I was most amused by the concluding comments in a talk by Andy Haldane, chief economists of the Bank of England, this week. So much so, in fact, that I share them in full:
The link between the competitive structure of product markets, the macro-economy and the setting of monetary policy is a relatively under-researched area. This paper has only scratched the surface of this important topic. But trends in concentration and market power have clear potential to impact on the macro-economy and monetary policy, justifying ongoing research on the topic. To that end, we conclude with a few reflections on potentially fruitful future research avenues.
First, the framework used here to understand the macro-economic implications of increased market power assumes a particular competitive structure — monopolistic competition. This has limitations, assuming as it does that no one firm is sufficiently large to have a significant bearing on others' behaviour. In practice, strategic interactions between firms are likely to be important in many markets, especially network markets (for example, Bramoullé, Kranton and D'Amours (2014)), with potentially important implications for pricing and the Phillips curve.
Second, the framework developed here also sidesteps questions about the competitive structure of the market for inputs, especially labour inputs. Dominant firms may exercise monopsonistic power over workers, in ways which have implications for profit and labour shares. Consistent with that, there is some empirical evidence linking market concentration to a lower labour share (Autor et al (2017)). How monopsony power influences wage growth and the slope of the Phillips curve are important areas to consider further.
Third, there is further work to be done in understanding the balance sheets and decision incentives of so-called “superstar” firms. This includes their choice of debt versus equity, distributing versus reinvesting profits and intangible versus tangible sources of capital. These choices might imply quite different incentives and behaviours — for example, about the level of investment and its interest elasticity. These are yet to be fully explored, at a micro and macro level.
Fourth, the emergence of a set of firms with significant degrees of market power clearly raises big questions about the appropriate stance of competition policy (Gutiérrez and Philippon (2018)). These policy issues are clearly outside of the remit of central banks. Nonetheless, how these anti-trust issues are tackled could have implications for the structure and dynamics of the economy and hence for the setting of monetary policy. This, too, is an area ripe for further research.
Finally, the apparent puzzle between the secular rise in mark-ups at the firm level on the one hand, and relatively low and stable aggregate inflation on the other hand, could usefully be reconciled. Current estimates of mark-ups using firm-level data may suffer from mismeasurement. Or other macro-economic factors may have more than offset their impact in order to keep inflation stable. How the evidence is reconciled could have important implications for inflation dynamics and the setting of monetary policy.
What to say. First, I like a man who numbers his observations.
Second, this comes as close as I think Haldane dares go to admitting that macro is choosing the wrong frameworks.
Third, that means it may not understand inflation and its drivers, at all.
Fourth, economics does not, then, explain the modern firm, nor does it embrace it in its thinking.
Lastly, the modern economy is about rent extraction by squeezing the labour share, but economics does not want to admit it.
That's not how Haldane put it. But I think that's what he meant, even if he was not sure himself.
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We can all play a part in history treating this period of neoliberal nightmare with disgust. The powerful people who drove it along with those who merely watched it happen will be judged as monsters in varying degrees.
Which side of that assessment do you wish to be on?
Mr Haldane is using obscure language to say that wages are not keeping up with the profitability of companies – rising or high share prices are not reflected in increase rewards for workers. Also he is admitting that large companies are distorting the workings of a supposed free market by their monopolistic or semi-monopolistic share of the market.
True
Talking of Central Bank economists understanding macro, this superb quote – way better than the, to me at least, guff Andy Haldane spots above – from Luci Ellis, the Assistant Governor (Economic) of the Reserve Bank of Australia is most definitely worth drawing attention to:
See MMT economist Steven Hails’s take here (has an on link to his FB page post) https://twitter.com/StevenHailAus/status/1033265430163419136
Very true
Current “research” into the theory of the firm uses language like Andy Haldane:
“Falsely making the equilibrium assumption of a “perfect” world of markets (spot, term, future, etc.), the firm has full information about competitors, about complementors in investment decisions, and about what consumers really want. But, in reality, much of this information is proprietary, tacit, or diffuse, and thus inaccessible. The decision to invest depends on sensing an opportunity and also on sensing how potential competitors and complementors will respond. This is not a capability required in a neoclassical world of perfect competition”. (forget who said this – I was going to critique it as numpty)
This means you’re gonna be guessing pal. Soon one finds oneself into metaphors on managerial decision based on whether you should stick on 16 in blackjack – in the big picture you should twist but managers stick fearing the sudden death of doing the sensible statistic thing, Good grief!
I favour a theory of big firms using metaphors like smuggling (tax stealing), piracy (pirate islands to stash profits) and the Cantillon first use of money in Ponzi speculation theory linked to Bill Black’s ‘The best way to rob a bank (firm) is to own one’. Monetary Theory looks more like a cover for subsidy we used to put into steel, mines and shipbuilding – now ploughed into ‘work smart’ financial institutions and share buybacks – than a real theory of anything.
In physics the micro and macro are subject to techniques of renormalisation (they have to justify each other). The tripartite view in biology focuses through 20 levels of ‘individual’ reduced to such farces as homo economicus in economic theory. The ‘biology of noise’ (not noise as sound – more signals’ theory) uses complex statistical review I don’t see in economics. Science is at least admitting to micro-macro linking and even insisting on it. Stochastic fluctuations in the very small and once assumed identical are identified and seen to produce very different macro outcomes. We have complex life-histories of parasitism down to molecular effects in host muscles. Meanwhile theorists of the firm play cards and tell us monetary theory needs no micro because the sciences do not reduce into each other (they do in complex ways). Monkeys are known to ‘down tools’ when rewarded with only cucumber when they see others getting grapes. Chimps might even refuse the grapes when they see others not getting them.
We can’t even start economics with real world likely decent assumptions such as our planet burning and pollution and instead continue groaf-oaf sloganising. New theories should contain a survival strategy and need to understand the old theories are no such thing. There is some decent work about that lays waste to such homilies as comparative advantage and economic assumptions on the rational actor. Haldane himself has looked at models of biological modularity to contain systemic collapse. The problem is that we don’t get, as we theorise, that the positive engines we create to view the world from are “micro” by focus and exclusion, like trying to view a landscape through a bomb-sight. There are already new ideas Mr Haldane. We need new ways to prevent them being suppressed by instruments of torture and threats the sky will fall if we try them. Why can an institution like the BoE not do something small-scale with MMT-based and green projects?
A killer last question
Read Andy Haldane’s introduction to Econocracy, the book by the Post Crash Economics team. In fact, read the whole book and don’t come back here until you’ve finished! Best critique of current economics teaching I’ve read.
Haldanes introduction is a trenchant criticism of the skills of economists he ends up employing, and what they’ve been taught. Startling from someone in his position.
He’s one of the more radical people out there and I’m glad he’s in the role he is. A touch naive to expect him to leap straight to MMT. Easy to suggest as a spectator and critic – a bit harder when you are trying to change the course of a supertanker and do actually have significant personal responsibility.
But he stays firmly in the mainstream himself
Ah Hah!
So nice to see someone like that being realistic about market power.
So, MMT people. It is time drop the assumption that inflation will not result from fiscal stimulus as long as there is spare capacity in the economy.
If incomes rise, demand rises and monopolists etc. will take advantage. The rent-seekers will use their market power to capture the benefit of stimulus for themselves (through rising prices).
Years of low inflation is due to poor demand (low wages, underemployment, greater inequality etc.) If that changes for the better then the monopolies and cartels will be ready.
So, competition policy (which is technically micro policy) should be adopted in parallel with MMT to make the latter viable.
BTW, it is also worth noting as we start to move away from neo-liberalism that back in the old before the neo-libs, the concentration of market power wasn’t anywhere near as bad as it is now. The old Keynesians knew thing or two about this One classic example was F.D. Roosevelt who adopted stronger Anti-Trust laws as well as strong fiscal policy.
Correction: ‘back in the old days’.
Interesting point
Rent seeking undermines any market
“That’s not how Haldane put it. But I think that’s what he meant, even if he was not sure himself.”
My impression is that we are paying this man a great deal of money for being incompetent, under educated, craven and generally bloody useless.
Am I being harsh ?
I don’t think so. I think we have a right to expect that public servants understand their brief.
Over-educated skilled incompetence is common mate. I can make a fair flash in this condition myself.
Those of us progressives who believe in social and economic fairness do not believe that it is fair when rent extraction by markets results in the worker receiving less and less for their labour.
Agreed!