same extent as is currently the case for mainstream economics. That is what we mean when we refer to an ‘opening up’ of economics.

Anyone with a familiarity of the evolution of the history of economic thought will know that in the Post World War 2 period (particularly in the period of neoliberal expansion – post 1980s), economists (micro and macro) gradually started to exclude consideration of schools of thought such as ‘institutionalism’ because it didn’t fit the growing antipathy towards government intervention and the growing emphasis on ‘free markets’.

This was an ideological shift.

The textbooks that were common, say in the 1950s, were more likely to present macroeconomics as a debate between schools of thought (hence the typical ‘Keynes and the Classics’ approach) rather than impose a unitary model for the pedagogy – a self-contained set of principles that is espoused without question.

Certainly, the more recent textbooks, such as Mankiw’s Macroeconomics, are clearly not ‘pluralistic’. That is, they do not present a debate between, equally privileged, but contrary conceptions of the economy.

There is now pattern where the New Keynesian approach is homogenised and presented as if there is no alternative explanation.

Just before the Global Financial Crisis (GFC) revealed its worst, Olivier Blanchard, the then chief economist at the International Monetary Fund (IMF), published a paper (August 2008) – The State of Macro – which reviewed the understanding that macroeconomists had of the real world,.

In his assessment, the “state of macro is good”.

He asserted that a “largely common vision has emerged” (p.5) in macroeconomics, with a “convergence in methodology” (p.3) such that research articles in macroeconomics “look very similar to each other in structure, and very different from the way they did thirty years ago” (p.21).

They now follow “strict, haiku-like, rules” (p.26).

He also noted that the dominant ‘New Keynesian’ approach in macroeconomics had “become a workhorse for policy and welfare analysis” (p.8) because it is “simple, analytically convenient … [and] … reduces a complex reality to a few simple equations” (p.9).

It didn’t seem to matter to these economists that in the “basic NK model is that there is no unemployment” (p.12), such that all fluctuations in measured joblessness are characterised largely by workers choosing whether or not to work as part of a so-called optimal choice between work and leisure.

The mainstream macroeconomists, who have an abiding faith in the ability of the self-regulated market to deliver optimal outcomes – which we will refer to as the neo-liberal approach, had declared some years before the crisis, with an arrogance common to the discipline, that the business cycle is dead.

That is, the large swings in macroeconomic performance (recessions and mass unemployment and boom and inflation) that had dominated the attention of economic policy makers in the Post World War II period and led to fiscal policy (the manipulation of taxation and government spending) being the primary tool governments used to maintain full employment and price stability, were now being denied.

University of Chicago professor Robert Lucas Jnr gave an extraordinary address to the American Economic Association in January, 2003 where he claimed (Source):

… that macroeconomics in this original sense has succeeded: Its central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.

A year later (February 20, 2004), the then US Federal Reserve Bank Governor, Ben Bernanke claimed that as a result of the policy shift away from governments attempting to manage total spending in the economy by varying fiscal policy settings in favour of using monetary policy (interest rate setting by central banks) to concentrate purely on price stability and the pursuit of fiscal surpluses, the world was enjoying the Great Moderation (Source).

Allegedly, damaging recessions were a thing of the past and low inflation and steady growth were now the norm.

The public was led to believe that these mainstream economists had triumphed over the old interventionists who had over-regulated the economy, sucked the enterprise out of private enterprise, allowed trade unions to become too powerful, and bred generations of indolent and unmotivated individuals who only aspired to live on income support payments.

The business cycle was dead and economic policy should now concentrate on deregulating labour and financial markets and reducing income support payments to reduce the subsidy to unemployment so that the ‘market’ can work even more efficiently.

This was denial writ large. And then the GFC arrived.

But, the point here, is that this arrogance fed into teaching programs everywhere.

Students were taught these “strict, haiku-like, rules” and everything else was excluded.

Progressively, courses in economic history, economic methodology (philosophy of science), ethics, history of economic thought, Marxian economics, and more were dropped from curricula that students were required to satisfy in order to graduate as an economics major.

And it didn’t seem to matter that mainstream macroeconomics had become a degenerating research program – in the way philosopher, Imre Lakatos conceived a body of work that had lost any sense of explanatory capacity.

As Thomas Kuhn noted, practitioners within such a program grimly hang on to their theoretical core despite failure to explain real world events.

A degenerative research program maintains its hegemony in a number of ways, including control of teaching programs in universities; control of the hiring process within the Academy; control of key publication outlets; control of major research funding bodies; and a dominance in the linkages between the Academy, business and government.

Much of the control is implicit and accomplished through networks to get around external oversight such as, anti-discrimination legislation.

The late economist Jack Barbash discussed the way in which the economics profession protects its belief system from criticism and avoids, as far as possible, addressing real world problems.

I wrote about his contribution in this blog post – 5.4 into 1 does not equal 5.4 (August 21, 2012).

In an article published in the US Magazine Challenge (March-April, 1982) entitled The Guilds of Academe (JSTOR link for those with library access), Barbash wrote there is:

… no formally coercive apparatus … [but] … the equivalent of an ‘old-boy’ network” in operation.

This “network” ensures that advantages (publications, research grants, promotions etc) accrue to those who conform to the rules.

Socialisation begins in one’s student days where the masters of the paradigm control the curriculum; the grading systems; and who gets postgraduate scholarships to pursue doctoral studies.

The indoctrination intensifies when one enters the postgraduate stages.

In economics, the graduate student learns that “rigor is more important than substance” and “method is more important than result” (p.52).

Remember those haiku-like rules that govern an economics paper’s chance of publication success.

More insidious is that mainstream (neo-liberal) economics privileges the interests of capital.

To understand why there is so much resistance to abandoning the failed economic theories we need to understand that the mainstream economics paradigm is much more than a set of theories that economics professors indoctrinate their students with.

In his 2013 book – Austerity – Mark Blyth noted that that these mainstream economic theories:

… enshrine different distributions of wealth and power and are power resources for actors whose claims to authority and income depend upon their credibility …

This explains, in part, why there was such resistance to abandoning them, even though it was clear that they were bereft of any evidential standing.

Historically, the body of theory that now represents neo-liberal economics was first developed in the late C19th as an antidote against the rising influence of Marxism, particularly in Europe.

The message was getting through to workers that profits were the reward for ownership of capital not a reward for any contribution to production.

The capacity of owners of capital to take the surplus labour of the workers – for nothing – was then the central story.

It was patently unfair and increasingly violent protests were threatening the capacity of capital to maintain their hegemony over the vast bulk of the population.

Clearly a solution was needed.

Economists were recruited by industrialists to develop theory that made it look like competitive capitalism was a fair system because it rewarded productive input in proportion to the contribution of that input to final output.

Later this was refined as attacks on government policy aimed at redistributing national income.

All the time, the interests of those who own or serve capital were being advanced at the expense of the less advantaged.

So, such is the Groupthink in the academy and the fact that the mainstream macro theories were supportive of the interests of capital, that any number of ’empirical failures’, including the failure to see the GFC coming, failed to dent the primacy of this approach.

Teaching programs have hardly been changed since the GFC.

It is in that context that the call for ‘pluralism’ has been gathering in popularity, particularly among student groups, who are sick to death of being fed the mainstream nonsense.

How does MMT deal with pluralism?

In my three presentations at the GIMMS launch – the initial polemic to launch GIMMS and then at times during the two formal workshops I conducted – the first on an introduction to MMT and the second on the Job Guarantee – I mentioned that our new textbook did not take the usual ‘pluralist’ approach.

By that I mean, it is common among previous ‘pluralist’ efforts to produce ‘heterodox’ texts, to privilege the mainstream approach as it is presented in the mainstream texts and then offer critical scrutiny of that approach – to broaden the students’ perceptions and to provide them with a ‘counter narrative’ to the mainstream pedagogy.

When we were conceiving of our own MMT pedagogy we considered that approach to be deeply flawed.

It was sort of trying to be ‘Mr or Ms Nice Guy’ – look how liberal we are – we don’t trash the orthodoxy but just criticise it. Students get to learn the orthodoxy but also some of its failings.

This implies there is some value in the orthodox theory and practice.

We disagree.

As part of our own strategy, we have been doing a lot of research in the area of social psychology and cognitive psychology (including the use of language and framing) and what becomes clear is that if one leads with a lie, the lie is immediately privileged.

By introducing the lie first, you immediately trigger the frames that support that lie and no matter how ‘factual’ you become in refuting key elements of that lie, the damage is done – the framing is reinforced and you get nowhere fast.

Those insights, which I have written about in the past, provide very powerful guidelines on how to present a pedagogy.

Past blog posts that are relevant here:

1. Framing Modern Monetary Theory (December 5, 2013).

2. The role of literary fiction in perpetuating neo-liberal economic myths – Part 1 (September 11, 2017).

3. The role of literary fiction in perpetuating neo-liberal economic myths – Part 2 (September 12, 2017).

4. The ‘truth sandwich’ and the impacts of neoliberalism (June 19, 2018).

My first refereed journal article with Dr Louisa Connors (more to come) came out last year in the Journal of Post Keynesian Economics – Framing Modern Monetary Theory (June 14, 2017).

That literature makes it clear that the way we frame our arguments and the language and vocabularies that we deploy is highly significant in whether our views are accepted or not in the public discourse.

So the question for those who call for ‘pluralism’ in economics teaching programs is: Should ‘non-knowledge’ be privileged equally with ‘knowledge’?

My answer to that question is clear: NO.

Non-knowledge should not enter teaching programs in any other guise as ‘history of thought’, to allow students to appreciate where an academic discipline has been in the past.

Juxtaposing ‘non-knowledge’ with what we would claim to be ‘knowledge’ is a flawed approach, no matter how dominant the ‘non-knowledge’ is in the current context of the economics profession.

Education is a process of expanding perception beyond crude superstitions and prejudices.

It is a way of exposing ideological dogma.

In that respect, I told the GIMMS audience that our soon to be published Macroeconomics textbook presents Modern Monetary Theory (MMT) as a mainstream approach – without compromise.

Where we think students should be exposed to existing mainstream macroeconomics we treat the material in a ‘history of thought’ manner and in self-contained HET-type chapters.

We never privilege the mainstream approach.

Why not? Simply because we consider it to be fake knowledge.

Its construction of the monetary economy and the capacities of the currency-issuing government within that economy does not correspond to anything in the real world.

Our goal was to present a macroeconomics that was strongly ‘congruent’ with the real world – to provide students with an accurate (if somewhat stylised) depiction of how things actually work in central banks, treasuries, commercial banks etc.

Congruency is about being consistent with the evidence.

We don’t claim that we are providing the ‘truth’. Rather, our body of work is a tentatively adequate depiction of the data generating process within the institutional framework that is operating.

That approach provides many insights that bear up when confronted with the data and which are in contradistinction to the predictions (or claims) of mainstream macroeconomics.

Some might claim, then, that our approach is monistic, which is the opposite (or denial) of pluralism.

I would disagree.

We present the specific MMT approach within a background of history, culture, institutional description and a very strong attributive environment recognising the past influences.

What we do not do is privilege the mainstream approach in any way.

We do not see it as a debate where the jury is out.

That is one of the shortcomings of the ICAPE approach – which thinks that New Classical Economics, Real Business Cycle Theory, New Keynesian economics offer “something unique and valuable to economic scholarship”.

We disagree.

They offer fake knowledge. We are not writing a religious liturgy. The textbook is about knowledge.

Conclusion

So if by ‘pluralism’, we mean that all ideas in the past and present should be treated with equal respect and privilege, we disagree.

We consider pluralism to mean a body of work that draws on past influences that are congruent and consistent but also adds new insights that might be temporally or institutionally dependent.

We should not ‘tolerate’ fake knowledge, especially as it has been used to advance policies that have deliberately forced millions of workers into unemployment, cut public sectors to the disadvantage of the poorest members of our societies, and redistributed income to capital.

This is a time for MMTers to be confident and not pay lip service to the mainstream macroeconomics, hoping that there will be some acceptance of our ideas.

Our textbook is 100 per cent MMT solid. And I make no apologies for that.

Remaining date in my current UK/European speaking schedule

I have several significant meetings in London tomorrow (which I may or may not disclose publicly – depending). Then I am off to Germany for the last event on this particular speaking tour.

Saturday, October 13 – Wurzburg, Germany. Makroskop event.

I am on a panel at 13:15 with Heiner Flassbeck and Martin Höpner – topic Exchange rate regimes

Location: Tagungszentrum Festung Marienberg, Oberer Burgweg 40, 97082 Wurzburg

The workshop runs from 9:00 to 18:00 with several speakers discussing aspects of currencies.

Contact: rsvp@makroskop.eu for details.

That is enough for today!

(c) Copyright 2018 William Mitchell. All Rights Reserved.

Economics: Class War by Another Name

Published by Anonymous (not verified) on Wed, 10/10/2018 - 10:15pm in

Frank Lee The terrible case which … socialists are able to make out against the present economic order of society demands a full consideration of all means by which the ownership of property may be … made to work in a manner beneficial to that large portion of society which at present enjoys the least share of its direct benefits.(John Stuart Mill – Essays on Economics – 1824 I recall an old anarchist cartoon which was in the form of a pyramid. The top stratum consisted of Kings and Queens, millionaires, billionaires, high-ranking politicians, the military, ministers and statesmen and various other high-falutin’ members of the ruling elite: the adjacent caption read – “We rule you.” The next tier down, consisted of the Pope, cardinals, archbishops, priests and other members of the clergy: the caption read – “We fool you.” Beneath that there were soldiers and militia and police: the caption read – “We shoot you.” And the lowest, broader and most populous layer was – us, the ordinary folk, the caption read: – “we …

There is only one option for oil and that is rationing

Published by Anonymous (not verified) on Wed, 10/10/2018 - 7:00pm in

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I noticed the Guardian reporting that:

The boss of Shell has said a huge tree-planting project the size of the Amazon rainforest would be needed to meet a tougher global warming target, as he argued more renewable energy alone would not be enough.

Ben van Beurden said it would be a major challenge to limit temperature rises to 1.5C (equivalent to a rise of 2.7F), which a landmark report from the UN’s climate science panel has said will be necessary to avoid dangerous warming.

What the IPCC delivered on Monday was the most massive warning. We have twelve years to save the planet from global warming. And Shell’s response is to avoid discussion of oil and instead suggest we plant trees without providing the slightest indication of where, who would fund it and why countries will be persuaded that they should do this when deforestation has been the trend throughout human history.

What he did not do is discuss the only obvious solution to this crisis. That is to leave oil in the ground. Of course, he can't do that. His company is valued on the basis that it can burn all the oil reserves that it claims to have.  The only slight problem with that plan is that it burns the planet as well. It is simply not possible for him to admit that controlling climate change and the continued existence of his oil company in anything like its current form are incompatible goals.

But there is a solution to this issue. It comes in three parts.

The first part is to ration oil. It can be done directly, or it can be done indirectly,  but either way it needs to be done. So, we can ration flights. And car usage. We could even ration some food stuffs - like meat, in particular. We have, of course,  done such things before,  and I'm well aware that the immediate response will be that there will be a black market. And I agree, there will be. Which is precisely why each person's ration could be traded. The person who wants to fly a lot could buy the ration of the person who does not want to fly at all. The person who does not have a car should be able to sell their right to have one. And so on. A meat ration might be tradeable as well. The goal is achieved, and virtue would be rewarded. Indeed, the whole policy could be progressive: the sale of rations could redistribute income to those less well off. Externalities could literally be priced.

The second point to note is that rationing would also increase the price of oil:  that is what happens when a product is in short supply, which would have to be the case if fixed quotas for production were imposed, as would have to be the case. In other words, oil company values need not be imperilled by this. But they would be required to invest in clearing up their own past messes.

And third, government revenues need not be imperilled. If the oil price increases, so might government revenue.

It is then possible for Shell to survive for some time to come as an oil company even as its market is forcibly taken from it. But there is no choice but impose that change on it. There are no other ways to get to zero emissions.

Hat tip: some ideas here were developed with Peter Dawe, who also paid for the beer as I recall.

How the City of London makes us all poorer

Published by Anonymous (not verified) on Wed, 10/10/2018 - 6:41pm in

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Oil price rally boosts electric car sales

Published by Anonymous (not verified) on Wed, 10/10/2018 - 9:04am in

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To be sure, charging infrastructure and range are still key concerns in consumers' minds regarding EVs.

Book Review: The Value of Everything: Making and Taking in the Global Economy by Mariana Mazzucato

Published by Anonymous (not verified) on Tue, 09/10/2018 - 9:42pm in

In The Value of Everything: Making and Taking in the Global Economy, Mariana Mazzucato explores the concept of value today, showing how value extraction is now more highly rewarded than value creation. This is a meticulous and insightful analysis of value in the economy that will help to reopen the debate into ‘the value of everything’, writes Wannaphong Durongkaveroj.

If you are interested in this book review, you may like to listen to a podcast here of Mariana Mazzucato’s LSE lecture, ‘The Value of Everything: Making and Taking in the Global Economy’, recorded on 23 April 2018. 

The Value of Everything: Making and Taking in the Global Economy. Mariana Mazzucato. Allen Lane. 2018.

Find this book: amazon-logo

Looking at the things around you, do you think they have some value? If the answer is yes, is it simply because they have a price in the market? If the answer is still yes, then The Value of Everything: Making and Taking in the Global Economy, authored by Mariana Mazzucato, is essential reading.

‘Value’ used to be a primary tenet in economics. It essentially originates from the cost of production and determines the price of things. Nowadays, everything that can fetch a price in the market has value accordingly. Scarcity and preference become key factors in getting the price right; as a result, price determines value. With this insight, Mazzucato points out that value can be easily used and abused by capitalists operating in numerous sectors.

Mazzucato discusses value by focusing on three sectors: finance; innovation; and the public sector or government. For the financial sector, there is the changing role of the financial sector from mobilising resources (and being viewed as an unproductive sector) to generating its own revenue and profit (and hence being seen as a productive sector and vital ingredient of the country’s GDP). Since the 1970s, the financial sector has expanded rapidly due to financial deregulation. New and complicated financial instruments (think of securities and derivatives) have become widespread. Based on this, Mazzucato argues that actors in this sector get rich by capturing value from other sectors through several ways, such as interest differentials and expensive transaction costs, rather than by creating value. Furthermore, when companies in non-financial sectors are controlled by private equity and venture capital firms, such companies’ apex aim is not to produce new things but to maximise the value of shareholders through share buy-backs resulting in higher earnings per share, as well as other short-term rather than long-term investments.

Regarding the innovation economy, Mazzucato explains that there are three key characteristics of innovation processes we should keep in mind: cumulativeness (where innovations are the fruits of long-term investments building on each other for many years); uncertainty (where most attempts to create innovation fail); and collectiveness (where innovation involves different people in different jobs and sectors). Value extraction in an innovation economy takes place in several ways: for instance, through the patent system, controlled by governments, and high-priced innovative products. Even though the core benefits of patents are to provide short-term protection and to encourage knowledge diffusion, patents are also used to prevent innovation because of extended coverage of products, longer periods of protection for the patent holder and patent hoarding. Additionally, firms often justify the high price of their products by asserting that they take risks and invest heavily in innovation (i.e. pharmaceutical products). Consumers thus pay a price that does not reflect collective value creation.

As we can see, governments also play a pivotal role in creating value. It has created fundamental technologies (such as GPS) that can be developed further for commercial reasons by the private sector. However, government is always viewed as an unproductive sector. Mazzucato believes that government should become an active value creator rather just a facilitator of the real economy or a spender during crises.

Image Credit: (m anima CC BY 2.0)

In this book, Mazzucato provides a meticulous and insightful analysis of value in the economy. She eloquently explains a change in the understanding of value and how it affects the way we see things. As entrepreneurship and innovation are vital components of the economy in the present day along with the growing importance of the financial sector, this book is timely in that it helps us distinguish between value creation and value extraction and gives a new lens through which to look at economic phenomena. However, I have the following comments to make.

I agree with Mazzucato’s argument that the debate about different theories of value has vanished from economics. Looking at how economics is currently taught, value is commonly seen as price multiplied by quantity. In economic research, even though the word ‘value’ appears, for example, in the term ‘global value chains’, a value-added of all activities needed to produce goods, its analysis starts from a completed distribution of wages and rent in total output. The question about the actual value arising from the factors of production is not raised. This significantly limits our ability to criticise the current market system and for us to design a better alternative. However, other than scarcity and preference regulating market price which, in turn, affects wages, some countries use a minimum wage system. Even though a minimum wage is used to sustain a sufficient standard of living, it sometimes limits value instead of reflecting the value of labour. To fix this, governments might need to rethink how to form a minimum wage system that truly rewards value creators. Ultimately, income inequality can fall.

In explaining the role of finance, Mazzucato seems to focus on rich, large-sized firms, which is appropriate because such firms have the power and resources to seek rent through lobbying or appropriation of existing assets. To be clear, a fast-growing financial sector triggers value extraction among these firms. However, the author seems to ignore its role in helping small- and medium-sized enterprises (SMEs) (and also startups) to access finance and raise the capital required to join the dynamic market. In the case of less developed countries where SMEs are ubiquitous, it is questionable that value extraction outweighs value creation, and that more financial regulations are required. As SMEs are less likely to obtain bank loans, their power over the market or the possibility of rent-seeking behaviour from them may be limited.

Mazzucato’s view about value extraction in the financial sector can be extended to analyse the coordination between commercial banks and other sectors (e.g., tourism, healthcare and retail). There exists a privilege for those who hold a bank’s credit card. At first glance, this practice sounds fine as a familiar marketing strategy as it can reduce transaction costs in making payments. It also boosts GDP from advertisements (think of billboards) and the production of credit cards, and competition among a few banks may increase market efficiency. Unfortunately, this is another form of moving existing money around, resulting in emboldening the power of a few rich banks without creating new products in the real economy. Also, this indirectly triggers monopolies in the market.

When value extraction is masquerading as value creation, we can end up praising and rewarding non-productive activities while ignoring productive sectors. As a result, GDP rises although an economy does not make anything new and people do not feel better off. Prosperity is thus concentrated in the hands of the rich few, and inequality tends to rise. If it is a value creator that deserves a higher proportion of national income, it is now time to reopen the debate about the ‘value of everything’.

Wannaphong Durongkaveroj is a PhD candidate at the Arndt-Corden Department of Economics, Crawford School of Public Policy, College of Asia and Pacific at the Australian National University, Australia. His research focuses on poverty, inequality and trade.

Note: This review gives the views of the author, and not the position of the LSE Review of Books blog, or of the London School of Economics. 


It is time to replace the Financial Reporting Council’s self-interested myopia

Published by Anonymous (not verified) on Tue, 09/10/2018 - 6:37pm in

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Economics

As the FT has noted:

Britain’s accounting watchdog will consider whether to ban firms from doing any consulting work for the companies they audit in an attempt to stamp out conflicts of interest in the scandal-ridden sector. The Financial Reporting Council said on Monday it would assess whether new action was needed to prevent the independence of auditors being compromised, “including whether all consulting work for bodies they audit should be banned”.

Like others who have campaigned on the issue of audit reform, I was amused by the sheer, brazen incompetence of this announcement.

Firstly, the FRC is trying to make claim for its survival by saying it will look at the issues being complained about. It is not saying it will actually do anything.

Second, the announcement made entirely misses the cause for concern. The problem is not just that Big 4 audit firms are doing consulting work for their own audit clients, although that, of course, is a matter of concern. Instead the problem is that any audit firm in this market is doing consulting work at all, which work then cuts down or even eliminates audit choice for a company seeking to change auditor to the point where conflicts of interest even prevent such change being possible. This is market failure and the dying FRC cannot spot it from a mile off.

In that case there is but one thing to do, and that is recognise that the FRC is well past its usefulness. It is time to replace it and its self-interested myopia with a new regulator, fit for purpose and structured to deliver the public interest.

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