Saturday, October 14, 2006

Nobel Prize in Economics given to Conservative Economist


Apart from 2001, when Joe Stiglitz got the prize with two other economists, it seems to have become a rule of thumb that the Nobel prize in economics be given to a conservative economist with pro-American leanings. America is the unofficial leader of the free world and the leading exponent of the Anglo-American model of free market competitive capitalism. So perhaps it is no wonder that the Sweden's Riksbank should give the prize to representatives of this profit-oriented view of the world we live in.

Phelps is being heralded for being an early critic of the Phillips-curve. In the opinion of many economists this curve showing a relationship between the two economic variables of the rate of unemployment and the rate of inflation is associated with keynesianism. In the Keynesian economists tool-box of economic policy instruments the right balance between unemployment and inflation could be found, it was thought.

The trade-off between inflation and unemployment was, however, never an important element in Keynes' work. It is due rather more to the post-Keynesians.
Phelps was right to point out that the inverse relationship between unemployment and inflation would to a large extent be determined by expectations. When inflationary expectations are built into the economy it may be difficult to make expansionary monetary and financial policies work. This, however, was correct in the mid-seventies, after the first oil shock, and well into the 1980's. It is not very interesting today.

Nor is the NAIRU, non accelerating inflation rate of unemployment, very interesting, as you can see it move back and forth according to the arbitrary labour market policies being pursued by various governments. The Scandinavian economies are a case in point. Many Danish and Swedish economists are surprised at the present low level of unemployment in Denmark. It should not be possible - at least not with the low level of inflation that persists in the country. A few years ago it was thought that the rate of "natural" unemployment in Denmark was 7-8 per cent. Now unemployment is getting close to 4 per cent, without triggering inflation, not for the time being at least. The rate of "natural unemployment" is a truism, reflecting after-rationalization about the working of the economy.

So what is Phelps' big contribution to economics today? - good question. The WSJ journal article (move down a few lines on the page the link brings you to) summing up Phelps' reactionary views on the trans-atlantic economic debate, and quoted by many when citing Phelps' latter-day work, cannot be considered an original contribution to economics. An example:

"The U.S. economy might be said to suffer from incomplete inclusion of the disadvantaged. But that is less a fault of capitalism than of electoral politics. The U.S. economy is not unambiguously worse than the Continental ones in this regard: Low-wage workers at least have access to jobs, which is of huge value to them in their efforts to be role models in their family and community. In any case, we can fix the problem".

Here Phelps is apologetic about the fact that many workers must make do with 5.15$ an hour (federal minimum wage). Actually, in spite of this extremely low wage nobody can live on in the US, there is still considerable unemployment in many places. In Phelps' view capitalism is not at fault. But how can an hispanic or black worker be a "role model" for his or her kids with a minimum level of education and a wage that nobody can survive on? It seems as if the relevant economic questions to Phelps are: How do you maximize profits? - Disregarding the impact on income and wealth distribution. They are not: How do you maximize living conditions for the low-paid workers in the economy? Because that would require investments in education, housing and health. That would require higher taxes, and that is not palatable to the conservative economist.

It is not much more than a political-ideological defense of competitive capitalism, of the Anglo-American capitalism model as opposed to the "central European corporatist model". It is always entertaining to whiplash the latter and accentuate the value of the former, but it is not a sign of sound economic sense.

The recent success of the American economy in terms of over-liquidization and over-consumption due to printing too many dollar bills and assets, which unfortunately mostly accrue to the wealthier segments of society, actually proves that Keynes is right.
The enormous budget deficit has stimulated the economy and brought unemployment down. This has been due to a stimulus to effective demand, not by supply side effects. But it has led to balance of payments deficits and budget deficits that are not sustainable in the long run. What is sustainable in the long run, however, is the proven competitiveness of the European "corporatist model". Germany and other central European economies are gaining market share in international markets at the moment.

The USA and Britain are losing market share, especially in manufactured products. Why did the Economic Nobel Committee give the Nobel prize in economics to a man whose economic theorizing was slightly interesting two decades ago, and whose economic writing is no better than the average conservative economic journalist? Well, there is probably a political motive behind it. How many Keynesian economists have got the prize, one may ask once again?

2 Comments:

Blogger Sophia said...

I am tired with the Nobels who think they can influence the course of events in the world by always making highly political choices. So much for Science and knowledge !
You seem to know a lot about economics...

7:36 PM  
Blogger Cosmic Duck said...

In the cloak of "science" they feel free to support the most reactionary views.

11:38 PM  

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