Cherchez la Firme. Redressing the Missing Meso Middle in Mainstream Economics
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Aristotle warned against a ‘missing middle’ in logic (Gk Mesos – middle; intermediate). This paper submits that one of the reasons why there has been next no major breakthrough in macroeconomics since the financial crisis of 2007-2008, has been a missing middle in the micro-macro syntheses of mainstream economics – constrained by partial and general equilibrium premises. It proposes that transcending this requires recognition that large and multinational corporations (between small micro firms and macro outcomes – yet also influencing both) merit the concept of mesoeconomics. Drawing on earlier applications, the paper relates this concept to the reasons for ‘too big to fail’ and suggests implications for both research and policies to gain institutional accountability of global big business. Including how a meso dimension to input-output could gain transparency on risk-prone financial transactions by banks and transfer pricing by multinational corporations and even on global warming. It also offers an invitation to interested scholars to join a post-Keynesian and post-Marxian mesoeconomics research network within an evolutionary economics perspective.
This is an interesting, important and dense paper which makes a remarkable combination of insights from economic policy, economic history, economic thought and psychology. The argument for the relevance of mesoeconomics is very persuasive, and well supported by historical and theoretical evidence. Given the enormous amount of information that is articulated to produce the argument, one actually ends up wondering whether there are actually two papers here, where one could focus on the parts relating to economic policy and economic history (to be considered for the World Economic Review) and another one focusing on the parts on economic thought and psychology (to be considered for Economic Thought). This would perhaps produce two papers that would be easier to follow for the reader, albeit losing the advantages of seeing both developments (empirical and theoretical) in a single paper. Another solution would be to remove parts that may not be as relevant to the paper (for example, the examples of uses of the term “meso” in other disciplines in page 2, which does not help establishing the case for meso-economics). Alternatively, one could also remove some parts which would require more analysis than the brief references made: for example, the references to David Ricardo’s putative knowledge of Portugal given the Portuguese origin of his family at the top of page 9, which is difficult to establish, much less with reference to the Portuguese origin which was somewhat remote at the time as his family had been for a long time in Holland before moving to England. Another example of a claim which would require further development is the reference to the influence of the later Wittgenstein on Keynes in the middle of page 10, which should include an analysis of the role of Piero Sraffa not only regarding his discussions with Wittgenstein, but also regarding his direct influence on Keynes (rather than indirectly through Wittgenstein). If the paper is divided in two, however, there would be plenty of space to develop these aspects, and other very interesting ones, such as the views of John Hicks on the IS-LM model. The paper refers to Hicks’ 1980-1 paper on the Journal of Post Keynesian Economics in which Hicks criticizes the IS-LM model, but the paragraph at the end of page 14 in this paper reveals first-person knowledge of Hicks’ views which goes beyond what is in that paper, and could be fruitfully articulated with other parts of this paper. For example, the fact that investment is influenced by prospective demand rather than the interest rate mentioned when discussing Hicks could be seen together with Michal Kalecki’s insight that the amount of capital owned by the firm which is reinvested is often an important positive determinant of investment, and the influence of the interest rate is difficult to disentangle from gross profitability since it often negatively correlated with gross profitability. So Kalecki ends up focusing on capital owned by the firm and gross profitability as drivers of investment rather than the interest rate (whereas existing capital has a negative effect on investment, which leads to a reversal of the business cycle whenever the latter negative effect outweighs the two other positive effects). This is important because Kalecki, together with various institutionalist economists since Thorstein Veblen, can be seen as an important precursor of the emphasis on meso-economics given many of his contributions that the paper rightly notes, and this analysis of the role of firms. In short, I think the paper would benefit either from removing some parts in order to focus on the key argument, or alternatively from being transformed into two papers. Either way, it contains very valuable insights, and it highlights a very important problem which has been relatively neglected in the literature, and certainly deserves to be brought to the public’s attention.
Stuart Holland has been one of the pioneers of the mesoeconomic concept. In Cherchez la Firme, with Andrew Black, he elaborates this as the missing middle in mainstream economics – not least after ‘Too Big To Fail’. Yet part of the force of the paper is that instead of lamenting this, they both propose feasible policies to countervail it and for a coherent research agenda that should appeal to post-Keynesian, post-Marxian and other heterodox economists.
The authors also offer an invitation to a network on research themes which could well offer not only meaningful graduate themes to some of those undergrduate economists who recently have been protesting about the irrelevance of the courses they are being taught, but also raise their awareness that – crossing intellectual barriers – they are jointly contributing to an alternative economic, social and political paradigm
Such as – to take only a few in their proposals from page 30 onwards in the paper:
– Meso in a Post Keynesian Context
Analysing meso-macro dynamics by moving beyond earlier post Keynesian concerns to try to reconcile Chamberlin style monopolistic competition with macroeconomic equilibrium.
The degree to which Keynes’ marginal efficiency of capital and Harrod’s warranted growth, as well as capital stock adjustment principles, no longer are national rather than global for meso corporations.
How this may differ between different economies and regions of the world economy, extending therefore Ohlin’s distinction between nations and global regions, and with differing policy implications.
– Meso in a Post Marxian and Post Kaleckian Context
Including relating ‘too big to fail’ to crisis theory in terms of declining rates of profit in traditional sectors in advanced economies and both the pressures and incentives for speculative finance with deregulation.
Confirming Marx on the now global role of a reserve army of labour as a lever of capital accumulation but qualifying assumptions of declining rates of profit for meso firms with multinational reach and price-making power.
Critiquing the commodification of labour and also of social services in advanced economies as capital seeks to privatise social institutions in health and education.
– Monetary Policy
In terms of qualifying IS/LM theory, to what extent are meso corporations influenced – or not influenced – in their investment decisions by interest rates?
– Fiscal Policy
Sample estimation of the fiscal loss for different countries from transfer pricing by meso corporations.
– Exchange Rate Policy
Assessing the degree to which multinational corporations follow through the devaluation or depreciation of a currency with lower prices or do not do so due to an ‘own competitor effect’.
– Foreign Direct Investment
Evaluation of export substitution effects from multinational FDI as submitted by Ohlin but neglected in mainstream comparative advantage theory.
Assessment of import promotion effects from multinational FDI (importing back to the country of FDI outflow from lower cost global locations).
– Meso Institutions and Finance
Econometric evaluation of the crowding-in effects of bond-issuing public financial institutions both in the EU such as the EIB and the EIF, and in individual European countries, such as with the KfW in Germany, the Caisse des Depôts et Consignations in France and the Cassa Depositi e Prestiti in Italy, as well as of the BNDES in Brazil.
– Accounting and Accountability
Evaluation of the decision of the European Central Bank to directly assess only 130 – meso – banks rather than the 6000 financial institutions in the EU.
Assessment whether it would be more feasible to introduce a Tobin style Financial Transaction Tax for meso rather than for all international financial transactions.
The ideas proposed in this paper represent a major breakthrough in what has become ‘ossified’ economics, trapped between unworkable theories and failing practice. This is the kind of shock treatment the discipline needs, but to articulate its proposals and concepts there needs to be a concerted effort to bring these ideas to a wider audience. Given the immense resources and time that have been spent on attempting to bolster unworkable theories, at times flying in the face of practice, this paper represents a refreshing vision on how economics could once again become praxis.
George Lambie, University of Hong Kong
George Lambie has given an excellent summary of the content of the paper of Holland and Black. I think Holland and Black are emphasizing the connection between monopolistic competition between transnational corporations and disparities on a national, regional and a global level;Disparities which are not only structural (between economic sectors globally) but also social (i.e. income and wealth inequality) and regional;
The questions and remarks raised by Lambie need further investigations in which publications and empirical research of UNCTAD on Transnational Corporations could be of use to connect the meso-theory with empirical developments; This would also mean to connect to ngo such as Tax Justice and TNI in Amsterdam. On issues such as transfer pricing and fiscal losses. Furthermore the PERI institute at the University of Amherst (USA) has contributed theoretically and empirically a lot on the subjects raised by Lambie. We do think of PERI researchers such as James Crotty, Robert Pollin and Gerald Epstein.
In general I support the conclusion of Lambie that this paper represents a major breakthrough in what has become ‘ossified’ economics, trapped between unworkable theories and failing practice. This is the kind of shock treatment the discipline needs!