Conversations on the Economy

Through Facebook, three of my good friends, Bonn Juego, Marvin Beduya (please visit http://synthesistblog.com), and Michael Ocampo, and I have been discussing interesting issues on the economic profession, the economic schools of thought, the status of mainstream economics, and other thoughts on heterodox evolutionary economics (Nelson and Winter had been mentioned several times in the course of the discussions). Looking at heterodox economics is important specially in the light of its failure to aid development of Southern countries and explain the current economic ailments of the Northern developed countries.

What is considered mainstream economics? What schools of thoughts constitute the mainstream? It is instructive that mainstream economics is sometimes called as the neoclassical synthesis (the term was supposedly developed by John Hicks and popularized by Paul Samuelson), being largely Keynesian on macroeconomics and neoclassical on microeconomics. But the mainstream is still evolving, incorporating elements of Milton Friedman's Monetarism (as practiced by Paul Volcker),  new classical economics by Robert Lucas (Chicago), Thomas Sargent (Stanford), and Robert Barro (Harvard), and supply side economics promoted by the likes of Arthur Laffer and manifesting in Reaganomics and Thatcherism of the 80s.

I hope this conversation will contribute in promoting interest on the history of economic thought and starting  debates and discourses amongst Filipino economists, political-economists, and students of development on the current status of mainstream economics and alternative schools. It is now more than ever that we should discuss what constitutes an effective economic development strategy for the Philippines, and this begins with the discussion on the warring schools of economic thought.

FACEBOOK STATUS MESSAGE: Nobel goes to the pioneers of search and matching theory, modeling markets in which frictions prevent instantaneous adjustment of the level of economic activity.

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Trio Shares Nobel Economics Prize - WSJ.com

online.wsj.com

Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides won the 2010 Nobel Prize for Economic Sciences for their analysis of markets with search frictions.

Peter Diamond, Dale Mortensen and Christopher Pissarides won the 2010 Nobel economics prize for developing theories that help explain how economic policies affect unemployment. Justin Lahart and David Weidner discuss. Also, Jonathan Cheng discusses why the recent stock rally has left bank shares behind.

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Michael Ocampo: DOLE has a program that allows companies to hire people as trainees and pay them at a rate lower than the minimum. If a company participates in the program, it must hire the trainees after the training period. It seems this is one way of addressing one of the "frictions" mentioned in the article.

James Miraflor: Well, that DOLE will allow companies to pay employees lower than the minimum is expected (although against the principle of "minimum wage"). In neoclassical economics, unemployment (not just frictional) is more likely than not caused by sticky wages and "distortion" of labor factor price through the minimum wage. And the government cannot employ without increasing its spending, which is a no-no because it supposedly crowds out private investments (unless youre a Keynesian, in which case government spending can boost aggregate demand).

Of course, we don't ascribe to this. We think that it is unjust to let markets determine wages because wages have real impacts on living conditions, and we believe that there is a certain standard of living conditions below which no person should be allowed to live. This normative point is, of course, glossed over by mainstream theory. How to operationalize an alternative framework is thus a challenge.

(I was informed that there are developments already in informational economics to describe why labor markets don't clear - but still, the fundamental normative question is still evaded.)

If this is the framework, then the objective of the training program must have been to raise the marginal productivity of the laborer so that the true cost of labor is equal the minimum wage. This sounds like a good plan, but I doubt this will work. Because companies can always just hire contractuals, why would they even bother to subscribe to the government process and invest for training people? And if they are willing to do that, why even involve DOLE in the first place?

I think its better if the government will just hire them. That will be like a applying grease to ease frictional unemployment.:-)

Bonn Juego:  Fuck this useless profession! Abolish the Nobel Prize for Economics!

I very much look forward to this film ("Inside Job") on economists, economics, and the economy re the global crisis: http://chronicle.com/article/Larry-Summersthe/124790/

I like this line from the author/director - Charles Ferguson - which also applies to many societies: "(Larry) Summers's career is the result of an extraordinary and underappreciated scandal in American society: the convergence of academic economics, Wall Street, and political power."

Marvin Beduya: Not so quick, please. There are good guys in the profession including Ha-Joon Chang, James's favorite economist.

My own favorites, as an engineer myself, include Lundvall, Freeman, Winter, and their ilk many of whom I may meet in KL at a conference on Nov 1-3.

We can't abolish prizes because we don't agree with their winners. What's to stop others from clamoring against the Leontief.

James: There are many flaws in the Nobel prize in economics. I think the more sustainable solution is to increase the sophistication - the empirics and the mathematics - of alternative frameworks in order to win back the academe. But then again, intellectual satisfaction may find itself a poor match to money.

Political strategy trumps anything else in pursuing an economic framework. Just look at how FDR pushed through his New Deal at a time of liberal orthodoxy of Hoover's time, Lyndon Johnson rammed his Great Society in the face of conservative backlash against welfare for African-Americans, and Lord Beveridge his ideas of full employment - with the last being pushed by the UK Labor party despite Beveridge being liberal.

Marvin: What I was really saying is that, in my ideal world, I would prefer that others with different perspectives add to the conversation rather than shut others up. So why not promote a prize, like the Leontief, that highlights an alternative view.

Bonn: @Marvin, my call for the abolition of the Nobel Prize for Economics is not a quickie comment but a product of painstaking observation being a student of the social sciences and development. I believe that we can have a Nobel Prize for peace, literature, and physics - but not in economics.

I said "useless", meaning "not fulfilling or not expected to achieve the intended purpose or desired outcome". We have nobel laureates who are only interested in "economics", and not in the "economy". The economics profession, including the Nobel Prize for Economics, is very much ideological. The likes of Ha-Joon Chang, Erik Reinert, Bengt-Åke Lundvall, Richard Nelson, Sidney Winter, et al. are not in the Department of Economics.

Ha-Joon is in the Development Studies Committee at Cambridge. Orthodox economists regard him either as a "sociologist" or a "historian" - something derogatory in the economics profession. Lundvall teaches in business studies at Aalborg University, Denmark. I think Nelson and Winter are also in the business or management school in the US. The late Chris Freeman was in SPRU in Sussex, focusing on science, technology, and innovation policies - not really in the department of economics. Yes, these guys are economists - Ha-Joon is a "heterodox economist" and Freeman-Lundvall-Nelson-Winter as "evolutionary economists". These "good guys" are not regarded as economists by the vanguards of economic profession and the Nobel Prize. In the question I asked Robert Solow during our class in Italy last summer re his thoughts on heterodox economics, he replied: "Orthodox economics is what Paul Samuelson and I think!" There you go - the economics profession is an ideology; it's an exclusive fraternity! The heterodox, evolutionary, Schumpeterian economists are not real economists to them. If you asked these "good guys", they wouldn't be happy to be referred to as economists!

Bonn Juego, Development Theories and Policies (7th sem, 2010)

View more presentations from Bonn Juego.

My best regards to friends and colleagues in the upcoming Asialics in KL!

@James, on your proposed solution where you said: "I think the more sustainable solution is to increase the sophistication - the empirics and the mathematics - of alternative frameworks in order to win back the academe." This is not the solution being resorted to by heterodox economists, precisely because some groups (e.g., "The Other Canon" Erik Reinert, Carlota Perez, Jan Kregel, Ha-Joon Change, et al. ) criticize the use of mathematics in understanding and addressing the wealth and poverty of nations. For them, empirics yes, but mathematics no! Their problem is that mainstream economists validate economic truth based on their mathematical methods. For the mainstream, development is simply like mathematics, i.e., it applies to all.

To me, of course, it depends on how one uses math. Karl Marx in Volume 3 of Capital even used mathematics.

I think Schumpeter got it right when he described the trade-off that economists face - what he called the "Ricardian Vice": “The general reader will have to make up his mind, whether he wants simple answers to his questions or useful ones—in this as in other economic matters he cannot have both." Mainstream economists - with their mathematical modelling and sophisticated methods - pile a heavy load of strong policy recommendations upon very shaky assumptions derived from neo-classical economics. My foremost consideration of a good theory is not elegance or simplicity; it's relevance! ;)

Taken from here: http://voxday.blogspot.com/ 

Keep your interest in economics going! Cheers! ;)

Marvin: ‎@Bonn, I could not have said it better than as most of how you wrote. And I agree with your distinction between Orthodox, Heterodox and Evolutionary and the 'economists' classifications that you made. Indeed, I will give them your regards if I meet with the 'good' ones.

You betray your own ambivalence when you describe Solow and Samuelson as "mainstream," i.e. if they are mainstream, then the others must be in the tributaries but economists nevertheless. I did not presume that your comment was whimsical: in fact, I assume it to be from an ideological rather than an objectively reasoned perspective.

In the real world, there are struggles between worldviews and the financial crisis may yet lead to a thought revolution and paradigm shift. Some mainstream economists are already questioning their own methods. Paul Romer, seems to have left his field possibly seeing the light, and have gone developmental with cities. I guess the world is better served by recognizing opposing forces than dismissing them.

I am not an economist but an industrial engineer. I consider myself an applied economist both in work and as a teacher. I do not agree with you that our 'good' economists, i.e. heterodox and evolutionary, are defined by others as being out of the mainstream and thus not economists themselves. Stiglitz is not in the mainstream but, I think, he would rather take the fight to the mainstream. Krugman, is in the mainstream as far as modeling, but his heart is in the right place. In the details, there are as many schools as their are economists - not just them and us.

Nelson and Winters explained their position against excessive modeling and not mathematics per se which they themselves used in proving path dependence. I agree with their distinction and I think Marx would as well. As you say, the danger with models is using them and their conclusions without knowing their assumptions and limits. There would be no progress if any form of modeling is dismissed outright; some modeling is always at the heart of science and inquiry.

Note that Elinor Ostrom was awarded last year's economics Nobel for work as a political scientist and not using classic mathematical modeling but game theory and cases with inductive logic as proof. She warned against using her conclusions outright as metaphor for policy - the correct perspective for an empiricist. The fact that the Nobel committee awarded her points to some openness to diversity that is the hallmark of how progress is achieved in this world.

Bonn: @Marvin, yes, I must say my position is ideological. It's value-laden. But I must also hasten to tell you that I live by your belief "that the world is better served by recognizing opposing forces than dismissing them."

I believe that my love for learning comes from my respect of different schools of thought and allowing myself to be exposed to "opposing forces". But at the end of the day, I also have my own reason and values.

I studied political science in UP Diliman with progressive intellectuals like Dodong Nemenzo, Temy Rivera, Walden Bello, and Randy David. I was also taught by professors like Alex Magno (I don't know how you label him; but he's definitely not a left intellectual anymore) and at the UP School of Economics.

I did my master's in KL in a programme organized by Rajah Rasiah at the University of Malaya, which I believe is the coordinator of the Globelics 2010 conference where you will participate in November. I also joined the heterodox economist Erik Reinert, the innovation theorist Carlota Perez, and the post-Keynesian/Minskyian economist Jan Kregel in Tallinn, Estonia for one year. I am also an alumnus of the Globelics Academy led by Bengt-Åke Lundvall and the national systems of innovation school held in Lisbon sometime 2007. In fact, I'm finishing my PhD now at the same university of Lundvall and Bjorn Johnson at Aalborg University, Denmark. I also learned rethinking development economics in Cambridge in a programme led by Ha-Joon Chang. I also participated in a summer school on "learning economics with the nobel laureates" whose course director was Robert Solow - with two other laureates, Michael Spence and George Akerlof; Clinton's economic adviser Robert Wescott; World Bank's former head of research, Paul Collier; and IMF's executive director Arrigo Sadun.

Yes, I'm ideological; but one cannot blame me for believing that the Marxist, heterodox, and evolutionary economists make much more sense to me than the mainstream, orthodox economists.

On Elinor Ostrom getting a nobel prize, it's a validation of the research done by the Marxist economist, Ben Fine, on the "imperialism" of economics on the social sciences. Just look at American Political Science Journal, it's full of quantitative researches, economics theories and methods encroaching on political science and other social sciences. And "game theory" is itself a branch of mathematics and very much used in economics.

Anyway, I'm very pleased to meet you, Jose Marvin. I have now found a Pinoy who is also interested in evolutionary economics, innovation, etc. Let's keep in touch. I have a dream of joining an alternative school of economics in the Philippines when I return. Maybe James, you, and I can start brainstorming.

Cheers from Denmark! :)

Marvin: @Bonn, thanks for fb friend and no need to justify your bona fides. As you may guess, I have my own big rock of a disagreement with James on the need for a strong state to have development.

Taking the perspective from innovation, I believe freedom is a necessity to development. I follow Lundvall to a large extent including his studies on Denmark as a progressive yet with a socially just society.

I lived in New Zealand for two years and it is also an innovative yet relatively just (both have Gini's in the mid-30s while the Philippines with China, and USA are in the mid-40s, strangely). So there is room for more justice but still with freedom and incentives for innovation. The Nordic countries are no slouch at useful innovation likewise with a very broad middle class.

It's all work-in-progress to me so I would be happy to join you and James if I am welcome.

I first met James in a Book Club organized by Ronnel who has become very busy as new mayor in Sorsogon. James dreams of reviving the sessions. Maybe, when you are back!

Bonn: @Marvin, thank you also, I enjoy the exchanges. It's a small world. Mayor Ronnel and I studied political science at UP. We're facebook friends, too. By the way, it says that your network is AIM. I worked there in 2002 as a case writer for the Master's in Development Management programme.

For the meantime, I have taken aside my readings and affiliations on innovation studies, my PhD thesis is much more on political economy of Southeast Asia - crisis and state restructuring. I'm not really a book person, haha, but I'd be very glad to learn from you all.

P.S. I also have issues with James' advocacy for the Philippines to have a la Malaysia's NEP, which is an ethnicized development strategy! If James looked at the difference between two Southeast Asian anti-neoliberal scholar activists, Martin Khor and Walden Bello, he would have realized that the difference lies in the fact that Walden believes in the synergy between democracy and development, and Martin does not concern himself on the issue of democracy so long as we have a developmental state! Peace James! ;)

Marvin: When he posted somewhere in facebook about that, I did react quickly. That the NEP was unique to Malaysian conditions to bring the majority Bumiputra closer to parity, economically, with the two other ethnic groups. Now, PM Najib is looking at scaling back. I guess there is some issues with dependency creating vested interests that can hamper future growth.

Also, I think you have read enough books! Lol. But one never really stops learning and from different sources now!

Who among the Professors at AIM-CDM did you work with? Lisa Dacanay is now with ISEA based at Ateneo ASoG and EdMo is with Ateneo Entrepreneurship and ABS-CBN Foundation.

Bonn: Naku, that was long time ago, totoy pa, work ko noon sa AIM-CDM ay research on local governance innovation, Galing Pook, with Edel Guiza and also case writing on leadership. Ang naaalala ko lang ay napakalamig ng opisina sa AIM, hehe! ;)

By the way, especially for James, this is Ha-Joon's personal website, just recently launched: http://www.hajoonchang.net/.

James. What an insightful conversation!

I would just like to clarify my position on Malaysia's NEP. My concept would actually have a development strategy that is biased, not on ethnicity, but on class. It is my fundamental belief that if on the supply side, you have to have a strong developmental state that would enable to provide support for technological evolution and facilitate linkages amongst industries, on the demand side, you would have to have a strong middle class base which can serve as your domestic market. It is with this idea that I would like to see a development policy that is explicitly biased to the poor - bringing them up to the middle class level and creating demand for domestic production.

The intricacies of this can further be discussed. Incidentally, FDC has its own NEP 2020 project - a continuing project on crafting an alternative to neoliberal in the Philippine context (this does not resemble Malaysia's NEP on ethnicity issue). It is my wish that we can get consult with both of you as soon as we finished the preliminary working draft.

As for my position on innovation and the developmental state, I have elaborated some of the key points as a comment to Marvin's blog post here: http://synthesistblog.com/learning-innovation-systems-from-small-developed-nations-178-0/. I wasn't able to respond yet to his replies though, hehe.

If it's ok with you, I will be publishing this conversation in my blog: http://politicsforbreakfast.blogspot.com. It will be good if people would get to know the current status of heterodox and innovation economics.

Marvin: Hi James, no problem with me on reposting.

On NEP for Philippines, I suggest to rebrand to avoid association with Malaysian NEP and, more important, to create a more Philippine identity. The apparent, though not real association, can obfuscate the consequent discussion on the issue.