Economics 706 Macroeconomics II Gerald Epstein

Home , Hyman Minsky, Industrial organization, Neuroeconomics, Nouriel Roubini

Fall, 2013

Office Hours: Jerry Epstein: Thompson 916 Monday, 2 – 4 PM and by appointment Telephone: (O) 577-0822 email: [email protected]

Gordon Hall Office: 319

The class will normally meet in the Ninth Floor seminar room of Thompson Tower. In the event that the Thompson seminar room is being used for a department function, we will inform you of the substitute room we will use that day.

If some of you would like to set up a regular meeting outside class to discuss class-related issues, let me know. Feel free to email at any time about class business. On non-class days, I spend a lot of time in my Gordon Hall office.

Grading

1. There are two papers worth 35 points each. The first will be on issues of economic theory and methodology in Keynes’s work and in post-Keynesian economics. The second will be on one of a number of topics covered in the second part of the class. The first will be due roughly around the middle of the semester and the second will be due shortly after classes are over.

2. Class participation is worth 30 points. This includes short papers, preparation of questions and comments about readings, class presentations and class discussion. The more active you are in class discussions, the more interesting the course will be. It will be almost impossible to get an A in the course unless you get most of the points here. I will announce in class short – paper assignments and class presentation assignments, etc.

3. Prerequisites: Econ 705 or equivalent and some familiarity with Marxian theory.

Moodle Site

Using the moodle site for this course will be important. Most of the articles and non-book readings (and even a few book readings) are on or accessible through the site. There will also be class notes and other important materials posted there as well. Also, we may ask you to upload some of your assignments to the moodle site. So make sure you have access to and can use the site.

Books

1. Buy J.M. Keynes; The General Theory of Employment, Interest and Money at Amherst Books (sometimes referred to as the GT). We will use this immediately.

2. You may also buy Lance Taylor’s , Maynard’s Revenge; The Collapse of Free Market Macroeconomics, Cambridge: Harvard University Press, 2010. THis is also available at Amherst Books. At various points in the course we may refer to parts of this book as well.

Reading List: Part One

Part One will deal with the witings and thought of John Maynard Keynes and some Post-Keynes work. Parts Two and Three will cover theories of competition and their effects on macro and micro economic theory (and the relation between the two), the rising influence of financial markets on economic outcomes since about 1980, theories of the ‘financialization’ of the nonfinancial firm in the current era, and analyses of the current global financial and economic crisis.

Please note that items on the reading list followed by ** are either on the moodle site or on electronic reserves. Volumes of Keynes's Collected Works are on regular reserve. Items with an ** are required reading and items with a * are important. HP is Jim Crotty’s home page, where many of Crotty’s articles are available. (http://people.umass.edu/~crotty/) Do not Panic: This list is bibliographic. I will only discuss a very small percentage of it in class, but you can use it to help with your research for assigned papers.

I. Keynes’ Vision of the Capitalist Macroeconomy: The Economics and Politics in The General Theory and Related Works.

Crotty has an unpublished and in-process manuscript tentatively titled Keynes's Radical Views on the Economic Role of the State: the Centrality of Planning and Public Investment - hereafter Keynes Manuscript. It is available on moodle. It is a description and analysis on the evolution of Keynes’s policy views, as informed by

the evolution of his theoretical perspective, from WWI until his death in 1946. I will assign sections to read over the first half of the course.( Jim Crotty is very interested in receiving feedback from students either in the form of criticism or of constructive suggestions for improvement of the manuscript. )

Biographies of Keynes

*R. Skidelsky, John Maynard Keynes: 1883-1946: Economist, Philosopher, Statesman (Penguin, 2003). This is the best available Keynes biography. It is even better in the three original volumes.

D. Moggridge, Maynard Keynes: An Economist’s Biography (Routledge, 1992). A more boring but still useful presentation by the editor of Keynes’s Collected Works.

Understanding Keynes’s views on political economy through his own work. If you don’t understand his ‘vision’ and his policy views before you read the GT, you will only see the IS-LM curve and counter-cyclical macro policy, and you will miss his call for the radical transformation of capitalism. These readings will help you do that. Read as many as you can.

** , "The General Theory of Employment," Quarterly Journal of Economics, Feb. 1937, 41, No. 2, pp. 209-23. A must read because it shows that the concept of fundamental uncertainty is the key to Keynes’s macro theory.

** , "National Self-Sufficiency," Yale Review, June 1933, 22 (4), pp. 755-769. This is the most important short statement of Keynes’s ‘radical’ positions on policy. You have to read it.

Essays in Persuasion, Collected Works, Volume IX, sections 4, 5, and **"The Economic Consequences of Mister Churchill," pp. 207-30, "Can Lloyd George Do It?," pp. 86- 125, "Social Consequences of Changes in the Value of Money," pp. 59-75, R.

_____, Collected Works, Volume XIX-I, "Liberalism and Industry," pp. 638-48, Volume XIX-II ** "Does Unemployment Need a Drastic Remedy?" and "Reply to Critics," pp. 219-32, R.

_____, Collected Works, Volume XX, "A Note on Economic Conditions in the U.S.," pp. 561-88, R.

**_____, Collected Works, Volume XX, "The Question of High Wages," pp. 3-16, (to be read with ch 2 of the GT),R.

_____, Collected Works, Volume XXI, "The Dilemma of Modern Socialism," pp. 33-38, , “The State and Industry,” pp.84-92 , “Democracy and Efficiency,” pp. 491-500 , “The Monetary Policy of the Labour Party,” pp. 128-37, .

__, Collected Works, Volume XXVII, "The Maintenance of Employment," pp. 352- 57, R.

__, Collected Works, Volume VI, "Historical Illustrations," pp. 132-85, R.

__ , Volume V, "The Industrial Circulation and the Financial Circulation," pp. 217-34, R.

Other analyses of broad political-economic issues in Keynes’s work

**J. Crotty, “Was Keynes a Corporatist: Keynes’s Radical Views on Industrial Policy and Macropolicy in the 1920s,” Journal of Economic Issues, Sept 1999, pp. 1-23. HP. This was a short article taken from Crotty’s Keynes Manuscript. If you want a sample of the material in the Manuscript, you could read it, but we hope to get a chance to read the Manuscript version.

*F. Carvalho, “Keynes and the reform of the capitalist social order,” Journal of Post Keynesian Economics, Vol. 31, No. 2, Winter 2008-09, pp. 191-211. This is an important Post Keynesian’s view of Keynes’s “radicalism.” However, it misses completely Keynes's emphasis on direct government control of 2/3 to 3/4 of capital investment along with strict capital controls and managed trade, and thus misses the most radical of Keynes's policy proposals.

**J. Crotty, "Keynes on the Stages of Development of the Capitalist Economy: An Essay on Methodology," Journal of Economic Issues, Sept. 1990, 24(3), 76l-80, R. HP.

II. Keynes' Vision of the Capitalist Macro-economy: The Implications of "Keynesian Uncertainty" for Economic Methodology and Economic Theory.

**J.M. Keynes, The General Theory, Preface plus chapters: 1, 3, 5, 8-10, 11 and 12, 13-15, 18, 19, 21, 22, 23 and the curious chapter 24. Chapter 12 is central because it contains Keynes’s fullest discussion of the effects of uncertainty on financial markets and the capital investment decision.

**J.M. Keynes, "The General Theory of Employment," Quarterly Journal of Economics, 41 (2), Feb. 1937, 209-23. As noted above, this post GT defense of that book demonstrates that the concept of fundamental uncertainty is the key to Keynes’s macro theory. It is a must-read.

, The Treatise on Money: Part II, Collected Works, VI, 319-24.

**J. Crotty, "Are Keynesian Uncertainty and Macrotheory Incompatible? Conventional Decision-Making, Institutional Structure and Conditional Stability in Keynesian Macromodels." In G. Dymski and R. Pollin, eds. New Perspectives in Monetary Macroeconomics, (Univ. of Michigan Press: Ann Arbor, 1994), pp. 105-47. , HP. This is an essential reading both because it provides a summary of several of my lectures about the implications of fundamental uncertainty for macro-theory, and it extends as well as interprets Keynes’s treatment of this crucial issue.

**R. O`Donnell, Keynes: Philosophy, Economics and Politics, (London: Macmillan, 1989). Chs 11*, 12* and 14* are a must; 8 and 9 are recommended. (you will be able to get these on eReserves and or Moodle)

*G.L.S. Shackle, Epistemics and Economics (Cambridge, 1972 and Transaction, 1993), especially chs. 1*, 7, 8, 12*, 15*, 16*, 18, 19*, 20, 21*, 33, 34, 36*, 37*, 38 (the *s are perhaps the most interesting). Shackle is one of the great figures in the economics of true uncertainty. (you will be able to get these on eReserves)

**J. Crotty, "Neoclassical and Keynesian Approaches to the Theory of Investment," JPKE, 14(4), Summer 1992, pp. 483-96. R, HP.

*R. Frydman and M. Goldberg, Beyond Mechanical Markets (Princeton University Press, 2011). Chs 1-6 present an analysis of the implications of uncertainty for the theory of financial markets and for macro economics by two economist who are well respected in the profession. It is a ‘modern’ discussion of this crucial issue.

*B. Loasby, "Uncertainty and imagination, illusion and order: Shackleian connections," Cambridge Journal of Economics," Sept. 2011, 771-83. Contains interesting insights into relation of uncertainty to theory in general and to economics in particular, with references to Knight and Smith.

*Lance Taylor, Maynard’s Revenge, Chs. 1 – 4.

A. Terzi, "Keynes's uncertainty is not about white or black swans," Journal of Post Keynesian Economics, Summer 2010, 32 (4), 559-65. A clear and short explanation of the difference between epistemological and ontological uncertainty.

G. Amromin and S. Sharpe, “Expectations of Risk and Return Among Household Investors,” Federal Reserve Board of Governors, Finance and Economics Discussion Series, 208-17, June 2008. Uses Michigan Survey of Consumer Attitudes to show that investors in fact act as depicted in Keynes’s theory of conventional expectations and confidence formation. Leads to procyclical expectations.

G. Bertocco, “The characteristics of a monetary economy: a Keynes-Schumpeter approach,” Cambridge Journal, March 2007, pp. 101-22. This article has an interesting comparison of the theories of Keynes and Schumpeter.

*D. Vickers, Economics and the Antagonism of Time, especially chs. 1, "Time and the Human Condition," and 8, "Economics in Time," (Univ. of Michigan Press: Ann Arbor: 1994). This is a wonderful source on the economics of fundamental uncertaintly.

*F. de Carvalho, “Decision-making under uncertainty: Keynesian and Shacklean themes in three of Shakespear’s tragedies,” JPKE, 25 (2), Winter 2003-03, 189-218.

*D. Dequech, “Conventional and unconventional behavior under uncertainty,” JPKE, Fall 2003, 26 (1), 145-68. Dequech has built his career interpreting and evaluating the role of uncertainty in Keynes's theory and in general.

*D. Dequech, “Keynes’s General Theory: valid only for modern capitalism?” JPKE, Spring 2003, 25 (3), 471-91.

*D. Dequech, “Uncertainty: individuals, institutions and behavior,” Cambridge Journal of Economics, 28 (3), May 2004, 365-78.

D. Dequech, “Uncertainty: a typology and refinement of existing concepts,” JEI, Sept. 2011, pp. 621-40.

M. Setterfield, “Keynes’s dialectic,” Cambridge Journal of Economics, 27 (3), 2003, 359- 76.

S. Leroy, “Rational Exhuberance,” JEL, Sept 2004, XLII (3), 783-804.

T. Lawson, “Reorienting history (of economics),” JPKE, Spring 2005, 27 (3), Spring 2005, 455-70.

Behavioral Economic Theory:

The central issue here for us is: What is the relation of Behavioral Theory to Keynes’s radical critique of mainstream theory? Is it a substitute for or complement to Neoclassical Theory? Is it built on fundamental uncertainty or irrationality? (This section will not be discussed in class, but the topic is interesting and you can write a paper about it. Suggestions for new entries appreciated.)

*Akerlof, G. and Robert Shiller. Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. Princeton University Press, 2009. This highly celebrated book reflects both the strengths and the weaknesses of behavioral theory. See whether you believe it is a radical attack on the foundations of mainstream theory or a debate within mainstream theory.

Akerlof, G. A. (2002). Behavioral Macroeconomics and Macroeconomic Behavior. American Economic Review, 92(3), 411-33. An important but very limited attack on mainstream macro theory. This is a wonderful example of the differences between

Keynes’s macro theory and mainstream theory as influenced by behavioral and experimental economics.

*T Jefferson and J.E. King, "Can Post Keynesians make better use of behavioral economics?," JPKE, Winter 2010-11, 33 (2), 211-34. Includes an attack on the Akerlof- Schiller book Animal Spirits.

*S. Dow, "Cognition, market sentiment and financial instability," Cambridge Journal of Economics, September 2011, pp. 233-49. An interesting evaluation of behavioral theory and a comparison with Post Keynesian economics.

*J.P. Raines and C. Leathers, "Behavioral Finance and Post Keynesian-Institutionalist theories of financial markets," JPKE, Summer 2011,33(4), 539-53. They argue that BF does not fully break with efficient financial market theory.

*Camerer, C & Loewenstein, G. (2004). Behavioral Economics: Past, Present, Future. In C. F. Camerer, G. Loewenstein & M. Rabin (Eds.), Advances in Behavioral Economics (pp. 3-52). Princeton: Princeton University Press. Available at http://www.hss.caltech.edu/~camerer/ribe239.pdf *C. Camerer, G. Lowenstein and D. Prelec, “Neuroeconomics: How Neuroscience can Inform Economics,” Journal of Economic Literature, March 2005, XLIII (1), 9-64.

*D. Kahneman, “Maps of Bounded Rationality: Psychology for Behavioral Economics,” (Nobel Prize Lecture) AER, 93 (5), December 2003, 1449-75.

*Rabin, M. (1998). Psychology and Economics. Journal of Economic Literature, 36(1), 11-46.

*Rabin, M. (2002). “A Perspective on Psychology and Economics,” European Economics Review, 46, pp. 657-685.

*R. Thaler, “From Homo Economicus to Homo Sapiens,” Journal of Economic Perspectives, 14 (1), Winter 2000, 133-41.

Frey, B. S. & Benz, M. (2002). From Imperialism to Inspiration: A Survey of Economics and Psychology. Working Paper - Institute for Empirical Research in Economics. Available at http://www.iew.uzh.ch/wp/iewwp118.pdf

*Wesley Pech and Marcelo Milan, Behavioral Economics and the Economics of Keynes (with Marcelo Milan); 2009, Journal of Socio-Economics, 38(6), 891-902. At: http://webs.wofford.edu/pechwj/Pech_Milan_Behavioral_Keynes_27april09.pdf.

III. The Keynes-Minsky-Marx Financial Instability Thesis

A. The Keynes-Minsky Tradition

**J.M. Keynes, The General Theory, Ch. 22.

**H. Minsky, Stabilizing an Unstable Economy, (Yale University Press, 1986), chs. 7- 9.

*H. Minsky, John Maynard Keynes, (Columbia University Press, 1975), chs. 1-6.

H. Minsky, Can “It” Happen Again: Essays on Instability and Finance (M.E. Sharpe 1982).

**Crotty, "Owner-Manager Conflict and Financial Theories of Investment Instability: A Critical Assessment of Keynes, Tobin and Minsky," JPKE, 12 (4), Summer 1990, 519- 42, R, HP.

**G. Dymski and R. Pollin, "Hyman Minsky as Hedgehog: The Power of the Wall Street Paradigm", in S. Fazzari and D. Papadimitriou, eds., Financial Risk, Government Policy and Macroeconomic Performance (Sharpe 1992), pp. 27-62.

**Crotty, "The Realism of Assumptions Does Matter: Why Keynes-Minsky Theory Must Replace Efficient Market Theory as the Guide to Financial Regulation Policy," At: http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_251- 300/WP255.

**R. Pollin, “The Relevance of Hyman Minsky,” Challenge, March-April 1997, pp. 75- 94.

*Lance Taylor, Maynard’s Revenge, Chs. 4 - 7.

*D. Papadimitriou and Randall Wray, “The economic contributions of Hyman Minsky: Varieties of Capitalism and Institutional Reform,” Levy Institute Working Paper No. 127, December 1997.

*P. Mehrling, “The vision of Hyman P. Minsky,” Journal of Economic Behavior& Organization, Vol. 39 (1999), pp. 139-158.

E. Tymoigne, “The Minskyian System,” Published in three parts (Working Papers 452, 453, and 455) by The Levy Institute of Bard College, 2006.

B. Marx on Money, Finance and Crisis: Is Marx's Theory Compatible with Keynes-Minsky Theory

**J.Crotty, "The Centrality of Money, Credit and Financial Intermediation in Marx's Crisis Theory." In S. Resnick and R. Wolff, eds., Rethinking Marxism (New York; Autonomedia, 1985), 45-82. (This is an important and original interpretation of

Marx’s theory of the role of finance in macro dynamics. ) The paper argues that crucial insights in Keynes’s and Minsky’s theory of financial instability are incorporated in Marx’s theory. Note: It would help to read or reread Capital Volume One, ch. 3 “Money, or the Circulation of Commodities,” before reading my paper. HP.

**J. Crotty, "Marx, Keynes and Minsky on the Instability of the Capitalist Growth Process and the Nature of Government Economic Policy." In S. Helburn and D. Bramhal, eds., Marx, Schumpeter, Keynes: A Centenary Celebration of Dissent (Sharpe, 1986), 297- 326. HP.

*David Harvey, The Limits to Capital (Verso 2007 (new edition)). This is an excellent treatment of the role of money and finance in Marx.

M. Aoki, “To the Rescue or to the Abyss: Notes on the Marx in Keynes,” Journal of Economic Issues, Dec. 2001, 931-54.

Reading List Part Two

IV. Slow Aggregate Demand Growth and Destructive Competition: Their Implications for the Theory of the Dynamics of Global Neoliberal Capitalism. Section Thesis: You cannot have an adequate theory of macro dynamics or of economic and financial crises without a realistic theory of the nature of competition.

A. Competition and Investment

**J. Crotty, “Rethinking Marxian Investment Theory: Keynes-Minsky Instability, Competitive Regime Shifts, and Coerced Investment,” Review of Radical Political Economics, 25 (1), March 1993, pp. 1-25. HP

*J. Crotty and J. Goldstein, "A Marxian-Keynesian Theory of Investment Demand:Empirical Evidence". In F. Moseley and E. Wolff, eds., International Perspectives on Profitability and Accumulation. Brookfield, Vt.: Edward Elgar, 1992, pp. 197-234.

M. Perelman, “Marx, devalorization, and the theory of value,” Cambridge Journal of Economics, 1999, 23, pp. 719-28.

B. Schumpeter on Creative Destruction, Oligopolistic Market Structures, and “Corespective Competition”: Are Marx and Schumpeter Complements or Substitutes with respect to the Theory of Competition?

The first two readings are central to an understanding of the role played by competition in both theory and history. Schumpeter stresses the theory, while Chandler provides rich historical evidence that, in the main, supports Schumpeter’s ideas. Read both critically; they are not without their flaws. Indeed, it would be a useful exercise to ask yourself as you read: what factors are missing from these theories that are essential for understanding economic theory or history.

**J. Schumpeter, Capitalism, Socialism, and Democracy, (George Allen and Unwin, 1942), chs 1-4, (6-8)*, 9-12. Chapters 1-4 are on Marx. Chapters 6-8 are on competition and cooperation in oligopolies. The ideas in chapters 6-8 are central to the theory of economic dynamics and must be read carefully. In chapters 9-12 Schumpeter explains why he thinks that capitalism be replaced by socialism. His reasoning is quite different from that of Marx.

**A. Chandler, Scale and Scope: The Dynamics of Industrial Capitalism (Harvard University Press, 1990), chapters 1*, 2*, 3, 4 (140-45), 5 (188-93), 6 (224-33), Conclusion (593-628)*. (The starred chapters are required and will be discussed in class.)

** J.B. Foster and Robert McChesney, The Endless Crisis: How Monopoly-Finance Capital Produces Stagnation and Upheaval from the USA to China. Paul Baran and Paul Sweezy published Monopoly Capital in 1966, a book read by virtually every radical economist in the US and Europe in the two decades that followed. The entry hypothesis of the book was that the laws of motion of capitalism that Marx laid out in Capital were only operative in the 19th century. As the 20th century proceeded, giant monopolies and oligopolies increasingly dominated global capitalism; what they called monopoly capitalism had very different laws of motion from the competitive capitalism analyzed by Marx, they argued. The implications of their theory continued to be elaborated in their influential journal Monthly Review to this day. The coauthors of this book are the current co-editors of Monthly Review. Their book contains lots of informative material about long-term movements in industry concentration, evaluates various theories of competition including their own, and evaluates the role played by oligopolistic competition in influencing economic outcomes. In particular, they attack Schumpeter’s theory of dynamic competition. The MR school believes that all the changes that have occurred in US and global markets in the past century have strengthened oligopoly power, which has led to ever greater market power and ever more corespective behavior over time. It does not accept the idea that periods of market control have been interspersed with periods of fratricidal or destructive competition. Thus, there has been an uninterrupted rise in the ability of capital to cut labor costs and raise prices and increase capital's income share. While we have serious criticisms of the MR school, we think it might be productive to discuss and critically evaluate their ideas about competition. The specific pages to be read will be filled in later.

**Crotty, J. Keynes's Radical Views on the Economic Role of the State: the Centrality of Planning and Public Investment, pp. 99-116. Keynes had a good deal

to say about the problems caused by excessive competition. You can get a sample in this section.

**M. Best, The New Competition: Institutions of Industrial Restructuring (Cambridge: Harvard University Press, 1990), chs 3*, 4 & 6. This is an important discussion of modes of competition and the modern economy. Check it out. .

*C. Leathers and J. Raines, “The Schumpeterian role of financial innovations in the New Economy’s business cycle,” Cambridge Journal of Economics, 28 (5), 2004, pp. 667-81.

*R. B. McKenzie, “Monopoly: A Game Economists Love to Play – Badly!,” Southern Economic Journal, 70(4), pp. 715-730, 2004. http://www.merage.uci.edu/~mckenzie/monopoly.pdf

*G. Bertocco, “The characteristics of a monetary economy: a Keynes-Schumpeter approach,” Cambridge Journal of Economics, Vol. 32, 2007, pp. 101-122. The author attempts a partial synthesis of Keynes and Schumpeter. However, he stresses the fact that Schumpeter’s theories adopt some version of Say’s Law, noting his “full employment of productive resources assumption.”

*J. Elliot, “Marx and Schumpeter on Capitalism’s Creative Destruction,” The Quarterly Journal of Economics, 95 (1), August 1980, pp. 45-68.

R. Langlois. The Dynamics of Industrial Capitalism: Schumpeter, Chandler and the New Economy. Routledge 2007.

*F. Scherer, “Schumpeter and Plausible Capitalism,” Journal of Economic Literature, 30 (3), Sept. 1992, pp. 1416-33.

H. Hanush and A. Pyka, “Principles of Neo-Schumpeterian Economics,” Cambridge Journal of Economics, Vol. 31, 2007, pp. 275-89.

J. Schumpeter, “The Instability of Capitalism,” Economic Journal, September 1928, pp. 361-86.

R. Heilbroner, “Was Schumpeter Right After All?,” Journal of Economic Perspectives, 7 (3), Summer 1993, pp. 87-96.

E. Mason, “Schumpeter on Monopoly and the Large Firm,” Review of Economics and Statistics, 33 (2), May 1951, pp. 139-44.

C. Building Destructive Competition and Coerced Investment into a Theory of Global Neoliberal Capitalism

**J. Crotty, “Slow Growth, Destructive Competition, and Low-Road Labor Relations: A Keynes-Marx-Schumpeter Analysis of Neoliberal Globalization,” http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_1- 50/WP44.pdf (Published version: “Core Industries, Coercive Competition and the Structural Contradictions of Global Neoliberalism.” In N. Phelps and P. Raines, eds., The New Competition for Inward Investment: Companies, Institutions and Territorial Development. Northampton Massachusetts: Edward Elgar, 2003, pp.9-38.) This is an attempt to bring together ideas from Keynes, Marx and Schumpeter to bear on an analysis of the economic and financial problems and contradictions of global neoliberal capitalism around the turn of the century in 2000. The theory of destructive competition, with its offspring coerced investment and the chronic reproduction of excess capacity, is central to this analysis. You might ask yourself what I would have to change to adapt this theory tightly to today’s global conditions.

*R. Brenner. The Boom and the Bubble: The US in the World Economy (New York: Verso, 2002), Intro, chs. 1-3, 11 (chs. 4-10 analyze the recovery after mid 90s). Brenner’s work on the regime of global neoliberal capitalism received more attention from heterodox economists than any other for a number of years, though he has not gotten much attention the last few years. I include it here because he stresses his own version of ‘destructive’ competition. I have a short review of Brenner’s work in: J. Crotty, “Review of Robert Brenner’s ‘Turbulence in the World Economy,’” Challenge, 42 (3), May-June 1999, pp. 108-118. HP. Brenner updated his work in “New boom or new bubble,” New Left Review, 25, Jan/Feb 2004, pp. 57-102.

J. Crotty, “Why Do Global Markets Suffer From Chronic Excess Capacity?: Insights From Keynes, Schumpeter and Marx.” 2002, HP. (This article appeared as “Why There is Chronic Excess Capacity” in Challenge, Nov-Dec 2002, pp. 21-44.)

Reading List Part Three

V. The Effects of “Modern” Financial Markets on the Performance of Nonfinancial Corporations: What is “Financialization” Anyway?

**Gerald Epstein, Introduction, Financialization and the World Economy (Edward Elgar Press 2004).

**J.Crotty, "The Effects of Increased Product Market Competition and Changes in Financial Markets on the Performance of Nonfinancial Corporations in the Neoliberal Era," 2002. This is my attempt to integrate the product market pressures from increased competition in the NL era with the impact of evolving financial markets on nonfinancial corporate performance. Again, you might ask yourself how I would have to revise the paper - if at all - to make it consistent with events since 2001. (Then tell me how to do it.) Available at PERI website: http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_1- 50/WP44.pdf. The published version is “The Neoliberal Paradox: The Impact of

Destructive Product Market Competition and ‘Modern’ Financial Markets on Nonfinancial Corporation Performance in the Neoliberal Era.” In Gerald Epstein, editor, Financialization and the World Economy, Edward Elgar, 2005, pp. 77-110.

** William Lazonik, "Innovative Business Models and Varieties of Capitalism: Financialization of the U.S. Corporation," Business History Review, 84 (Winter 2010), pp. 675-702. This paper and the two that follow are recent analyses of the evolution of US corporations in the context of financialization by one of the most astute industrial organization theorists of our time.

** William Lazonick, “From Innovation to Finanicalization: How Shareholder Value Ideology is Destroying the US Economy,” in Wolfson and Epstein, (Handbook), pp 491-512.

**William Lazonick, “Financialization of the U.S. corporation: what has been lost , and how can it be won back?,” The Academic-Industry Research Network, October 2012. At: http://mpra.ub.uni-muenchen.de/42307/1/MPRA_paper_42307.pdf.

**Epstein and Crotty, “How big is too big? On the social efficiency of the financial sector in the United States” forthcoming in Weisskopf Festchrift Volume, 2013.

*Engelbert Stockhammer, “Financialization and the Global Economy” in Wolfson and Epstein (Handbook), pp. 512 – 526.

*Greta Krippner, “The Financialization of the American Economy,” Socio-Economic Review, Vol. 3, pp. 173-298, 2005. This is the paper that Arrighi refers to as settling all debate on the subject. It is a chapter in her new book Capitalizing on Crisis: The Political Origins of the Rise of Finance: Harvard University Press, 2011.

* K-H Lin and D. Tomaskovic, "Financialization and US Income Inequality: 1970-2008," 2011, unpublished. This paper explores both the financialization of the nonfinancial firm and the relation of financialization to the rise in inequality in the past few decades. It shows econometrically that increased dependence on financial income by nonfinancial firms decreased labor’s share of income, increased top executives capture of revenue, and increased earnings inequality among workers.

*E. Stockhammer, “The Finance Dominated Accumulation regime, income distribution and the present crisis,’ Vienna University of Economics and Business Administration, Department of Economics Working Paper Series No. 127, April 2009, http://www.wu.ac.at/inst/vw1/papers/wu-wp127.pdf. This is a brief overview of some of the key issues and questions in this literature (Engelbert Stockhammer is a UMASS Amherst Ph. D.)

O. Onaran, E. Stockhammer, and L. Grafi, "Financialization, income distribution and aggregate demand in the USA," Cambridge Journal of Economics, Sept. 2011, 637-61. The paper evaluates the effects of financialization on AD in the US. Mostly econometric.

Concludes that it was on balance neutral, but has left the economy in bad shape, with a likely slowdown in AD in the future.

*Jerry Epstein, editor. Financialization and the World Economy (Edward Elgar Press 2004).

*Froud, J., Johal, Leaver, A. and Williams, K. (2006) Strategy and Financialisation: Narratives and Numbers (London: Routledge). Julie Froud and her various co-authors are a collection of post-modern Marxist accountants and professors of business who teach in British universities. As you can see below, they have written many articles on the financialization of non-financial firms. This book is their latest effort. It is well worth reading if you have a serious interest in this general topic.

*Ozgur Orhangazi. (2008) Financialization and the US Economy (Northampton: Edward Elgar). This is our good friend’s full dissertation. It contains the material in his CJE article above, but much else as well.

Photis Lysandrou, "Globalisation as commodification" (September 2005). Cambridge Journal of Economics, Vol. 29, Issue 5, pp. 769-797. This is a provocative paper offering one kind of Marxist analysis of why financialization on a global scale took place when it did, and why the globalization of finance and ‘shareholder’ capitalism was an essential step in forcing an ever increasing percent of the world’s economies to reorganize themselves to resemble the US’s economic structure and logic. The article is a bit too determinist for my taste, sees necessity at key junctures where I see contingency, and strangely asserts that financialization forces all financial and nonfinancial firms to become ‘transparent’ – did he miss the Enron-type scandals of the late 1990s? – but it is well worth reading and thinking about.

Froud, Julie, Colin Haslim, Sukhdev Johal and Karel Williams, “Cars After Financialization: A Case Study in Financial Underperformance, Constraints and Consequences,” Competition and Change, 7 (1), pp. 13-41. This is the only industry case study of the causes and consequences of financialization and globalization that I have come across.

I. Erturk, J. Froud, S. Johal and K. Williams, “Corporate governance and disappointment,” Review of International Political Economy, 11(4), 2004, 677-713. This paper has interesting things to say about a number of things, the issue of a new class alliance in NLR and role of agency theory and ideology in cementing NL ideas about relation between corporate capitalism and society.

Froud, Julie, Colin Haslim, Sukhdev Johal and Karel Williams, “Shareholder value and financialization: consultancy promises, management moves,” Economy and Society, February 2000, 29 (1), 80-110. Note: all articles from Economy and Society are available on line through the library.

Boyer, Robert, “Is a finance-led growth regime a viable alterative to Fordism? A preliminary analysis,” Economy and Society, February 2000, 29 (1), 111-45. This article discusses the changes in the regulationist model that Boyer thinks necessary to take account of the increasing dominance of financial markets in the determination of the laws of motion of current-day capitalism. He also presents a formal model that incorporates his ideas, though I think the ideas themselves are more interesting than the model.

Lazonick, William and Mary O’Sullivan, “Organization, Finance and International Competition,” Industrial and Corporate Change, 5 (1), 1996, 1-49.

Lazonick, William and Mary O’Sullivan, “Maximizing shareholder value: a new ideology for corporate governance,” Economy and Society, February 2000, 29 (1), 13-35.

Aglietta, Mischel, “Shareholder value and corporate governance: some tricky questions,”Economy and Society, February 2000, 29 (1), 146-59.

Aglietta, Mishel and Regis Breton, “Financial systems, corporate control and capital accumulation,” Economy and Society, November 2001, 30 (1), 433-66.

Part III

The Rise of Finance Capital and the Current Global Economic and Financial Crisis (Since the literature on this topic is exploding, please send us references to any really good articles you come across.)

An Historical Overview

Charles Kindleberger, Manias, Panics and Crashes: A History of Financial Crises (Wiley: 1979). This is the most widely read history of financial market booms and busts. It’s a great read.

John Kenneth Galbraith, The Great Crash of 1929 (Penguin 1961). The most widely read history of the financial collapse of 1929-33.

Reinhart, Carmen and Kenneth Roggoff, “This Time is Different: A Panoramic View of Eight Centuries of Financial Crisis,” NBER Working Paper No. 13882, 2008. This is a widely cited source on the history of financial crises since the 19th century.

G. Arrighi, The Long Twentieth Century (Verso Press, 1994). Arrighi’s thesis that the rise of finance in the twilight of American hegemony is not the onset of a new social structure of accumulation, but rather a phase in a historical progression of the rise and fall of empires, has been very influential.

Gerard Dumenil and Dominique Levy. Their latest book on the global economic and financial crisis is The Crisis of Neoliberalism, Harvard U Press 2011. It presents a fairly

simple theoretical framework analytical model Capital Resurgent: Roots of the neoliberal model. Cambridge: Harvard University Press, 2004. This book attempts to tell a coherent story about how and why the Golden Age ended and was replaced by the NL era from a traditional Marxist macro economic perspective. It also explains what role evolving financial markets played in this story, again from a broad macro perspective. See also their latest book.

Causes of the Current Financial and Economic Crisis (There is an exploding literature on the causes and consequences of the financial crisis and on the adequacy of the government’s response to the crisis in the US and elsewhere. The readings here are merely representative of this burgeoning literature. We begin with articles on financial aspects of the crisis and move to articles that root the global crisis in long-standing contradictions in the real sector.)

Articles that Emphasize the Financial Sector

(Several of the articles below are from the newly published edited book: Martin Wolfson and Gerald Epstein, eds. 2013. The Handbook of The Political Economy of Financial Crises. Oxford: Oxford University Press. (Handbook).

** Gerald Epstein and Martin Wolfson, 2013. Introduction. (Handbook), pp. 1 – 16.

**J. Crotty (2008). “Structural Causes of the Global Financial Crises: A Critical Assessment of the ‘New Financial Architecture,’” August. Available at PERI web site: http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_151- 200/WP180.pdf. This paper is about the causes of the financial crisis within the financial system itself. It is fairly detailed and should be of special interest to those of you who have not followed developments in financial markets closely. I received a lot of positive feedback on this paper. A shorter version appears in the Cambridge Journal of Economics, Vol. 33, No. 4, July 2009, pp. 563-580.

**J. Crotty (2010). “The Bonus-Driven “Rainmaker” Financial Firm: How These Firms Enrich Top Employees, Destroy Shareholder Value and Create Systemic Financial Instability,” August. Available as Economics Department Working Paper at : http://www.umass.edu/economics/publications/2009-13.pdf. This paper demonstrates how the bonus-system used on Wall Street provides rational incentives to key personnel to create bubbles that inevitably end in crashes. These “perverse incentives” were a major cause of the global financial crisis - and yet they do not appear in any major theory of financial markets, not in Marx or Keynes or Minsky. It may be difficult to cut financial instability in the future unless this system is changed.

**J. Crotty and Gerald Epstein (2009). “Avoiding Another Meltdown,” Challenge, Vol. 53, No. 1, January-February 2009, pp. 1- 26. The second half of this article is a list of suggested changes in financial market regulation to help prevent future financial catastrophes. (We did not expect our program to be implemented.)

** Marc Jarsulic, “The Origins of the US Financial Crisis of 2007: How a House-Price Bubble, A Credit Bubble and Regulatory Failure Caused the Greatest Economic Disaster Since The Great Depression”, in (Handbook, pp.21 – 46).

**J. Crotty (2007). “If Financial Market Competition is So Intense, Why are Financial Firm Profits So High?: Reflections of the Current ‘Golden Age’ of Finance,” May. This paper was written in late 2006 for a conference in London in February 2007. It attempts to explain why financial firms were so profitable and financial markets so explosive. It concluded in late 2006 that a systemic crisis was likely – how cool is that!  Available at PERI website: http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_101- 150/WP134.pdf. Published version is: "If Financial Market Competition is Intense, Why are Financial Firm Profits so High? Reflections on the Current 'Golden Age' of Finance," Competition and Change, Vol. 12, No. 2, June 2008, pp. 167-83.

**Gerald Epstein and Pierre Habbard. 2013. “Speculation and Sovereign Debt: An Insidious Interaction,” in (Handbook), pp. 326 -357.

**Michael Greenberger, “Derivatives in the Crisis and Financial Reform”, in (Handbook), pp. 467 – 491.

**Damon Silvers, “Deregulation and the New Financial Architecture”, in (Handbook), pp. 430 – 447.

**Wray, Randall (2008). “Financial Market Meltdown: What Can We Learn From Minsky?,” Levy Institute, Public Policy Brief No. 94, April. The analysis of the crisis is on pages 6 through 28, the conclusion is on pages 35-37. Policy suggestions occupy the space between. Available at: http://www.levy.org/pubs/ppb_94.pdf.

*Tomaskovic and Kin, “Income Dynamics, Economic Rents, and the Financialization of the US Economy,” American Sociological Review, 76(4), pp. 538-99, 2011. This paper analyses the institutional and income dynamics associated with the financialization of the US economy since the 1970s. It estimates that around $6 trillion was transferred to the financial sector since 1980 and argues that explaining rising inequality requires a study of both market institutions and politics. It is a useful complement to Crotty 2010. At http://asr.sagepub.com/content/76/4/538.full.pdf+html.

**London School of Economics (July 2010). The Future of Finance: The LSE Report. Available at: http://www.financialregulationforum.com/wpmember/book- choice-the-future-of-finance-the-lse-report-4722/. This book has many interesting chapters. Two authors in particular have written many interesting articles on the crisis, its effects on the real sector, and what should be done to regulate financial markets: See especially Adair Turner's chapter Chapter 1: What do banks do? Why do credit booms and busts occur and what can public policy do about it? at http://harr123et.files.wordpress.com/2010/07/futureoffinance-chapter11.pdf. It has loads of interesting data on the evolution of financial markets over recent decades. I highly

18 recommend it. See also Andrew Haldane's chapter Chapter 2: What is the contribution of the financial sector: Miracle or mirage? at http://harr123et.files.wordpress.com/2010/07/futureoffinance-chapter21.pdf.

*Viral Acharya, Thomas Philippon, Matthew Richardson and Nouriel Roubini. “A Bird’s Eye View,” Prologue to: The Financial Crisis of 2007-2009: Causes and Remedies. This is a forthcoming book by well-known financial economists at the Stearn School at New York University. The prologue is a very detailed chronology of the lead up to and onset of the financial crisis packed with useful data. If you want to write about financial aspects of the financial crisis, this is an excellent source. Available at : http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0416.2009.00147_2.x/pdf .

*Wray, Randall (2009) “The rise and fall of money manager capitalism: a Minskian approach,” Cambridge Journal of Economics, Vol. 33, No. 4, pp. 807-28, July.

Wray, Randall (2010). “The Global Financial Crisis and the Shift to Shadow Banking,” Levy Institute Working Paper No. 587.

Wray, Randall (2011). "Waiting for the Next Crash: The Minskyan Lessons We Failed to Learn," Levy Institute, Public Policy Brief No. 120. This is a short analysis of the causes of the financial crisis and some policy suggestions.

Ocampo, Jose Antonio (2009). “Latin America and the global financial crisis,” Cambridge Journal of Economics, Vol. 33, No. 4, pp. 703-24. There is a growing literature on the effects of the global economic and financial crisis on developing countries. This is just a sample selection.

Publications with More Emphasis on the Real Sector

**Dumenil, Gerard and Dominique Levy (2011). "Neoliberalism and its crisis." At http://www.jourdan.ens.fr/levy/dle2011l.pdf. This is a broad overview of D&L's analysis of the severe crisis of the neoliberal global capitalist regime

**Dumenil and Levy (2011). The Crisis of Neoliberalism, Harvard U Press (2011). This is the full statement of their theory of the development of the evolution of the current crisis of global capitalism that is the basis of the previous entry. It uses a fairly simple general theoretical framework within which to explain the main forces that created and reproduce the crisis.

**Kotz, David. (2011). "The Current Crisis in the US: A Crisis of Over-Investment. David argues that the current crisis, unlike some earlier crises, was not preceded by a decline in the profit rate. He defends the proposition that it was caused by "over- investment" or the creation of too much capital relative to a sustainable level of demand, in which crisis breaks out when demand, stimulated by excessive debt, declines. See if

you can find any coercive competition threads in the argument. I see them even when others don't.

** Kotz, David (2009). “The Financial and Economic Crisis of 2008: A Systemic Crisis of Neoliberal Capitalism,” Review of Radical Political Economics, Volume 41, No. 3, Summer, 305-317. This is longer run view of the contradictions that led to the current global crisis as seen through the perspective of Social Structure of Accumulation theory. The emphasis is on real sector problems. Available at: http://rrp.sagepub.com/content/41/3/305.full.pdf+html.

**Crotty, James (2011). “The Great Austerity War: What Caused the US Debt Crisis and Who Should Pay to Fix It.” At: http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_251- 300/WP260_revised.pdf. This paper sees the current austerity drive as the culmination of right-wing efforts to destroy America’s weak version of social democracy that began in the 1930s and are on the verge of success today. It traces the history of, and discusses the causes of, rising US fiscal deficits since 1980. The Republican and Democratic Party approaches to solving the deficit problem are outlined and alternative progressive policies are put forth.

Macroeconomic Policy Institute, “From the financial crisis to the world economic crisis: The Role of Inequality,” October 2009. At: http://www.feps- europe.eu/fileadmin/downloads/political_economy/0910_FEPS_IMK.pdf. The authors include your classmate Simon Sturn. Like Palma’s paper above, this paper puts rising inequality at the center of factors contributing to the current global crisis. [For a quick check on US inequality data, see G. William Domhoff, “Wealth, Income and Power,” http://www2.ucsc.edu/whorulesamerica/power/wealth.html]

*Brenner, Robert (2009). “What is good for Goldman Sachs is good for America: The origins of the current crisis.” This is the prologue to a Spanish edition of his much discussed 2006 book on the global neoliberal economy titled “The Economics of Global Turbulence.” It is to some extent a summary of the arguments in his book, but is useful here because it puts forth a forceful claim (all Robert’s claims are forceful) that the current financial crisis is rooted in deep structural problems in the real global economy that have existed for decades. Available at: http://www.sscnet.ucla.edu/issr/cstch/papers/BrennerCrisisTodayOctober2009.pdf

* Basu and Vasudevan, “Technology, Distribution and the Rate of Profit in the US Economy: Understanding the Current Crisis” (2011). At: http://people.umass.edu/dbasu/BasuVasudevanCrisis0811.pdf. This is an ambitious paper that discusses various Marxian theories of crisis, undertakes a wide ranging review of data on key variables in these theories, and draws conclusion from theory and data about the causes of the current crisis.

**Palma, Jose Gabriel (2009). “The revenge of the market on the rentiers. Why neoliberal reports of the end of history turned out to be premature,” Cambridge Journal of

Economics, Vol. 33, No. 4, pp. 829-69, July. This paper does not limit itself to financial market causes of the crisis and it focuses heavily on rising inequality as a major cause of the financial crisis. This is a recurrent theme on the left.

*Ozgur Orhangazi, ""Financial" vs. "Real": An Overview of the Contradictory Role of Finance," at http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_251- 300/WP274.pdf. This is Ozgur's first attempt to integrate real-sector financial-sector interaction in a theory of the global crisis.

Perez, Carlotta (2009). “The double bubble at the turn of the century: technological roots and structural implications,” Cambridge Journal of Economics, Vol. 33, No. 4, pp. 779- 805, July. Carlotta Perez is a well known writer on long-run technical change who is strongly influenced by Schumpeter. This essay is interesting in that it tries to integrate the internet boom at the end of the 1990s with the recent financial crisis.

Books on the Financial Crisis Many, many general-audience books have been written recently about financial aspects of the crisis. These are just a few of them. You should sample a few chapters if you are interested in or want to write about the financial crisis.

**Martin Wolfson and Gerald Epstein, eds. The Handbook of The Political Economy of Financial Crises. Oxford: Oxford University Press, 2013.

**Marc Jarsulic. 2013. Anatomy of a Financial Crisis; A Real Estate Bubble, Runaway Credit Markets and Regulatory Failure. Palgrave-MacMillan.

*Simon Johnson and James Kwak (2010). 13 Bankers. Pantheon Press.

*Yves Smith (2010). E-conned: How Unenlightened Self Interest Damaged Democracy and Corrupted Capitalism. Palgrave.

*Nomi Prins (2009). It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street. Wiley.

*Michael Lewis (2010). The Big Short, W.W Norton. A marvelous book that explains in clear terms how Wall Street sharpies innovated their way into huge fortunes for bank rainmakers and crashed the global economy in the process. Lewis is a superb writer whose book Liar's Poker about the beginning of the investment bank carnage was a hilarious best seller.

Noriel Roubini and Stephen Mihm (2010). Crisis Economics: A Crash Course in the Future of Finance. The Penguin Press.

Robert Kuttner (2010). A Presidency in Peril: The Inside Story of Obama’s Promise, Wall Street’s Power, and the Struggle to Control our Economic Future. Chelsea Green.

Carmen Reinhart and Kenneth Rogoff (2010). This Time is Different: Eight Centuries of Financial Folly. Princeton University Press.

Joseph Stiglitz (2010). Freefall: America, Free Markets, and the Sinking of the World Economy. W.W Norton.

Sheila Bair, Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself. New York: Free Press, 2012.