Research Proposal
Heterodox Macroeconomic Project for the Greek Economy (HMM-GR)
Introduction
The recent global economic crises, from the Great Recession of 2008, to the pandemic induced economic instability, to the war in Ukraine, and finally to the emerging stagfation regime have left a deep scar on society. In this framework the promotion of societies without exclusions is equivalent, among other, to the promotion of full and steady employment, the sharp reduction in poverty levels and the development of the full economic potential of the economy.
This string of crises has generated a prolific radical and heterodox literature on the political economy of Greece (Tsoulfidis and Tsaliki 2014, Tsoulfidis, Alexiou and Tsaliki 2016, Mavroudeas 2015, Maniatis and Passas 2013, Economakis and Markaki 2015). This is not surprising given that the severity of the current crisis in the case of Greece has taken the form of a Great Depression with economic activity still below levels last seen in 2008. This literature does not only focus on the description of the current crisis, both from an economic and a social perspective, but also tries to shed light to the fundamental causes of the current crisis and to present alternative exit strategies from the ones currently employed.
It is our opinion that in order to understand the current crisis instead of relying on conjectural events one has to place recent events in a historical and global perspective. The current crisis should be considered as an integral event of the entire post war evolution of Greek capitalism and of the global economy[1]. Within this perspective it is critical to note the links between the current and the last crisis, the stagflation crisis of the 70’s and ‘80s, with the nature and causes of the latter still being the subject of lively debate (Vlachou, Theocharakis, and Mylonakis 2011, Laskos and Tsakalotos 2011).
In particular, from a radical and Marxian perspective, in order to understand the current crisis, one should start by focusing on the long-term trend of capital profitability; this variable influences in a great degree the intensity of capital accumulation; the latter in turn influencing output growth. However, the profitability of capital in turn depends on a great degree on labour productivity[2], and the latter in turn depends on a great degree on the regime of accumulation and the structure of competition (Dumenil and Levy 2004, 2011a, Bowles, Gordon and Weisskopf 1984, 1990). This interconnectedness of explanatory variables is what necessitates looking the subject as a whole.
Moreover, it is our opinion that a heterodox perspective is uniquely placed to understand current phenomena as it allows for a theoretical foundation that focuses on issues that in any case cannot be identified with general equilibrium analysis. Arguably. a heterodox macroeconomic model by allowing disequilibrium dynamics to play a dominant role is better positioned to empirically and theoretically incorporate issues such as poverty, structural unemployment, chronically insufficient demand, declining profitability and investment rates. In addition, the rich tradition of political economy is uniquely positioned to identify the linkages between the political and the economic and therefore to endogenize the development of new ideological trends in the political superstructure in a coherent narrative. Therefore, the study of a society aspiring to be inclusive has much to gain first by describing the broad outlines of the conditions of the current society, in the form of macroeconomic variables. Then by identifying the way those variables relate to one another in the form of a macroeconomic model. And finally, by recognising those critical policy elements that will allow for a transition to a high growth – low inequality regime.
Objectives, overview of the proposed project
Our main objective in this study will be to provide a methodologically consistent overview of the historical evolution of the post war Greek economy up to and including the current crisis from a Classical-Marxian perspective. Such an analysis should ideally explain endogenously the major structural breaks that occurred in the historical evolution of Greek capitalism, such as the crisis of the 1970s and late 2000s, and not rely on ad hoc external formulations in the form of unexplained external shocks. Therefore, institutional factors such as the state of competition should be analysed, and a number of system critical variables should be identified and their determinants explored econometrically. Having obtained a number of simultaneous equations, and assuming that some form of equilibrium relationship exists, it will be possible to set up a macroeconomic model of the Greek economy. We note that our estimates will be presented both in terms of mainstream economic categories and in categories relevant for the Classical-Marxian tradition[3].
Our proposed project will be structured in the following way. First, there is a need to construct detailed long run chronological series for key macroeconomic variables of the Greek economy at the sectoral level. Such series currently are either missing, not reported, or reported in mutually incompatible vintages of National Accounts data. Our task will be to centralise data from ELSTAT and EUROSTAT and link them with previous similar publications by EUKLEMS and OECD STAN databases. Second, having obtained reliable National Accounts data for the period under consideration we will proceed into transforming National Accounts variables into their Marxian value equivalent categories based on the methodology of Shaikh and Tonak (1994). Third, we will econometrically estimate the determinants of a number of system critical variables, such as labour and capital productivity, employment, investment, etc, utilising a number of state-of-the-art panel methods (panel GMM and panel cointegration). Fourth, we will explore qualitative and quantitative measures of competition by sector in order to obtain insight into the institutional characteristics of the process of competition in the Greek economy. Fifth, we will generate a macroeconomic model, informed by Marxian Political Economy and heterodox economics in general, in order to compare alternative hypotheses and policy options. The steps that we described are related to the empirical considerations of the proposed project. In parallel to them it will be necessary to discuss and clarify theoretical issues (unproductive labour, production functions, constant quality measures of labour and capital, to name only a few), and to integrate our findings into a narrative regarding the structure of the post-war Greek capitalism from a historical perspective.
The main element of originality in our approach, besides the synthetic economic and historical approach that we propose, will be the use of the Marxian Political Economy as its theoretical framework. Attempted explanations of the current economic crisis from within the mainstream economics tradition provide ample evidence of the theoretical faults of this tradition. It is not only the “rational expectations” approach to macroeconomic phenomena, but also the “new Keynesian” DSGE models, that have utterly failed to predict and indeed to explain the current crisis. In general, the theoretical underpinnings of mainstream economic theory, including both “new Classical” and “new Keynesian” variants, based as they are on the twin pillars of logical atomism and marginalist theory of distribution, have conclusively been proven to be incapable of explaining major trends found in modern capitalism such as the decoupling of real wages from labour productivity; and its corollary huge rise in income inequality. On the contrary the Classical Marxian tradition, with its emphasis on antagonistic class relations and its central emphasis of capital profitability, provides in our opinion a much more fertile ground for an exegesis of the current crisis.
Thus, our analysis will provide the building blocks for the construction of an empirical (macroeconomic) model of the Greek economy, and will attempt to compose such a model from within the Classical-Marxian tradition.
State of the art
The main cause of the current economic crisis proposed by a substantial part of the heterodox literature has been identified with a perceived fall in capital profitability in the years leading to the crisis (Carchedi and Roberts 2017, Shaikh 2010, 2016). Preliminary empirical results (Maniatis and Passas 2017), based on the well-known decomposition of the profit rate (into the effects of income distribution, effective demand, and technological transformation[4]), indicate that in the case of the Greek economy the crisis cannot be attributed to conjectural phenomena such as a profit squeeze or a failure of effective demand, and therefore to economic policy mistakes, but rather the heart of the problem is to be found on a structurally low capital profitability caused mainly by a capital-biased technical change. Since technical change can be considered as a composite variable consisting of labour and capital productivities[5] the proper measurement of variables thus becomes central to our argument. In particular, accepting the distinction between productive and unproductive labour results into widely different estimates of labour and capital productivities and therefore has a significant impact on our analysis. Following the tradition of Mihail (1995) and Bowles, Gordon, and Weiskopf (1983, 1990) it is possible to formulate econometric models of productivity that explore for a number of determinants informed by competing economic traditions[6].
Current full scale econometric macroeconomic models of the Greek economy are basically those employed by the European Central Bank (ECB). The model currently operated by ECB is a micro-founded DSGE model by Christoffel, Coenen and Warne (2008), while a more traditional macroeconomic model developed by Fagan and Mestre (2001) was used previously. Those models have been transcribed and calibrated for the Greek economy by Papageorgiou (2014) and Zonzilos (2004) respectively. We also have to note an even older model employed directly by the Bank of Greece (BoG) and developed by Garganas (1992). The other centre of macroeconomic modelling in Greece has been the Centre of Planning and Economic Research (CEPE), housing the first ever macroeconomic model of the Greek economy by Suits (1964), and also one of the most recent by Papageorgiou and Kazanas (2013). What the latest of those models have in common is the fact that they belong to the DSGE class of models. This, in our opinion, is their main problem since this class of models rests on a very strict set of theoretical assumptions regarding the way individuals interact and moreover has been repeatedly found to underperform in its forecasting abilities. Therefore, we propose the construction of an alternative model, based on alternative macroeconomic foundations, in order to diversify the existing stock of models currently existing and facilitate scientific debate in that particular field.
We regard the task described above as attainable for a number of reasons. First, although long run macroeconomic series for the Greek economy are indeed sorely missing, the methodology proposed by the EUKLEMS project in order to link different vintages of data is straightforward and we have utilised it in previous reported estimates of key Marxian variables for the Greek economy (Maniatis and Passas 2013, 2017; Mavroudeas and Paitaridis 2015). Second, econometric exploration of determinants of system critical variables utilising state of the art panel data econometric techniques and relying on a diverse field of background theory has also been used previously to estimate the determinants of labour productivity in particular (Passas 2016). Third, inquiries into the state of competition by sector have been reported for manufacturing and therefore merely need expanding for the remaining sectors (Maniatis, Marsellou, Passas 2015). Fourth, the authors have experience with macroeconomic modelling and its policy implications from previous projects. Therefore, our main task will be that of synthesis and advancement of currently ongoing projects to a new level. This is in our opinion both easily attainable and with significant impact, and it is not trivial since it requires synthesis at a higher level.
Impact
In our view the proposed project will generate a number of significant benefits for science, economy and society. First, the creation of standardised long run macroeconomic series from existing National Accounts data and their open access to members of the public will allow further research on the subject that is now severely restrained because of this bottleneck. Moreover, basic research on the econometric specification of key macroeconomic variables would enhance our understanding of the Greek economy. Second, the formulation of a heterodox economic model of the Greek economy, and the open access status of its data and equations, will stimulate debate between different traditions in economics and will make policy scenario simulations accessible to members of the public and thus educate and inform large parts of society on economic issues. Third, it will provide an alternative source of economic modelling, therefore allowing government and institutions to obtain macroeconomic forecasts and policy simulations from an independent source.
The end results of the project will include the following: (a) a dataset of long time series of National Accounts and Labour Force data for the Greek economy, (b) econometric estimation of key macroeconomic variables, (c) qualitative and quantitative measure of competition for sectors of the Greek economy, (d) a mainstream and a heterodox model for the Greek economy, (e) a written text that combines an economic and a historical approach for the description of the structure of post-war Greek capitalism, including a set of proposals for its productive restructuring. Those end results will be disseminated in conferences (such as the World Association of Political Economy annual Forum, the annual International Initiative for Promoting Political Economy [IIPPE] conference etc.), in scientific publications (peer reviewed articles), and possibly in the form of a published monograph.
Methodology and Implementation
Central to our research strategy is the distinction between productive and unproductive labour. Classical Political Economy (Smith, Ricardo, Mill, etc) utilised the distinction between productive and unproductive labour as an analytical tool in its “inquiry into the nature and causes of the wealth of nations”. The same is true for Marxian Political Economy later on, but critically not for mainstream economic theory after Alfred Marshall. The key concept of the distinction between productive and unproductive labour is that not all labour produces new value and thus profit for capital (Smith 1776, Marx 1867, 1908, Mohun 1996, Coontz 2003). Significantly, only a subset of total labour is employed in that manner, i.e., productively; another subset of total labour does not generate new value (and thus profit) but instead is a direct cost to production and a burden to total surplus product, i.e., it is employed unproductively[7]. This does not mean that unproductive labour is unnecessary, or that one should try to eliminate all unproductive labour. Unproductive labour, if frugally employed, has various functions within the system of the reproduction of capital (Mohun 2014). It facilitates the faster turnover rate of capital (through its function as circulation labour), it oversees the system of the reproduction of capital (through its function as supervisory labour), and it is in fact a source of effective demand if and when the system generates vast amounts of surplus that cannot be productively placed (for example because the rate of profit has come very low). It is also important to note that the distinction between productive and unproductive labour has nothing to do, at least in its economic formulation, with ethical and normative issues in general.
The application of the distinction between productive and unproductive labour on mainstream National Accounts data provides for a richer understanding of the economic structure. Critically, it alters the magnitude and growth rates of measures of labour (and capital) productivity, and thus allows for a completely new perspective on the actualities of the distribution of income and of the growth potential of the system as a whole. Mainstream economic concepts including, by not limited to, (a) the distinction between tradables and non-tradables sectors, and (b) between financial and nonfinancial sectors can be considered as expressions of the distinction between productive and unproductive labour from a Marxian perspective. Thus, a critical difference is that those distinctions, that are theoretically ad hoc when viewed from within the mainstream economic tradition, can be considered as a subset of an idea that is internal to Marxian Political Economy.
Moreover, the distinction between productive and unproductive labour provides a firm basis for discussions of economic structure, and restructuring, as it presupposes at least a two-sector economy. Mainstream macroeconomic models, of DSGE or earlier forms, conceive the economy as more or less consisting of an undifferentiated single sector, thus failing to account for the effects of the macroeconomic structure on policy simulations. To give an example, for mainstream macroeconomic models it is totally indifferent if a national economy is dominated by the banking sector or by manufacturing, as long as both can at least export a portion of their output. On the contrary for a model informed by the distinction between productive and unproductive labour those two industries belong to entirely different circuits of capital and thus a policy intervention (such as a tax increase) would have vastly different end-results. In this framework issues of balance and fragility become much more transparent and tractable. Therefore, the distinction between productive and unproductive labour can be considered as the methodological basis for an alternative research project on the historical trajectory, current conditions and possible future growth paths of the Greek economy. An issue that, in our opinion, is both critical from a policy perspective and theoretically appealing.
References
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[1] This is most true given the fact that Greek capitalism is progressively moving more and more in sync with global trends (Maniatis 2013).
[2] Here the distinction between productive and unproductive labour is of critical importance since it directly effects both the level and the trend of the mainstream measure of labour productivity
[3] In the tradition of Classical-Marxian Political Economy National Accounts categories require a transformation to account for the distinction between productive and unproductive labour. The methodology for such transformations was pioneered by Shaikh and Tonak (1994) and has been extensively documented and adapted for the Greek economy by Paitaridis (2012) and Passas (2016).
[4] Starting with the contributions of Weisskopf (1979) and Gordon (1987) the rate of profit is decomposed using the following expression
With r the rate of profit, K capital stock, Π profits, Y output, and YN potential output. Therefore, the profit rate is understood as consisting of a profit share component (Π/Y), capturing the effects of income distribution; a capacity utilization component (Y/YN), capturing the effects of effective demand; and of a potential output to capital ratio (YN/K), capturing the effects of technological transformation.
[5] The latter can be decomposed into labour productivity and the inverse of capital productivity
[6] This can be achieved econometrically estimating a relationship of the form
With LP denoting labour productivity in sector i and time t, TECH a vector of technological determinants, SOC a vector of social determinants, MACRO a vector of macroeconomic determinants, and STRUCT a vector of structural determinants. See Passas (2016) for a detailed description.
[7] Mainstream economics assumes that all labour produces profit for capital (and thus also value) if employed efficiently, therefore the mainstream economics concept is nested within the Classical Marxian as a special condition where all labour is considered productive.