HIST159b final

lowkey this professor made me feel bad so like if ur in this course take that as you will

Neoliberalism

• Favors a strong state that creates markets and makes sure markets work properly

  • I.e. prevent the emergence of oligopolies and monopolies

• Neoliberalism as a specific set of policies

  • Supply-side economics

  • Monetarism

  • liberalization/deregulation

  • Privatization

  • Tax cuts

  • Welfare cuts

  • Shock therapy

  • Washhington consensus

• Shifts in economic control from government → personal

• Limits the government control so that there is economic growth by favoring free trade and privatization

  • Preference of private control over public
    
    Associated figures: Friedrich Hayek, Milton Friedman, Gary Becker, James M. Buchanan

Classical political economy

Value is created by labor, labor shares wealth with capitalists and landlords

Keynesian economics

An economic theory of total spending in the economy and its effects on output and inflation. Developed by the British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression

Associated figures: Joan Robinson, Michael Kalecki, Hyman Minsky

Multiplier effect

• Coined by Richard Kahn

  • “Public works of doubtful utility may pay for themselves over and over again at a time of severe unemployment if only from the diminished cost of relief expenditure”

  • Refers to the consistent increase or decrease of final income that results from an injection or withdrawal of capital.

Neoclassical economics

• Term invented by Thorstein Veblen

• Distinguished between the modernized classical, Marxist, and historical schools of economics

• First step toward neoclassical economics: Marginal Revolution of the 1870s. Marginalists focused on the demand side, other economists later applied the principle of marginalism to the production side

• Abandoned the label “political economy” in favor of economics/production factors

  • Classes disappear

• At the end of the 19th century, economics had become an allegedly objective, value-free, exact (i.e. mathematically founded) quasi-natural science

Associated figures: John Bates Clark, Alfred Marshall, Vilfredo Pareto

Volcker Shock

Federal chairman Paul Volker increased interest rates to 20% between 1979-1981. Inflation subsequently declined, but at the price of an economic recession and increasing unemployment, reaching 10% in the early 1980s

Rationality

• The opposite of mysticism, traditionalism, speculation, adventurism, despotism, etc.

• Based on calculation (of perceived profits and losses) rather than instinct, intuition, tradition, or other motivations

Formal rationality

• Defined by Max Weber

• Techniques and institutions that allow for rational economic calculation

• Money (as unit of account), the company form (as separated from the household) and bookkeeping play an important role

• Capitalism is all about profit calculation

Substantive rationality

• Rational value system/related code of conduct

• People act rationally NOT based on rational calculation (as the utilitarians and marginalists argue) but because they believe certain behavior is rational. Social norms, standards, traditions, religion, culture, and law establish values/affect individual behavior

Hedge financing

• Relatively low risk financing strategy where having a return from assets/dividends/other financial streams that originate from financial assets are enough to pay back principle + interest of credit that was taken out to purchase

  • Other definition: Hedging risk involves engaging in a financial transaction that offsets a long position by taking an additional short position and vice versa

Speculative financing

• Considerable risk

• Investment of capital into assets with considerable risk of short-term price fluctuations and potential for significant gains or losses, often based on market trends and predictions rather than fundamental value.

Ponzi financing

• Defined by Minsky 

• Considered high risk 

• Isn’t this a scam?

• An investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money

Business cycle

The finance regime moves from mostly hedge to increasingly speculative to ponzi financing. Speculative and ponzi financing greatly increase the risk of an economic crash 

Pareto optimality

• Equilibrium based on ordinal values

• A distribution is optimal when it is impossible to make one individual better off without making another one worse off

Friedrich Hayek

• Market is a spontaneous order, has no collective purpose

• Actions or state of affairs can only be judged as just or unjust if the relate to human conduct, i.e. if they are human made

• Social justice = distributive justice = socialism

• The market order does not distribute equally

• The market order (as wealth-creating game) is whether its just or unjust

• Believed consciousness is an emergent property of relations between networks of neurons in the brain

• The theory of equilibrium (theory of supply and demand) is fundamentally unsuitable for an explanation of economic disequilibria (recessions and their opposite, ‘inflationary episodes’)

• Argued that standard equilibrium framework could explain economic fluctuations if supplemented w/ various assumptions about use of money/role of bankers, more drastic measures are required

• Later noted in ‘Economics and Knowledge” that the concept of equilibrium has a clear meaning in the context of a single economic actor

  • To say that some person is ‘in equilibrium’ is to say they hold an internally consistent plan of action, that they can w/o contradiction, as would arise if their plan required the same person to be in 2 places at the same time

Milton Friedman

• Major works: A Monetary History of the United States (with Anna Schwartz), 1963 + Capitalism and Freedom, 1962

• Crisis is not result of a lack of demand, they are the result of inadequate monetary policies

• Supported the Volcker Shock, but was critical of an anti-cyclical monetary policy

• Instead, central banks should focus on steady money supply that guarantees price stability (i.e. moderate yearly increase of money supply)

• Volcker Shock

  • Steady monetary growth would provide a monetary climate favorable to the effective operation of those basic forces of enterprise, ingenuity, invention, hard work, and thrift that are the true springs fo economic growth

Gary Becker

• Neoliberal economist

• Attempted to measure return on human capital (differentiates between ability and education)

• Estimates that ⅔ of the gains are due to education. “College education itself explains most of the… earnings differential between college and high school graduates… Consequently, it may be concluded that even after adjustment for differential ability, the private rate of return to a typical white male college graduate would be considerable, say, certainly more than 10%.”

• Association of human capital with slavery

• Differentiates between private gain and social gain and argues that private gains outstrip social again

• If gains are predominantly private, why should the public pay for it? Human capital theory provide a powerful argument for the introduction and increase of college tuition 

Hyman Minsky

• Goal was to develop a theory explaining why the economy fluctuates, showing that the instability and incoherence exhibited from time to time is related to the development of fragile financial structures that occur normally within capitalist economies within the course of financing capital assets ownership and investment

• Interest is incompatible with neoclassical theory

• Finance/price of assets/stock markets/bonds/other things is only indirectly related to the price of output/subsequently, profits

• Prices of products determined by markets

• Stock and other financial markets can increase when profits remain stagnant or increase only moderately 

• The economy is unstable because of capitalist finance

  • hedge/speculative financing can only last for a certain time, stability invites speculation

• The transitory tranquility (there is no stable equilibrium) is transformed into an expansion in which speculative financing increases. An investment boom follows. Margins of safety are eroded.

• Interest rates increase as a result of the boom (increasing prices for material inputs and wages). A break in the boom occurs when high interest rates threaten profits and weigh on debt (remember that speculative and ponzi financing is paid by debt)

• The boom gives way to a crisis and the cycle starts again

• Big government is largely responsible for preventing the fragile and unstable financial system from breaking down ina  full fledged financial crisis, debt deflation, and deep depression

• Big government sustains demand and profits and feeds secure assets into asset portfolios (e.g. treasury bills) but big government has to take care not to fuel inflation

• The Government can also reduce risk by regulating financial markets. However minsky notes that investors constantly undermine existing regulation by so-called financial innovation. Hence, regulation must constantly be updated and adjusted to new financial practices.

• Can it happen again?

  • ____ thought that because of big government and its strategies to stabilize the unstable economic repetition of the great depression was unlikely but not impossible 

  • The Great Recession (“____ Moment”) showed in can happen again

• Financial instability hypothesis:

  • The economy is unstable because of capitalist finance. An existing mix of hedge/speculative financing can only last for a certain time. Stability invites speculation

  • The transitory tranquility (there is no stable equilibrium) is transformed into an expansion in which speculative financing increases. An investment boom follows. Margins of safety are eroded.

  • Interest rates increase as a result of the boom (increasing prices for material inputs and wages). A break in the boom occurs when high interest rates threaten profits and weigh on debt (remember that speculative and ponzi financing is paid by debt)

  • The boom gives way to a crisis and the cycle starts again

Michael Kalecki

• Full employment was possible in a capitalist system, unlikely because of political resistance because big businesses opposed experiments for increasing employment

  • Why?

1. General dislike of government interference

2. Dislike of direction of government spending

   1. Public enterprises compete w/ private companies, cost profits

   2. Spending should be limited to public organizations/infrastructures that don’t interfere with private sectors (like hospitals and schools)

3. DISLIKE OF THE SOCIAL/POLITICAL CHANGES RESULTING FROM THE MAINTENANCE OF FULL EMPLOYMENT

   1. Strengthens the power of the workers/working class– threat of being fired/losing a job/economic existence is crucial in maintaining the capitalist discipline in a worker

• During periods of economic crisis, the pressure of the masses are strong enough to force government into deficit spending to fund major investments to limit unemployment and to induce a recovery

• During subsequent boom strong opposition from business leaders will emerge to cut spending

• Together with big rentiers which suffer from inflation caused by full employment, big business 

• Following austerity, the boom will give way to new slump, cycle starts from anew

John Maynard Keynes

• ____ Revolution

  • ____ challenges these concepts:

    • Supply does not automatically create demand 

      • 3 leakages created where money can “run out of the economy”

        • When people save

        • Businesses borrow money for new investment 

        • Whats the other leak..

    • The interest rate does not equalize savings and investments

      • The higher the income, the higher the propensity to save, the lower the propensity to consume

    • A cut in wages does not necessarily increase employment

      • Can reduce unemployment only if it doesn’t affect demand 

      • If it reduces demand, it doesn’t create more jobs, leads to more unemployment

    • An economic equilibrium does not guarantee full employment

      • Every level of consumption and investment corresponds to a particular level of employment 

      • Full unemployment is a special case that does not emerge automatically

      • Full employment depends on expectations, which reflect on existing situations

• Say’s law: The mere circumstance of creation of one product immediately opens a vent for other products

• The role of expectations:

  • Ultimately, full-employment depends on expectations

  • Expectations depend on existing situation

  • In a recession, the projection of the current state misery into the future and/or low confidence can severely hamper a recovery. In this case the government has to step in and bolster demand and confidence, including through public works program

  • The resulting spending on income unleashes a chain-reaction with more demand, more investment, and more income– what ___’s student Richard Kahn has termed the multiplier effect

  • Public works might pay for themselves repeatedly at a time of severe unemployment if only from the diminished cost of relief expenditure

  • Against critics of government spending ___ notes, one of the most wasteful activities is gold mining since it adds nothing to the real wealth of the world but involves the disutility of labor

Joan Robinson

• Keynesian Economist

• The only major female economist of the 20th century

  • Influence in macroeconomics

• Assumed wages are variable/not fixed

• Too low wages = lack of demand

• Too high wages cause fall in profits, subsequently in investments + increasing prices/inflation

• Wage increases are not inflationary, assumed that wages lead to demand increase

• Wages increase with productivity

• Wages increase because of trade unions

• Trade unions are not an alien element in capitalism but necessary as part of its mechanism, strong labor movement is required to rescue capitalism from its “internal contradictions”

• Strong unions can enforce too high wages, fuels inflation

• In a growing economy, total profit increases

• Cost of living has to account for wages 

Alfred Marshall

• Founding figure of Neoclassical economist

• “Principles of Economics”

• Sought to join together influences of cost production and consumer utility

• Theory of entrepreneurship

  • Entrepreneurship is the driving element behind organization

• Concept of utility heavily emphasized

  • Price that a consumer is willing to pay for a good is an indication of the utility of that good to the consumer

• Supply and demand curves

  • Production side: diminishing marginal productivity

  • Demand side: diminishing marginal demand price (diminishing marginal utility)

  • Consumer surplus: demand price is higher than supply price

  • Producer surplus: supply price is higher than demand price

Vilfredo Pareto

• Developed __ optimality

  • Equilibrium based on ordinal values

• __ optimality: A distribution is optimal when it is impossible to make one individual better off without making another one worse off

• Desire for one good depends on the desire for another good

• Because we compare utility/desirability with other goods, we can develop rankings + an index of rankings of different goods’ desirability 

  • Example: course evaluations

• Notes a difference between usefulness/desirability

• Utility can be both

• Ophelimity = to account for desirability

• Contemplates how to measure ophelimity/utility, argues that it cannot be measured quantitatively

• Desirability depends on taste/taste for one good depends on taste for others

• While we cannot measure desirability, we can rank it. Results are ophelimity/utility rankings

• Rankings can be expressed in ordinal numbers, resulting in ordinal ophelimity/utility

W.E.B Du Bois

• Slave economy

  • Capitalism benefited the slave economy

  • Civil act had economic reasons involving tariffs and it was not just a “moral act” on slavery

  • Black labor was a foundation for southern social structure, northern manufacture/commerce, english factory system, European commerce, buying/selling on a worldwide scale

  • Slaves subjected to the worst conditions out of any laborers in the US/worldwide, denied status of human being while slaveowners made substantial profits

• Chattel → wage slavery

  • Civil war changed nature of slavery w/ reconstruction

  • Chattel slavery replaced with age slavery

  • The southern states were allowed to introduce discriminatory laws and practices (Jim Crow)

  • Rather than protecting them (civil) rights, african americans were intimidated, threatened, prosecuted, and killed to the point they stopped using their right to vote

• The color caste

  • Blames white capitalists for oppressing/exploiting black labor, white labor was also complacent and benefited

  • Rather than inviting black workers to join their struggle for better working conditions they saw them as competitors and pushed for discrimination and exclusion

• Imperialism

  • Argument for imperialism applicable worldwide, developed own version of capitalism where the imperialist center not only uses colonies to “dump” commodities and access raw materials (Luxemburg),, but also to exploit cheap non-white labor

  • Consequently led to color caste being implemented around the globe

• Black Marxism

  • Became increasingly interested in Marx

  • Thought about the relevance of Marx’s theories for the situations of African Americans

  • Racism prevented the formation of a unified working class that can take on capitalism

  • For __, the revolutionary subject was not the working class in general, but black and other non-white workers in the US and around the globe

• Racial Capitalism

  • Does not use the term “racial capitalism” but his analysis of capitalism especially in the Black Reconstruction amounts to a history of capitalism characterized by racial discrimination, exclusion, and exploitation

  • Little doubt that capitalists benefited from racism as it allowed them to pay lower wages to certain racially defined groups of workers and the capitalist center in the Global North to benefit from slavery and other forms of exploitation in the Global South

  • Theoretically capitalism may be able to exist without racism but given the potential power of a unified working class, perhaps not for long

Ellora Derenoncourt (et. al.)

• Wealth of Two Nations: U.S. Racial Wealth GAP (1860-2020)

• Comparison of accumulated wealth between the white/European Americans and African Americans

• Wealth: Value of assets such as real estate, stock, businesses, fixed income from securities

• At the start of the Civil War white Americans owned 56x more than Black Americans

• After emancipation, wealth gap shrank rapidly from 1870-1930

• During postwar decades, wealth gap stagnated between 5:1: and 7:1

• For African Americans the main asset is their houses, the main difference to white Americans is the lack of stocks, businesses, and fixed income securities

• If we take out the richest 10% white Americans from the equation, the differences largely disappear

Max Weber

• Argued that in the field of substantial rationality, there was no counterweight from marginal-utility theory

  • No rational acting/no homo economicus as natural being

• Rationality had to be learned by people to accept it as the greater rationality they should orient their work/living towards

• Supported menger’s view of combining rationality, but regarding fear of substantial rationality, he says that people don’t do that naturally but it’s something learned

• Modern capitalism did not emerge in Western Europe because of formal rationality (i.e. the invention of bookkeeping)

• Modern capitalism emerged because of substantial rationality

• Protestant ethic provided the substantial rationality that complemented the formal rationality and resulted in a profoundly rational economic and social system (i.e. Western capitalism)

  • Asceticism

  • Work as calling

  • Hard work as a religious duty

  • Profit-making as a religious virtue

• People filled with spirit of capitalism tend to be indifferent if not hostile to the Church, but it does not prevent them from working hard. Instead, man exists for the sake of his business instead of the reverse.

Otto Neurath

• Theory of War Economy

• Governments don’t rely on markets and instead measure in terms of money 

• They develop plans that start with raw materials and the end products they need to win the war

• Calculating inputs and outputs in terms of physical units rather than monetary values

• As a result of the war, production of material goods (e.g. weapons) takes precedence over profit considerations

• What is needed is produced. Not what delivers the highest profits

• Alternative economy based on calculation in kind in natura instead of money calculation

• Measurements should be based on physical units rather than monetary values

John Bates Clark

• Neoclassical economist

• Developed a theory to explain the distribution of wealth

  • Classes become production factors:

    • Capitalists, landlords, workers become capital, land, labor 

  • Capital becomes permanent fund, land becomes capital 

  • Rent becomes interest, profit disappears

  • Capital receives interest and labor wages

• Applied law of diminishing returns to production factors

  • Output per production factor first increases and then decreases

  • Marginal product is the last unit of output produced by the last unit of the production factor (capital or labor)

• Classical political economy: Value is created by labor; labor shares wealth with capitalists and landlords

• Set out to find a natural law that explains the distribution of wealth

• Classes become production factors. Capitalists, landlords, workers become capital, land, labor

• Capital becomes a permanent fund and land becomes capital

• Rent becomes interest and profit disappears

• Capital receives interest and labor wages

• Supply is determined by demand in a general equilibrium 

• Companies optimize production based on the marginal productivity of capital and labor

• The additional output created by the marginal unit of the production factor equals its cost

• The marginal cost determines reward of the respective production factor 

James Buchanan

• Public choice applied the paradigm of the rational, utility-maximizing individual to politics, governance, and government 

• Public choice focused on two main areas of research

  • Elections and democratic decision-making processes

  • Government bureaucracies

• Voters are ill informed and care little about issues that do not directly affect them. They may have special interests and are therefore receptive to special interest policies 

• Politicians are mainly interested in being re-elected. In order to do so, they promote the special interest of their constituencies rather than general interests

• Special interest coalitions can push through policies that do not reflect the general interest and promote public welfare

• Solution: make important issues constitutionally matter.. That needs a super majority to be changed while leaving less important topics to majority-rule

• Bureaucrats are not the neutral, benevolent actors that act in the interest of the general public and government bureaucracies can be hardly controlled

• As a result, government bureaucracies are growing, becoming increasingly expensive, and are inherently inefficient

• Solution: reducing government, expanding markets, e.g. school vouchers instead of public schools

• From market failure to government failure