...the international financial crisis is just the last in a series of economic calamities produced by a type of theory that converted the economics profession from a study of real world phenomena into what in the end became mathematized ideology...
...more than three decades of applying neoclassical economics and neo-liberal economic policies (have) destroyed, rather than created, real wages and wealth. A reconstruction of widespread welfare will need to be based on the understanding that what welfare destruction was not ‘market failure’; it was ‘theory failure’.
- Erik S. Reinert Neo-classical economics: A trail of economic destruction since the 1970s
How is it that I have never heard of this man or his work? (A search of DKos turns up zilch.) Why did I have to find out about him from the obscure (to ordinary folks) economics blog
Real World Economics Review (RWER)? The obvious answer is that he produces the kind of devastating, readable economic critique that the corporate media and TPTB don't want anyone to know about.
Mitt Romney is the epitome, the poster child, for the failed theory of neoliberal economics. Reinert's critique applies both to Mitt's biography and his stated policies (Ryan budget). Anyone not lobotimized by the propaganda bubble that is American media understands exactly what a disaster neoliberalism has been; yet this Frankenstein monster has been reanimated after the disaster of 2008.
I'm a big picture (forest) guy. All I need to know is that neoliberal theory is a bunch of mathematical crapola, which the results of using it bear out. But, past the dayglo orange "please trespass" sign, I have tried to give less theoretically oriented folks Dr. Reinert's view of some of the trees in the economic forest.
First, a couple of paragraphs about RWER; then on to Dr. Reinert.
The RWER was originally called the Post Autistic Economics Review, and was born from the growing disbelief among professional economists in "orthodox" neoliberal/neoclassical economics in the face of one unpredicted financial calamity after another. Among other writings, they have thoughtfully provided a credible alternative scenario to the illegitimate elevation of neoliberal theory
I am a little uncertain of the tribes in RWER, but I know that Michael Hudson publishes there. And, I suspect Billy Mitchell and other proponents of Modern Monetary Theory. In general, though, the articles at RWER are abstruse, academic dissections of the ever more obviously broken and self-serving "theories" of neoliberalism. That is, they are hard to read, with a high MEGO (my eyes glaze over) factor.
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What grabbed me about Dr. Reinert, besides his resume, was the clarity and accessibility of his writing. He is trying to get a hearing for proven, workable, real-world economic policies - policies that, in the past, made America great. He is arguing that REAL capitalism is about making tangible, non-fungible (i.e., REALLY risky) investments in the REAL world; not about making millisecond speculations/wealth extractions in the High Frequency Trading financial cloud.
Understanding this extremely important distinction – between raw materials subject to diminishing returns, monoculture, and perfect competition on the one hand, and manufactured goods and advanced services subject to increasing returns, dynamic imperfect competition, and a large division of labor on the other – was the economic basis for Stalinism, for the Marshall Plan and Keynesian social democracy in Western Europe following World War II, and for US capitalism. The trail of economic destruction that has sequentially hit the world since the mid-1970s is largely the result of neo-classical economic theory (‘mainstream economics, ‘standard textbook economics’) which – by destroying economics as an empirical science – unlearned the wisdom of close to 800 years of economic policy and also the former common understanding of wealth creation from the United States on the right to the USSR on the left.
- ER
Reinert is part of the chorus that is dismantling the bogus mathematical arguments of the neoliberal pirates. It is vital to the 99% that neoliberal economics becomes synonymous in the public mind with piracy, looting, and cruel exploitation. So, it is music to my ears when he calls neoclassical economics "physics envy" and proceeds to rake it over the coals.
A creeping mathematization and formalization of economics took place after World War II. Economics became ‘social physics’ based on late 19th century physics. With this development the distinction between industry and the production of raw materials – between increasing returns and large synergies on the one hand and diminishing returns and monoculture on the other hand – became blurred and disappeared. Increasing returns was thrown out of economic theory because it was not compatible with equilibrium; instead equilibrium should have been thrown out as the centrepiece of economics because it is not compatible with reality. Traditional development economics disappeared and The Washington Consensus slowly took over. Technological change, increasing and diminishing returns, and entrepreneurship disappeared from economic theory, obliterating any signals of dangers of a de-industrialization.
- E. Reinert, op cit.
Reinert may sound like a socialist to neoliberals; but he is in favor of productive, industrial capitalism, as opposed to extractive financial scams. His writing is extremely pertinent to the credibility of Mitt Romney's previous life as an asset stripping, debt loading vulture capitalist.
Not understanding that capitalism is about collecting innovation-based rents, the World Bank and IMF spent almost 40 years destroying production-based rent in the world periphery – from Peru via Russia to Mongolia and now the West itself – while tilting the playing field towards financial rents. Existing industrial rents were largely destroyed by premature shock liberalization, but – as we shall see in Figure 6 – this policy instead led to rapidly increasing rents in the financial sector.
- ER
In another paper, from which the article in the intro was condensed, he demolishes the inviolability of debt in a paragraph, quoting an economist from over 200 years ago:
Thus did English economist Richard Price (1769) express the force of compound interest:
A shilling invested at 6% interest at the birth of Christ would ...have increased to an amount (gold) larger than could be contained in the whole solar system, if this is constructed as a sphere with the diameter of Saturn’s bane around the sun.
As someone must obviously have invested 1 shilling at the time of the birth of Christ, this means that any system permitting compound interest necessarily must break down at intervals.
- E. Reinert "Mechanisms of Financial Crises in Growth and Collapse: Hammurabi, Schumpeter, Perez, and Minsky"
Download from: tg.deca.ee/files/main/2012040412332727.pdf
I think I will stop here. I have tried to give some representative samples of Dr. Reinert's writing.
A few more interesting papers:
"The Economics of Failed, Failing, and Fragile States: Productive Structure as the Missing Link" Download from: tg.deca.ee/files/main/2012040412332727.pdf
Economics and the Public Sphere: The Rise of Esoteric Knowledge, Refeudalization, Crisis and Renewal
The Other Cannon website, especially the paper by Michael Hudson: Financial Capitalism v. Industrial Capitalism