Cambridge Journal of Economics - recent issues

Introduction: the global financial crisis

Blankenburg, S., Palma, J. G. — 2009-07-01

From global imbalances to global reorganisations

Wade, R. — 2009-07-01

The world feels itself to be in transition, but to what is unclear. Will the liberal market model retain its normative primacy once some semblance of normality is restored, or will other varieties of capitalism, with a bigger role of the state, acquire more legitimacy? The answer depends partly on one's explanation for the current crisis. This essay argues, first, that global imbalances had too important a role to ignore, in contrast to a mainstream view that focuses on mistakes in monetary policy and financial regulation. It argues, second, that in light of global dynamics, the crisis is likely to become worse by early 2010—which, on the face of it, makes significant reorganisations of capitalism more likely. The third section lays out what should be done to reconfigure capitalism at national and international levels. The final section discusses the political economy of policy reforms in terms of the difficult translation from what should be done to what can be done. The broad conclusion is that in five years from now the liberal market model will have been restored to normative primacy and ‘we must have more globalization’ will again be the elite rallying cry; but the crisis will have left behind sufficient doubts about factual propositions and value priorities that political parties and economists advocating alternatives will have more scope than they have had for the past three decades.

Structural causes of the global financial crisis: a critical assessment of the 'new financial architecture'

Crotty, J. — 2009-07-01

We are in the midst of the worst financial crisis since the Great Depression. This crisis is the latest phase of the evolution of financial markets under the radical financial deregulation process that began in the late 1970s. This evolution has taken the form of cycles in which deregulation accompanied by rapid financial innovation stimulates powerful financial booms that end in crises. Governments respond to crises with bailouts that allow new expansions to begin. As a result, financial markets have become ever larger and financial crises have become more threatening to society, which forces governments to enact ever larger bailouts. This process culminated in the current global financial crisis, which is so deeply rooted that even unprecedented interventions by affected governments have, thus far, failed to contain it. In this paper we analyse the structural flaws in the financial system that helped bring on the current crisis and discuss prospects for financial reform.

The limits of central bank policy: economic crisis and the challenge of effective solutions

Morgan, J. — 2009-07-01

The paper examines the development of central bank policy prior to and during the recent financial crisis. The argument is made that it contained multiple failures that not only generated constraints on adequately identifying and addressing the crisis but also contributed to that crisis. Those failures derived from a combination of theory and institutional practice. Specifically the use of forms of inflationary targeting based on broad adherence to the Taylor rule framework and the use of versions of a Conventional Theoretical Macro Model (CTMM) were both problematic. This was particularly so in the way policy was focused through issues of the primacy of price stability. The institutional arrangements of the central banks were also problematic. The division of labour between the central banks and other regulatory bodies and the limited information available within a liberalised finance system hampered efforts to fully appreciate the gravity of the situation. Partly due to the constraints imposed by the thinking and strategies that had been developed the central banks never got to grips with the fundamental problems of the crisis. Interest rate policy and liquidity provision were undertaken in ways that steadily radicalised the approaches of the banks but always in a way that was event led and always in ways that could not resolve those fundamental problems. The nature of the crisis highlights the importance of transforming the approach and institutional framework of the central banks. Relatedly, it highlights the need for a more Keynesian and heterodox approach to economics within decision making bodies at central banks.

The fat years: the structure and profitability of the US banking sector in the pre-crisis period

Tregenna, F. — 2009-07-01

Bank profitability in the USA was extremely high in the pre-crisis period, yet this did not prevent the current crisis. It has become clear that these profits were on shaky grounds and also that bank profits were not used to buttress banks’ capital bases. This paper analyses the effects of structure on profitability from 1994 to 2005. Bank-level panel data are used to test the effects of concentration, market power, bank size and operational efficiency on profitability. Efficiency is not found to be a strong determinant of profitability, suggesting that banks’ high profits during this period were not ‘earned’ through efficient performance. Robust evidence is found that concentration increases bank profitability. This holds even when the largest banks are excluded from the sample, suggesting that the relationship between concentration and profitability acts in a generalised structural way and that the higher profits arising from concentration are at the expense of the rest of the economy. The analysis points to various policy implications relevant to the current crisis, in particular in terms of the legitimacy of expectations of the restoration of pre-crisis profit rates and the need for much stronger regulation of the banking sector, especially in terms of the structure of the sector, pricing behaviour and use of profits.

The evolving international monetary system

D'Arista, J. — 2009-07-01

The global financial and economic crisis has prompted renewed interest in international monetary reform. The key-currency status of the US dollar has been challenged but discussion of what might be reasonable objectives and institutional structures for a new system has not yet broken new ground. Nevertheless, as interest in the issue begins to include policymakers and non-governmental organisations, new proposals are likely to emerge. To assist the process, this paper provides an overview of how the international monetary system has evolved since the inauguration of the gold standard in the late 1800s to provide a context for some of the reform ideas that emerged during and after the discussions at Bretton Woods and some of the proposals that were offered subsequently. It concludes with an outline of three proposals by the author that are intended to expand the debate.

Why don't the bailouts work? Design of a new financial system versus a return to normalcy

Kregel, J. — 2009-07-01

The innovative support measures introduced by the US Central Bank and Treasury in response to the current crisis to bolster bank balance sheets have had little success in restoring liquidity to financial markets. These policies mirror similar policies employed in the 1930s in the USA and the 1990s in Japan, in both cases with little impact. This paper identifies three policies impacting incomes rather than prices, the assessment of system failure, and proposals for system design that were employed in dealing with prior financial crises. That they have not been introduced in response to the present crisis may explain why current measures have not yet had their intended impact of restoring bank lending to the productive economy.

The crash of the knowledge economy

Pagano, U., Rossi, M. A. — 2009-07-01

This paper advances the hypothesis that some of the roots of the present crisis are to be found in the present institutions of the knowledge economy. While protectionism is seen as a possible dangerous outcome of the crisis, the extent of protectionism inherent to the strengthening and globalisation of intellectual property rights (IPRs) associated, in particular, with the signing of the Trade-related Aspects of Intellectual Property Rights agreement is not generally perceived as one of its possible causes. Indeed, IPRs have acted as ‘super-tariffs’. They have particularly raised the cost of investments for countries that had neither abundant cheap labour nor high amounts of intellectual property resources. Moreover, IPRs may have later exerted negative effects even on IP-rich firms, as the proliferation of conflicting rights has led firms to increasingly inhibit each other's investments. The resulting investment strike has manifested itself as a saving glut and has mainly affected the USA in a situation aggravated by inadequate regulations. If intellectual monopolies are one of the causes of the crash, the remedies should not only focus on monetary policy, financial regulations or even on standard Keynesian policies. Aggregate demand stimulus should be coupled with policies that decrease the level of intellectual monopolisation of the economy.

A developing country view of the current global crisis: what should not be forgotten and what should be done

Frenkel, R., Rapetti, M. — 2009-07-01

Macroeconomic theory will surely be affected by the current global crisis. There are signs that some ‘old’ theories and insights will have a comeback. This paper argues that among them economists should not forget the lessons that have been learnt from three decades of several financial crises in developing countries. We emphasise two important lessons. First, preventing crises in developing countries requires not only the regulation of domestic financial systems, but also a consistent set of macroeconomic policies. In particular we stress the need for consistency between the exchange rate rule, the capital account regime and the domestic financial market regulations. Second, financial crises in developing countries tend to worsen both the balance of payments and the fiscal balance. Traditional adjustment policies tend to exacerbate the recessive trends in output and employment. This is just the opposite of what is required and what governments in developed countries are able to do. Developing countries should push for an agenda that helps them deal with these problems.

Latin America and the global financial crisis

Ocampo, J. A. — 2009-07-01

The current world economic crisis has hit Latin America very hard. Although financial conditions have deteriorated, particularly since September 2008, the financial shock has been less severe than during the two previous crises. Thanks to improvements in external balance sheets, there has been room for counter-cyclical credit and monetary policies. The decision to absorb large capital inflows during the boom as foreign exchange reserves is one of the major sources of the increased room to manoeuvre. However, these strengths have been insufficient in the face of a strong trade shock. The region's economies should therefore seriously think again in the domestic market, with regional integration and active production sector policies as engines of growth.

The costs of 'coupling': the global crisis and the Indian economy

Ghosh, J., Chandrasekhar, C. P. — 2009-07-01

The view that the Indian economy would be less adversely affected by the global economic crisis because of limited integration and other inherent strengths has proved to be wrong. The economic boom in India that preceded the current downturn was dependent upon greater global integration in three ways: greater reliance on exports particularly of services; increased dependence on capital inflows, especially of the short-term variety; and the role these played in underpinning a domestic credit-fuelled consumption and investment boom. These in turn made the growth process more vulnerable to internally and externally generated crises, as is now becoming clear.

Out of the corridor: Keynes and the crisis

Leijonhufvud, A. — 2009-07-01

We should learn from Keynes to focus on the macroproblems of our day. Today's problem is the financial crisis and the resulting great recession. Neither the standard Keynesian policies of decades past nor the monetary policy doctrine of recent years provides useful solutions. Dynamic stochastic general equilibrium theory is part of the crisis wreckage, but turning to old or to New Keynesian theory will be of little use. A balance sheet recession requires that policy address the problems in the private sector's capital as well as its income accounts. We need serious theoretical work on problems of system stability using, for example, agent-based methods. Monetary theory needs to develop analysis of processes in which intertemporal budget constraints are violated. Network theory will be useful in that quest.

The current economic crisis: its nature and the course of academic economics

Lawson, T. — 2009-07-01

The current crisis has triggered significant debate concerning economic theory and policy. Largely absent from this debate is an informed discussion of the methods used by economists in analysing the economy and formulating their proposals. But method matters. Here I argue that current academic research practices need to be transformed before real insight can be achieved. Specifically, I indicate why and how a more grounded framework than that presupposed by current research practices facilitates a potentially more fruitful approach to understanding the crisis.

The double bubble at the turn of the century: technological roots and structural implications

Perez, C. — 2009-07-01

This paper argues that the two boom and bust episodes of the turn of the century—the internet mania and crash of the 1990s and the easy liquidity boom and bust of the 2000s—are two distinct components of a single structural phenomenon. They are essentially the equivalent of 1929 developed in two stages, one centred on technological innovation, the other on financial innovation. Hence, the frequent references to that crash, to the 1930s and to Bretton Woods, are not simple journalistic metaphors for interpreting the ‘credit crunch’ and its solution, but rather the intuitive recognition of a fundamental similarity between those events and the current ones. The paper holds that such major boom and bust episodes are endogenous to the way in which the market economy evolves and assimilates successive technological revolutions. It will discuss why it occurred in two bubbles on this occasion; it examines the differences and continuities between the two episodes and presents an interpretation of their nature and consequences.

The rise and fall of money manager capitalism: a Minskian approach

Wray, L. R. — 2009-07-01

We are in the midst of a global financial crisis accompanied by a deep and probably long-lasting economic downturn; indeed, some analysts are already calling this the first depression of the post-World War II era. In this article, I argue that this is a systemic crisis—a crisis of what Hyman Minsky called money manager capitalism. I link this to the analyses of Hilferding and Veblen of an earlier period, finance capitalism, and argue that this is, in effect, the second failure of this type of capitalism. The essential characteristics of early finance capitalism are: relatively small government, use of external finance for investment, and growing concentration of economic power in the hands of ‘trusts’—or what we might today call megacorporations with varied interests and diverse affiliations across ‘industry’, ‘finance’ and ‘insurance’. Unlike the first phase, the second phase of finance capitalism took place in the context of a big government, neoconservative model. Minsky's analysis helps us to understand how the New Deal and big government created a paternalistic capitalism after World War II, which favoured high consumption, high employment, greater equality and financial stability; however, that stability was destabilising because it permitted the rise of managed money. Over time, innovation and deregulation increased fragility, which generated increasingly frequent and severe financial crises. While previous crises were resolved quickly enough to prevent ‘it’ (another debt deflation) from happening again, this crisis appears to be sufficiently severe that the very survival of money manager capitalism is thrown into question. The article examines the contributing factors to the current crisis, including the real estate boom and bust, the rise of risky financial instruments such as securitised debts and credit default swaps, the commodities market bubble and the fiscal squeeze. The article concludes with some suggestions concerning the possible outcome of the failure of this form of finance capitalism.

The revenge of the market on the rentiers.: Why neo-liberal reports of the end of history turned out to be premature

Palma, J. G. — 2009-07-01

Starting from the perspective of heterodox Keynesian–Minskyian–Kindlebergian financial economics, this paper begins by highlighting a number of mechanisms that contributed to the current financial crisis. These include excess liquidity, income polarisation, conflicts between financial and productive capital, lack of appropriate regulation, asymmetric information, principal-agent dilemmas and bounded rationalities. However, the paper then proceeds to argue that perhaps more than ever the ‘macroeconomics’ that led to this crisis only makes analytical sense if examined within the framework of the political settlements and distributional outcomes in which it had operated. Taking the perspective of critical social theories the paper concludes that, ultimately, the current financial crisis is the outcome of something much more systemic, namely an attempt to use neo-liberalism (or, in US terms, neo-conservatism) as a new technology of power to help transform capitalism into a rentiers’ delight. In particular, into a system without ‘compulsions’ on big business; i.e., one that imposes only minimal pressures on big agents to engage in competitive struggles in the real economy (while doing the opposite to workers and small firms). A key component in the effectiveness of this new technology of power was its ability to transform the state into a major facilitator of the ever-increasing rent-seeking practices of oligopolistic capital. The architects of this experiment include some capitalist groups (in particular rentiers from the financial sector as well as capitalists from the ‘mature’ and most polluting industries of the preceding techno-economic paradigm), some political groups, as well as intellectual networks with their allies—including many economists and the ‘new’ left. Although rentiers did succeed in their attempt to get rid of practically all fetters on their greed, in the end, the crisis materialised when markets took their inevitable revenge on the rentiers by calling their (blatant) bluff.

Introduction

Singh, A., Wilkinson, F. — 2009-04-25

Better to be rough and relevant than to be precise and irrelevant: Reddaway's legacy to economics

Singh, A. — 2009-04-25

Professor W. B. Reddaway (known to friends and colleagues as Brian Reddaway) was an exceptional economist who had a huge influence on how economics in Cambridge has been taught and researched. He held leadership positions in the Faculty of Economics and Politics at Cambridge for 25 years, between 1955 and 1980. The main purpose of this paper is to explain Reddaway's method and his distinct approach to economics. It also briefly reviews his life and times. The words in the title summarise his philosophy of research, as will become clear in the paragraphs which follow.

On data: a case study of the evolution of income inequality across time and across countries

Atkinson, A. B., Brandolini, A. — 2009-04-25

This paper takes income distribution as a case study of the role of data in economics. After describing the transformation which has taken place with regard to the availability of data on income inequality, it discusses how the comparability of these estimates is brought into question by differences in methodology that cannot be eliminated by simple adjustments. Recent analyses of the relationships between income inequality and growth or globalisation are shown to be based on time series plagued by discontinuities which can seriously affect regression results. The paper concludes by calling for greater attention to data quality in applied economics.

Applied economics, contrast explanation and asymmetric information

Lawson, T. — 2009-04-25

The purpose of this paper is to illustrate the workings of an explanatory method for applied economics. It is a method that is rarely explicitly examined or defended in the discipline, but which, I believe, has a lot of promise for the sorts of contexts that economists must address. My strategy is to show that, and how, the method in question effectively underpins at least one study already widely regarded as explanatorily successful.

Growth and changes in economic structure: a straightforward statistical approach with an application to the Italian economy

Andreopoulos, G. C. — 2009-04-25

The paper presented here, part of my PhD dissertation written under Professor Brian Reddaway's guidance, is offered as an example of his approach to applied economics as well as a tribute to his legacy. The scope of this paper is to suggest an operational approach to the analysis of growth, an approach that allows us to grasp immediately the most important changes that might occur in the structure of an economy. This procedure is applied to the Italian economy over the period of its most rapid growth (1960–79) to see whether some of the most important results established in the literature on modern economic growth are confirmed.

Characterising deindustrialisation: An analysis of changes in manufacturing employment and output internationally

Tregenna, F. — 2009-04-25

Deindustrialisation is typically conceptualised as a decline in manufacturing as a share of total employment. From a Kaldorian perspective deindustrialisation could have negative implications for long-run growth, given the special growth-pulling properties of manufacturing. However, defining deindustrialisation purely in terms of employment share is conceptually limiting given that some of the Kaldorian processes operate primarily through output rather than employment, as well as blunting empirical analysis by not focussing enough on changes in manufacturing share of gross domestic product (GDP). This study develops a new method using decomposition techniques to analyse changes in manufacturing employment levels and shares in 48 countries over periods of ‘deindustrialisation’. The analysis separates out changes in the levels and shares of employment manufacturing into components associated with changes in the share of manufacturing in GDP, the growth of manufacturing value-added, the labour intensity of manufacturing production and economic growth. The results indicate that in most cases the decline in manufacturing employment is associated primarily with falling labour intensity of manufacturing rather than an overall decline in the size or share of the manufacturing sector. We suggest that deindustrialisation should appropriately be defined in terms of a sustained decline in both the share of manufacturing in total employment and the share of manufacturing in GDP.

A synthetic, stock-flow consistent macroeconomic model of 'financialisation'

van Treeck, T. — 2009-04-25

This article is centred around the notions of shareholder value orientation and financialisation. Shareholder value orientation is reflected by a high dividend payout ratio applied by firms and the reluctance of firms to finance physical investment via new equity issues. Financialisation is the more general development towards an increased importance of the financial sector of the economy relative to the non-financial sector. In this article, a synthetic, stock-flow consistent model is developed that attempts to encompass some important recent works on the effects of financialisation. This includes contributions from the fields of mainstream information economics and post-Keynesian economics. We conduct simulations reflecting increased shareholder value orientation, and show that the results are consistent with important stylised facts.

Joseph Schumpeter and the German Historical School

Michaelides, P. G., Milios, J. G. — 2009-04-25

So far Schumpeter's affinities with the German Historical School (GHS) have been inadequately acknowledged or even unexplored in major accounts of Schumpeter's work. This essay argues that Schumpeter formulated some of his principal theses in accordance with the conceptual framework of the GHS. Schumpeter's affinity with the GHS is established by examining his writings and his relationship with major scholars such as Schmoller, Max Weber and Sombart. It is demonstrated that Schumpeter's works built heavily on GHS insights, and he even referred positively to the ideas of certain of its members. However, some obvious differences between Schumpeter and the GHS are observed. The paper concludes that the GHS should inspire further research in evolutionary economics.

Critical realism and the Austrian paradox

Martin, A. — 2009-04-25

Austrian economics provokes mixed reactions among critical realists. It preaches methodological individualism, marginalism, and rational choice while embracing emergence, open processes, and error. The Austrian school stands paradoxically with one foot each in the mainstream marginalist tradition and heterodox social theory. I argue that this paradox can be disentangled by appeal to the fundamental distinction between the logic of choice and the logic of action. I then extend the analysis of the logic of action to the critical realist account of the basic ontology of social structures, arguing that successful retroduction of social structures depends on marginalist insights.

The economics of identity and the identity of economics?

Fine, B. — 2009-03-03

Drawing upon individual and social choice theory, the economic approach to identity associated with Akerlof and Kranton is critically assessed in terms of its own definitional and technical conundrums. This leads on to an external critique in terms of the limited extent to which identity can be addressed by mainstream economic methods. Indeed, the latter essentially sets aside the insights into the nature of identity that emerged with modernism, let alone postmodernism. As a result, the enterprise of constructing an economics of identity is set in the context of recent changes in, and disagreement over interpretation of, the identity of contemporary economics.

Plural situational logic: the rationa(lisabi)lity principle

Kerstenetzky, C. L. — 2009-03-03

In the context of a critique of the exclusive use of the rational choice approach in economics, the article presents a pluralistic interpretation of the Popperian notion of situational logic as an alternative approach. This is proposed in connection with a reading of the rationality principle as a rationalisability principle. I argue that this principle can accommodate an ample array of rational responses to different situations and even rationalise the multiple responses that are given to the same situation. I present some examples to illustrate the relevance of the proposed interpretation.

Care regimes and national employment models

Simonazzi, A. — 2009-03-03

Rapid population ageing has dramatically increased the social and economic cost of elderly care. As a consequence of the search for cost effectiveness/reduction we observe a convergence in how the care market is organised: all countries are moving towards home care, private provision and cash transfers. The aim of this paper is twofold. It is argued that the way in which elderly care is provided and financed may entail considerable differences in the creation of a formal care market. National employment models in turn shape the features of the care labour market, affecting both the quantity and quality of care labour supply, the extent of the care labour shortage, and the degree of dependence on migrant carers. This paper presents a comparative analysis of various European country models of elderly care to show how these two factors combine to shape the characteristics of elderly care regimes, and their differing capacity to meet increasing demand for care either by using native workers or, alternatively, by turning to immigrant workers in order to cope with labour shortages.

Why do women have longer durations of unemployment than men in post-restructuring urban China?

Du, F., Dong, X.-y. — 2009-03-03

This paper provides the first systematic analysis of the reasons why women endure longer unemployment durations than men in post-restructuring urban China. This analysis is based upon data obtained from a national representative household survey. Rejecting the view that women are less earnest than men in their desire for re-employment, this analysis shows that women's job search efforts are handicapped by a lack of access to social networks, unequal entitlement to social re-employment services, higher earnings losses from job separations for women, and unfair treatment of women with respect to mandatory retirement.

Human resource management and performance in European firms

Rizov, M., Croucher, R. — 2009-03-03

We develop a theoretical framework to examine three hypotheses on the relationship between human resource management (HRM) practices and organisational performance in European firms. The first is that collaborative forms of HRM practice are more strongly associated with superior firm performance than calculative forms. The second is that these associations are strongest where national institutional and normative settings support them. The third is that employer–employee consultative committees and collective payment methods are also associated with superior firm performance. The first two propositions are strongly empirically supported, as is the third, albeit more weakly. The implications of the findings for European policy and Varieties of Capitalism theory are discussed.

Macroeconomics without the LM curve: an alternative view

Setterfield, M. — 2009-03-03

This paper develops a ‘fully articulated’ post-Keynesian alternative to the ‘New Consensus’ macroeconomic model, based on explicitly post-Keynesian hypotheses about the inflation process, the income-generating process and the appropriate conduct of monetary policy. The paper demonstrates how the equilibrium configuration of this model can be manipulated by non-monetary policy interventions, including fiscal policy and incomes policy. One (perhaps surprising) result that emerges from the analysis is that in the context of the proper policy environment, inflation targeting can have a positive impact on real economic performance.

Racial discrimination in English professional football: evidence from an empirical analysis of players' career progression

Goddard, J., Wilson, J. O. S. — 2009-03-03

A novel test for racial discrimination in English professional football is presented, based on an assessment of the effect of race on footballers' labour market transition probabilities. Career progression is observed over five-year intervals within the period 1986–2001. Transition probabilities are estimated using a three-equation model with initial divisional status, retention and divisional transition as dependent variables. Retention depends on age, divisional status, first-team appearances, playing position and birthplace. Divisional transition depends on age, first-team appearances and playing position. Black players tend to be employed by teams of higher divisional status and have higher retention probabilities, suggesting a form of hiring discrimination affecting the process of becoming a professional.

Human capital, graduate migration and innovation in British regions

Faggian, A., McCann, P. — 2009-03-03

With the aid of a geographical information system, our paper constructs a three stage least squares simultaneous equation model to investigate the interrelationships between the interregional flows of human capital, and the innovation dynamism of a region. In order to do this, we model the interregional migration behaviour of high quality British university graduates from university into first employment, and we relate these human capital flows to both the labour market characteristics and the knowledge characteristics of the employment regions. This is done for all industries and separately for just high technology industries. Our results indicate that for England and Wales there is a two-way causality between the interregional human-capital employment-migration flows of recent university graduates and the innovation performance of regions. However, the results for Great Britain as a whole depend on whether London is included and Scotland is excluded. We find little or no support for the argument that the presence of local universities or small firms promotes regional innovation.

At the origin of the industrial district: Alfred Marshall and the Cambridge school

Belussi, F., Caldari, K. — 2009-03-03

This paper investigates the origin and evolution of the concept of the industrial district. The idea of industrial district is quite widespread in modern industrial economics and in business studies, with a variety of meanings and typologies. Indeed the real original conceptualisation dates back to Alfred Marshall and the economists of the so-called Cambridge school. Quite often the concept of industrial district is considered as synonymous with agglomeration, localisation and clustering. But, according to the meaning given originally by Marshall, these processes of industry ‘territorialisation’ are quite different from the more ‘compound localisation’ that is the Marshallian industrial district. Therefore, the aim of our contribution is focused on disentangling its original meaning from other subsequent interpretations, referring particularly to the debate on this subject that arose among the economists of the Cambridge School.