Tuesday, 20 May 2014

Who are we?

We are most likely to be aged 18-34....

We are from London, Berlin, Oxford, Cambridge, Vienna, New Delhi, Lisbon, Manchester, São Paulo, Barcelona, New York, Paris, Copenhagen, Islamabad, Rome, Kuala Lumpur, Singapore, Santiago, Lahore, Belo Horizonte, Melbourne, Rio de Janeiro, Washington, Bangkok, Brussels, Calcutta and many, many more!

Sunday, 11 May 2014

The Economics of Information in the 21st Century: A Review of Jaron Lanier's Books

Author: Dave Hochfelder

Jaron Lanier, You Are Not a Gadget: A Manifesto. New York: Vintage, 2010. 240 pp.
Jaron Lanier, Who Owns the Future? New York: Simon & Schuster, 2013. 416 pp.

The specter of technological unemployment has been haunting traditional economics since at least the Great Depression. Technological unemployment arises from increasing labor productivity due to technological advances like automation and computerization. In the aftermath of the Great Depression, American economist Hans Neisser warned of “permanent” technological unemployment and ended his article with the “inevitable” conclusion that “there is no mechanism within the framework of rational economic analysis that…would secure the full absorption of displaced workers and render ‘permanent’ technological unemployment in any sense impossible.” [1] More recently, in 2012, Nir Jaimovich and Henry E. Siu published an NBER working paper showing that recovery from the last three recessions has been “jobless” because of productivity gains from technology.[2]

Enter Jaron Lanier, a Silicon Valley pioneer turned critic of Web 2.0. In these two books, he lays out a powerful indictment of the technological and economic ideology behind today’s Internet and its likely future development. In particular, Lanier warns of a serious potential effect of networked information technologies: an increasing gap in the distribution of wealth. In a world where information is free, the creators of that information derive no economic value, Lanier argues. Instead, wealth flows upward to those who control the servers that store and disseminate that information. Karl Marx famously noted that “the hand-mill gives you society with the feudal lord; the steam-mill society with the industrial capitalist.” In Lanier’s future, the digital cloud gives you society with a techno-oligarchy.

Traditionally, the workers most affected by technological unemployment were in the manufacturing sector. 3-D printing and new-generation robotics are likely to reduce employment in manufacturing while enabling dramatic increases in output. Lanier, however, warns that workers in the so-called creative and knowledge classes are also likely to fall victim thanks to the technological networks of the 21st century. File-sharing, for example, has allowed musicians to reach broader audiences while at the same time has eroded their ability to earn a living at their craft.

Lanier offers a solution—allow individuals to monetize the information they share in the digital cloud. He reasons that since this information is valuable to Google, predictive analytics companies, and advertisers, then the people who generate this information should be compensated in the form of “nanopayments” (Who Owns the Future? p. 20).  It is unclear whether the “lords of the clouds” (You Are Not a Gadget, p. 54) will accept this solution, but Lanier argues that it is in their long-term interest to do so. Otherwise, he concludes, the alternative is a world of vastly unequal distributions of wealth and power.

[1] Hans P. Neisser, “’Permanent’ Technological Unemployment: ‘Demand for Commodities Is Not Demand for Labor,’” American Economic Review 32 (March 1942): 50–71.
[2] Nir Jaimovich and Henry E. Siu, “The Trend Is the Cycle: Job Polarization and Jobless Recoveries,” National Bureau of Economic Research Working Paper, 31 March 2012. http://faculty.arts.ubc.ca/hsiu/research/polar20120331.pdf (accessed 5 May 2014).

Saturday, 10 May 2014

When the Economist Does Bad Philosophy

Authors:  Erin Nash and Joe Seydl

In an article in the New York Times in December 2011, Gregory Mankiw, Chair of Harvard University’s economics department, asserts that “like most economists” he doesn’t “view the study of economics as laden with ideology”.

However, his piece last month in the New York Times entitled “When the Scientist is also a Philosopher” indicates that there has been an evolution in his thinking. He effectively retracts his 2011 statement by admitting to the (in his words) “dirty little secret of economists who give policy advice”, which is that “When we do so, we are often speaking not just as economic scientists, but also as political philosophers. Our recommendations are based….on our judgments about what makes a good society”.

But the reality is that the vast majority of economists are not also trained in political philosophy during their undergraduate education, let alone able to be considered ‘political philosophers’. This is just one of the reasons why more than 42 groups across 19 countries in our global network are rethinking economics and seeking changes to the way economics is taught at universities. 

Political philosophy is a separate academic discipline with a much longer and richer history than economics, replete with its own body of knowledge, skill sets and methodologies, and importantly, many complex ongoing debates. Mankiw fails to acknowledge and respect this, and through the philosophical mistakes and omissions he makes in his proceeding analysis, it is evident that we should view Mankiw himself as an economist and not also as a political philosopher.    

For example, Mankiw instructs practicing economists and students to “be sure to apply the principle “first, do no harm”. But just what is a harm? Mankiw presupposes a common acceptance of a definition of harm where no consensus exists, especially among academic philosophers. This is the first indication that Mankiw is smuggling morally-loaded material into methodological prescriptions he conveys as morally neutral.  

For Mankiw, the ultimate harm is interfering in what he calls the voluntary agreements made within free markets. This is a type of libertarian philosophy most famously propounded by Harvard philosopher Robert Nozick in the 1970s, but that is very easily countered.

The first key counter argument relates to fairness and inequality. This argument interrogates the background conditions within which so-called voluntary transactions are carried out. If someone is desperate (hungry, homeless, ill, needing to provide for their dependents) or they do not possess the knowledge and ability to bargain on fair terms, then the transaction cannot be considered to be without a type of coercion, and therefore does not count as voluntary. This is one is one justification for not allowing people to sell themselves into slavery, and perhaps one of the key reasons why a society may choose to mandate a minimum wage. Mankiw’s colleague at Harvard University, Political Philosopher Michael Sandel, outlines the fairness and inequality argument in his latest book, ‘The Moral Limits to Markets’.

The second key counter argument relates peoples’ rights. By not intervening in voluntary transactions we can sometimes fail to uphold certain human rights. What is and is not a human right is also somewhat of an open philosophical debate. However, there are compelling arguments that universal access to a certain standard of health care is a human right, and that through providing this we value and respect humans in an appropriate way. This relates to the second key argument within Sandel’s book regarding how we ought to value certain things within society, and how these things can be degraded or corrupted if we engage in economic or market reasoning about them.  

Mankiw may even accept these counter-arguments and agree that ideology lurks underneath his advice. However, he might attempt to argue that economics itself still remains ‘value-free’ because it is only in the application of economic models and the provision of policy advice based on this economic information that the economist is forced to make value judgments. But this does not hold for the following two reasons.

First, the construction of some types of the economic models very obviously demand value judgments on behalf of the economist. For example, discount rates are parameters used within some modeling that represent the rate at which society as a whole is willing to trade off present benefits for future benefits. The discount rate therefore effectively places a value on the welfare of current and future people. In calculating the appropriate discount rate to use, the economist must decide what we owe to future generations. What discount rate economists ought to use in their models is therefore tied up in moral and political philosophy and cannot be answered by using economic data alone.

Second, economists study social phenomena, which in essence is created and then attempted to be understood by humans. As such, economic phenomena are continually manipulated and directed by new ideas, beliefs and assumptions which generates an intrinsic feedback loop between the ideas proffered by social scientists like economists, and the way in which those ideas eventually manifest within, propagate through, and affect the very social world some of these scholars claim to be studying objectively. Many economists are not aware of or do not understand this important relationship. Thus the ontology of the social world mandates that the endeavors of economists are fundamentally not positive, but normative.

Our arguments in response to Mankiw highlight the secondary nature of economics in providing answers to these policy questions and the predominance of political and moral philosophy. It therefore seems there are two options open to society: either economists are cognisant of the boundaries of their discipline and engage and defer to the expertise of philosophers on certain matters; or economists also play the role of a political philosopher.

Both of these solutions necessitate a change to the way economics is currently taught at universities to somehow encompass moral, political and economic philosophy, so that as a minimum, the economist is aware that economics is not an objective, positive science, and that economics and its application are entangled with ideology. It is critical that we understand this and are adequately equipped to navigate the implications that follow with due care.  

Authors: Erin Nash and Joe Seydl – International Organisers for Rethinking Economics in London and New York.  Erin's Twitter handle is @ErinJNash.

Tuesday, 6 May 2014

Shimomuran Economics and the Rise of Japan and China

The BoJ Law of 1942 set out the major objective of the BoJ as assisting economic growth. During Japan’s Economic Miracle years (from about 1950 to 1975) the BoJ enabled Japanese economic growth by acting under Government control and creating no-cost investment credit (with a targeted effect of between 10% to 15% of GDP a year) with the objective of increasing the percentage of national investment in plant and equipment in private industry.

Japan’s most influential post-war economist” was Dr Osamu Shimomura (1910-89). Shimomuran Economics is based upon no-debt Investment Credit Creation at the BoJ, where created credit is distributed to all businesses (including millions of SMEs) through the national banking system to long-term, low-cost loans for private industry in every part of the country, creating a lasting boom in capital investment and widespread prosperity as evidenced by high, continually increasing productivity, in a nearly full employment economy with increasing wages and good social benefits.

Dr Osamu Shimomura’s model replaces the I=S Keynesian Investment-Saving equation in his “Model of the Japanese Economy” (Shimomura, 1961) with the more dynamic equation:

Is +Id = S+D

where Is= Investment financed by Saving, and Id = Investment financed by Debt, and where S=Saving and D=Debt

This is the prime equation for an economy in which investment vastly exceeds saving due to investment credit creation. That central equation of Shimomuran Economics is the natural development from Keynes’ observations, as follows:

i) “While there are intrinsic reasons for the shortage of land, there are no intrinsic reasons for the shortage of capital” (Keynes, 1936, p. 376)
 ii) “Saving can be created in advance of the return on investments which justify it..”

These observations are fundamental to the practice of Shimomuran economics. Or as Kenneth Bieda has written: “The Japanese monetary policy, in fact, applied one of the Keynesian principles: saving does not have to precede investment in conditions where there is unemployment, but investment acts financed by bank-created money can precede savings" (Beida, 1970).

iii) Central Banks can purchase no-debt assets by making claims against themselves - In the “Tract on Monetary Reform”, Keynes recognised that a Central Bank “may itself purchase assets, i.e. add to its investments, and pay for them, in the first instance at least, by establishing a claim against itself” (Keynes, 1923).

This is precisely what the Central Banks of all the “economic miracle” countries have done (the USA 1938-44, Japan 1946-75, China mid-1970s to now) and they did not only do this in the first instance but, in the case of Japan and China persisted in that policy over several decades, as a deliberate act of long-term economic policy. These created credits have a repayment schedule, so they are CB assets, and no borrowing to support them is necessary, but a fictional entry of “savings of the people” is usually generated to preserve the double-entry nature of national bookkeeping. As John Kenneth Galbraith observed “the creation of money is so simple that the mind is repelled”.

Keynes’ writings are like a box of fireworks and not just the single-rocket solution to deficient demand in which the neoclassicists have boxed him. The economist Professor Richard Andreas Werner, has proven that the Japanese BoJ credit creation has a Granger Predictive Causality linkage to subsequent economic growth (Werner, 2005). Shimomuran economics is not, as so many neo-classical economists have told me over decades, just based on a correlation but is now founded on a Granger Causative proof - that higher investment credit produces subsequent higher growth.

Shimomuran economics has the same credit-creating principles as the Rooseveltian economics which won the Second World War for the Allies by producing the explosive economic growth of America from 1938-44, when the USA doubled its economic output. It is the understandings set out in his seminal book “Seicho Seisaku No Kihon Mondai” which propelled Japan, in the course of a few decades, from being an  impoverished war-damaged economy into one of the major industrial economies of the world. China’s adoption of Shimomuran economics from the mid 1970s has produced the largest economic miracle and potentially the major preponderant superpower of the 21st century.

The relevance of the Shimomuran Economic Model Today

According to the DBJ, Dr Osamu Shimomura (1910-89) “rose to become Japan’s most influential post war economist, founding a school of thought based on the “Shimomura Theory,” which attracted numerous followers" and "Dr Shimomura was well known for the development of a theory of economic growth based on a dynamic view of Keynesian economics.”Yet Shimomura’s works have been almost totally ignored by Western economists.

In brief, Shimomuran economics, by providing abundant capital:
a) Enables full employment and thus can tap all of the available human ingenuity in the economy
b) Improves labour productivity through higher investment in new and existing facilities
c) Provides upskilling of the workforce through training
d) Funds higher invention and R&D
e) Funds innovation and increases economic growth
f) Assists government by providing the capital funds for major projects and to provide the restorative capital required in the aftermath of national disasters

Abundant no-cost investment capital solves many of the economic problems of the world. As the master growth economist Dr Kenneth Kenkichi Kurihara has concluded with respect to the Shimomuran Model of Economic Growth:

“If, therefore, greater investment can be financed partly by credits, there is no need for that 'abstinence' which the classical economists considered necessary for economic progress, any more than there is for that 'austerity' which some present day underdeveloped countries impose on already under-consuming populations at the constant peril of social unrest. Nor is it difficult, in such credit-creating circumstances, to agree with Keynes' observation that investment and consumption should be regarded as complementary rather than competitive." (Kurihara, 1963, p. 61).

Why have Western Economists Ignored Shimomura?

The works of Shimomura are not generally available in the West, although the Library of Congress has many of his works and the National Library of Scotland has successfully acquired three of the eight which I asked them to acquire. The only English translation of one of Shimomura’s books ("Basic Problems of Growth Policy" 1961) has been provided by the Indian Statistical Unit at Kolkata.

If Western Economists have ignored Shimomura to date, then perhaps it is time to grant him his proper place as one of the world’s greatest economists. Judging by the great prosperity and history-tilting results his insights have produced so far, he should be placed where he belongs, among the giants of economic understanding.

Beida, K. (1970) "The Structure and Operation of the Japanese Economy" John Wiley and Sons Australasia Pty Ltd, Sydney
Keynes, J.M. (1923) "Tract on Monetary Reform"
Keynes, J.M. (1936) “The General Theory, Book 6, Chapter 24, Section 2
Kurihara (1963) Applied Dynamic Economics, George Allen and Unwin, London
Shimomura, O. (1961), “Seicho Seisaku No Kihon Mondai” (Basic Problems of Growth Policy)
Werner, R.A. (2005) “"New Paradigm in Macro-Economics” Chapter 15