19th September, 2014 Dr. Asad Zaman, VC PIDE. MacroEconomics Concepts... · 2015. 11. 16. · CORE...
Transcript of 19th September, 2014 Dr. Asad Zaman, VC PIDE. MacroEconomics Concepts... · 2015. 11. 16. · CORE...
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CORE Macroeconomics Concepts & Terminologiesunderstanding Key Economic Indicators & their significance vis-à-vis economic developmentTalk at NDU, on 19th September, 2014 Dr. Asad Zaman, VC PIDE.
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Economics: Humanities or Science?
HISTORICAL CONTEXT Who invented the
theory? What problem was it
designed to solve? What happened
when theory was applied to solve the problem?
SOCIAL SCIENCE: Theories are like
scientific laws. Universal Invariants.
Who invented the
theory and When and Why DOES NOT MATTER
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Your Vote? Science or Humanities?
What does Harvard University have to say? SOCIAL SCIENCE: Application of SCIENTIFIC
METHOD to study of human beings and societies.
QUANTITATIVE METHODS – MEASURE everything.
Mathematical Laws of Motion for Humans & Societies.
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The Battle of Methodologies:
Historical/Qualitative
Must look at historical context to understand theory.
Math/Physics Laws
History is UNIQUE – impossible to learn any laws.
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Science Won – Truth Lost !!!
Since 1890’s STEADY DECLINE in understanding of economics –
WHY? WRONG method being used to try and understand economic events.
THERE are economic LAWS – Supply & Demand.
LAWS of consumer behavior.
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Goals of Macroeconomic Policy
Full Employment == Maximum Production Stable Prices Rapid Growth {NOW a little bit Controversial}CONTROVERSIES about how to achieve these goals. ALSO Full Employment as a means of providing meaningful jobs to people VERSUS Maximizing Production of Goods and Services.Growth VERSUS Sustainable Growth, Pro Poor Growth
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First Crisis: Great Depression 1929
GD took Economists by COMPLETE SURPRISE Irving Fisher: “There may be a recession in stock
prices, but not anything in the nature of a crash.” Julius Barnes: “The spring of 1930 marks the end of
a period of grave concern. American business is steadily coming back to a normal level of prosperity.”
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BIG PUZZLE – Still Unsolved
WHY did GD Happen? Economy was ROARING along – Full Employment.
Massive Production of Everything. Everyone Happy. SUDDENLY – factories close, 20% unemployment, stock
market crashes, banks collapse. Life Savings Destroyed. Complete Misery.
WHY ???? – Stock Market Crash Banking Collapse Productive Capacity is there, Labor is there, no war, no
destruction.
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KEYNESIAN (MACRO)ECONOMICS:INVENTED TO SOLVE GD PUZZLE
CLASSICAL ECONOMICS: UNEMPLOYMENT cannot happen. SELF-REGULATING Economy
WHY? LAW of Supply & Demand. Wages will fall to restore full employment.
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PUZZLE: Do Wages Fall?
One thousand applicants for FOUR positions at IIUI.
Similar situations all over Pakistan. WHY dont wages fall to eliminate
unemployments?CONVENTIONAL ECONOMIC THEORY is incapable of dealing with the MOST IMPORTANT ECONOMIC PROBLEM: Unemployment.
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Banking Crisis Regulation
Glass-Steagall Act Maximum Interest Rate Federal Deposit Insurance Restriction to ONE state operation.
RESULT: Very few banking failures until 1980’s.
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Wrong Theories Huge Impact
In Mundell’s (2000) assessment, ‘had the major central banks pursued policies of price stability instead of adhering to the gold standard, there would have been no great Depression, no Nazi revolution, and no World War II’.
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Keynesian Solution: Macroeconomics
Problem: SHORTFALL in EFFECTIVE DEMAND SOLUTION 1: MONETARY POLICY – Increase money
supply, people have more money, will spend DEMAND
Possible Problem: LIQUIDITY TRAP. No one wants to borrow money, even at ZERO interest rate.
SOLUTION 2: FISCAL POLICY: Government engages directly in investment and public works. CREATES Demand.
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Battle of Ideologies
Free Markets
Key Proponents: Hayek, Friedman Minimize Government Privatization Liberalization De-Regulation No interference with free
markets
Regulation
Fiscal Policy, Monetary Policy
Employment Policy Social Welfare Trade Unions Regulations on Monopoly Incentives for Industry &
Exports
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Economics of 20th-21st Century
Naomi Klein: The SHOCK DOCTRINE: The Rise of Disaster Capitalismwww.asadzaman.netThe Rise and Fall of the Market EconomyCurrent Crisis in Economic TheoryCapitalism in Crisis
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Keynes rules – post WW2
Low AD Unemployment – High AD Inflation
Phillips Curve. Stable, Sound Economies, Prosperity 50-
70 Klein: Chicago School – waiting for a
crisis. Monetarists versus Keynesians.
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The Keynesian World
Low Agg. Demand
Low production Excess Capacity UNEMPLOYMENT
High Agg. Demand
Production at maximum capacity
Full Employment INFLATION
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Keynesian Quarter Century 48-73
TOBIN: All advanced democratic capitalist societies adopted Keynesian strategies of demand management after World War Two. Unparalleled prosperity, growth, expansion of world trade, and stability. During this ‘Golden Age’ inflation and unemployment were low, the business cycle was tamed.
Britain and other Western countries had full employment for a quarter of a century after the war because their governments were committed to full employment, and knew how to secure it; and they knew how to secure it because Keynes had told them how
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Trouble in Keynesian Paradise
Multinationals Military Industrial
Complex
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"ONLY A CRISIS-ACTUAL OR PERCEIVED-PRODUCES REAL CHANGE. WHEN THAT CRISISOCCURS, THE ACTIONS THAT ARE TAKEN DEPEND ON THE IDEAS THAT ARE LYING AROUND. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.
Milton Friedman -- Preface to Capitalism & Freedom 1962.
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Preparing IDEAS for Crisis:
Great Depresson: A Monetary History of US Inflation/Employment Tradeoff: Natural Rate of
Unemployment. Fiscal Policy: CROWDING OUT Hypothesis. Monetary Policy: Rational Expectations.
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Utilize Post-Crisis Confusion
PRIVATIZATION Slash Social Welfare Programs De-Regulation Free Trade – Collapse Domestic Industry, let
multinational rule. Free Exchange Rates – LOWER EXCHANGE Rates. DEBT TRAP
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Oil Crisis & rejection of Keynes
Stagflation – IMPOSSIBLE according to Keynes. NEW SOLUTION: SUPPLY SIDE ECONOMICS Rise of Reagan & Thatcher New Respectability of Hayek, Friedman and
Chicago School
POST KEYNESIAN CONFUSION: SEVEN SCHOOLS OF MACROECONOMIC THOUGHT
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Reagan DE-REGULATES S & L
DISASTER FOLLOWS S&L make huge gambles with others money Losses of around $80 BILLION MORE THAN ENTIRE EARNINGS OF BANKING
INDUSTRY FOR PAST FIFTY YEARS GOVERNMENT BAILOUT – LOOTERS PROFIT,
PUBLIC LOSES.
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Margaret Thatcher: Iron Lady
Busted Labor Unions – Especially Coal Miners Subsidies and Tax Breaks for the Rich. Massive increase in Unemployment. Reduction in Social Welfare. De-Regulation of Finance Industry. RESULTS: Concentration of Wealth, Increase in Poverty.
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Fall of Russia & Washington Consensus Privatize, Liberalize, De-Regulate Let free markets work their magic Complete Catastrophe in Chile, Russia NAOMI KLEIN: THE SHOCK DOCTRINE, Rise of
Disaster Capitalism. Originator of Washington Consensus admits to
failure World Bank Admits to Failure.
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Megatrends: Financialization
Massive shift of resources from real sector to financial sector.
Wall St. Rookies earn million dollar salaries by playing with pieces of paper and conning prospective buyers into get rich quick schemes.
No relation between earnings and Value Added/Productivity.
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Megatrends: Neo-Colonialism
Mossadegh of Iran Salvador Allende of Chile Long list of popular leaders deposed by coups
and replaced by Leaders favoring multinationals.
Debt Model: Debt pays salaries of leaders, who do tax farming for multinationals.
Good governance – free currency exchange – no regulations – privatizations – all favor MNC
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Invisible Hand of Multinationals
Poor Countries
Bottom 3 Billion
Rich Countries
TOP 85 INDIVIDUALS
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The Battle of Ideas Perspective
1776: Britain has 50 year lead in Industrialization
Theories of FREE TRADE & FREE MARKETS emerge in England
Adopted Everywhere Disaster for the Colonies, Depression in
Europe
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Protection in USA & Europe NOT in Ottoman, India, China, Japan Alexander Hamilton: 1755 – 1804 Friedrich List == 1789 to 1846. NO Protection in India – Industries destroyed. Opium Wars: 1839-42, 1856-1860 – Free Trade in China Opening of Japan: 1852-56 Capitulations of Ottoman Empire 1830 – 1870.
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Selling FREEDOM
Freedom for Capitalists to make profits. Freedom for laborer to sell his body/time for wages No freedom for government to regulate sale of labor –
no minimum wage, health & benefits etc. No freedom for labor to band together and negotiate
against powerful capital. No freedom for weak nations to protect their infant
industries, against highly advanced MNC’s.
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Timeline of Ideological Warfare
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Early Twentieth Century
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Late 20th to Early 21st Century