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The 21st-Century Case for a Managed Economy: The role of disequilibrium, feedback loops and scientific method in post-crash economics

Book Description

This book argues that the scientific concept of feedback - the idea that change in some element of a system can cause further change in that element - represents a general concept of economic change. Positive feedback causes runaway change, such as a market bubble, inflation or long-run growth, while negative feedback causes stability and stasis. Emphasising both kinds of feedback stands in contrast to the equilibrium theories of classical economics which, in effect, emphasise negative feedback only. In practical terms, the feedback perspective implies a need for extensive government involvement in the economy to suppress undesirable feedback effects - such as those causing wild instability or self-perpetuating inequality - while supporting desirable feedback effects - such as those causing economic growth. -------------------- For decades, free-market economists have told a consistent story. Markets are rational, efficient, stable and fair, and even volatile financial markets should be left mostly to their own devices. The economic crisis that began in 2007 has, however, disproven such belief in the perfection of markets. The reason market fundamentalism fails is simple: it is built on economic theories that incorporate only one half of how the economy actually operates. These theories focus on a concept of long-run equilibrium that sees the economy as being continually drawn back to balance after any change from this position, in a form of what scientists would call negative feedback. However, there is also positive feedback; a process whereby a given change amplifies itself until the system is driven far from equilibrium, and this phenomenon is equally visible in the economy. Positive feedback drives economic growth, speculative bubbles, inflation, recessions, deflation and self-perpetuating inequality. It is what gives us the secular trends and cyclical fluctuations we observe in the real economy. And it deserves to be a central part of our economic theory. This book makes a first attempt at applying the concept of feedback to economic theory and economic policy. It recognises that the state must support desirable feedbacks while suppressing undesirable ones. But it also recognises that central planning leads to oppression and inefficiency. This leads us back to the common-sense idea of a mixed economic system in which the role of the state is almost as great as that of the market.

Table of Contents

  1. Cover
  2. Publishing details
  3. About the Author
  4. Acknowledgements
  5. Preface
    1. Long-run equilibrium
    2. Disequilibrium and the logic of feedback
    3. Replacing a blinkered view
    4. The necessity of a mixed economy
  6. Part One: Foundations
    1. 1. Introduction: Disequilibrium and the Logic of Feedback
      1. Equilibrium Theory and its Limitations
      2. Introducing Feedback
      3. The Inescapable Logic of Feedback
      4. Further Aspects of Economic Feedback
      5. Animal spirits
      6. A Broader Keynesianism
    2. 2. From the Old to the New
      1. Mainsprings of the Classical Theory
      2. Abuse of mathematics
      3. Relaxing standards to preserve the theory
      4. A closed intellectual universe
      5. Points of Agreement
      6. Building a Better Theory: Feedback and Allied Ideas
      7. The Scientific Method
      8. Behavioural and Institutional Foundations
      9. Institutions – behavioural patterns and building blocks
      10. Microfoundations
      11. Some recent advances in behavioural economics
      12. A molecular basis for market movements?
      13. Systems Theory
      14. No thermodynamic equilibrium
      15. Tipping points
      16. Sensitivity to initial conditions
      17. Self-organisation
      18. More exotic ideas
      19. Testing Our Theories
      20. Micro-level predictions
      21. Getting the Numbers Right
      22. How much math is the right amount?
  7. Part Two: Feedback in Action
    1. 3. The Business Cycle: How Feedback Drives Economic Volatility
      1. The Credit-Asset Cycle
      2. The ubiquity of the cycle
      3. Intensifying the cycle
      4. International effects on the cycle
      5. Sovereign and corporate bonds: exceptions but not invulnerable
      6. Inefficient market hypothesis
      7. Cycles in Prices, Output and Jobs
      8. Cycles in Commodity Prices
      9. Self-sustaining bubbles
      10. The role of the wholesale buyers
      11. Price bubbles without inventory movement
      12. Commodities’ susceptibility to bubbles
      13. Futures markets
      14. Futures markets and commodity bubbles
      15. And in reverse…
      16. Special characteristics of commodity bubbles
      17. The human and economic impact
      18. Explaining Boom and Bust
      19. Inventory in a recession
    2. 4. Depression and Hyperinflation: Extreme Examples of Feedback
      1. Falling Off a Cliff
      2. Disaster strikes when you least expect it…
      3. When Banks Have No Money
      4. CDOs and CDSs – infectious uncertainty
      5. What constitutes a bank
      6. When Money is Worth Nothing
      7. Rolling Recession
      8. A mild recession or a deep slump?
    3. 5. Two Modern Crises as Feedback Loops
      1. The Emerging Markets Crisis, 1997-2002
      2. The Global Credit Crisis and Recession, 2007-2009
  8. Part Three: Policy
    1. 6. Counter-Cyclical Policy
      1. Control of the Currency
      2. Setting the Rules
      3. The Public Purse
      4. Saving the Banks
      5. Prevention is Better Than Cure
    2. 7. The Limitations of Counter-Cyclical Policy
      1. Delayed Effects
      2. Liquidity Traps
      3. Enforcing the Rules
      4. Moral Hazard
      5. A Policy Philosophy
      6. A Stabilisation Strategy
    3. 8. Counter-Cyclical Policy in a Globalised World
      1. The Agonies of the Poor
      2. Problems of Rich and Poor
      3. Currency Exchange: Help and Hindrance
    4. 9. Harmful Effects of Counter-Cyclical Policy
      1. Drowning in Red Tape
      2. Too Much Money
      3. Exchange-rate Challenges
      4. Reckless Spending
      5. The Temptation to Protect
      6. Laissez-faire is Still Wrong
    5. 10. Growth and Inequality as Feedback Processes
      1. Explaining Growth
      2. Explaining Inequality
      3. Social Democracy: a Coherent Package
    6. 11. Conclusion: The Need for Change
      1. The Feedback Perspective and its Implications for Policy
      2. Ethical Imperatives