The Cambridge Controversy – a fundamental refutation of orthodox economic theory – Part 2

This is Part 2 in a two part series that deals with the importance of the = Cambridge capital controversy – which saw economists associated with Cambridge University in England and MIT in Cambridge, Massachusetts argue about the validity of neoclassical distribution theory. Most recently, in response to a New York Times article about Joan Robinson, one of the key protagonists in that controversy, Paul Krugman declared the Controversy “a huge intellectual muddle” which was really unimportant in the scheme of things. That just revealed his ignorance and/or his part in an on-going denial that the basis of the framework he operates in is deeply flawed and has no scientific legitimacy. In this Part, we get down to the complexity (as best I can without becoming too technical) of the debates. The import though is clear – orthodox economics, which is still taught on a daily basis in our universities and which people like Krugman use to make money by writing textbooks about is based on a series of myths that cannot be sustained, both logically, in terms of their own internal consistency, and, in relation to saying anything about the real world we live in.

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No inflationary trends evident in Australia – latest data

I have been seeing a lot of crazy predictions that inflation is about to accelerate because of the elevated levels of government spending, record low interest rates and substantial government bond purchases by the Reserve Bank of Australia. It is almost as if the conservative, deficit-haters want that to happen so they can say “We told you so” as they cling on to their flawed macroeconomic theories. Well sorry to disappoint. Today (April 27, 2021), the Australian Bureau of Statistics released the latest – Consumer Price Index, Australia – for the March-quarter 2021, which hoses down the inflation fears. The Consumer Price Index rose by just 0.6 per cent in the quarter (mostly petrol prices) and over the 12-months to March 2021 it rose 1.1 per cent. The less volatile series, Trimmed Mean rose just 0.3 per cent and the Weighted Median rose 0.4 per cent. So nothing to see here. The RBA keeps buying government debt and effectively funding substantial proportions of the fiscal interventions since the pandemic, interest rates remain low and yet inflation is still well below the lower bound of the RBA’s inflation targetting range. The most reliable measure of inflationary expectations are flat and below the RBA’s target policy range.

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The Cambridge Controversy – a fundamental refutation of orthodox economic theory – Part 1

Some years ago, I promised to write about the – Cambridge capital controversy – which saw economists associated with Cambridge University in England and MIT in Cambridge, Massachusetts argue about the validity of neoclassical distribution theory. I never wrote the blog posts because I considered the material was a little difficult for a blog audience. Also, while of great interest to me, the topic was not necessarily compulsory reading for those trying to come to terms with Modern Monetary Theory (MMT). But today, I relent. For two reasons. First, I think my readership has reached much higher levels of economic literacy over the last 15 years and can handle a challenge. But, more importantly, there are times when the mainstream characters, who have been claiming that there is nothing new in MMT and that they knew it all along and all the important results can be explained within an orthodox New Keynesian approach, reveal their true colours. Their hubris sees them get ahead of themselves and they show they never really understood the basics that undermine their own approach. Such was the case this week when Paul Krugman declared the Controversy “a huge intellectual muddle” and “a tortured debate that illuminated nothing much”. Well, that just goes to show how the mainstream denial functions. A body of work comes along and blows the dominant paradigm out of the water, and the response is to ignore it as a meaningless muddle. Their current attacks on MMT are just another application of that approach, which I first encountered as a student while studying the capital debates. Given the complexity of this issue and the amount of material, this will be a two-part series. Today, we learn the historical context, which will convince you that this was not idle or arcane discussion. This was a debate that went to the heart of the existence of capitalism and the defenders of that system – the mainstream economists did everything they could to defend the myths that they had erected to make the system look fair. They failed but went on anyway. Here is Part 1.

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The IMF is all at sea, stuck in its ways, and sending conflicting signals

Last week, I wrote about how the IMF is presenting a somewhat nuanced view these days. See – IMF now claiming continued inequality risks opening a “social and political seismic crack” (April 21, 2021). But, there was a warning for those who might think this suggests the institution is leaving its mainstream macroeconomics past behind them though. Rather, I think what is going on is a series of ad hoc responses to the growing anomalies that the institution faces between the observed reality and the sort of predictions it has been making based on its core paradigmatic approach. We are observing a specific form of dissonance in many of the current contributions coming out of mainstream economics. This takes two forms: (a) an incomplete response to the current situation (pandemic, GFC aftermath, climate change) where there are conflicting signals being sent; and (b) a tortured attempt to absorb pragmatic narratives within a theoretical structure that cannot consistently accept that absorption. The IMF’s latest blog post (April 20, 2021) – A Future with High Public Debt: Low-for-Long Is Not Low Forever – is a good example of both forms of this dissonance.

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The Weekend Quiz – April 24-25, 2021 – answers and discussion

Here are the answers with discussion for this Weekend’s Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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German Bundesverfassungsgericht decision is no victory for EU federalists

The banner on the home page of the German citizens’ group – Bündnis Bürgerwille e.V. – says “Recht gilt auch in der EU” (Law also applies in the EU) and the sub-header “EU – Verträge müssen eingehalten werden” (EU treaties must be complied with). I have sympathy for that sentiment but not the politics of the so-called ‘Citizens’ Will Alliance’, which recently sought to block German government approval of the much vaunted, much delayed, fairly small recovery plan. The mainstay of the EU is the Eurozone because it comprises 19 of the 27 EU nations and the largest nations. The dynamics of the EU economy are driven by what happens in the largest Member States of the Eurozone. The European Commission has been dithering for more than a year to get a fiscal stimulus plan in place and by the time it eventually gets the pittance proposed flowing, significant economic and social damage will have been done, given that if all 27 states ratify the plan, funds (loans mostly) will only start flowing in July – like 18 months after the pandemic began. The Bündnis Bürgerwille group has challenged the German participation in the German Constitutional Court, the Bundesverfassyngsgericht, which delivered its (interim) decision last week. Bündnis Bürgerwille lost, or did they?

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IMF now claiming continued inequality risks opening a “social and political seismic crack”

It is Wednesday and I have had lots of unscheduled commitments (that just come out of the blue) to attend to today. So not much writing. I did have time to read the latest IMF – Fiscal Monitor, April 2021 : A Fair Shot – which was published on April 7, 2021. The schizoid nature of this institution continues to evolve and it will be hard for the austerity mavens to unambiguously use it as a cover for their arguments when they resume their call for public sector spending cuts etc. Music follows.

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The Brexit predictions of doom are proving to be wildly inaccurate

When the British Office of National Statistics published the January 2021 trade figures in March, the first after Brexit was finalised, they showed a 42 per cent decline in UK exports to the European Union. Exports fell by £5.6 billion and imports fell by 28.8 per cent or £6.6 billion. it was the worst monthly drop since records were first published on a monthly basis in 1997. The Remain crowd went berserk and the ‘I told you so’ chorus was raucous. I wonder where there voice has gone now the February 2021 trade figures show a 46 per cent rise in UK exports to the UK. Boats and trucks are carrying goods to the EU from Britain still. We shouldn’t take the monthly data too seriously, especially as it has been complicated by the transition arrangements and COVID. There will be costs from the change in border arrangements. But the predictions of doom are proving to be wildly inaccurate. I have my flame suit standing by.

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Dr Die Schwarze Null still not thinking beyond more austerity

Project-Syndicate recently published the latest Op Ed (April 16, 2021) from former German finance minister and current President of the German Bundestag, Wolfgang Schäuble – Are We Risking a Debt Pandemic?. He is the person who personified the so-called ‘die schwarze null’ (Black Zero) while finance Minister. His conduct as finance minister was an instrumental element in extending the GFC across the Eurozone. He is still influential in European politics and his latest Op Ed makes it clear that the austerity mindset is still alive and well despite the current relaxation of the Stability and Growth Pact rules during the pandemic. The problem is that if Europe reverts back to that mindset, the essential changes to the monetary union that are necessary to make it viable will never be discussed. It will be just more of the same. And that same is pretty ordinary for the common folk across the EMU.

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