Syllabus

Fall 2011
Monday, Wednesday and Friday, 8:00-9:00am, JES A121A
Professor Harry Cleaver
Office: BRB 3.162
Office Hours: T:8:00-10:00am, MW:10:00-11:00am, BRB 3.162

Teaching Assistants:
TBA, office hours: TBA
TBA, office hours: TBA
TBA, office hours: TBA.

Warning: This syllabus is currently undergoing revision.

Overview

After this historical overview - designed to both motivate and situate the study of economic theory - the course turns to a detailed exploration of macroeconomic theory and its development over the last 50 years. We study the long dominant Keynesian model of the macroeconomy with its emphasis on employment and output, its crisis in the late 1960s and early 1970s, the rise of monetarist alternatives, the elaboration of aggregate supply and demand models that highlight prices instead of employment, the surge of supply-side and rational expectations economics during the first Reagan administration and the continuing debates among economists over the merits and problems of the various theoretical approaches. As this list might suggest, there is little consensus among economists over economic theory at this point in history. The long prominent Keynesian concensus of the profession has been largely, but by no means entirely, replaced by neoliberalism - a market worshiping ideology that has been wielded against labor, government regulation and the various programs of the "welfare state" that have cushioned economic change for the poor and middle class. On-going debates between neoliberals and neo-Keynesians require students to understand the arguments mobilized by both sides and decide which ones make the most sense. The course design is aimed a facilitating this process by putting the developments within an historical and political framework.

Basically students are required to 1) understand and be able to explain various assigned texts, 2) understand and be able to explain the lectures (which include critical commentary on those texts) and 3) develop their own views on the material covered and be able to articulate the reasoning behind their acceptance of some positions and their rejection of others.

Study Resources

The reasons for not ordering any textbook are the following: first, because I disagree with the usual textbook manner of discussing macroeconomic theory (and macro textbooks are all very similar) I have long organized my lectures quite differently. As you will discover, because I believe that theory should be, indeed can only be, understood within the historical context in which it was formulated, my lectures are organized accordingly. In other words, I present macroeconomics as it evolved in the last half century or so. As a result whichever textbook I might choose for students merely provides some material covering a smaller set of the same ideas that I present in lectures. That smaller set consists mainly of a-historical explanations of various aspects of the theory as it is usually presented today. Therefore, I have, in the past, assigned material from the text according to my own logic of dealing with the issues at hand.

This is a skill you would do well to learn: how to appropriate material for your own uses and not simply follow others' logics - including mine. As you work your way through the material of the course, you should be constantly reorganizing what you are learning in ways that make sense to you and fit in with what you already know. If you simply memorize some book's material, or my presentation, you will not be appropriating the material in any meaningful way. Your knowledge of it will disappear soon after the last test and you will have largely wasted your time (and mine!).

Second, every macroeconomic textbook I have examined is ridiculously expensive and while I do recommend that you obtain a copy for the vast amount of information it obtains, most of what you will need to focus on will be presented in lectures and in other assigned materials (generally made available through this webpage). Personally, I used, kept and repeatedly reused - for many years - the introductory textbook that was assigned in my first economics course precisely because it served as a useful reference book, either for things I had "learned" and forgotten, or for things I never studied the first time around. Virtually all such textbooks contain far more material than it is possible to cover in any one semester course.

Because the presentation of macroeconomic theory in this course is historical, the odds have it - given the usually pathetic quality of the American and world history courses you are likely to have encountered - that you will frequently need to look up and add to your knowledge of specific historical periods, phenomena, people, events and so on in order to better understand the theory, its genesis and its use. I encourage you to do so. These days the Internet makes this very easy although all the usual admonitions about being critical in your research apply.

It is highly recommended that you read and study the material assigned before attending the lectures on that material because lectures will be structured on the assumption that you have done so. A course outline is provided below so that you will know what material will be covered when. Ad hoc additions or changes will be announced in class and on Blackboard. Blackboard also provides discussion forums - places where you can discuss the material among yourselves and/or with me. If you feel more comfortable asking questions there rather than in class please feel free to do so, and to answer others' questions.

Along with weekly lectures, you also have the possibility of making use of my office hours to ask questions and discuss the material covered in the book or in class. The Learning Skills Center, in Jester A332, has resources available to you specifically designed for introductory economics courses.

Grading

The tests are not cumulative in the sense that questions in later tests will not duplicate those in earlier tests, but they are cumulative in the sense that later material usually builds on earlier material. Therefore, there is no "final" exam in the usual sense. The first test covers the first third of the material; the second test covers the second third; the last test covers the last third and will be given during final exam week. The final score will be based on weighing each of the tests almost equally, i.e.., final grade = .333(firsttestscore) + .333(secondtestscore) + .334(thirdtestscore). The final distribution of averaged numerical grades will be divided into letter grade categories. I take account of systematic improvement in test scores and sometimes it can result in a higher letter grade than would otherwise be the case.

NB: Students with disabilities may request appropriate academic accomodations from the Division of Diversity and Community Engagement, Services for Students with Disabilities, 471-6259.

Course Outline (currently being revised)

What is Economics?

Cleaver packet: Chapter 1: "The Definition of Economics" + lectures + slides.

If you have obtained a copy of some "Introduction to Economics" textbook, you will discover that the opening chapters almost always deal with this issue of the nature of economics, e.g., Chapters 1 & 2 of Case, Fair & Oster. Something similar is true of introductory textbooks in the other social sciences as the authors seek to differentiate their "discipline" from others. If you are interested in understanding the world around you, however, recognizing the lines that divide "disciplines" will give you an idea of exactly what is missing in each of them and where else you may need to look to discover what you need for understanding.

Variations in Capitalist Economies

Cleaver slides & lectures.

During the Cold War virtually every introductory economics textbook included one or more chapters on what was called "comparative economic systems". The focus was on differentiating "Western" capitalism (euphemistically called "the free world" - a term that usually included not only the wealthy countries of Europe, North America and Japan but also those of the often impoverished "Third World") from Soviet-style "socialism" and the key factor was always the relative roles of the "market" and "planning." Because, however, "planning" was actually widespread in the "West" such chapters also dealt with various intermediary "mixed economies" such as France that had what it called "indicative planning" or India that actually had "five year plans". In general the object of such analysis was to valorize the efficiency of markets and critique that of planning, although economists did recognize the existence of market failures and the need for some government intervention to avoid or offset the difficulties they caused. Since the end of the Cold War, however, comparative systems has been largely reduced to the study of spread of markets and pro-market policies in formerly "socialist" nation states.

The Market

Given the centrality of markets to capitalism, every introductory textbook includes a discussion of what are generally viewed as the basic components of most markets: demand, supply and the dynamics of market "equilibrium". Introductory textbooks usually provide the basic concepts, usually illustrated with graphs, while intermediary microeconomics textbooks provide a more in-depth discussion, often in terms of the mathematics behind the graphs. E.g., chapter 3 in Case, Fair & Oster.

Growth and Accumulation, a Theoretical and Historical Overview

Cleaver packet: Chapter 2, "Growth" + slides & lectures.

The most general long term characteristic of the macro-economy and policy goal of capitalist policy makers is "growth". Growth is generally defined as an increase in total marketed output - in other words, the sum of all goods and services that are produced and sold. There are various measures of output, such as gross (or net) national or domestic product. Total output may rise or fall over the years - in what is sometimes called "the business cycle" but there has been a long-term secular increase, i.e., growth. Not surprisingly, theories of growth have long been a part of economics and have been developed with a view to providing guidence to policy makers desirous of stimulaing growth. As a result they have been primarily concerned with the "how" of growth - what needs to happen for it to occur or be accelerated - rather than the "why" which was assumed to be a natural and desirable outgrowth of market forces. Although critiques of growth have been voiced from the margins of capitalist society throughout its existence, those voices became more widespread and more insistent in the late 20th Century with the emergence of the environmental movement and concerns about persistent poverty. The former movement's preoccupation with the ecological degredation brought about by growth and an understanding of the impossibility of spreading "developed world" levels of consumption and resource use to the billions of poor throughout the world resulted in a questioning of both its limits and its desirability.

As a general rule, there is, today, very little discussion of either growth models or of the desirability of growth in contemporary macroeconomic textbooks. There usually is, however, some discussion of the "sustainability" of growth because of the environmentalist critique, e.g., Case, Fair & Oster, chapter 17 on Long-term Growth.

Classical Economic Crises

Cleaver packet: Chapter 3 "Economic Crises Before the Great Depression" + slides + lectures

Long before the Great Depression of the 1930s, periodic downturns in the level of economic activity had become commonplace. Such downturns included not only falling production but collapses in commerce and financial panics. But as each downturn was followed by an upswing and the secular trend was generally that of growth, the term "crisis" came to be replaced by the term "business cycle". There were endless debates over these crises, or cycles, beginning with a famous one between the two classical economists David Ricardo and Thomas Malthus, with the former arguing generalized crises were impossible and the latter arguing not only that they were possible but were becoming all too commmon. By the time of Great Depression the existence of crises or downturns were widely recognized and either they were accepted as a generalized pattern of "market corrections" or economists sought to explain "why" they happened.

The Great Depression and Keynesianism

Cleaver Packet: Chapter 4: "The Great Depression and the Keynesian Solution" + lectures + slides.

At first the Great Depression, seemed to be following a familiar pattern: a financial crisis (the "Crash" of 1929) and a generalized downturn in the economy. But unlike previous downturns this one persisted; no automatic "market correction" was forthcoming and most of the policy advice offered by economists was either unhelpful or counterproductive. Moreover, the "downturn" became more and more of a "crisis" as high unemployment led not only to poverty bbut to widespread social unrest and protest. Within mass production industry, workers fought for shorter hours to "spread the work" to their out-of-work bretheren and the latter marched for some form of income to ward off suffering and starvation.

This combination of a non-self-correcting downturn and widespread unrest led to two important changes: the rise of Keynesian macroeconomics and the adoption of national economic policies either consistent with or, later, inspired by his new theories. Those theories and policies essentially accepted the widespread social demands that capitalist development be wrapped around rising wages and standards of living and led to a quarter century of unparalleled growth and development in the years following World War II. Despite some changes, contemporary macroeconomics still depends upon some of the basic concepts elaborated during that period.

FIRST TEST:September 28, 2010.

In this section I will be presenting the theory in lectures, using slides to illustrate the concepts involved. In the absence of a textbook you would do well to attend class with copies of the slides in hand and be prepared to ask for any clarifications you need to understand the material.

Income Determination, Private Sector

Lectures + slides

The bulk of the economy is the private sector - the domain of production, distribution and consumption - and it was central to the changes in economic theory introduced by Keynes. Fundamental to his work was a shift in focus on wages from cost (the preoccupation of most businesses) to demand. Although capitalists manage production - imposing work and extracting a surplus to reinvest - the major source of demand for their output - and therefore the major stimulus to invest in order to expand their productive capacity - comes from consumers. So Keynes developed a theory of consumer demand whose growth he saw to be an essential stimulus to investment. As wages grew, consumer demand grew and as consumer demand grew investment grew to meet that demand. Growth in the private sector, therefore, could be organized around growing wages if only business would stop trying to reduce wages and respond positively to a growing demand for its products.

In the macroeconomy, Keynes argued, equilibrium would only exist when aggregate production matched aggregate demand. Ideally, that equilibrium would be constantly shifting as both production (supply) and wages/consumption rose in the process of economic growth. Unfortunately, as the Great Depression demonstrated, equilibrium could also exist in conditions of stagnant wages and business reluctance to invest.

Income Determination, Adding Government and the World

Lectures + slides

Although the private sector constitutes the largest part of the economy, consumption and investment demand are not the only sources of demand for the commodities produced by labor under the direction of business. Two other significant sources of demand are government and foreign demand for exports.For Keynes, long an economic advisor to the British government, the most significant of these two was government because it had the power to affect aggregate demand through changes in its own expenditures and tax policies. This was especially important during periods of depression when the failure of the private sector to expand could be both offset and stimulated by an expansion of government expenditures and perhaps a reduction in taxes. In other words, if the private sector was mired in an equilibrium situation of high unemployment, stagnant wages and investment, expanding government expenditures, or reduced taxes, could stimulate business investment, hiring, wage growth and pull the private sector back into growth. To some degree the government could also enact policies to stimulate foreign demand as well, although that was primarily determined by patterns of growth in foreign economies. In periods of growth, as opposed to depression, the government could also intervene in the economy to facilitate the growth of wages, profits, investment and overall economic activity.

Income Determination: Monetary Policy

The manipulation of government expenditures and taxation, however, are not the only tools at the disposal of governments to stimulate or manage the economy. By the early 20th Century the United States government, like those in many other countries, was able to manipulate - to some degree - the quantity of money in the economy and through that manipulation affect the behavior not only of the financial sector but of consumption and investment as well. Not only did governments monopolize the minting and printing of coin and paper currency, but central banks, e.g., the Federal Reserve in the United States, or the Bank of England, could manipulate the supply of credit money as well. Keynes, therefore, also elaborated a theory of the monetary side of the economy and its interactions with the "real" economy that provided some policy guidelines about how and when government control over the amount of money in the system could used effectively to manage the overall economy. Given that he believed the supply of money could largely be controlled by monetary policy, his theoretical innovations primarily concerned the private sector and its behavior in relation to conditions in the monetary or financial sector, e.g., interest rates.

Derivation of IS-LM Model

Lectures + slides

Up to this point I have been elucidating Keynesian macro theory using tools very similar to those he introduced in the 1930s. As his ideas spread, however, they were both critiqued and reformulated by many influencial economists. Some of those innovative reformulations became standard tools for macroeconomists weilding Keynesian ideas to come up with government policies to manage the economy in decades following World War II. One of the most important of those reformulations was that of a model developed by John Hicks who, in what became a famous article titled "Mr. Keynes and the Classics: A Suggested Interpretation", laid out an alternative formulation that not only permited a comparison of Keyne's ideas with those of his predecessors but overcame certain limitations to Keynes' own formulation. Despite certain limitations of its own, e.g., its failure to take into account uncertainty - a central issue for Keynes, his new model came to be widely used.

The Collapse of Keynesianism

Cleaver packet: Chapter 5, "The Crisis of the Keynesian Era" + lectures + slides

Although the Keynesian era proved to be a golden one for capitalism - at least in the highly developed countries - it was thrown into crisis in the late 1960s by a confluence of trends that undercut some of its basic assumptions and by so doing rendered some of its policy solutions ineffective. This confluence occurred both within countries where Keynesian policies had been dominant and in the international relationship among such countries. At the heart of these trends was a inability to adapt to changing desires and needs that rendered the social compact upon which Keynesianism had been based - the trade off of rising wages for collaboration in capitalist investment and growth - inadequate to maintaining social peace. The result was a rupture of the deals upon which economic growth had been based and a resulting accceleration in inflation that undercut inflation and proved impossible for Keynesian macro policies to manage. Behind that rupture, moreover, lay a whole series of other social conflicts that could also no longer be managed within a Keynesian framework. The result of all this was a two-fold crisis: of Keynesian policies and of Keynesian theory that would open the way for other, alternative economic theories and policies to displace existing ones.

SECOND TEST

"Inflation": Problem or Solution?

While the crisis of the Keynesian approach to managing the macroeconomy was manifested in the acceleration of infation that began in the late 1960s and accelerated into the 1970s, this didn't prevent policy makers from trying to make use of inflation to undercut what many thought to be its primary source: accelerating real wages that raised business costs and forced it to raise prices to defend its profits. Those price increases, ceteris paribus, reduced real wages so when oil prices quadrupled in the wake of the 7-Day War between Israel and the Arab states, some policy makers saw an opportunities to turn inflation into a means to transfer income from wage earners to business. The result, however, was highly unsatisfactory: workers fought back raising money wages contributing to a wage- price spiral that made inflation into even more of a problem. By the mid-1970s the International Monetary Fund was declaring it the number one global economic problem.

Post-Keynesian Economics: Aggregate Supply and Demand

Lectures + slides

Not surprisingly, a major shift emerged in the formulation of macroeconomic theory in response to the ever more pressing problem of inflation. In place of the Keynsian cross and IS-LM models of the macroeconomy, many economists elaborated a new theory of aggregate supply and demand that put the focus on the price level rather than either aggregate demand or the interest rate. This new theory was, effectively still beholden to Keynes' focus on aggregate demand and supply but both the formulation and policy preoccupations differed. Although in the wake of several major crises in the 1980s, 1990s and the first decade of the 21st Century that included both financial collapses reminicent of the 19th Century and two serious depressions (including the present one), some variation of this aggregate supply and demand model with its focus on inflation is still the primary model taught in introductory textbooks today. As we will see, it has even been used to justify historically high levels of unemployment.

Monetarism and New Classical, or Neoliberal, Economics

Cleaver Packet: "Supply Side Economics: The New Phase of Capitalist Strategy in the Crisis" + lectures + slides.

The reformulation of macroeconomic policy that resulted in the new aggregate supply and demand model with its focus on inflation took place amidst a number of other theoretical and policy "innovations." Among the most important of those was the new attention given to "monetarism" - a minoritarian view that had been sidelined during the Keynesian era - and "supply side economics" that dominated policy making in the Reagan Administration during the first years of the 1980s. Monetarism involved shifting the preoccupaton of monetary policy from its Keynesian use to stimulate investment and consumption to an anti-inflationary role. Supply side economics, on the other hand, was preoccupied with shifting resources from consumption to investment and weilded not only fiscal policy but deregulation to attack the growth in wages that was understood to be at the heart of inflation. The result of these policies was global depression, substantial decline in working and middle class standards of living, dramatic concentrations of income and wealth in the hands of the rich and the return of 19th Century financial speculation and inevitable financial crises. The ideological justification for these changes involved a revival of that 19th Century "liberalism" associated with the British Empire: a celebration of "free markets" and the unbridled pursuit of wealth. Thus the title of Neoliberalism - first commonly used in Latin America but soon a commonplace worldwide.

The Global Debt Crisis

Cleaver Packet:
H. Cleaver, "Close the IMF, Abolish Debt and End Development:A Class Analysis of the International Debt Crisis",
Peter G. Peterson, "The Morning After" The Atlantic, October 1987,
Jeff Faux, "The Austerity Trap and the Growth Alternative", World Policy Review, Summer 1988, pp. 387-413.
+ lectures + slides

At the international level the most dramatic consequences of the monetarism and supply side economics of the Reagan Administration was the onset of global depression and an international debt crisis. The former was caused by the dramatic increase in interest rates that not only curbed inflation but threw financial markets into turmoil by raising the debt service obligations of international borrowers - especially Third World borrowers - to impossible levels provoking threats of widespread default. Widespread default would have wiped out billions in bank assets and precipitated the collapse of both the largest international banks and many of those smaller banks who had participated in the large international loans whose viability was suddenly jeopardized. The banks, backed by the Fed and the US government fought back seeking repayment through the imposition of austerity in debtor countries. When deals were cut between debtors and creditors exchanging debt rollover for austerity, widespread uprisings and resistance repeatedly undermined those deals leading to new negotiations and years of financial crisis, social turmoil and falling standards of living.

In many ways these debt crises are still very much with us but today the focus has shifted to the developed world as countries as diverse as Greece, Spain and the United States have become preoccupied with rising national debt while, once again, banks and creditor country governments are calling for the imposition of austerity.

Lectures and a variety of materials to be provided.

While there are many parallels between the recent financial crisis in the United States and earlier ones, both at home, e.g., the Savings & Loan Industry collapse in the 1980s, and abroad, there are also differences worth examining. The high levels of unemployment brought on by the financial crisis and subsequent economic downturn, the expulsion of millions of people from their homes as the result of (often crooked) foreclosures on their mortgages, the dramatic cutbacks in local, state and federal services being sought or imposed are imposing harsh austerity and suffering on millions of Americans while financial institutions have benefited from massive government bailouts and are now reaping huge profits which they are handing out to their high level employees contributing to an ever widening gap between the income and wealth of the richest few and the growing hardship and poverty of the many. As the Obama Administration moves into its second two years it is confronted by a Republican dominated that House of Representatives whose clarion call - shared by quite a few conservative Democrats - is for the imposition of widespread austerity on those already suffering from the economic crisis. If ever there was good reason to study macroeconomics in order to be able to evaluate the arguments for and against such austerity it is the present. As time permits we will examine the current situation and debates.

No Final, Last Test during Exam Week