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Transcript of INET
*Core thesis= economic crash of 2008 has created a new form of capitalism Capitalism 1.0 Capitalism 2.0 Capitalism 3.0 Capitalism 4.0 1.0: 1776: the US Declaration of Independence and the Wealth of Nations to 1815 the defeat of Napoleon at Waterloo
1.2: 1848-49: Europe's year of revolutions, repeal of the Corn Laws and the Navigation Acts, until the late 1860s, during the aftermath of the US Civil War and the Franco-Prussian War.
1.3: 1870-1914: United States Gilded Age or 2nd Industrial Revolution:
1.4: 1917-32: Period of disintegration 2.0: 1931-38: The abandonment of gold and New Deal experimentation
2.1: 1939-45: Government-led militarism
2.2: 1946-69: The Keynesian Golden Age
2.3: 1970-80: Inflation, the energy crisis, and the breakdown of the postwar gold-backed currency system 3.0: 1979-83: Early monetarism and confrontation with unions
3.1: 1984-92: Volcker and Greenspan, Thatcher-Reagan booms
3.2: 1992-2000: the Great Moderation
3.3: 2001-08: Market fundamentalism under Greenspan and George W Bush - New Thinking –
- Krugman and Stiglitz -
rational consumer model?
are we ready for new thinking?
potential to advance our current theories?
is this radical thinking? Stiglitz More openness in economic thinking
Move away from obsession with empirics
Wrong ‘empirical lens’
Everything that didn't fit was ignored
Harvard professor – example of what not to do! Defined by:
Recognition that markets and governments can fail
Bringing the state and the economy closer together
Shrinking size of governments Critically evaluate the Institute for New Economic Thinking's contention that "the havoc wrought by our recent global financial crisis has vividly demonstrated the deficencies in our outdated current economic theories and shown the need for new economic thinking- right now" Seminar Question Convergence between U.S. and Europe Part 2: The Arrow and The Ring The World of Capitalism 4.0 Introduction The chapter is based on the premise that American and global capitalism will adapt, the policies of government stimulus will be continued until they have proved unequivocally effective, and the world will return to robust growth, with falling unemployment and normalizing financial conditions, after a year or two.Chapter also considers the ten global consequences to the transition to capitalism 4.0
Chapter also considers 10 global consequences to the transition to Capitalism 4.0 Global Competition Between U.S. and China Will the new model be Western Democratic or Eastern Authoritarian?
Conversion between the two models is an illusion
Reliance on Exports
Development of China
Political Arrangements Assuming the U.S. and Europe emerge from this recession without permanent damage it will reaffirm the relative resilience of Anglo-Saxon Financial Capitalism
Crisis exacerbate trhee profound structural problems:
Southern and Central Europe Crisis
Euro transformation Closer Convergence between the American and European models will make a reformed version of the new capitalism
Reasons why convergence of America and European thinking will favor Western democratic values:
Acknowledgement of dysfunction
Extreme imbalances fixed
More devotion to countries with advanced capitalism The Rivalry of Western and Asian Values Reflex will be to oppose increased interaction
As dust settles after recession, reconsideration of business and governments will occur
Simple polarization between government and business won’t make sense Business Interests Will Embrace New Model China and US grew in dependence
Specialization not valid
Next phase of capitalism marked by massive amount of industrial restructuring
Redirection of global trade
Priority accorded to free trade
Coordination of macro policies Trade and Industrial Structures 4.0 encourage serious thinking about physicla and environmental constraints on economic growth
World will run out of raw materials
Catastrophic environmental effect
Political intervention needed to bring out equilibrium
Key objective ill be to redirect rent from rulers of oil producing countries to governments and taxpayers
Elimination of energy subsidies
Oil consumption with subsidies Limits to Growth and Physical Resources Approach going to change in Capitalism 4.0
Environmental Movement present clean energy as an opportunity
Shift in global economy that places a much higher price on carbon
All forms of energy must be commercially competitive Environment Can Become a Positive Economic Story Progressive social and environmental policies will be accepted if a convincing case made
Reshaping market incentives
Incentives to preserve environment and improve society
High prices on public goods will lead to higher not lower economic growth Prosperity without Growth New Bretton Woods
Value of floating currency
Currency interventions and global macro coordination likely
Only alternative to the dollar as the key currency would be some artificial international money Currency and Financial Relations ‘it automatically does not produce what people really need; it produces what they think they need, and are willing to pay for.’ Chapter 3: Corruption and Bad Faith Krugman Reorienting Modern Economics The French Student Petition Shifts in Economic Paradigms Flawed Consequences New Economic Thinking and Conclusion Due to a rise in inflation and therefore increased interest rates the cost of obtaining funds for the S&L’s became more than the receipts they were taking in from their mortgages. However instead of becoming bankrupt and having to be bailed out by the government, the companies were kept in business when they should naturally have failed.
Cooperate executives using junk bonds (high risk but high yield debt) to pay off stock holders
Huge rises in Executive pay ‘to overestimate current profits, all
Enron had to do was underestimate the
future purchase price’ Enron Cooperation
Corruption ‘the lenders were successful in placing these loans among some of the most vulnerable, least educated, and least informed members of society.’ ‘a major new industry, and one that was not properly regulated.’ Sub-prime lending ‘culture changes over time to facilitate or to
hinder aggressively competitive and predatory activities.’ ‘corruption feeds back into more corruption’ ‘decisions are influenced by nominal dollar amounts,’
‘failing to add inflationary expectations into wage bargains and price setting.’ However because the concept of money illusion didn’t fit with economists’ Skidelsky Animal spirits are the thought patterns that animate people’s ideas and feelings.
The economic crach can be linked to economists ignoring the role of ideas in the conduct of an economy.
Traditional Smithian economics teaches that the only risk of an ecnomic downturn comes from government intervention.
John Maynard Keynes emphasises animal spirits with regards to departures from full employment. Animal Spirits as an economic term refer to a restless and inconsistent element within the economy and our peculiar relationship with ambiguity or uncertainty. Confidence
Corruption and Antisocial Behaviour
Stories 5 Animal Spirits Confidence The trust aspect of confidence shows that economics misses a key element to confidence when they claim it comes from rational decisions.
John Welch long time CEO of General Electric claims that these decisions are made “straight from the gut”.
Confidence Multiplier 1/(1-MPC)
Michigan Consumer Sentiment Index Fairness Economist Albert Rees claimed the neoclassical theory of wage had nothing to say about fairness, however, the factors involved in setting wages and salaries in the real world seemed to be very different from those specified in the neoclassical theory.
When asked whether a hardware store raising the prices of snow shovels in the wake of a snow storm 82% of respondents said it was unfair even though it agrees with all economic theory about demand and supply.
Considerations of fairness are a major motivator in many economic decisions and are related to our sense of confidence and our ability to work effectively together.
phenomena as basic as the existence of involuntary unemployment and the relation between inflation and aggregate supply can be easily explained when fairness is taken into account. The INET website is a wealth of knowledge full of blogs, videos, articles, and more. Here is a brief snapshot of a few interesting "new" economic thinkings and whether they're new at all. teaching has not changed drastically since the advent of INET
there are plenty of theories on what the new economics can be like but will it ever happen?
it will be quite a few years before there will be any substantial changes
although there is a wealth of knowledge, a lot of the "new" economic thinking is just old economic thinking with a new dress on
ineteconomics.org Economics Curriculum Committee - reform of undergraduate curriculum
1. A common understanding of the problems
and principles for curriculum reform
2. Separate national strategies for reform
3. A common set of deliverables to support
national strategies Current Problems Three part project: Potential
Solutions Implementation Summary Reform Ideas Keynesian solutions are relatively unchanged, they are merely brought to the fore once again. Undergraduate curriculum reform seems positive, but may be too idealistic: tough to implement. Keynesian "How much is enough" -Notion that economics is a
disappointing study-Recent critiques of economics -Tony Lawson targeted the inadequacies of using deterministic models to study economicsoWrote “Reorienting Economics” real word is found miles away from mathematical assumptions-Life is not deterministic-Constant conjunctions of events simply do not exist in the natural world outside of controlled experiments -2001 wrote a manifesto declaring themselves to be generally dissatisfied with the teaching they received-called for teachers to wake up -Thing mainstream economics is “autistic” -UK credit card has been
‘maxed out”-Risk of credit creation has
calculated -A two speed Europe is developing:Northern Europe is benefiting from a boost to exports to the far East. Southern Europe is grinding to a halt or retreating
-Quality and quantity of jobs degrading -INET a cast of global opinions to discuss new thinkings-Only radical voice to be heard is that of Tony Lawson – who was the only one to question whole intellectual approach of model building-Perhaps look at the sociology of discipline and its imperialistic ambitions-Escape from conceptual jails that confine us-Return to a critical enquiry