Preface to the Revised and Expanded Edition

This revised and expanded edition of The ABCs of Political Economy: A Modern Approach is dedicated to the memory of Pete Seeger who died at the age of 94 on January 27, 2014 when I was finalizing the new edition. Through song and good cheer Pete Seeger helped five generations of Americans use the goodness within us to fight against injustice in all its forms – from the labor movement of the 1930s and 1940s, to the civil rights, anti-war, and women’s movements of the 1960s and 1970s, to the environmental and global justice movements of the 1980s, and beyond. Pete Seeger, Presente! You are already missed by me and my children.

The ABCs of Political Economy was first published in 2002. Since then we have experienced the most tumultuous economic events in four generations. Whereas the spread of neoliberal globalization that took off after 1980 created severe crises in many less developed economies, the more advanced economies were relatively immune from crisis until 2008. However, the financial crisis of 2008, which triggered the Great Recession and continuing stagnation, has shaken the developed economies more than any events since the Great Depression of the 1930s. So there is much new for this new edition of a political economy primer to address.

Fortunately, The ABCs of Political Economy was intended to provide readers with analytical tools they can use to evaluate important economic issues for themselves, rather than provide my own critical analysis of current events. And fortunately, many of the tools developed turn out to be precisely what readers need to understand the cause of recent economic turmoil and pros and cons of different policy responses. So, fortunately for the author, no major rewrite is in order: the tools are ready and still sharp. What is needed mostly is to help readers see how to apply the tools to analyze recent events in the advanced economies.

No author can resist saying “I told you so.” No, I did not predict the exact nature or timing of the recent events. And if I am to be honest, I must admit that I was surprised by the severity of the financial crisis, as well as the intransigence of ruling elites in response to a crisis of their making. However, I am gratified that while many economists in the advanced economies were celebrating neoliberal globalization in the early 2000s, the first edition of The ABCs drew attention to escalating inequality, financialization run amok, and unsustainable macroeconomic imbalances, and warned of dangers associated with these trends. And as it turns out, the financial and macroeconomic models in Chapter 9 are remarkably useful for analyzing financial crises and making sense of disagreements over whether fiscal stimulus or deficit reduction was the appropriate response to the Great Recession.

Chapter 1: The social theory outlined in this chapter contains an important role for economic dynamics and class relations. However, unlike traditional Marxist historical materialism, “liberating theory” or “complementary holism” also emphasizes the importance of the political, cultural, and kinship spheres of social life, racial, gender, religious, and political non-class “agents of history,” and human agency. As core capitalist economies were shaken by economic trauma not seen in many generations it is interesting to consider what recent social uprisings have to teach us in this regard.

Chapter 2: The new version of this chapter about economic “goals” updates data on rising inequality over the past dozen years, elaborates considerably on what environmental sustainability means, and comments briefly on the goal of a “steady state economy” and the rise of the “de-growth movement.”

Chapter 3: Occupy Wall Street erupted like a primal scream over escalating economic inequality. The corn model developed in this chapter provides an easy way to grasp the essential dynamics that permitted the top 1% to appropriate the lion’s share of productivity gains in our economies over the past thirty years.

Chapter 4: In 2002 the “free market jubilee” was still in full swing. Six years later, after free market finance had created the greatest financial crisis in eighty years, and with carbon emissions on course to unleash cataclysmic climate change, many started to question whether free markets are as wonderful as we are usually told. In short, the “debate” over whether markets are guided by a beneficent invisible hand, or instead by a malevolent invisible foot described in the original version of this chapter, could no longer be swept under the rug by market enthusiasts. Now, in 2014, what should have been treated as perhaps the most crucial issue in all of economics has at long last become a full-fledged public debate.

Chapter 5: The biggest change in this chapter is the addition of a model illustrating the dilemmas faced when designing international climate treaties. As we race like lemmings toward climate disaster perhaps no subject is more important for the engaged public to understand clearly. The Sraffa model is now compared and contrasted to the neoclassical theory of income and price determination as well as the Marxian labor theory of value, closing with a “modern” argument for how we can distinguish between producers and parasites.

Chapter 6: The biggest policy debate since the economic crisis broke in 2008 is over fiscal stimulus vs. austerity. Government after government – conservative and liberal alike – has chosen austerity over stimulus despite the fact that competent macroeconomic theory and historical experience both teach that exactly the opposite is what is needed. The expanded version of this chapter shows how basic political macroeconomic theory, based on Keynes’ insights, helps explain why government policy aggravated the Great Recession and continues to hamper recovery.

Chapter 7: In 2002 when this chapter was first written free market finance was in vogue. Despite numerous financial crises in lesser developed countries during the 1980s and 1990s, only the upside potential of financial deregulation and new financial “products” was discussed. When published, the explanations in the chapter about perverse incentives that plague banks and financial markets and the case for prudent regulation fell largely on deaf ears. In the aftermath of the greatest financial crisis since 1929 interest in the downside potentials of financialization has skyrocketed. The expanded version of this chapter includes a point-by-point explanation of what led to the financial crisis in 2008, as well as explanations of new monetary policy wrinkles like “quantitative easing” and “tapering.”

Chapter 8: Globalization has continued to proceed unabated since 2002. However, crises have shifted from the “periphery” of the global economy to its “center” since 2008. In order to expand treatment of crisis in the advanced economies this chapter has been streamlined, with discussion focused more on the Trans-Pacific Partnership Agreement, the European Monetary Union, and austerity policies imposed on Portugal, Ireland, Greece, and Spain, the so-called PIGS in the Eurozone.

Chapter 9: The useful macroeconomic models in this chapter remain the same, but now the closed economy macro model is used to evaluate the weak fiscal stimulus applied by the newly elected Obama administration in early 2009. Tedious derivations of the reduced form solutions to the long-run political economy growth model and the comparative statics analysis have been replaced with a fuller explanation of the intuition behind the results and their political importance.

Chapter 10: The point-by-point critique of the economics of competition and greed in the original version of this chapter resonates quite differently now that the bloom is off the neoliberal rose, and hundreds of millions of dissident voices across the globe have risen to shout ENOUGH!

Chapter 11: An expanded version of this chapter includes material on what is known as the “new” or “future” economy,” and why a “Green New Deal” is urgently needed to address both the economic and the ecological crises we face.

I would like to thank the Mesa Refuge Foundation for supporting me as a writer in residence during 2014. During my time there I was able to finish this revised and expanded edition as well as work on other writing projects.