Tuesday, January 13, 2015


Download the summary text of the lecture given by Dante A. Urbina at the Volkshochschule (“Community College”) in Göttingen - Germany organized by the Inter-Cultural Association “Our America Göttingen e. V.” on January 9, 2015. It includes a chapter by chapter summary of this famous book of the French economist Thomas Piketty and also a frontal critique of it from a heterodox perspective (after so much applause is also necessary to think about its limitations and deficiencies).

This is the link for the free download:

You can also download the slides of the lecture from this link:

Thursday, April 3, 2014


Full transcript of the video “On the Welfare State, employment, unemployment and underemployment”: https://www.youtube.com/watch?v=gUUtrOYaY8w (Excerpt from "Is there a future for the capitalism?" -full video in Spanish-, discussion organized by Dante A. Urbina in the course of Political Economy, Faculty of Economic Sciences of the Major National University of San Marcos (Lima - Peru) on July 5, 2013).

This leads us to the issue of the Welfare State. The Welfare State has as its fundamental point an infrastructure of free market capitalism but with redistribution, this means that production is carried out based on a capitalist free market, incomes are generated and from them redistribution is performed. However this cannot be sustained long term and may not be sustainable in times of crisis when production falls. And that is what is currently showing us the financial crisis and the protests in Greece and all other countries.

I think the problem is in the mechanism, that is, instead of generating mechanisms to ensure that all people can participate meaningfully in the productive system and get their own income based on their effort and work, what is done is only a redistribution process that depends on only a certain members of society. So, in fact, the Welfare State can end excluding. Precisely the Welfare State is given in Europe where the phenomenon of multilocalization or delocalization of production is most pronounced, that is to say, where you can put a company in Switzerland and get that your whole production takes place in Africa, or the bulk of the production takes place in Africa, but the brand is from Switzerland.

That dynamic of delocalization of firms in the context of globalization is generating an unemployment problem in a important part of developed countries because, as people in Europe live in a Welfare State, the State protects certain social rights to ensure that wages are relatively high. What the companies do in this context of globalization is this: they seek labor force abroad or outsource the production, they go to developing countries where the laws are not as strict and where it is not established a Welfare State, and pay much lower wages and even establish systems of informal recruitment or outsourcing of services, etc.

So we see that in developed economies, with this scheme, unemployment is being created and, in underdeveloped economies, employment is not being created. In underdeveloped economies is underemployment what is being created, or forms of precarious employment. And this is something that Peruvian economists should keep in mind because whenever we see statistics, when we see how the employment or the unemployment are moved, we forget that our country (Peru) has underemployment basically. However, what extent economic theory helps us think about underemployment? Economic theory speaks us in terms of employment and unemployment, but not about the content of the working conditions. That's a problem we have here and that is being generated in globalization. Then we also have to think about that.

You can contact the author of this article in: “Dante Abelardo Urbina Padilla” (Facebook) and dante.urbina1@gmail.com (email)

Tuesday, April 1, 2014


Full transcript of the video “On Economic Corruption, Political Corruption and Financial Crisis”: https://www.youtube.com/watch?v=4kot_GHdIMU (Excerpt from “The financial crisis, guilt of the market or the State?” -full video in Spanish-, discussion organized by Dante A. Urbina in the course of Macroeconomics II, Faculty of Economic Sciences of the Major National University of San Marcos (Lima - Peru) on November 28, 2013).

It is said that the State is a conglomeration of individual interests. Precisely there is a theory about this, which is the Public Choice Theory. Well, in this context it is assumed that each person is the best judge of his own welfare. The point is this: we realize that if each person is an agent seeking to maximize their welfare and may even be involved in corruption in order to maximize this welfare... if that is true regarding the State, why would automatically false regarding the market? Is there no corruption in the market? Or rather: is there not a systemic relationship between corruption in the market and corruption in the State? Are separate phenomena?

It was mentioned that some people in the State who had some particular economic interests had also important positions. But what is the problem here: the State itself, the institution itself, or rather the corrupt economic environment which dominates the State, the State capture?

It is said: “Banks take riskier positions because the State allows it”. Correct. But why the State allows it? The State allows it, for example in the U.S., because the lobby is legal. What is the lobby? It means that companies can “solve” their problems by giving money to Congress members so that they promote certain types of policies. And the same occurs in the Executive. When the crisis emerged there was a general problem of moral hazard. I mean, is not as simple as that the State is saying “Give me money, give me money to do what you want”. There is not only someone behind the door waiting for money to carry out corrupt actions but also there are also lots of private companies knocking on the door in order to corrupt. Where corruption exists there must be corrupt and corrupting people.

Someone might say: “Well, but why governments are not honest? Why don’t they stop the corruption?”. The issue is: the market is not an abstract entity; the market also exists in a set of power relations. Individuals who manage the big banks may also have control over media. If they have power over media, have the power to show the image of the governments to the people and, in a democratic system, as the people is ultimately who vote, this allows them to manipulate the image of the government. If the government behaves well with respect to their economic interests, their media will say that this government does things right, whereas if the government begins to contradict their economic interests, their media (in which they are the owners) could show the government in a negative way.

It was also mentioned that President Carter supported to leftists and forced the banks to give loans to insolvent people. But if we see a documentary like, for example, “Capitalism: A Love Story” by Michael Moore, we will find that the process of the current crisis can be understood from the deregulation which came in the 80s with Reagan, which was not supported by leftists but rather by rightists. He gave the banks free rein to do whatever they want.

The point is that government officials are also people who have been working on these big banks. Henry Paulson, the Secretary of the U.S. Treasury, was CEO of Goldman Sachs and, moreover, the President Reagan's chief economic adviser was Chairman of Merrill Lynch.

Well, then it’s very important understanding that exist an interrelationship between corruption in market and state corruption, they are not separate phenomena.

You can contact the author of this article in: “Dante Abelardo Urbina Padilla” (Facebook) and dante.urbina1@gmail.com (email).

Saturday, February 22, 2014


5. The issue of the rationality of the agents

The idea of ​​“endogenous” explanation of the crisis is quite problematic for the Austrian paradigm. In the Austrian School’s view the market is a "spontaneous order" and if something is wrong it is due to the “exogenous” intervention of an external agent (either the State or Central Bank). In the market, if there is no intervention, the agents should behave in a “rational” way, or at least constituting a “rational order”. “Human action is always rational”, writes Ludwig von Mises, the great master of the Austrian School (18).

However, there are important paradigms of economic theory that put into question this view. Among them we have to Behavioral Economics, Neuroeconomics and Experimental Economics. According to these approaches economic agents are not rational subjects who make decisions carefully calculated but rather are systematically conditioned by a set of purely subjective perceptions (optimistic or pessimistic), emotions, neurobiological factors, cognitive biases, group behavior, contexts of moral hazard, etc.

Several leading economists have studied the current crisis based on this perspective. One of them is Robert J. Schiller, recently awarded the Nobel Prize in Economics, who in his book Irrational Exuberance gives an interesting explanation of how the financial bubbles are created. He focuses particularly on the behavioral patterns of the agents and their expectations of future asset prices. If asset prices begin to rise, then less sophisticated investors will enter into the speculative scheme and they will believe that prices will continue to rise continuously. Then there comes a time when expectations are not met and the “irrational exuberance of optimism” becomes an “irrational exuberance of pessimism” with the consequent entropic effects on the market that involves this kind of perception.

Thus, one finds in Schiller’s analysis a very interesting “behavioral” correlate of the Minsky’s approaches because, as McCulley says: “Humans are not only momentum investors (…) but also inherent both greedy and suffering from hubris about their own smarts. It’s sometimes called a bigger fools game, with each individual fool thinking he is slightly less foolish than all the other fools” (19). It seems this one, and not the Austrian vision of “spontaneous order”, a better description of what has happened in the financial markets in recent years.

6. Conclusion

Is true that some Austrian economists predicted the crisis, but this is an example of being right for the wrong reasons or at least too simplistic reasons. We do not want to detract Austrian contribution about how central banks can influence the generation process of “financial bubbles” and “fictitious economies” but we want to prevent that this contribution lead us to reach conclusions as extravagant as saying that the “exogenous” state intervention is the only explanatory factor in the crisis and that the crisis in no way put into question the optimality of the free and unregulated market.

In fact, as we have seen, there are very relevant endogenous factors that have much greater explanatory power regarding the generation of the “financial bubble” such as those related to the Minsky’s financial instability hypothesis, the dynamics of the monetary aggregate M3, the complex derivatives, toxic assets, excessive speculation in the housing markets, the role of rating agencies, cognitive biases, the “irrational exuberance” of the agents, deregulation and moral hazard environment generated that should be considered for a coherent and consistent explanation of the crisis and the generation of better judgment elements for its solution.

Thus the current crisis is a highly complex phenomenon that cannot be properly approached from a unidirectional perspective. For this reason this paper has taken into account several paradigms of economics such as Neo-Ricardianism, Post Keynesianism, Behavioral Economics and Experimental Economics. In fact, in order to analyze the phenomenon is not only necessary to do so from a perspective multiparadigmatic but also from a multidisciplinary perspective taking into account the contributions and developments in other social sciences such as Sociology, History and Political Science. Moreover, this problem should be approached even from a transcendent philosophical perspective for a more solid and enduring civilizational reconstruction of the economic system. But that is something that goes beyond the scope of this article and might be a matter for a later one.


18) Ludwig von Mises, La Acción Humana, Unión Editorial, Madrid, 1980, p. 45.
19) Paul McCulley, “The shadow banking system and Hyman Minsky’s economic journey”, Global Bank Central Focus, May 2009.

You can contact the author of this article in: “Dante Abelardo Urbina Padilla” (Facebook) and dante.urbina1@gmail.com (email)

Wednesday, February 12, 2014


4. The financial instability hypothesis: "endogenous" explanation of the crisis

Hyman Minsky was a post-Keynesian economist whose ideas were rejected in their time because they were considered “overly radicals” but who currently (posthumously) has become very famous because his “financial instability hypothesis” seems to explain quite well the current crisis.

Specifically, Minsky begins considering that economic agents can basically take three financial positions:

1) Hedge: Investments are financed in a way that they can fulfill all payment obligations regardless of the cash flows generated by the investment. Principal and interest payments on debt are insured for the proper time.

2) Speculative: In this case the agents bet on the future variations of the price of goods. Revenue flows generated by investments are adequate to meet the interest payment but the payment of principal is not guaranteed.

3) Ponzi: In this situation the payment obligations exceed the revenue stream derived from the investments. Agents have to borrow more and more to pay debts, so that the final solution is selling assets to obtain liquidity to afford the payments since the debt renegotiation is increasingly difficult.

Given this scheme, Minsky’s hypothesis is this: that from a position of financial stability (hedge) economies will tend, due to its own dynamic, to positions of financial instability (speculative and ponzi) in which will reach a point of overall insolvency of the economy with consequent bankruptcies of companies and banks that this implies (“Minsky’s moment”). In Minsky’s own words: “The first theorem of the financial instability hypothesis is that the economy has financing regimes under which it is stable, and financing regimes in which it is unstable. The second theorem of the financial instability hypothesis is that over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system”. (17)

To understand why the instability is generalized in the system we must begin by understanding what happens in the boom phase. Firstly, financial stability (predominance of the hedge position) predominates and expectations are optimistic. Because of this economic agents rely on their ability to meet payments (solvency) and that the future returns on their investments will be more than sufficient (optimistic estimate of the marginal efficiency of capital). At the same time, banks, considering the environment of prosperity and the large amount of funds which they have available to lend, are more lax at the moment of establishing restrictions. Although some reluctances may arise on the part of lenders, these are diluted by the economic strength of the boom phase; system robustness makes the agents rely on that this one will not fail and therefore begin to take riskier positions (speculative and ponzi) which contribute, paradoxically, to making more fragile to the system (paradox of debt). Thus, the optimistic expectations lead firms to overestimate the performance of their investments and that banks underestimate the possibility of default on obligations. In this way it will begin to systematically happen that agents cannot meet their payment obligations as these exceed the yields obtained. Initially they will seek to solve this through the debt renegotiation but sooner or later the agents have to sell their assets to obtain liquidity, a process which leads to a deflationary episode that finally leads to the crisis with the subsequent bankruptcy of companies and banks.

Thus, stability creates instability, the robustness the system makes it fragile and optimism leads to pessimism. Here is the great contribution of Minsky facing a discredited Austrian Business Cycle Theory: an “endogenous” explanation of the crisis.


17) Hyman P. Minsky, “The financial instability hypothesis”, The Jerome Levy Economics Institute Working, Paper Nº 74, May 1992.

You can contact the autor of this article in: "Dante Abelardo Urbina Padilla" (Facebook) and dante.urbina1@gmail.com 

Thursday, February 6, 2014


3. The Fed did it?: critique of “exogenous” explanation of the crisis

The other central point of the argumentation that is made from the Austrian Business Cycle Theory in order to sustain that the State caused the crisis refers to the preponderant role of the Federal Reserve (Fed) in the generation of the “credit bubble”. In this manner, the problem is not the free market, deregulation or the dynamics of private banks but rather the distorting action of “central agent”.

Taking into account the important caveat that the Federal Reserve is, in institutional terms, a private organization and not a government organization (as is often believed), one can answer the Austrian's argument in two ways.

First, by demonstrating that the causal process involved is not as simple or straightforward as the Austrians claim. There have been periods of significantly low interest rates in which asset bubbles or substantial recessions have not occurred. Interest rates are merely another cost of companies among many others. In fact, the Federal Reserve began to raise interest rates in a period as early as 2005 but even so the bubble doesn’t burst. Likewise, the economist Nouriel Roubini, internationally promoted as who predicted the crisis, had said in his lecture September 2006 at the International Monetary Fund, that an “imminent” crisis would occur in early 2007 (13). However, the economy seemed to be working perfectly even until early 2008 and the bubble did not burst until September. Therefore, the correlation between economic activity and interest rate is not as simple or straightforward as to try to make a reliable prediction based only on it. (14)

Second, by attending to the distinction between the monetary aggregates and their respective dynamics. Austrian economists tend to illustrate his argument by referring to a Central Bank which manipulates “the” money supply. However, it is widely accepted (from orthodox neoclassicals to the heterodox post-Keynesians) that there is an important distinction between the types of monetary aggregates. The aggregate M0 is a narrow measure of money supply and M3 is the broadest. While M0 is strictly controlled by the Federal Reserve, M3 basically depends on the specific action of individual banks. Thus, if one wants to find evidence that “the Fed did it”, such as the Austrians argue, must be verified that the dynamics of M0 is much more correlated with the crisis than the dynamics of M3.

Is there such evidence? In his article “Debunking Macroeconomics”, heterodox economist Steve Keen gives relevant econometric information in this regard (15). Specifically, he establishes, for the period 1990-2012, the correlation between changes in M0 and M3 and the dynamics of real economy (taking the level of unemployment inversely). In what follows, the graphs presented by Keen:

Graph 1

Graph 2

As shown in Graph 1 the correlation between M0 and economic activity is weak and has the wrong sign, whereas the correlation between M3 and economic activity is strong and has the correct sign. Therefore, according to this, you can consistently say that the dynamics of the crisis is more due to the action of individual banks rather the action of Central Bank (the Fed).

But you could still argue that the initial action of the Fed is what has distorted the dynamics of banks. However, this reply should be dismissed becausethe correlation between changes in M0 and changes in M3 is (…) strongly of the wrong sign for the pre-crisis period from 1990-2008 (-0.55), and only barely positive for the post-crisis period (+0.14)”. (16)

Therefore, there is no solid basis for considering the current crisis as a merely “exogenous” phenomenon regarding the market caused by the arbitrary intervention of a central agent (Fed) in a financial system which would work perfectly without such intervention. You cannot ignore the context of “moral hazard” generated by private banks, the “toxic assets”, the role of “rating agencies” (with the implied corruption) and the specific influence of private agents in the process of deregulation. All this, then, must lead us to an “endogenous” explanation of the crisis.


14) It must be said, however, that the Roubini’s theory, an heterodox and multidisciplinary economist, incorporated many more items than the mere Austrian Business Cycle Theory and therefore is much more plausible.
15) Steve Keen, “Debunking Macroeconomics”, Economic Analysis & Policy, vol. 41, nº 3, December 2011.
16) Steve Keen, Ibídem, p. 160.

You can contact the author of this article in: “Dante Abelardo Urbina Padilla” (Facebook) and dante.urbina1@gmail.com (email)

Thursday, January 30, 2014


2. Hayek - Sraffa debate and the fallacy of the “natural rate of interest”

The debate between Friedrich von Hayek, perhaps the most prominent representative of the Austrian School in the twentieth century, and Piero Sraffa, Italian economist who founded the Neo-Ricardian school, on the problem of uniqueness and consistency of the notion of “natural price” was curiously result (and somehow the continuation) of an earlier discussion between another two great economists: John Maynard Keynes and Lionel Robbins.

In the early thirties the intellectual environment of the University of Cambridge (England) was largely dominated by Lord Keynes who, by then, had already published his Treatise on Money and was working in The General Theory of Employment, Interest and Money. The professor Robbins, renowned liberal economist of the time, disagreed with the ideas of Keynes. However, he had failed to build until that moment a conclusive rebuttal of them.

It is precisely in this context that Hayek was invited to Cambridge. Joan Robinson, considered as the most important disciple of Keynes, describes the event as follows: “While the controversy about public works was developing, Professor Robbins sent to Vienna for a member of the Austrian school to provide a counter attraction to Keynes. I very well remember Hayek’s visit to Cambridge on his way to the London School. He expounded his theory and covered a black board with his triangles. The whole argument, as we could see later, consisted in confusing the current rate of investment with the total stock of capital goods, but we could not make it out at the time”. (2)

Thereby Hayek’s involvement in the Keynes-Robbins debate began to tip the balance to the side of Robbins. Keynes would had to overcome such criticism to continue successfully the project of the General Theory, but had little success in response: like other English economists, he had difficulty understanding and replying to Hayek given the little knowledge we had about the conceptual structure of the Austrian approach. And that's where Sraffa, with more knowledge of the Austrian tradition and invited by Keynes in 1927, enters in the debate.

The controversy between Hayek and Sraffa focuses, as has been said, on the issue of “natural price” which, of course, is central and relevant to the Austrian Business Cycle Theory since this theory postulates that crises are caused by Central Banks that artificially determine an interest rate below the level of the “natural rate of interest”. In 1932, Sraffa published in the Economic Journal the article “Dr. Hayek on Money and Capital” (3) and the same year Hayek responds with “Money and Capital: A reply” (4). Subsequently Sraffa replies with “Money and Capital: A rejoinder”. (5)

Sraffa’s critique is basically an internal critique, i.e., he analyzes the logical consistency and coherence of the Hayek’s argument. By doing this analysis Sraffa realize that there are serious logical gaps in Hayek’s theory and therefore is canceled all the explanatory value of the notion of "natural price" and also of the notion of “natural rate of interest”.

Specifically, the strongest Sraffa’s attack is to the uniqueness of the “natural price”. Starting from Hayek’s assumption about that money is merely a medium of exchange and by introducing the notion of “own rate of interest” for each good, Sraffa demonstrates the non-uniqueness of the alleged “natural price”. He writes: “If money did not exist, and loans were made in terms of all sorts of commodities, there would be a single rate which satisfies the conditions of equilibrium, but there might be at any one moment as many ‘natural’ rates of interest as there are commodities, though they would not be ‘equilibrium’ rates. The ‘arbitrary’ action of the banks is by no means a necessary condition for the divergence; if loans were made in wheat and farmers (or for that matter the weather) ‘arbitrarily changed’ the quantity of wheat produced, the actual rate of interest on loans in terms of wheat would diverge from the rate on other commodities and there would be no single equilibrium rate”. (6)

Thereby, considering the dynamics of the market, if there is only one disequilibrium between supply and demand of goods, the natural rate of interest on such goods will diverge with respect to the natural rate of other goods. Therefore, there is no uniqueness of the “natural price”.

In his reply Hayek, having had to admit the existence of multiple “natural rate of interest”, however says that they all are “equilibrium rates” (7). Sraffa is conclusive in showing the theoretical and practical difficulties of such a response: “Dr. Hayek now acknowledges the multiplicity of the ‘natural’ rates, but he has nothing more to say on this specific point than they ‘all would be equilibrium rates’. The only meaning (if it be a meaning) I can attach to this is that his maxim of policy now requires that the money rate should be equal to all these divergent natural rates”. (8)

Hayek’s attempts to revive the debate were sterile. Sraffa’s critique was too strong and the Austrian economists had to bear it for decades. In fact, it was not until 1994 that the prominent Austrian economist Ludwig Lachmann, defender of radical subjectivism, gave a relevant answer to the Sraffa's critique pointing out the ability of “entrepreneurial action” to eliminate the disequilibrium (9).

However, in an important paper in 2010 entitled “Multiple Interest Rates and Austrian Business Cycle Theory”, the Austrian economist Robert Murphy recognizes the inadequacy of the Lachmann’s solution: “Lachmann’s demonstration -that once we pick a numéraire, entrepreneurship will tend to ensure that the rate of return must be equal no matter the commodity in which we invest- does not establish what Lachmann thinks it does. The rate of return (in intertemporal equilibrium) on all commodities must indeed be equal once we define a numéraire, but there is no reason to suppose that those rates will be equal regardless of the numéraire. As such, there is still no way to examine a barter economy, even one in intertemporal equilibrium, and point to “the” real rate of interest”.  (10)

It is clear that there is no such thing as a “natural rate of interest” and therefore actually Austrian economists lack an objective parameter on which to base their argument that the crisis is caused because the Central Bank establishes a rate of interest “below” of “the” natural rate of interest. In fact, that leads us to the epistemological issue of falsifiability: given a lack of objective parameters, there is no way to determine if the theory corresponds to reality or not. One can understand the Austrians’ critique of the mathematization of Economics because this is not the ideal way to understand “complex phenomena” (11) but their rejection of the Statistic itself in the study of specific cases turns the theory in unfalsifiable and, therefore, puts into question its scientific character. (12)

To be continued


2) Joan Robinson, “The Second Crisis of Economic Theory”, The American Economic Review, vol. 62, Issue ½, 1972, p. 2
3) Piero Sraffa, “Dr. Hayek on Money and Capital”, Economic Journal, vol. 42, 1932, pp. 42-53.
4) Friedrich von Hayek, “Money and Capital: A reply”, Economic journal, vol. 42, 1932, pp. 237-249.
5) Piero Sraffa, “Money and Capital: A rejoinder”, Economic Journal, vol. 42, 1932, pp. 249-251.
6) Piero Sraffa, “Dr. Hayek on Money and Capital”, Economic Journal, vol. 42, 1932, p. 52.
7) Friedrich von Hayek, “Money and Capital: A reply”, Economic journal, vol. 42, 1932, p. 245
8) Piero Sraffa, “Money and Capital: A rejoinder”, Economic Journal, vol. 42, 1932, p. 251.
9) Cf. Ludwig Lachmann, Expectations and the Meaning of Institutions: Essays in Economics, Routledge Press, London, 1994, p. 154.
10) Robert Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory”, consultingbyrpm.com, 2010, p. 14.
11) Cf. Friedrich von Hayek, “Theory of Complex Phenomena”, Studies in Philosophy, Politics and Economics, University of Chicago Press, Chicago, 1967, p. 22-42.
12) See: Karl R. Popper, La Lógica de la Investigación Científica, Tecnos Press, Madrid, 1980.

You can contact the author of this article in: “Dante Abelardo Urbina Padilla” (Facebook) and dante.urbina1@gmail.com (email)