The New Paradigm Papers of the Month of May

Capitalist systems and income inequality

Marco Ranaldi, Branko Milanović

The extent of inequality and the most suitable instruments to combat it to date are still highly debated. In a recent contribution, Ranaldi and Milanovic introduce a new measure of income inequality, which permits a measurement of inequality composition and severity among different forms of capitalist societies. Inequality assessments usually focus on inter-personal income inequality. Contrarily, using data from 47 countries covering the period 1995–2018, Ranaldi and Milanovic assess inequality in the factoral (capital or labour) composition of people’s incomes, hence deriving a novel proposition for effective income taxonomy. To begin with, the authors distinguish two forms of capitalist economic systems: the first is classical capitalism, where one group of people receives income entirely from the ownership of assets, while the other group’s income derives entirely from labor activities. This system typically comes with high levels of income inequality. The other variant is liberal capitalism, a form of capitalism where a significant percentage of people receive incomes both from capital and labor (Milanovic 2019). In this regime, inter-personal income inequality may still be high, but inequality in terms of composition of income is lower than in a classical capitalist system. Ranaldi and Milanovic find that on average, classical capitalism tends to be associated with higher income inequality than liberal capitalism. They also find that societies with low compositional inequality may still have high rates of income inequality. To conclude, they propose a novel taxonomy of varieties of capitalism based on the two inequality dimensions, allowing for a stronger empirical and distributional focus into the literature on the varieties of capitalism across regions and countries.

Intellectual rivalry in American economics: intergenerational social cohesion and the rise of the Chicago school

Lasse Folke Henriksen, Leonard Seabrooke, Kevin L Young

For decades, neoliberalism has been the dominant doctrine in economics and has reshaped whole societies. How did this doctrine ascend to mainstream and unprecedented prestige? A recent study by Lasse Folke Henriksen, Leonard Seabrooke and Kevin L Young takes a novel look at this question by focusing on intellectual rivalry within different schools of thought in the US economics profession: the neoliberal pioneers from the Chicago School of Economics, and the ‘Charles River Group’ (Harvard University and the Massachusetts Institute of Technology), the mainstream Keynesian stronghold. The study draws inspiration from Randall Collins work on intergenerational social cohesion as a driving force behind intellectual networks.

Using both qualitative and quantitative evidence from a new dataset from archives, memoires, and bibliometric data, spanning the years 1960 to 1985, the authors argue that the rise of the Chicago School was built on socialization mechanisms fostered by a group of core elite professors and their graduate students. The findings suggest strong forms of social cohesion between elite professors and their students, which differentiated them from their Charles River intellectual rivals and guaranteed the effective transmission and spread of desired value orientations across generations. Among the most relevant social cohesion mechanisms were intensive training, debate within a doctrine, and selective isolation. Among other things, this led the Chicago professors to rely on each other for citations, while the Harvard & MIT professors fragmented. From the mid-1970s onwards, Charles River students were more likely to cite Chicago profs than their own. Hence, its superior social cohesion compared to its intellectual rivals played a crucial role in enabling the tectonic epistemic shift from Keynesian dominance to the mainstreaming of neoliberal ideas during the 1970s and 1980s.

Paradigms and policies: the state of economics in the German-speaking countries

Jakob Kapeller, Stephan Puehringer, Christian Grimm

How balanced is the institutional and paradigmatic structure underlying German-speaking economics? A new study by Jakob Kapeller, Stephan Puehringer, Christian Grimm takes a closer look at this question. Applying an indicator-based analysis to the CVs, research profiles and data on memberships and associations of more than 700 professors of economics at German, Austrian and Swiss universities, the researchers assess their paradigmatic orientation as well as their degree of political involvement in different dimensions.

Their findings, less surprisingly, suggest a significant ideological bias in German public debate and economic policymaking that prevailed in the last decade. This is sourced both from a strong paradigmatic homogeneity among economists in Germany, but also the asymmetric positioning of pluralist/heterodox perspectives relative to ordoliberal views in policy contexts. Whereas heterodox researchers, compared to their small total size, disproportionately often claim interest in and work on policy relevant issues such as the global financial crisis, they remain underrepresented in institutionalized policy contexts. According to the authors, this insinuates that “intellectual closeness to traditional German attitudes in economic policymaking is rewarded with greater political visibility and influence”. The study ends by emphasizing that more recent developments indicate a shift in the balance between critical and mainstream voices, with more critical voices gaining ground in public debates.

Trust and monetary policy

Paul de Grauwe, Yuemei Ji

While many standard macroeconomic models still take rational expectations as a core assumption, the importance of expectations beyond the rational, and with them feelings of trust that economic agents experience, is eminent. Trust in a stable economic and political environment, in the rule of law, and the quality and credibility of institutions all has profound effects on the behavior of economic agents. For example, the credibility of an inflation target announced by a central bank plays an important role for the investment decisions of agents and in the effectiveness of monetary policies. A recent contribution by Paul de Grauwe and Yuemei Ji now pursues the analysis of trust in macroeconomic modelling, and how it affects the transmission of negative demand and supply shocks, more systematically. To do so, the authors assume two dimensions of trust: trust in the credibility of an institution and its targets, such as the central bank inflation target, and second, trust in the future, measured by the degree of optimism about future economic activity. They then use a behavioral macroeconomic model that assumes that individuals do not understand the underlying model and do not know the distribution of shocks that hit the economy, to show that trust plays a crucial role in determining the trajectory an economy takes after a large negative demand or supply shock. In the bad trajectories trust collapses, in the good trajectories it is not affected. For supply shocks, the overall effect is stronger. Initial conditions also matter. The findings provide interesting input to policy makers and institutions, as building institutional trust can be a lever to making an economy more resilient to absorb exogenous shocks. 

Equality and the Horizon of Human Expectations

Darrin M. McMahon

 There is growing evidence that wealth and income inequality have increased dramatically in almost all advanced economies over the past four decades. Yet, the assumption that humanity overall is moving towards greater equality has stubbornly persisted. A paper by Darrin McMahon in Global Intellectual History now makes the effort to trace back the roots of this assumption, the groups that have reinforced it, and ultimately turned it into an extensive, often largely unexamined, horizon of expectations. In doing so, the paper establishes how intellectuals, economists, and policymakers have generated the expectation about the future of (in-)equality that has often been at odds with actual trends and data. This allows a clearer conception of the great resurgence of inequality in our time and to more effectively face the challenges and growing societal discontent that rising rates of inequality provoke.