Reveries

Because today is Friday…

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Neoclassical economics turned to be the main ideology on Social Sciences in the last forty years. Not only economics, but political science, sociology, anthropology and even History became hostage of the intellectual dungeon represented  by the methodology established by Milton Friedman and the Chicago Boys (not a rhythm & blues band, as some could suppose). Fragile concepts as “rational choice” and presuppositions unmasked by History as “market’s general equilibrium always results in full employment” turned to be saints of a school of thought that turned to be a dogmatic church.

There is a cycle in economics methodoloy, with five temporal waves: the classics (Smith, Ricardo, Stuart Mill, etc), the socialist counter-revolution (Marx, Engels), neoclassics (Jevons, Walrás, Menger, Marshall), Keynesianism (Keynes, Joan Robinson, etc) and Chicago’s neoclassical monetarism (Milton Friedman and the Chicago’s boys). These five schools represent ruptures in the economic thought, mainly due to the incapacity of the previous theoretical approach to deal with concrete economic problems. Marxism became very seductive to the mass of workers of the XIX century, which were living and working in sub-human conditions; the neoclassics represented a rupture with political economy through the establishment of what is called Economic Science, the base of the Chicago school; Keynesianism was the answer to the big market faillure represented by the great slump; neoclassical monetarism was the answer to the process of stagflation of the 1960′s-1970′s. A common feature between the last three schools is the process of dogmatisation, which determined the academic  debate of the last 130 years.

By the time of the great slump, the fact that market equilibrium wasn’t resulting in full employment was undeniable. Keynesianism became the main school of thought between economists. As the great slump was so serious, nobody wanted to hear about free market. This was something of the XIX century. We’re modern. However, by the time of the stagflation of the 1960-1970′s, there was an inversion: neoclassical monetarism became the new economic orthodoxy. In the same way that talk about free market and the significance of the monetary policy instead of fiscal policy was considered a sin, the contrary turned ot be true: to defend Keynesian ideas became the new original sin.

In reality, it was even more. Friedman and Stigler were also succesful in transform the adoption of the neoclassical monetarist pressupositions a matter of political choice. Sonja Amadae in her book Rationalizing Capitalist Democracy: The Cold War Origins of Rational Choice Liberalism explains that mathematical economics and rational choice as methodology imply in the defense of capitalism as political rhetoric. This is very true in Eastern Europe. As I’ve learned recently in a conference here in Latvia, to defend the idea that enfant industrial sectors in developing countries must be protected to avoid predatory competition, and that complete free-trade regimes aren’t so good when there are differences in the terms of trade between the participating countries, means that you’re a supporter of the North Korean regime. This may be explained by the USSR factor. OK. Anyway, it’s undeniable that Chicago’s view of the world and its methodology made the glorification of quantitative methods and rationality as the methodologic demiurge of the last 40 years, affecting all fields of social sciences.

This results in a methodological problem. Neoclassical economics uses the hypothetical-deductive method, but this method applies to hard sciences, not to substantive ones as economics. For substantive social sciences, the historical-deductive method of the classical and Keynesian economics are more adequate. Only with the adoption of the historical-deductive method economists and social scientists in general may be able to understand the any society’s behaviour. Economic, social, and political systems are open systems that, different from the closed systems that result from the hypothetic deductive method, cannot be formalized. In this sense, Economics and Social Sciences can only be considered as “Science” in the sense of Hegel’s Wissenschaft, not modern natural science although Jevons tried to make economics a positive science saying that “it is clear that Economics, if it is to be a science at all, must be a mathematical science”.

Jevons won and math became the norm. If Adam Smith, Karl Marx, Joseph Schumpeter or John Keynes were alive and tried to publish an article in some economic journal, most probably it would be denied with a recommendation to publish it on a journal of sociology. This idea is part of an interesting article of Prospect Magazine, that you can read clicking here. It also analysis how seductive monetarism was to politicians. Besides the methodologic problem that quantitative methods became an objective rather than an instrument, it even created some people wanting the reality to be adapted to some specific model than the opposite or, in other words, “this isn’t part of the model, so you can’t affirm that”.

Some people are applying the hypothetical-deductive method without taking in consideration its expanded multifactorialism and typologism. This means that theory is seen as the active process of construction of the object of knowledge. The consequence is that empirical hypotheses established outside a systematic theoretical framework can only be confirmed and are without conclusive significance, as researches attempting to confirm theoretical hypotheses are tautological (see Pinatel, J. and Favard, A.). At the same time, there attempts to avoid History to be used to support analysis. As Social Sciences’ models can be confronted with History to test their validity, thus History may be used to unmask ideology masked as reality, some people are against using it as part of analysis.

The main point is that multidisciplinarity and critic is fundamental. Science in general (humanitarian or hard) must be free of dogmatism, as people must be free to think creatively beyond the boundaries of any theoretical dungeon. It’s time to end the dogmatism, conventionalism and indifference. Modesty to admit our limitations, our mistakes and to hear and to accept other people opinions and views are fundamental for the development of science. Economists and part of the social sciences guys must urgently remember that. In a methodological level, that’s why we have this big economic crisis.

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Veiko Spolitis just sent this video to me this morning.

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Nothing new. They’ll never change. It’s always the dicotomy: keynesianism to the rich, monetarism to the poor. Although the author doesn’t understand what is happening in Latvia, it’s a good article from South Africa!

IMF using global crisis to ‘re-launch’ itself

By Christi van der Westhuizen

CAPE TOWN, May 15 (IPS) – The International Monetary Fund (IMF) is attempting to reinvent itself with the global financial crisis, in the process using the opportunity to promote policies that exacerbate the recession by shrinking rather than growing economies.

This is the opinion of Deborah James, director of international programmes at the Centre for Economic and Policy Research (CEPR) based in Washington, U.S.

James also urged developing countries, including those in Africa, to find ways to stimulate economic activity. She argued against those who promote the idea that only the North can afford stimulus packages.

Several countries in the South, including a poor country such as Bolivia, are using stimulus packages to buffer their populations against the ravages of the crisis.

She distinguished between policies that stimulate economic activity and those that don’t. Tax breaks and assistance to buy imports do not stimulate economies but food stamps, transport vouchers, rent reduction or housing vouchers are all reactivating because such assistance is spent immediately and therefore circulates in the economy.

IPS interviewed James after she spoke at a public meeting hosted by Our World Is Not For Sale (OWINFS), of which CEPR is a member, and Amandla Publishers in Cape Town, South Africa.

OWINFS, which held its biannual strategy meeting in Cape Town from May 11 to 15, is a global network of organisations, individuals and social movements that oppose corporate globalisation. CEPR is a non-governmental organisation that promotes democratic debate about economic and social issues through research and public education.

While some say that neoliberalism is in crisis, others are saying “we need more of the same”, James told the audience. Apart from the IMF, the World Trade Organisation is the other institution which, despite promoting neoliberal policies such as deregulation and liberalisation, is projecting itself as “part of the solution”.

Before the economic crisis struck, the IMF was teetering on the brink of becoming redundant as lending dropped to its lowest level in 25 years.

Its financial reserves were falling because of countries such as Argentina and Brazil deciding not to take out further IMF loans and regions such as South America and Asia deciding to form their own monetary funds that will lend money without policy strings attached.

The Group of 20 meeting at the beginning of April this year gave the faltering organisation a new lease on life. The G20 leaders decided to make 750 billion dollars available to the IMF ostensibly to help countries battling with recession.

According to James, the IMF is presenting itself as the institution that can help with bailing out countries that are suffering from balance of payment problems and are running out of reserves. But the loan policies that the IMF is enforcing are still the same as before: contracting rather than stimulating economies.

Contractionary policies are about keeping interest rates high which makes it expensive to borrow money and therefore inhibit the growth of economies. Stimulus policies, on the other hand, are what governments in the North are doing by spending more money to counteract the recession.

“The whole point of the IMF coming into those countries is to help them not collapse but they are forcing them to adopt policies that make the recession worse. High interest rates (one of the IMF’s conditions for a loan) choke off growth,” explained James. Interest rates are a key determining factor in growth.

The IMF has also made other counterintuitive measures the criteria for bail-out assistance, such as raising the rates of services such as water and electricity (at a time when people cannot afford such hikes), and freezing pensions and unemployment benefits (at a time when people desperately need assistance).

As an example, Latvia’s economy is due to contract by 12 percent because the IMF has forced it to adopt contractionary policies. Such negative growth will translate in hundreds of thousands of job losses. When Latvia deviated from the imposed policies, the IMF denied it the second tranche of bail-out money, according to James.

Countries like Latvia in Eastern Europe have been particularly hard hit because Eastern Europe is more globalised than other regions, has deregulated extensively, and is dependent on speculative investments from the west.

The policies that the IMF is still forcing on countries are the same that led South American countries such as Argentina to decide to break ties with the institution. Cumulative growth in South America was 82 percent in the period 1960 to 1980. Between 1980 to 2000, in the grip of the IMF policies that come with loans, cumulative growth in the region fell dramatically to nine percent.

In the wake of the Argentine economic crisis in 2001, the IMF tried to impose more contractionary policies on Argentina.

The latter broke with the IMF and adopted expansionary policies that saw its economy rebound faster than had been expected to economic growth of between eight and nine percent per annum over the last five years, one of the best in the region, James said in an interview with IPS.

This is not only due to commodity exports, argued James, because Argentina has outshone other commodity-exporting South American countries. As a result of this growth, 10 million people have managed to cross the poverty line to better livelihoods.

The IMF would want to use the global economic crisis to reclaim some of its former power because, by last year, it was “a shell of its former self”, James said. Its crisis was exacerbated when South American countries decided not to borrow more money.

The IMF has a billion dollar operating budget. It keeps itself operating from the interest that it gets from developing country loans. Therefore it has a perverse incentive to keep countries indebted to keep itself functioning, argued James.

Rather than shrinking and “going away” as more countries rejected its services, it decided to fund itself in perpetuity by selling an eighth of its gold reserves. The G20 in April gave its stamp of approval to this action.

The IMF’s troubles have intensified since Asian and South American countries have decided to create regional monetary funds. The United Nations’ commission led by Nobel economics laureate Joseph Stiglitz also recommended that regions rather look at developing their own monetary funds, given the U.S.’s domination of the IMF.

The U.S. has an effective veto in the IMF as a decision needs 85 percent of the stakeholders to vote and the U.S. – as the largest funder – holds 60 percent of the vote.

After years of attempted reforms of the vote in the IMF, amid serious economic crises exacerbated by IMF policies in both Asia and South America, the two regions decided to pool their our own reserves and lend money without forcing countries to adopt contractionary economic policies.

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Ivars Ījabs is one of the most interesting political scientists in Latvia. He has really good ideas and has a multidisciplinary baggage that gives to him the ability to go beyond the usual boundaries of most of Latvia’s political scientists. We were colleagues at the PhD program of the University of Latvia. Ījabs wrote an article stating that Latvia is passing through a process of “brazilianisation”, what I’ve considered a personal homage to me. As a Latvian born in Brazil I was really touched. Thank You Ivars!

Jokes apart, the term “brazilianisation” was popularised in Michael Lind’s book ‘The Next American Nation’ as a process of “fissioning along class lines”. This process is symbolised by the withdraw of the white elite from the public arena to a private world. In other words, to private neighbourhoods, private police, private health care, etc. Most probably the author has chosen Brazil because Rio de Janeiro was the destiny of all bandits running away after a well-done job in the movies of the 1960′s and the 1970′s. There was that classic scene of the airplane departing to Rio, with Barry White singing “Rio”. The fact is that this is a dual characteristic of any underdeveloped country with a significant concentration of income. Dual, because its manifestation appears in two ways: by the incapacity of the State to provide basic services and by the increasing of violence. The first explain the elite looking for private services instead of using those provided by the state; the second, result of a mix of culture and concentration of income – the bigger the social inequality, the bigger the violence, made the social elite to confine itself in the private condominiums under private security, at the same time that the financial incapacity of the state due to recurrent crisis resulted in the development of private sectors to provide good services to people who may pay. A question here: isn’t this the essence of the capitalist ideal? If you can pay, you have it; if you can’t you haven’t. This is a crude reality in Brazil. In Latvia it isn’t.  

Latin American countries, especially Brazil, are fashion in Europe nowadays, resulting in a lot of idealisation about what’s happening there. The best characterization of Brazil is the term “Belindia”, coined by Edmar Bacha in 1974: wealthy as Belgium, at the same time that some regions are poor as India. Latvia cannot be compared to Brazil, due to a lot of differences. Although both countries have passed through a process of neoliberal transition, the cultural, social, political and, more important, the economic aspects of both countries are completely different. But going specifically to the question of failed-state, Latvia still too far away from Brazil. In Latvia you still call the police and believe it can help you, while everybody knows that in Brazil it’s easier to deal with the bandits yourself if you can (unless you’re a politician or a millionaire, when the police will solve your problems in moments); in Latvia, there are discussions to support young mothers with money from the state, while in Brazil a pregnant woman could loose her job just 10-15 years ago just because she was pregnant; in Latvia, you pay corrupt doctors to receive treatment, while in Brazil people are dying in the cues of public hospitals, because they can’t pay private health; a boy was shot to death by private security, while trying to jump the fence of the condominium he used to live to avoid walking until the entrance. Why am I telling all these things? To say that a lot of people in Latvia are exaggerating: if a few time ago, some were surreally optimistic, saying even that Riga would be an international financial centre, some are extremely pessimist, as they just have realised that Latvia still is a very underdeveloped country, like Uruguay or Bolivia, for example. Latvia isn’t a failed state. It’s still transitioning and looking for its way, through a process determined by the distortion of the concept of economic liberalism by the political actors to promote private interests, combined with the methodological ingenuousness of the intelligentsia. Latvia is just eighteen years old. In Historical terms, this is nothing.

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Prof. Ha-Joon Chang is going to give a conference in SSE-Riga. He’s recognized as one of today’s leading heterodox economists. Focussing on development economics, he has published a number of critical studies examining the economic policy rich nations as well as international institutions such as the World Bank have advocated for less developed countries.

The conference’s theme is “Keynesianism for the Rich and Monetarism for the Poor? The Current Financial Crisis and the Hypocrisy of the Rich Countries in Historical Perspective”.

You must register to be admitted. CLICK HERE to register.

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Finally the Latvian society is waking up for the problem of plagiarism. There’s a good article on today’s Diena about this issue. Dealing very often with plagiarism from my RSU students, I’m more and more convinced that it’s the result of three problems (have to say that our department is very serious and effective in this issue). The first is the infantilisation of education in general. Young adults are treated as little children, affecting the sense of responsibility and capacity to deal with frustration. The second is the popularisation of higher education as a passport to get a good job, as consequence of the technological revolution of the last 40 years. That’s not true that everybody wants to get knowledge in an effort to achieve an emancipatory condition, etc, bla-bla-bla. Most of the students want a diploma to get a job. The easier, the best. This results in a lot of people that don’t really want to go the university, who would be very happy with a professional education, going to the academy.

This may be seen in the change of the what has been taught: the approach has been changing abstract and theoretic  to more and more practical and concrete examples. The objective of higher education – here as the bachelors level – is to teach people to think, thus to help people to develop their intellectual capacity to  deal with unexpected concrete problems. This is only possible through the development of abstract thought: to be able to adapt the theories and the Historic experiences to real and concrete problems. If mostly practical and concrete cases are taught, students aren’t able to develop these capacities, what limit their ability to solve problems. This is only a matter of balance between abstract and concrete, making students to apply the theories and History their learn to concrete problems. This is a hard process to them. It’s easier to deal with the concrete through practical examples. And than comes the third point. 

The third problem is the way higher education is financed. As the budget of some universities in Latvia depends on the student’s payments, in some departments there is the understanding that to be rigorous means to loose students. What is to be rigorous? To search for plagiarism and seriously punish the students, for example. The conclusion is quite simple:  less students = less money = problems to finance our Department = our job may be at risk = let’s close our eyes.  This is a direct effect of the process of commoditisation of education. The fact that there is an inverted problem of moral hazzard in higher education is something that, until now, no one wants to discuss. At least, I’ve searched and found nothing in the international academic literature about this issue, besides the discussions about commoditisation, which phocuses most in problems of access of the poorest social stracts not in quality.

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My page is online! There are some of my texts, a more complete page about me and some movies reviews. I’m planning to share more things, but I’m still planning what. The page address is: http://www,janisberzins.lv

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A very interesting video of Fernando de Solo, Joseph Stiglitz and Naomi Klein discussing economic power. The main questions issued are:

What is the role of the U.S. in the disposition of the world’s economic and environmental resources? How are financial markets best defended from economic shock? Does liberalization ensure prosperity?

Enjoy!

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