Wednesday's Top 10 with NZ Mint: 'Markets are not stable, efficient or self-correcting'; The 'Great Gatsby' parties return; Krugman and Summers adopt MMT?; 7 myths about Keynesian economics; Dilbert

Here's my Top 10 links from around the Internet at 12 midday today in association with NZ Mint.

As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

See all previous Top 10s here.

My must read is #9 on the myths about Keynes.

1. 'Markets are not stable, efficient, or self-correcting' - Nobel prize winning economist Joe Stiglitz makes this point in an excellently argued piece over at Economonitor.

Stiglitz is touching on a big boil that has yet to be really lanced in the economics community.

All the 'End of History' hubris in the wake of the collapse of Russian communism in the late 1980s has been exposed.

Most policymakers in New Zealand and elsewhere were taught through the 1980s, 1990s and early 2000s that markets are best.  Markets work.

All you need to do is deregulate, privatise and target stable inflation and everything will work.

Broadly, they still believe that. I listen every day to this group think in Wellington. Treasury, the Reserve Bank and the cabinet have not changed that mindset.

The Global Financial Crisis has exposed that as both arrogant and wrong. New Zealand can kid itself that our relative economic stability and apparent prosperity (relative to everyone else) is the exception that proved rule.

But we all know we escaped because we were lucky. Our banking system was simple and backed by Australian taxpayers. China (which doesn't believe in the free markets group think) reacted quickly and forecefully to stabilise its economy. We (and Australia) just happened to benefit from the actions of a communist government in China. Whether that can be sustained is questionable, given the new leaders of that communist government are actively trying to slow down that investment-led growth. Sadly, we also got very lucky in an economic growth sense (but not much else) with the Christchurch earthquakes.

Here's Stiglitz capturing the lessons well. They have yet to be learned or accepted here.

The big lesson that  this crisis forcibly brought home—one we should have long known—is that economies are not necessarily efficient, stable or self-correcting.

There are two parts to this belated revelation. One is that standard models had focused on exogenous shocks, and yet it’s very clear that a very large fraction of the perturbations to our economy are endogenous.  There are not only short‑run endogenous shocks; there are long‑run structural transformations and persistent shocks.  The models that focused on exogenous shocks simply misled us—the majority of the really big shocks come from within the economy.

Secondly, economies are not self-correcting.  It’s clear that we have yet to fully take on aboard this crucial lesson that we should have learned from this crisis: even in its aftermath, the tepid attempts to fix the economies of the United States and Europe have been a failure.  They certainly have not gone far enough.  The result is that we continue to face significant risks of another crisis in the future.

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2. Great Gatsby parties - Quartz has an interesting piece on the fashion for 'Great Gatsby' parties and the apparent lack of self awareness among a certain social set in America, despite everything that has happened since 2008. The movie starring Leonard di Caprio opens in American theatres on Friday night.

In the novel, Gatsby’s infatuation with social class is represented by the green light on the dock of the Buchanan estate across the bay from his house. And if there’s one line that neatly, almost overbearingly, conveys the novel’s jaundiced view of the American dream, it’s this one: “Gatsby believed in the green light, the orgastic future that year by year recedes before us.”

At Boston Latin School, however, the green light is just good old American ambition. “My green light is Harvard,” a 14-year-old Chinese-American immigranttold a reporter visiting her English class. On the wall of the classroom, students had written their own “green lights” (pdf) on a large piece of green construction paper in the shape of a lightbulb: Pediatric neurosurgeon … Earn a black belt … Make it to junior year… Become incredibly rich.

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3. The rise and the fall of the Guaranteed Minimum Income idea - I had no idea that the US House of Representives voted in favour of the Guaranteed Annual Income (GAI) in 1970. It was rejected by the Senate, but clearly has been around for a while. It is similar to Gareth Morgan's Universal Basic Income idea which he has wrapped into his Big Kahuna plan.

Here's RemappingDebate with a piece on the pros and cons and history of the GAI.

In the course of weeks of reporting — both through interviews and an exploration of the documentary record — Remapping Debate found that GAIproposals were given room to breathe in a social and political environment that took seriously the values of citizenship and mutual obligation, and that accepted the fact that social problems could be — indeed, should be — solved by governments.

That environment has disappeared, due in large measure, we found, to the rise of “market thinking,” a mindset that subordinated — and, in some respects, supplanted altogether — the values of citizenship and mutual obligation.

On both sides of the aisle, the voices describing unfettered market relations as a virtuous and unstoppable force to which the citizenry had to adapt and submit (as with globalization) grew ever louder. Ultimately, these market devotees drowned out those who continued to believe that government has a vital role to play and that markets do not on their own reflect and honor a broad range of important social values.

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4. Have Krugman and Summers adopted Modern Monetary Theory? - L Randall Wray reckons they have. Let the money printing begin....or continue....forever...

5. Abenomics is sweeping the world - The brand of economics practiced in Japan, Abenomics, is taking off, says Ed Hugh in this piece at Economonitor

6. China steps up its Cyber-War - The FT reports on the biggest cyber-hackers around. I hope the GSCE is reading.

7. Career retailer? - I like this Warehouse plan to increase wages to improve employee engagement and reduce staff turnover. It smacks of the Henry Ford idea from 1914 to double wages so as to keep his staff and give them an income big enough to buy his cars.

8. Long term unemployment - Tim Harford writes here about the horrible trap of long term unemployment. 

9. Seven myths about Keynesian Economics - Here's Mark Thoma with an excellent piece in the wake of Niall Ferguson's painful apology over a smear aimed at John Maynard Keynes.

10. Totally Jon Stewart on the NRA convention.

 

And Part II

 

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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22 Comments

In reference to a few of the above  top 10 items....
Does the economy ,and the measures of economic activity , exist to 'serve" the people ...or do people exist to serve the economy...and measures of economic activity.
Seems to me....   the powers that be will do almost anything to get GDP growth.
I personally think that what Japan is doing ...  is madness....   and they they .."know not what they wish for"...   in regards to their focus on Monetary policy.
If Japan has a declining population... well so be it...   aggregate GDP should decline
Most of the western worlds problems lie at the feet of...  "excessive credit growth".
Most people don't see what a errosive effect it has had on their economic lives...
This guy has nailed it.. in my view.
http://market-ticker.org/akcs-www?post=220451
Take pt 1...    Mkts can be self correcting ...BUT... we never let them correct.. .. So..suddenly the mantra is .."mkts are not self correcting".

"Most of the western worlds problems lie at the feet of...  "excessive credit growth"."
 
I found this link a great resource which another commentor on here posted:
 
http://www.positivemoney.org/how-banks-create-money/banking-101-video-co...
 
Its more than credit, it is actual debt based money that the private banks create without limitations ( at least in the UK case but it seems to be similar in EU USA etc ).
 
" Mkts can be self correcting ...BUT... we never let them correct.."
 
I don't believe so, just look at economic history, markets are inherently unstable and need careful regulation to function that doesn't cause them to implode and take down our entire civilisation.

Bigger thinking needs to be thunk and outside of the box at that.
 
If economics or reliance on an economy can bring down our entire civilisation then there must be something inherently wrong with the equation.  Economies are meant to serve the people.  An economy cannot exist without society which cannot exist without other fundamentals. 
 
Unfortunately, civilisation has been thoroughly taught and preconditioned to rely on and serve the economy.  The issues go far deeper than excessive credit growth and money creation.
 
Most of the western worlds problems do not lie at the feet of "excessive credit growth", they lie at the feet of every single person and not just in western worlds.

Well according to one investment outfit throughout history governments of Empires and Nations always end up abusing the currency system by debasement  till it blows up sending their societies back to bartering 12 chickens for a cow.
 
That's what I was really thinking of when I said bringing down a civilisation, eg the Roman Empire.
 
"Most of the western worlds problems do not lie at the feet of "excessive credit growth", they lie at the feet of every single person"
 
I guess there could be a 'moral decline', again like Rome built up by the Farmer Soldier types then sinking into decadence with Bread, Circuses and Orgies.
 
I read some interesting philosophy describing our current technocratic elite as like the last days of the French Monarchy, too far removed from reality, unable to deal with the real problems, devoted to their power structures, rituals and dogmas.
 
 

#4, no PK has long said its doo doo (MMT)  What we see here is yet more attempts by those being discredited as incompetant and politically blinkerd to discredit their opposition who are winning through.
regards

The GAI (#3) article is Interesting (thanks, BH) but manages to miss quite a few of the overall tides and currents which lead to the victory (temporary) of the markets-can-do-everything hypothesis:
 

  • the decline of religion (religare - to bind together) which had formerly held together a fractious bunch of quarrelsome tribes (to use Nicholas Wade's phrase) and thus ate away at a hitherto very strongly felt basis of community
  • the demonstrated incompetence of, and hence a growing suspicion of, Big Gubmint. The 60's and 70's were the locus of what David Goldman terms a 'great awakening', it was just after the McCarthy witchhunts and the 1962 atom bomb crisis, it was in the middle of the Vietnam schemozzle:  all good reasons not to entrust a massive bureaucracy with an inevitably extensive personal income support and surveillance effort.
  • The jump in productivity which release a good deal of economic surplus into the hands of ordinary people.  IIRC the high point for real US worker earnings was 1973....
  • The height of the personal exploration era (flower power, Leary and LSD, Carlos Castenada fiction, and a whole lotta navel-gazing) which, like Occupy a half-century later,  rather failed to get any collective act together - no real community....buncha quarrelsome tribes, with the additional bonus of mostly fried neurons.

Question for te proponents of the Big Kahuna etc:
 
What's changed?

"What's changed?"
 
The whole system is brocken and the politicans and banksters can't figure it out. They can't go on indefinitely QEing and Cyprusing, we just keep lurching from one overnight crisis to another.
 
People are getting fed up and the mood is reaching boiling point especially in Europe with 50% + youth unemployment in some areas.
 
So more chance that massive reform of society and economies will be enacted after the current failed elite are cleared out.
 
 

massive reform of society and economies
The record here is not too flash. Often it just leads to a power grab by a bunch of nasty bastards like Napoleon, Hitler, Stalin, Mao. Be careful what you wish for.

I wish for reform because there is a need for reform.
 
But yeah there is a risk of War or Revolution, which is definitely to be avoided.
 
The longer the current elite retain power and continue their failed policies the worse the socially instability and increasing chances of War.

#1 It is the primary goal of all businesses to create an inefficient market (only where they sell  - they still want to buy in an efficient market). When you boil down the vast acres of turgid prose produced by 80's business strategy guru, Michael Porter, it boils down to one piece of advice: do what it takes to become a monopoly in your area. All businesses want the increased profitability that monopolistic behaviour brings so the unwritten strategy of all commercial enterprise is to become #1 or, even better, the Only One.
 
In genuinely free markets with minimal regulatory intervention the almost inevitable outcome is the collapse, sector by sector, down to one or two players who then prefer to extract rents rather than compete through enhancement of customer value. It's so much less hard work after all. The only way to break these neo-feudal structures up is through disruptive innovation that allows new players entry (is this Schumpeter's "creative destruction"?). 
 
So, as designed, market economies will be unstable and inefficient. It's not really news as even a cursory glance at 19th C economic history tells us.

#1:  What a strange comment by Bernard; it leaves me wondering whether he actually understands either what a market is or what the word "arrogant" means.
 
Market:  in which individuals decide for themselves whether to buy, or sell, goods or services at a proposed price.
 
Alternative to market: in which policy makers decide which goods and services will be bought and sold, by and to whom, and at what price.
 
Now, who is being arrogant - the policy maker who thinks that the outcome is likely to be better if the decisions are made by individuals, or the policy maker who thinks that the outcome is likely to be better if the decisions are made by policy makers?
 
Kumbel:  you're quite right, it is the aim of all businesses to establish a monopoly because that is an easy way to make money.  But each individual business will also want to prevent other businesses from doing that.  If one business does nevertheless succeed in establishing a monopoly and sits there extracting rent, other businesses will have an opportunity and an incentive to undercut them and so break into their monopoly.  The monopolist will of course seek to prevent that; it is the job of competition authorities to ensure that he cannot do so by illegitimate means, such as creating artificial barriers to entry. 
 

MdM - I've come across folk with similar devotion to doctrine, but mostly attached to churches - the mindset goes with the territory.
 
You can't choose what to buy if you can't afford it, and if that's a life-supporting item you were out-bid on (corporate-owned water, energy, food, shelter - hell, in some US States, you aren't even allowed to carch your roof-water, someone owns it) you will die. In increasing numbers, beyond peak underwrite.
 
A society faced with such a scenario will disintegrate at some point, unless well led. Actually, 7 billion of a species in overshoot, even well led, probably can't reduce to 2 billion or so, fast enough to avoid disintegration. But it's worth a try, and a market sure isn't the mechanism that will get there - it was what got us in the shit in the first place. Bowie was right - putting out the fire with gasoline. The problem with markets is that they are reactive, and driven by an ultimately unassuageable desire to collectively collect.
 
Who appoints your competition authority, by the way? If markets tend to monopolies, which leads to the need for a competition authority - presumably neutral and non-vested-interest - then seems to me you acknowledge the need for governance. What you don't have an answer for/to, is ultimate scarcity. Neither do our current Govt, nor Labour, although Labour would try harder to look after the bottom end....

What do you mean, no answer to ultimate scarcity?  Economics is all about scarcity.  If there were no scarcity, there would be no economics, for there would be no prices and nothing would need to be bought or sold; everybody would have everything they need without having to work or pay for it.
 
Yes, people always want more.  That's true under any system of governance.  Markets - the price mechanism - is what prevents them from getting it.  They can have only as much as they can afford.
 
Yes, people die if they can't get what they need to live.  That's true under any system of governance.  Hang on - is your problem that markets provide too much, or too little?   Anyway, that need is what makes markets work - it's precisely why people are willing to buy from and sell to each other, and why they are willing to work. 
 
Anyway, what exactly is your solution?  What exactly is it that you think is "worth a try"?   How would you go about trying it?
 
Of course I acknowledge a need for governance.  Show me where I've said otherwise.  Even the staunchest of libertarians, and I certainly wouldn't call myself that, acknowledges a need for governance, in order to protect private property rights and the enforceability of contracts.

http://www.zerohedge.com/news/2013-05-07/jeremy-grantham-we-have-been-conned
 
The lessons of Jeremy Grantham's recent interview with Charlie Rose seem to be becoming increasingly prescient as the stock market surges to new highs amid a crumbling macro (and micro) economy. "Bernanke is whipping the economic donkey that can only grow at 1-2% as if it was a race horse growing above 3%," and unfortunately he will keep doing it "until the donkey is dead."

#1 - The GFC is being used as an example of the failure of markets? Really?
What triggered the GFC? Oh yeah, the sub-prime crisis in the states. What was one of the contributing factors? Oh yeah, government intervention. The financial markets are anything but a free market. While regulations should be in place to safeguard our money etc, legislating that a certain percentage of loans must be given to those who can't afford them is rubbish. FIX THE SUPPLY SIDE!

Any theory that fails because it wasn't executed properly is a failed theory.

Exactly.
 
I've heard plenty of Socialist apologetics that the USSR "wasn't really Communist anyway" to explain away that failure.
 
Same with the "Free Market" zealots. How many of them were complaining about Global Finance not being "a real free market" PRIOR to the GFC. The few who called it what it is "Casino Capitalism" were ridiculed for being anti capitalist, socialist etc by the "Free Market" zealots.

I don't agree, this statement appears to be one of those meaning less throw away lines which speaks to everybody's personal prejudice (precisely because it's meaningless).
Of course you can have a theory which fails because its miss-applied. For example I remember seeing a nice Dilbert cartoon which begins with Wolly explaining how he reused the computer code for an Accounting system in his Air Traffic control system. The punch line is don't fly on pay day. Nobody would agree this is funny because the Accounting system was a failure.
On the other-hand, nobody (at least nobody favourable to a free-market) was critical of Alan Greenspan's concept of leaving the financial industry in the US to its own means, at least before the financial crisis. Unless somebody can come up with a sensible definition of 'Laissez-Faire' which implies that financial markets should be regulated I will continue to believe that free-market economics was applied pretty much as intended by its proponents.
Of course a stronger criticism would be to take the free-market economic theory on its own statements and assumptions and to show that it fails on its own grounds. In fact that's precisely what I observe.
Like in other areas to form a judgement of correct application you need to look at the details and check them against the facts, and there is probably some personal prejudice involved for anything complex anyway.

I am not saying that poor execution is the only reason for a theory failing :-P But I don't think you are giving enough weight to my statement, which draws its meaning from psychology or human behaviour. If you don't take into account basic flaws (you can't get them all) in human behaviour, such as greed, when you formulate a theory and it fails on that basis then the theory is flawed no matter how good it looked on paper.

Markets depend on human greed.  Next?

No, I still find this deeply problematic.
If you have a theory that 'free markets will lead to perfect equality' (taking the Adam Smith statement), and that doesn't work out in reality there has to be a reason. Either, the theory was wrong, or the theory was incorrectly applied (or both).
If I was to take your statement in a scientific context then I have a problem, gravity doesn't apply to particle physics, but does that invalidate the theory of gravity? No, clearly it doesn't.
Actually if you look at economics the last thing it does is to ignore greed. Ayn Rand had a critique of real existing capitalism, it was a simple one, people are not selfish enough. You can have an ideal economy but people need to be more selfish then things work better. There is pleanty of reason to think she was right.
 

I do know what you mean.
 
To take an extreme if you get a psychopath that comes along, such as Mao or Stalin then all the theory is out the window as they simply do that they desire to fulfil their own plans. Given estimates that 10% of CEO's are psychopaths and you can see the weakenss in the corporate structure, or in fact limited liability.
  So the argument could be made that a more balanced and fair economy could be had by introducing a system to identify, filter or suppress the psychopaths, or other mentally disordered people. Take out those creating the unbalance and the rest will look after itself :-P
 
I sometimes wonder if economists and economic theory are a luxury that society can't afford. It seems the various theories look good for a generation to two before they come undone.