Monday, March 26, 2012

Thomas Palley's Book On The Little Depression

Figure 1: A Figure Illustrating Data From A Table In Palley (2012)
I have been reading Thomas Palley's new book, From Financial Crisis to Stagnation: The Destruction of Shared Prosperity and the Role of Economics. He argues that the ongoing crisis is not just a downturn in the business cycle, but the manifestation of the exhaustion of the neoliberal paradigm for economic growth1. Palley points to underlying structural contradictions, such as the role of consumer debt in the United States of providing the mass-based aggregate demand for consumption no longer sustainable when the overwhelming majority of workers do not participate in income gains from improving productivity. The expanded power of the less-regulated financial sector fits nicely into this thesis. Palley also discusses flaws in how the United States has come to fit into the global economy.

How academic economists have forwarded flawed ideas in support of these unsustainable structures is another major theme of this book. Both the freshwater (also known as Chicago school) and saltwater (also known as MIT school) economists are neoliberals. Palley, as is typical of Post Keynesians, opposes the views of saltwater economists, who agree with freshwater economists that, if it were not for failures of competition, externalities, information asymmetries, and sticky and rigid prices, the economy would generally perform well. The disagreement, on the level of analysis, is on the empirical importance of such imperfections2. Both erroneously think that economics can be separated from politics. Palley names his contrasting, third view as "Structural Keynesianism".

Palley does not describe the ideas of economists as driving economic policy in the United States. Rather, the market capture of academic economics provides a challenging obstacle for enlightenment. Palley approvingly quotes3 both Keynes' final paragraph in the General Theory and Karl Marx from the The German Ideology, "The ideas of the ruling class are in every epoch the ruling ideas..."

I have yet to finish this book, but I still have some criticisms. I wish Palley had included more graphs in this book. It seems to me that some of his charts in Chapter 4 could more usefully be graphs. What figures he has are usually decompositions of ideas, like Ishikawa diagrams in another format. In his discussions, Palley drops some nuances4 from his text that are explained earlier. Having skipped from Chapter 2 to Chapter 11, I can see some redundancies. Also, I wish Palley had referenced more heterodox economists.

Finally, I want to note José Antonio Ocampo's cover blurb:

"This is an outstanding book: clear, concise, and comprehensive. It shows that the economic crisis is the result of economic policies derived from flawed ideas and flawed ideologies. Read it and recommend it to your friends. It provides a map to overcome the Great Stagnation and to return to shared prosperity."
Ocampo has been in the news lately; Brazil just nominated him for president of the World Bank.


  1. Palley dates the start of this growth model with the Reagan era. I would rather point to Nixon's abolishing of the Bretton Woods' system. I suppose one could say the last half-decade of the 1970s was a transitional period.
  2. Palley notes Post Keynesian agreements with saltwater economists on short run policy.
  3. Antonio Gramsci does not appear in the index.
  4. Such as the distinction between textbook (or bastard) Keynesianism and structural Keynesianism.

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