Economic Theory

A Reading List For Economic Heretics

Published by Anonymous (not verified) on Fri, 09/08/2019 - 5:04am in

Do you think that the discipline of economics is a sham — an ideology masquerading as science? If so, here is a reading list for you. These 10 books have influenced my thinking over the years. Read them and join me in the journey of the economic heretic.

1. Capital as Power. A Study of Order and Creorder
    Jonathan Nitzan and Shimshon Bichler


Few books offer both a compelling critique of mainstream economics and a bold alternative vision for political economy. But in Capital as Power, Jonathan Nitzan and Shimshon Bichler have the audacity to do just that.

Nitzan and Bichler point out that orthodox theories of capital are built on non-existent units. Neoclassical theory is built on the non-existent unit of ‘utility’. Marxism is build on the non-existent unit of ‘socially necessary abstract labor time’. Because they are based on non-existent quanta, Marxist and neoclassical theories of capital are incoherent.

Having boldly dismissed orthodoxies, Nitzan and Bichler build their own theory of capitalism. Their thesis, as the title Capital as Power suggests, is that capital is a commodification of power. The relative capitalization of a firm, Nitzan and Bichler argue, represents the differential power of the firm’s owners. With this bold vision in hand, Nitzan and Bichler chart a new approach for political economy, backed by ample empirical research.

Capital as Power represents everything that I look for in a paradigm-shifting work of science. It presents a compelling critique of existing orthodoxies, offers an alternative approach to political economy, and grounds this approach in innovative empirical research. Read Capital as Power and have your worldview forever changed.

2. Debunking Economics: The Naked Emperor of the Social Sciences
   Steve Keen


Now almost 20 years old, Debunking Economics remains the best introduction to all that is wrong with economics. What really makes this books is Steve Keen’s style, which is both accessible and humorous. Keen revels in the awfulness that is neoclassical economics.

If you take one thing from this book, it should be that the neoclassical theory of supply and demand is hopelessly flawed. I remember taking Economics 101 as an undergrad. The professor drew the familiar supply and demand curves and pointed at the intersection. Here, the professor announced, is the equilibrium price.

At the time, the bullshit alarm sounded in my head. This explanation of prices seemed to be too simple to be true. But as a good undergrad, I swallowed my skepticism and memorized what I needed to know to pass the test.

A decade later, I began thinking about these issues again. And I was delighted to discover Keen’s critique of supply and demand. To put it simply, there is no supply curve and there is no demand curve. Keen shows how the logic used by neoclassical economics to construct these curves is hopelessly flawed. As a result, the neoclassical explanation of prices is exactly what I suspected it was as a lowly undergrad — bullshit.

Debunking Economics is, of course, much more than a critique of the neoclassical theory of prices. It’s a frontal assault on most aspects of mainstream economics. If economic theory raises your bullshit alarm, but you don’t quite know why, read this book. Steve Keen will show you why your intuition is correct.

3. History of Economic Thought: A Critical Perspective
    E. K. Hunt


If you needed to design an ideology that perpetuated itself with virulence, the first thing you’d want to do is ban all (scientific) discussion of the ideology’s origin. To be virulent, the ideology must be presented as received wisdom — a gospel to be unquestioningly transmitted from one generation to another.

This is exactly how most students learn economics. They learn the gospel, but not its sordid history. Ask an economics graduate student if they’ve ever taken a course on the history of economic thought. The answer will likely be “no”.

With masterful scope, E.K. Hunt fights against this enforced ignorance. History of Economic Thought critically discusses the origins of most aspects of modern economic theory.

What I found fascinating about this book is the blatant ideological agenda of the early political economists. These thinkers had little interest in science. Instead, they were mostly interested in using armchair philosophy to justify their favored politics.

The coup d’état of neoclassical economics is that it managed to transform blatant political ideologies into seemingly objective scientific theories. Reading History of Economic Thought will remind you that economics has always been about ideology.

4. Debt: The First 5,000 Years
    David Graeber


If you surveyed anthropologists and asked them their opinion of economics, most would probably tell you that they’re skeptical. But because of disciplinary boundaries, most anthropologists don’t write about this skepticism. David Graeber is the exception, and we’re lucky for it.

Debt: The First 5,000 Years is a book that only an anthropologist could write. It’s an ambitious foray into the deep history of credit and debt that draws on the study of archaeology, written history, and the observation of traditional societies.

Graeber begins by demolishing the fable of the ‘barter economy’. This is the story told by mainstream economists about the origin of money. First there was barter, economists say — the direct exchange of goods. Money was then invented as a lubricant for this barter. First came coins, then came ‘virtual’ money. Graeber argues that actual human history shows the reverse trend. Money started out as an IOU — a quantified obligation.

What separates Graeber’s work from other histories of money is his willingness to connect credit and debt to systems of power. Graeber acknowledges that the creditor-debtor relation is all about power. And he shows how this has changed through human history.

With the rise of Modern Monetary Theory, the theorization of credit and debt has become a sexy topic. After reading Debt: The First 5,000 Years, you’ll realize that there’s nothing modern about Modern Monetary Theory. More accurately, MMT has rediscovered that money is nothing but a quantified obligation that can be created and destroyed at will.

5. Energy and the Wealth of Nations:
    Understanding the Biophysical Economy
    Charles Hall and Kent Klitgaard


In a 1974 speech given to the American Economics Association, the economist Robert Solow remarked “The world can, in effect, get along without natural resources”. Since then, Solow’s comment has become synonous with the obliviousness of neoclassical economics to the natural environment.

As an ecologist by training, Charles Hall has spent most of his career trying to rectify this neglect. Energy and the Wealth of Nations is Hall’s magnum opus, written together with heterodox economist Kent Klitgaard.

The book puts energy front and center in the study of the economy. If you’re a social scientist with no training in the natural sciences, this book should be essential reading. It’s designed as a textbook, so it comes with plenty of examples and diagrams.

As we move into an energy-scarce future, understanding the biophysical economy will only become more important.

6. Capital in the Twenty-First Century
    Thomas Piketty


For most of the 20th century, economists paid little attention to income distribution, preferring instead to focus on economic growth. By with income inequality skyrocketing in many countries, it’s becoming harder for economists to ignore income distribution.

Few economists have contributed more to the study of income inequality that Thomas Piketty. Because of this, I recommend reading Capital in the Twenty-First Century. It’s a masterpiece of empirical research.

Since Capital was published, it’s become somewhat of a cottage industry for heterodox economists to critique Piketty. True, his central thesis about the cause of inequality is cringe worthy. He proposes that when the rate of economic growth is less than the rate of return on capital, income inequality will increase. I don’t buy this for a second.

Still, I have enormous respect for Piketty because he actually went out and measured inequality in a novel way (using tax records). Read Capital in the Twenty-First Century not for its theory, but for its data.

7. How the Other Half Dies: The Real Reasons for World Hunger
    Susan George


When I was first becoming interested in economics, I would browse the University of Toronto library for books that looked interesting. I’d read the book, and then read the bibliography, noting references that looked interesting. I’ve long since forgotten the book in whose bibliography I discovered How the Other Half Dies. But Susan George’s polemic has stayed with me.

Although George doesn’t frame it this way, her book is about the political economy of food distribution. Her thesis is simple: no famine in modern history has been caused by a global food shortage. Famine is not a problem of too little food production (or over population). Famine is a problem of distribution. People who starve do so because they are poor. There may be food in the world that could feed them. But the starving lack the money to buy this food.

Even if you’re familiar with the political economy of global food distribution, the urgency and moral outrage of George’s writing is worth the read.

8. This View of Life: Completing the Darwinian Revolution
    David Sloan Wilson


David Sloan Wilson is an evolutionary biologist who has spent his career studying the evolution of sociality — the propensity to cooperate in groups. Together with E.O Wilson (no relation), David Sloan Wilson has been a primary proponent of ‘group selection’, which proposes that sociality evolves by selection between groups, rather than selection between individuals. As the two Wilsons put it: “Selfishness beats altruism within groups. Altruistic groups beat selfish groups”.

In This View of Life, Wilson argues that group selection has made the small group the natural unit of human organization. In light of this fact, Wilson notes, most economic theory makes little sense.

Economists base their theories on the idea that humans are selfish utility maximizers. Sociality never enters the equation. Wilson cogently argues that if we want to design institutions that function effectively and equitably, we need to understand our evolutionary heritage. This means acknowledging human sociality and abandoning much of economic theory.

9. When Corporations Rule the World
    David Korten


When Corporations Rule the World has a special place in my heart because reading it was part of my political awakening.

I was in high school when the infamous Battle in Seattle took place — the protests that shut down a World Trade Organization meeting. I remember seeing these protests on the news and having no idea what they were about. As usual, the corporate media framed it as a bunch of radicals who were up to no good. And I more or less bought this framing.

Only when I read Korten’s book (a decade later) did I understand the other side of the story. Korton made me realize that the World Trade Organization (and other organizations such as the IMF) exist to promote a corporate agenda based on free-market ideology.

If you want to understand what neoliberalism is about, read When Corporations Rule the World. Korten’s outrage at the corporate take over of the world is palpable throughout the book. You can’t help but feel enraged when you read it.

10. The Shock Doctrine
      Naomi Klein


In the 1970s, the University of Chicago trained a group of Latin American economists who became known as the ‘Chicago Boys’. Having been indoctrinated as free market fundamentalists (after studying with Milton Friedman and his ilk), the Chicago Boys returned to Latin American to spread the gospel. The results were disastrous. Think Pinochet and all the horror that came with his take over of Chile.

The Chicago boys preached that the best way to pursue free-market reforms was through ‘shock therapy’ — a dramatic change in policy that would ‘shock’ society into a free-market utopia.

In The Shock Doctrine, Naomi Klein documents the rise and spread of this practice. Although she’s writing about economic policy — which can be dry and abstract — she makes the subject lively and engaging. The story is always told through the lens of individual participants, which brings economic policy down to the human level.

Since disaster capitalism is more prominent than ever, The Shock Doctrine remains relevant a decade after it was first published.


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A failure of collective intelligence

Published by Anonymous (not verified) on Mon, 29/07/2019 - 2:32pm in

By Warwick Smith
An essay I wrote has won second prize in New Philosopher magazine’s latest writer’s prize and has been published in the magazine.

As I did with my last New Philosopher essay, I’ll probably publish this in another outlet after the next edition of New Philosopher comes out. If you want to read it in the meantime, pick up a copy of NP.

Hicks mistakenly credits Keynes for coining ‘liquidity’, 1962

Published by Anonymous (not verified) on Tue, 23/07/2019 - 6:00am in

In June 1962, John Hicks devoted his Royal Economic Society Presidential Address to the concept of ‘liquidity’. Whereas many terms of economics were drawn from practical commercial life, he believed ‘liquidity’ was a rare example of traffic in the other direction. A piece of theoretical jargon had passed into the wider world, and in such situations economists had ‘some responsibility for these animals, when they are inclined to get loose’. He suggested that Keynes was responsible for coining the term, in its economic sense, in the Treatise on Money. Hicks also pinpointed a passage in the 1931 Macmillan Report where the voice suddenly shifts and ‘liquidity and its congeners (liquid resources, liquid assets) begin to flow all over the vocabulary’. Undoubtedly this was Keynes’s contribution, Hicks concluded, connecting it to passages in the Treatise published the previous year.

After the Treatise and the Macmillan Report, he suggested, ‘liquidity’ the noun and ‘liquid’—as an adjective applied to assets and institutions—quickly entered into the language of commercial life. It also entered the lexicon of economics. In the latter sphere, however, its meaning was later overwritten by Keynes’s more systematic use in the General Theory. A linguistic divergence developed:

For Liquidity escaped to the outside world, not through the General Theory, but through the Macmillan Report and hence through the Treatise; some of the slipperiness which belongs to that period it carried with it. Now (since Radcliffe*) that is a situation with which we economists can no longer refuse to reckon. And perhaps it will do us no harm to open our minds to some of the nuances which the strong music of the General Theory for a while almost blotted out.

* ‘Radcliffe’ being the 1959 Report of the UK Radcliffe Committee on the Workings of the Monetary System, on which, much more anon.

According to Hicks, Keynes had launched ‘liquidity’ on two careers, and both were thriving. There was the ‘liquidity’ of the General Theory—the economists’ ‘liquidity’—clearly defined in terms of the schedule of demand for money. Then there was the ‘liquidity’ of the Treatise—the ‘liquidity’ of bankers and central bankers—with multiple meanings, all hard to pin down. Nebulous it may be, but it captured important features of monetary relations that were not represented by the theory of liquidity preference as a schedule of demand for a given stock of money. Addressing economists, Hicks made the case for the other senses of ‘liquidity’ and attempted to clarify them.

This is a pivotal paper, and I’ll return to it several times—especially to flesh out the idea of ‘liquidity’s two careers’ around mid-century. Hicks is going to be one of the heroes of this story, and this paper his own turning point. But for now, I just want to note that he was wrong to credit Keynes with coining ‘liquidity’. Nothing to get too cocky about; he just didn’t have Google Scholar. He might have been tipped off, though, by the Macmillan Report itself. ‘Liquidity’ and especially ‘liquid’ do appear many times in the 1931 Macmillan Report—a clear sign, in Hicks’s view, of passages authored by Keynes. But there is no sense in the report that these were words readers would be unfamiliar with. They are used—without explicit definitions—to refer to properties of both assets and of banks. In fact the words show up in the quoted testimony of a banker, Mr Hyde of the Midland Bank, who described the business of banking as distributing ‘our assets over a variety of different forms of employment so as to secure two objects, first of all liquidity, and, secondly, profits.’

The ‘notable passage’ Hicks singles out as one where ‘liquidity and its congeners… begin to flow all over the vocabulary’ (‘liquid’ appears 17 times in two pages) discusses the international assets of the the Bank of England—something of an outlier, since most uses elsewhere discuss the liquidity of assets and institutions in the domestic financial system. There are passages which are more clearly of Keynesian origin, such as a discussion of bank accommodation of the public’s ‘increased relative preference for liquid assets’. But nowhere is there any indication that a novel term is being introduced.

Because it wasn’t. By 1930 ‘liquid’ and ‘liquidity’ were common terms in the literature on banking. They appear many times in many texts of the 1920s—books for the banker like the American Banking Institute’s (1922) Elementary Banking and O. Howard Wolfe’s (1924) Practical Banking, and books for students and scholars, like Harold G. Moulton’s (1921) The Financial Organisation of Society and Robert G. Rodkey’s (1928) The Banking Process. The origins of ‘liquidity’ go much further back.

Hicks was on to something in recognising that the ‘liquidity’ of ‘liquidity preference’ in the General Theory was hard to square with the ‘liquidity’ of the Treatise. He was just wrong that Keynes introduced ‘liquidity’ in the Treatise. Rather than introducing a term of economics into ‘commercial life’, it was the other way around: Keynes brought a term already current among bankers into theory. He adopted an existing meaning in 1930—and perhaps put it is a particularly clear form. Later, with ‘liquidity preference’, he brought the term from one conceptual realm to another: from the world of banking to ‘high’ economic theory. He joined ‘liquidity’ to the Cambridge tradition of demand-for-money functions. That was the novelty.

The jump from one context to another was fruitful, bringing ‘liquidity’ out from hiding in technical questions of bank balance sheet management to a central role in the dynamics of the capitalist economic system as a whole. Hicks’s unfamiliarity with the term is testament to the intellectual distance between high economics and the applied economics of banking—on which, more to come.

In any case, in travelling between discourses ‘liquidity’ left much conceptual residue behind. The old ‘liquidity’ would continue to be developed among the financial specialists, even as ‘liquidity preference’ as ‘demand for money’ became the province of macroeconomics. The two liquidities would run into each other again, because the special problems of the banking system would again (and again) impinge upon the economic system as a whole, even if macroeconomics, the conceptual system, abstracted from banking. Hicks’s 1962 paper registers one of these encounters, and we’ll come back to it.

First published at Owl of Athena

The post Hicks mistakenly credits Keynes for coining ‘liquidity’, 1962 appeared first on Progress in Political Economy (PPE).

The Fall and Rise of Racket Capitalism

Published by Anonymous (not verified) on Sat, 06/07/2019 - 11:00am in

Frank Lee Delving back into the history of Economic Thought[1] perhaps the most important contributions were made by the British Classical tradition starting with Adam Smith (1723-1790) followed by David Ricardo (1772-1823) and finally Karl Marx (1818-1883) and Friedrich Engels (1820-1895), all of whom made significant contributions to the study of political economy and the politics …

‘Liquidity’, a keyword in the history of capitalism: Introduction

Published by Anonymous (not verified) on Tue, 18/06/2019 - 6:00am in

liquidity, n.: Econ. The interchangeability of assets and money.

Oxford English Dictionary, 2 ed. (1989).

You don’t anywhere come right out in the open and say what liquidity is.

Joan Robinson (1935) Letter to John Maynard Keynes.

a highly complex phenomenon. Its concrete manifestation is powerfully affected by changes in financial institutions and practices, which have been occurring with extraordinary rapidity in recent decades. It calls for analysis both at the microeconomic and the macroeconomic level, with unusually strong dangers of committing fallacies of composition.

A. B. Cramp (1987) ‘Liquidity,’ New Palgrave Dictionary of Economics.

No formal definition is equivalent to any substantial definition except under very artificial assumptions… It is the ambiguity in the definition of liquidity preference which gives it the appearance to some of being at one and the same time useful, formally valid, and of very general application. It may with suitable chosen definitions be any two of these but never all three.

Max Millikan (1938) ‘The liquidity-preference theory of interest,’ American Economic Review, 28(2), p. 247.

Socrates: Now tell me about ‘the liquidity position as a whole,’ on which I understand the Committee places great emphasis. How does the Committee define liquidity?

Economist: Well, the Committee doesn’t actually define liquidity anywhere, Socrates…

W. T. Newlyn (1960) ‘The Radcliffe Report: a Socratic scrutiny,’ Banker’s Magazine.

‘Liquidity’—in its economic usages—is a very strange term, resisting definition. Sure, you can find straightforward definitions, like the one in the OED—but there are too many, they give different meanings and still don’t cover all the ways the word has been used.

It’s not just that the meaning has changed over time. It has, of course, but at any point in time it has been marked by different uses. Not just different meanings in different contexts—that’s normal where words are concerned—but different meanings that seem to get thrown together in the same space. There were shared, stable meanings in certain subliteratures, but they bled into one another and caused confusion whenever literatures started to intermingle: say, when the ‘liquidity’ of a parliamentary banking enquiry met the ‘liquidity’ of macroeconomists. Even within the subliteratures, meanings proliferated. It is a word that easily throws off new usages that make intuitive sense given family resemblances between concepts. But over time the plant grows weird branches so that it no longer seems to be all one organism, and the conceptual pruning begins. But the cast-offs find soil somewhere else and keep growing, and sometimes someone rediscovers them and grafts them back on.

Scattered across the decades are a number of odd pieces trying to sort out what ‘liquidity’ meant—I quote from a few above, from the 1930s through the 1980s. They are alike in one way: the writers conclude it is hard to define ‘liquidity’ in a satisfying way. There have been attempts to expunge it from the lexicon: ‘For an answer which cannot be expressed the question too cannot be expressed. The riddle does not exist.’

But people clearly kept hearing the riddle nonetheless, because ‘liquidity’ always came back. (It fell out of favour in economics in the 1980s and 1990s, but came roaring back again with 2008 and all that. Cramp’s great entry on ‘liquidity’ from the first edition of the New Palgrave was missing from the second, 2008, edition and restored for the third in 2018. Bank liquidity requirements were out of fashion for Basels I (1988) and II (2004), but back in time for Basel III (2010).)

A difficult word

It was just a difficult word, a word I could think of as an example of the change which we were trying, in various ways, to understand.

Raymond Williams (2 ed., 1983) Keywords: a vocabulary of culture and society, p. 13.

The riddle of ‘liquidity’ is posed by the social relationships it refers to. It is tricky in part because what it refers to is difficult to understand, and in part because the relations it refers to are evolving all the time. My hunch is that ‘liquidity’ is one of those words Raymond Williams discussed in Keywords, whose evolution and problems tell us something about the evolution and problems of capitalism itself.

Williams wrote of

a process quite central in the development of a language when, in certain words, tones and rhythms, meanings are offered, felt for, tested, confirmed, asserted, qualified, changed. In some situations this is a very slow process indeed; it needs the passage of centuries to show itself actively, by results, at anything like its full weight. In other situations the process can be rapid, especially in certain key areas.

Williams (1983), p. 12.

‘Liquidity’ is one of these latter words. The story is largely a twentieth century one, though it continues to the present and has ancestor concepts stretching further back. Like Williams, I treat it as an indicator, a useful way in to understanding social change. The word both reflects that change and is part of the change—it has been used as part of attempts to pick out, describe, explain and intervene in real social relationships and processes:

Of course the issues could not all be understood simply by analysis of the words. On the contrary, most of the social and intellectual issues, including both gradual developments and the most explicit controversies and conflicts, persisted within and beyond the linguistic analysis. Yet many of these issues, I found, could not really be thought through, and some of them, I believe, cannot even be focused unless we are conscious of the words as elements of the problems.

Williams (1983), pp. 15-16.

Where Williams was interested particularly in words which had passed from specialised meanings into common usage, I am interested in liquidity mainly as a technical term in economics and finance. I think that still fits the project as Williams described it, because economics and finance and their discourses are so important to the infrastructure of capitalism.

Why is liquidity a keyword?

I think the troublesomeness of ‘liquidity’ comes down especially to two things:

  1. Liquidity crosses the state-economy divide. On the one hand, liquidity can be sustained through the strategic action of numerous self-interested agents. On the other hand, the landscape of liquidity is profoundly shaped by official activity. State agents can often foster the liquidity of particular instruments and institutions, but it is harder for them to withdraw liquidity when other agents are supporting it. Liquidity dynamics are challenging for one-sided state-and market-centred understandings of money. Puzzling about liquidity in the literature is often connected to the evolution of the role of states within the capitalist financial system, and the evolution of that system itself.
  2. Liquidity does not fit neatly into either micro- or macroeconomics, the two major approaches to understanding capitalism within the discipline of economics. That is the point Cramp makes in the excellent Palgrave entry quoted up the top there. There are, as Cramp puts it, ‘unusually strong dangers of committing fallacies of composition’. Further, it involves issues of time and uncertainty that have made it difficult to formalise in ways that are both realistic and rigorous in the sense recognised by modern economics. ‘Liquidity’ appears in plenty of models, but it has tended to escape abstraction.

First published at Owl of Athena

The post ‘Liquidity’, a keyword in the history of capitalism: Introduction appeared first on Progress in Political Economy (PPE).

Labor wants to pay childcare wages itself. A perfect storm makes it not such a bad idea

Published by Anonymous (not verified) on Sat, 11/05/2019 - 7:50pm in

This article was first published in The Conversation.

Warwick Smith, University of Melbourne

This article is part of an election series on wages, industrial relations, Labor and the union movement ahead of the 2019 federal election. You can read other pieces in the series here, here, here, here, and here.

Opposition Leader Bill Shorten has promised that a Labor government will work to increase the wages of Early Childhood Education and Care (ECEC) workers by 20% over eight years. That’s pretty conventional, but the method isn’t.

The government will directly fund the salary increases so that neither childcare providers nor parents bear the costs. These increases will be in addition to any changes to the award over these years.

Internationally, such interventions exist, but they’re rare. In Ontario, Canada, the government tops up the salaries of childcare workers by $2 per hour. For Australia, it’s a first.

Childcare workers are among the lowest-paid in the country, with more than 70% reliant on award rates that are not much higher than the minimum wage.

The perfect storm of market failures

There is also limited opportunity for career progression in childcare. These two facts combine to lead to an extraordinarily high turnover in staff.

As long as legal minimum wages and awards are being met, the fact that a job is poorly paid isn’t normally enough to justify government intervention.

But childcare is a special case in which multiple market failures coincide.

“Market failure” is a term used to describe a situation economists like to believe is rare – where the workings of the free market lead to bad outcomes. Classic examples include polluting industries where the costs of pollution aren’t borne by the polluter itself (an “externality” in economics speak), and street lighting, for which it is impossible to charge users (economists call that a public good).

In economic theory, a market failure will at least justify the consideration of government intervention.

Childcare’s benefits are direct, and indirect

The provision of childcare creates both private benefits and public goods.

Mothers who can earn more than the cost of childcare benefit from it because they can maintain and build their skills and careers. Society also benefits because it makes better use of the skills of women.

There is also clear evidence that quality early childhood education positively affects the prospects of children for the rest of their lives, particularly those from low socioeconomic backgrounds.

It’s good for them and their families, but it’s also good for the entire community as those children are more likely to make full use of their skills and talents in later life and contribute productively to society. They are also less likely to engage in antisocial or criminal behaviour.

Mothers can’t afford to pay good wages…

But if entirely left to the market, childcare would only be affordable to those who earn high wages (and whose children might be the least likely to benefit). The total costs of the staff, venue, and administration needed to provide childcare are beyond most parents’ means.

This is why we already have government intervention in the form of means-tested assistance, which subsidises the cost of childcare up to A$10,190 per year, per child.

However, despite the existence of this subsidy, most Certificate III qualified childcare workers still only earn about A$850 per week (A$44,000 per year), about half the average full-time wage.

Why aren’t they paid more, given that their work is so important?

…in part because they don’t get good wages

One answer could be that 96% of childcare workers are women, and about 95% of stay-at-home parents are women. The gender pay gap in Australia is currently about 14%. It’s the result of a combination of gender discrimination, gender role expectations in child-raising, and relatively low pay in typically “feminised” industries.

It means mothers cannot easily afford to pay for proper childcare from their wages, and that childcare workers come to accept low pay.

Subsidising quality childcare through both a rebate to parents and a direct increase in childcare workers’ wages addresses these dual aspects of the gender pay gap by helping more mothers maintain careers (that will enable them get paid more) and acknowledging and addressing the extent to which the market won’t pay childcare workers enough.

There’s a case for top ups, but they’re not ideal

While Labor’s commitment to increasing childcare worker pay is welcome and is addressing an agglomeration of genuine market failures, a specific government top-up for a specific profession leave its workers vulnerable to a change of government policy that cuts or abolishes it.

The long-term solution is to do something more systematic about the undervaluation of care work in Australia. It would be best dealt with by adjusting how the Fair Work Commission sets award wages in light of the public value generated by the industry and an understanding of the historic undervaluing of work performed by women.

Labor has announced policies that aim to do this, so presumably this wage top-up is a stopgap that provides much-needed pay rises in the short term while longer-term solutions are being put in place.

Read more:
Why Labor’s childcare policy is the biggest economic news of the election campaign

The Conversation

Warwick Smith, Research economist, University of Melbourne

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Memories. In 1961 Labor promised to boost the deficit to fight unemployment. The promise won

Published by Anonymous (not verified) on Fri, 19/04/2019 - 4:17pm in


First published in The Conversation

File 20190415 147525 1tx2vbv.jpg?ixlib=rb 1.1Arthur Caldwell almost defeated Robert Menzies in the poll in 1961, and won the debate about policy.
National Archives, National Library of Australia, Wikimedia

Warwick Smith, University of Melbourne

Lately, governments and oppositions have been obsessed with “returning to surplus” in order to balance the budget.

It hasn’t always been so. In the lead-up to the 1961 federal election, unemployment had climbed above 2% and was creeping towards 3%. (By today’s standards that doesn’t sound much, but for two decades since the onset of the second world war unemployment had been mostly well below 2%.)

The Labor opposition, led by Arthur Calwell, went to the 1961 election promising that:

Labor will restore full employment within 12 months, and will introduce a supplementary budget in February for a deficit of £100 million, if necessary, to achieve this.

From the end of World War II, there had been a bipartisan commitment to full employment in Australia. As laid out in the Curtin government’s 1945 White Paper, Full Employment in Australia, this was achieved by “stimulating spending on goods and services to the extent necessary to sustain full employment”.

The strongly held view, developed primarily by British economist John Maynard Keynes during the Great Depression, was that government could, and should, use its spending power to fill any gap left by private expenditure, ensuring there was always enough spending to keep operating near (but not above) capacity.

Spending stopped unemployment

The 25 years after World War II in which this happened are often referred to as the “postwar boom” because times were so good. This period had rapid economic growth, steadily improving material standards of living (for most), and falling inequality.

Involuntary unemployment was scarcely heard of. “Long-term unemployment” didn’t exist as a statistical category.

By focusing on keeping the Australian economy at or near full capacity and investing heavily in infrastructure, research and education to improve productivity, the postwar governments of both major parties were able to do what these days would be thought impossible: to run constant government deficits while overseeing a dramatic fall in the ratio of government debt to gross domestic product.

Source: Australian Federal Government deficits, debt and the stock market, Centric Wealth

What’s important to understand is that the postwar boom occurred, at least in part, because of the budget deficits, not in spite of them.

By always spending enough to maintain the economy at full employment, the government ensured a strong economy. Economic growth made the ratio of debt to gross domestic product shrink.

All of this was very much part of the public conversation back in the 1940s, 1950s and 1960s. Very little attention was given to the budget balance, with people instead focused on the level of unemployment. On the rare occasions the budget balance was mentioned, it was often in the context of pushing for greater deficits to reduce unemployment.

Calwell won the fight, if not the election
After the 1961 election Robert Menzies made Arthur Calwell’s policy his own.
National Library of Australia

Calwell’s Labor opposition didn’t win the 1961 election, but there was a massive swing towards it and the result was one of the closest in Australia’s history, decided by mere hundreds of votes.

The fact that unemployment had crept up towards 3% was a significant contributor to the Coalition losing 15 seats in the House of Representatives and control of the Senate.

Immediately after the election, to shore up his position, Menzies effectively adopted and extended Labor’s policy delivering a 1962-63 budget that focused squarely full employment and brought down a deficit £120 million, £20 million more than Labor had been proposing.

The debt burden shrank as GDP climbed

By the end of World War II, government debt was 120% of gross domestic product total. This means that total debt was 1.2 times the annual economic output of the country. By comparison, today’s federal government debt is about 18% of GDP, a mere one-fifth of annual economic output.

So, according to the modern political discourse on government debt, the postwar generations must have been terribly burdened by all of that debt, and governments must have had to show incredible fiscal discipline to pay it off, right?

The answer will surprise many who have fallen for the modern rhetoric. Although each loan was paid off as if came due, the total stock of debt didn’t shrink, but the economy grew strongly, allowing the debt-to-GDP ratio to wither to the point at which it approached zero.

Commonwealth Treasury

Australia’s budget history is one of modest deficits leavened with occasional larger deficits and occasional surpluses. It’s been entirely sustainable.

Our postwar governments lived by Keynes’s dictum:

Look after the unemployment and the budget will look after itself.

The economy has changed a lot since then and we can’t simply copy the policies that worked for Curtin, Chifley and Menzies.

But we can learn from them. The reality is that we don’t know how low unemployment could fall in modern Australia because we haven’t made any genuine attempt to push it below 5% for decades.

Read more:
Explainer: what is modern monetary theory?

A modern-day policy commitment to full employment, along lines inspired by what we did after the war, could lift wages, reduce inequality, drive increases in productivity and, most importantly, provide full employment for the more than two million Australians who are currently unemployed, underemployed or discouraged attempting to get work.

Treasurer Chifley summed up the goal this way in 1944:

Our objective is not primarily social security, but rather the much higher objective of full employment of manpower and resources in raising living standards.The Conversation

Warwick Smith, Research economist, University of Melbourne

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Challenging Economic “Common Sense” … From Toronto to Sydney!

Published by Anonymous (not verified) on Mon, 23/05/2016 - 9:00am in

I am thrilled to accept the University of Sydney’s recent invitation to serve as an Honorary Professor in the Department of Political Economy.  I have a long and collegial association with the Department – including delivering the second Ted Wheelwright lecture in 2009 (on the Global Financial Crisis), participating in seminars and conferences, and most recently squatting in Frank Stilwell’s office for six months in 2014 while on research leave here with my family.

The Department is a unique and irreplaceable asset in the global political economy community.  It is a multidisciplinary meeting place for both scholars and activists.  Its research and teaching stretches the frontiers of our understanding of world economy and society.  And it attracts ambitious, committed students from around the world.  I can also attest to the remarkable collegiality within the Department: its culture and practice marks the best traditions of mutual respect and diversity of analysis, yet combined with a willingness to challenge each other in the interests of formulating stronger, more convincing analyses.  It will be both a great honour, and a great opportunity to further my own thinking, to be welcomed into such a fine scholarly community.

I have just settled in Sydney, having left in January my long-time position as Economist with Unifor, Canada’s largest private-sector trade union.  (Unifor was formed in 2013 through a merger between the Canadian Auto Workers, where I worked since 1994, and the Communications, Energy and Paperworkers unions.)  The leaders and members of Unifor supported me very generously while I was there: not only providing concrete economic analysis and advice to the union, but also allowing me to play a broader role in economic policy debates in Canada and internationally.  It was a difficult decision for me to leave that job (after 22 years), and I carry with me a tremendous “scrapbook” of memories of our union struggles, victories, and lessons.  But the desire to do something different (not to mention the appointment of my spouse, Professor Donna Baines, to a senior position in the Department of Social Work here at the University of Sydney!) spurred the big move.

StanfordI have great hopes for transferring my work as an “activist-economist” from Toronto to Sydney.  And it is already clear there will be no shortage of urgent opportunities for me to do so.  A core theme in my work has been a desire to democratise economics, by expanding popular understanding (including among union members and other working people) about the ideological roots and hegemonic functions of conventional economic discourse.  We need to understand that what is widely accepted as economic “common sense” (rooted in ideas about the virtue and productivity of private property, the universality of greed, and the efficiency of markets) is not scientifically based (and hence “sensible”) at all.  Rather, it reflects a conscious and political effort to justify the status quo – rather than truly explaining it.  I have placed great emphasis on communicating critical approaches to economics in ways that are accessible, without being simplistic or populist.  The best example is through my book Economics for Everyone (now in its second printing with Pluto Books) and its associated web-based curriculum materials (all available for free at

The economic and political similarities between Australia and Canada will make my transition easier, I suspect – as will Sydney’s much more appealing climate!  While I am cautious about drawing too many parallels between the economic experience of the two countries, they are too obvious to overlook: both suffer from a renewed recent reliance on resource extraction as the main engine of accumulation, the associated problems of deindustrialization and environmental degradation, the distorting influence of credit-fueled speculation (in both financial assets and property), and the increasingly aggressive exercise of political influence by the concentrated interests which benefited from those regressive trends.  Canada held a federal election in October 2015 (just before I left the country), in which voters threw out an unapologetic right-wing pro-extraction government, replacing it with a more moderate and balanced (but still pro-business) party.  That election hasn’t remotely solved all Canada’s problems, but it was undeniably a move in the right direction – and a testament to the ability of progressive resistance campaigns to influence the course of events.  With a federal election now underway in Australia, will there soon be another parallel we can draw between these two countries?  I hope so.

My paying job here in Australia will be with the Australia Institute, the leading progressive research institute in the country.  I will work with them as an economist, and director of a new project called the Centre for Future Work.  This Centre aims to strengthen the Australia Institute’s presence and engagement in issues related to employment, labour markets, incomes, industry, and globalization.  We will be publishing research reports (some quick-and-fast, some longer-term and more comprehensive), building links with trade unions and other progressive constituencies, and trying to influence the battle of economic ideas related to these topics.  I am interested in partnering with political economists and other academics interested in these issues, and would welcome any inquiries in my new role (you can reach me at jim[AT]  The Australia Institute will be a great home for me, and I look forward to working closely with their team of progressive, entrepreneurial researchers (including a prominent alumnus of the Department of Political Economy, Dr. Richard Denniss).

I am already participating in some of the research going on in the Department of Political Economy: including Lynne Chester’s project on industry policy, and Frank Stilwell’s tireless efforts around inequality, tax policy, and related topics.  And I look forward to doing much more – including guest lectures, supervision of graduate students, and other contributions.

Thank you very much to the University and the whole Department for this opportunity, and for your warm welcome to Sydney!

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