Self-righteous Chicago drivel — far from everything you need to know about economics

April 24, 2014 7 comments

from Lars Syll

In 2007 Thomas Sargent gave a graduation speech at University of California at Berkeley, giving the grads “a short list of valuable lessons that our beautiful subject teaches”:

1. Many things that are desirable are not feasible.
2. Individuals and communities face trade-offs.
3. Other people have more information about their abilities, their efforts, and their preferences than you do.
4. Everyone responds to incentives, including people you want to help. That is why social safety nets don’t always end up working as intended.
5. There are trade offs between equality and efficiency.
6. In an equilibrium of a game or an economy, people are satisfied with their choices. That is why it is difficult for well meaning outsiders to change things for better or worse.
7. In the future, you too will respond to incentives. That is why there are some promises that you’d like to make but can’t. No one will believe those promises because they know that later it will not be in your interest to deliver. The lesson here is this: before you make a promise, think about whether you will want to keep it if and when your circumstances change. This is how you earn a reputation.
8. Governments and voters respond to incentives too. That is why governments sometimes default on loans and other promises that they have made.
9. It is feasible for one generation to shift costs to subsequent ones. That is what national government debts and the U.S. social security system do (but not the social security system of Singapore).
10. When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation.
11. Most people want other people to pay for public goods and government transfers (especially transfers to themselves).
12. Because market prices aggregate traders’ information, it is difficult to forecast stock prices and interest rates and exchange rates.

Read more…

Occupy the teaching of economics

April 24, 2014 1 comment

from David Ruccio

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Back in 2009, in the midst of the Great Crash (and therefore at the start of the Second Great Depression), a colleague and friend asked me whether I expected the teaching of economics to change. His view was that, since mainstream economics had so miserably failed in both predicting the crash and providing a guide as to what to do once the crash occurred, it was obvious the economics being taught to students had to fundamentally change. My answer was that, while the need for a change was obvious, I didn’t see it happening—and it probably wouldn’t happen (thinking back to the emergence of the Union of Radical Political Economics in the late-1960s) unless and until students of economics demanded a different approach. Read more…

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April 23, 2014 3 comments

from David Ruccio

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Read more…

Categories: Uncategorized

60-page report on undergraduate teaching of economics

April 23, 2014 Leave a comment

The Post-Crash Economics Society at the University of Manchester has published a comprehensive, 60-page report on undergraduate teaching of economics at the University.  Called ‘Economics, Education and Unlearning’, it can be downloaded at www.post-crasheconomics.com/economics-education-and-unlearning/. Highly recommended to anyone who wants economics to get back in touch with the real world.

First Piketty and now Gilens and Page

April 23, 2014 18 comments

from Peter Radford

“When the preferences of economic elites and the stands of organized interest groups are controlled for, the preferences of the average American appear to have only a minuscule, near-zero, statistically non-significant impact upon public policy.” – Martin Gilens & Benjamin Page, ” Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens, forthcoming this Fall

Wow. The second shoe drops.

Whilst we are all absorbing the impact of Piketty – and I repeat: go read it before you comment on capitalism henceforth – in come Gilens and Page with a blockbuster paper that shreds any concept that America is a functioning democracy, where by democracy we mean a state whose policies are influenced by popular sentiment.

We are an oligarchy, with a slew of special interest groups providing a supporting cast to an economic elite who manage to direct policy to their advantage. Not always, but often enough to skew society prodigiously. Having established with their research that American policymaking is dominated by an elite, Gilens and Page end:

“Americans do enjoy many features central to democratic governance, such as regular elections, freedom of speech and association, and widespread (if still contested) franchise. But we believe that if policymaking is dominated by powerful business organizations and a small number of affluent Americans, then America’s claims to being a democratic society are seriously threatened.”

Read more…

Categories: Plutonomy

Krugman still thinking about Sweden — and still only gets it partly right (2 graphs)

April 23, 2014 Leave a comment

from Lars Syll

As I reported last week, Sweden is according to Statistics Sweden in a state of deflation. The inflation rate was -0.6 percent in March.

To a large extent the deflation is caused by tight monetary and fiscal policies  pursued by Sweden’s  Central Bank and the government. With a very defensive fiscal policy and a targeted inflation rate set at a very low level, real inflation has during the last 2-3 years been very close to zero, and now even negative. Another consequence of the austere fiscal and monetary policies is that overall unemployment is still at almost 9 % and youth unemployment close to 26 %.

This is deeply worrying. On this Krugman and yours truly seem to agree:

I’m still thinking about Sweden’s slide into deflation, which actually offers several lessons relevant to the rest of us.

First, it’s an object lesson in the power of sadomonetarism, the desire of many monetary officials to raise interest rates … In 2010 Sweden had high unemployment and low inflation; Econ 101 level macro should have said that this was no time to raise rates. Yet the Riksbank went ahead and did so anyway. Why?

It now says that it was all about financial stability, about fears of excessive house prices and borrowing. But that’s not what it was saying at the time! The bank’s governor did a chat in December 2010 in which he declared that it was about inflation:

“If the interest rate isn’t raised now, we’ll run the risk of too much inflation further ahead. This wouldn’t be good for the economy. Our most important task is to ensure that we meet our inflation target of 2%.”

Strange to say, however, when inflation started coming in well below the target, the Riksbank just kept raising rates, and switched to the financial stability justification.

Krugman’s argumentation, however, gives a somewhat too simplistic view of the problems facing the Swedish economy today.  Read more…

The imputed rent is to darn high! More on Piketty

April 22, 2014 2 comments

Quite some people who are reading Piketty are somewhat puzzled by ‘r’, the return on capital. How can r keep increasing when the amount of capital, as a % of GDP, doubles?! What is ‘r’ anyway? Piketty is actually quite clear on ‘r’: he uses the definitions and data from the national accounts. One of the constituent parts of ‘r’ are house rents: actual rents as well as imputed rents. Imputed rents are an imputed stream of income of owner occupants of houses and are supposed to be as high for these owners as actual rents for comparable houses (becomes a little difficult for houses of the top 0,1%, but for most owner occupied houses this procedure is reasonable). And when we look at imputed rent as a % of total household expenditure we see that this did increase quite a lot (should have calculated this as a part of disposable income or GDP but that required a whole lot of additional calculations while these data were directly available on the Eurostat site). Even for neoclassical economists, who do not believe that house prices are house prices and calculate the value of housing capital as the discounted value of the stream of rents (look here, in french, via Marginal Revolution) this will mean that the amount of capital increases, compared with household expenditure (and a fortiori when the ECB lowers interest rates, i.e. the discount factor). I do admit that it is troublesome to mark houses to market when they are not on the market. But discounting a stream of income in an uncertain world is troublesome, too, and it does not make any sense to calculate the extra ordinary rise of house prices in many countries away! Anyway – the imputed rents are too darn high! Which explains part of the conundrum. Read more…

Categories: Uncategorized

Paradigm Lost?

April 22, 2014 12 comments

from Peter Radford

The story so far:

Robert Locke asserts that neoclassical economics never attained paradigm status and thus cannot be seen as about to be dethroned from its exalted perch. He also decries the failure of mainstream economics to discuss its failures. This only a few months after an interview conducted by Paul Rosenberg with Edward Fullbrook in the RWER issue #66 in which he discussed the contrast between new and old paradigms in economics, and I may have stirred things up when I used a Thomas Kuhn quote to begin one of my own articles earlier this month.

So is there? Or isn’t there?

Let me try to square the circle.

Clearly there exists in economics some center of gravity. Indeed this center is so large that it appears to engulf most else around it. Economists either acknowledge that the discipline is rife with many voices – these seem to be in the minority – or they simply behave as if the big questions have been settled and that what they do is “economics” without the need to give a more precise definition. These latter are what I suspect Locke would refer to as the “mainstream”.

Equally clearly, at least to those who occupy the center, mainstream economics is a coherent whole. It isn’t just the degree of mathematical formality with which it is expressed, it isn’t just a methodology, nor is it just a set of “laws”, insights” “tools” and what have you. It is all of these packaged together. If a person doesn’t conform to this package then he or she is outside the mainstream and will find it hard, often impossible, to advance professionally or participate in the major arguments of the day.

The boundaries of the center are malleable to a degree. There are factions within it so it is not thoroughly homogenous. But there are sufficient shared traits that, to someone on the outside looking in, the center is manifest. It is manifest enough to exert enormous power over what is or isn’t published. It is manifest enough to dominate what is taught in most schools and universities. It is manifest enough to dominate policy circles and other domains that require input from economists.

It is manifest enough to deserve to thought of as  a paradigm. Read more…

On Piketty and definitions. ‘Financial capital’ is not the same thing as ‘physical capital’ (two graphs)

April 21, 2014 5 comments

The discussion about Piketty is getting messed up. The vagueness of economic parlance allows people to accuse him of mistakes he doesn’t make. The meaning of the word ‘capital’ is a case in point. Financial capital (like bonds, cash, receivables (which are included in the estimates of financial wealth in the national accounts and which have the same magnitude as cash, deposit money and money in savings account combined)) are not the same thing as physical capital (houses, cars, buildings, machinery and the like). Financial capital is to quite some extent owned by old, retired women. Physical capital is used by people at work. The Piketty book, ‘Capital in the 21st century’, is about the inexorable rise of financial capital, not about the increase of physical capital, as Clive Crook rightly notes (below).

Over the course of history, capital accumulation [physical capital, M.K.] has yielded growth in living standards that people in earlier centuries could not have imagined, let alone predicted — and it wasn’t just the owners of capital [financial capital, M.K.] who benefited. Future capital accumulation may or may not increase the capital share of output; it may or may not widen inequality. If it does, that’s a bad thing, and governments should act. But even if it does, it won’t matter as much as whether and how quickly wages and living standards rise.

That is, or ought to be, the defining issue of our era, and it’s one on which “Capital in the 21st Century” has almost nothing to say.

That’s right. But the english word ‘capital’ can mean financial capital as well as physical capital. Read more…

Categories: Uncategorized

Pensions: an Iznop game? (three graphs)

April 20, 2014 Leave a comment

Does Europe have to panic about pensions? Or about unemployment? Paul Samuelson famously wrote, back in 1967,

Social security is a Ponzi scheme that works. The beauty of social security is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he paid in – exceed his payments by more than ten times (or five times counting employer payments). How is it possible? It stems from the fact that National Product is growing at a compound interest rate and can be expected to do so as far as the eye cannot see. Always there are more youths than old folks in a growing population. More important, with real income going up with 3% a year, the taxable base on which benefits rest is always greater than the taxes paid historically by the generation now retired…. A growing nation is the greatest Ponzi scheme ever contrived

Samuelson was of course right. Here you find (in french) an INSEE study which calculates that (due to the fact that about ten years ago french pensions were not indexed to wages anymore but to inflation) the burden of french pensions will not increase, thanks to growing labour productivity. France however has a relatively high fertility rate (about 2,0, just below the replacement level of 2,1). Countries like Germany and Italy and Spain however have fertility levels of only about 1,4. And, to paraphrase Samuelson, ‘Always there are more old folks than youth in a shrinking population’. Is this a problem? Not entirely. Dear comrades and (what’s the female equivalent?), unemployment in the EU is at a historical high of 12%, putting these people to work will mean less unemployment benefits and much more production, which will pay for the pensions problems and the more so when we add productivity increases. Also, fortunately and wisely, during the Ponzi-days the de facto retirement age was lowered all over Europe, which means that at this moment there is, surely in Southern and Eastern Europe, a large labour reserve (graph 1). True, after about 2000 labour participation rates of this age group increased everywhere (graph 2, though there seem to be recent setbacks because of ultra high unemployment). Read more…

Categories: Uncategorized

More effective remedies for inequality than Piketty’s

April 19, 2014 22 comments

from Geoff Davies

I have read only reviews of Thomas Piketty’s Capital in the Twenty-First Century, but clearly it is valuable for documenting the nature and history of inequality over the past century or three, and for highlighting the excessive political power that flows from super-wealth.  Yet he frames it in terms of capital and capitalism and, for all the quality of his diagnosis, his main prescription evidently is just to tax the wealthy, through income and inheritance taxes.

The trouble is, capital and capitalism are very ill-defined.  To speak of capitalism is to invite an un-constructive shouting match.  Capitalism has caused great harm to people and the world!  Yes but capitalism is what has made us rich!

A more useful framing is that there have been, and can be, many ways to structure a market economy.  When one looks into the mechanisms that have operated in market economies, one can readily identify mechanisms that pump wealth from the 99% to the 1%.  One can then think of ways to stop or reverse these flows, so wealth flows more fairly to everyone involved in its generation.  It will be much more effective to fix the problems at the source than just to apply traditional retro-active bandaids like taxes.

In my own book Sack the Economists, I identified seven fairly obvious such mechanisms.  Below is an edited excerpt that summarises mechanisms identified in the course of the book’s analyses.  (Dean Baker has also made lists, short and longer, which are a little more detailed and only partly overlapping with mine.) Read more…

2013 CEO-to-worker pay ratio in the USA

April 18, 2014 3 comments

from David Ruccio

CEO-worker-2013

According to the AFL-CIO’s latest “Executive Paywatch” report, the CEO-to-average-worker-pay ratio rose last year to 331:1. And the ratio of CEO pay to the minimum wage was much higher: 774:1.

That’s because, in both cases, workers’ wages remained more or less constant while the amount of surplus those workers created that ended up in the pockets of the CEOs of the nation’s largest corporations continued to rise.

As the AFL-CIO argues in their report: Read more…

Capital: Piketty and such

April 18, 2014 9 comments

from Peter Radford

I will not pile on any more: the Piketty book is required reading. Enough said.

What strikes me is that his data set is so comprehensive that it ought to end many of those lingering debates within economics. I doubt it will, but it ought to.

I have a few comments I want to make because of his book and the reaction to it.

First: it confirms, in my mind, my argument that economic systems cannot ever be carved out of their historical, social, and political contexts. Not, at least, if the analyst wants to be left with anything at all useful. Studying economics as some abstracted other-worldly stand alone entity is entirely pointless. Pretending that everyday people act in an economic sense without reference to a whole slew of cultural, institutional or other relationships and pressures is just nonsense. Of course they do. We all know that.

I understand that distilling some uniquely “economic” regularities is useful. I understand that establishing certain cause and effects relationships can help us understand society, but, ultimately it is society we are understanding, not just some economic agents roaming about absent any other influences. So anything understood within the domain of economics must then be converted to, or fitted within, the larger picture before it is thought of as having any relevance. Particularly policy relevance.

So it is not enough to build upon micro foundations unless those foundations extend across a diverse realm that includes all the elements at the base of the society being studied. To avoid such an extension is to display an extraordinary and willful narrow mindedness.

With this in mind, I think Piketty’s book is the starting point for a thorough review of economic thought. Including much current heterodox thought which suffers from the same disease as orthodoxy: it is not comprehensive enough to have real value. Read more…

The solitude of Latin America. Nobel lecture, 8 December 1982, Gabriel Garcia Marquez

April 18, 2014 1 comment

The Solitude of Latin America

Antonio Pigafetta, a Florentine navigator who went with Magellan on the first voyage around the world, wrote, upon his passage through our southern lands of America, a strictly accurate account that nonetheless resembles a venture into fantasy. In it he recorded that he had seen hogs with navels on their haunches, clawless birds whose hens laid eggs on the backs of their mates, and others still, resembling tongueless pelicans, with beaks like spoons. He wrote of having seen a misbegotten creature with the head and ears of a mule, a camel’s body, the legs of a deer and the whinny of a horse. He described how the first native encountered in Patagonia was confronted with a mirror, whereupon that impassioned giant lost his senses to the terror of his own image.

This short and fascinating book, which even then contained the seeds of our present-day novels, is by no means the most staggering account of our reality in that age. The Chronicles of the Indies left us countless others. Eldorado, our so avidly sought and illusory land, appeared on numerous maps for many a long year, shifting its place and form to suit the fantasy of cartographers. In his search for the fountain of eternal youth, the mythical Alvar Núñez Cabeza de Vaca explored the north of Mexico for eight years, in a deluded expedition whose members devoured each other and only five of whom returned, of the six hundred who had undertaken it. One of the many unfathomed mysteries of that age is that of the eleven thousand mules, each loaded with one hundred pounds of gold, that left Cuzco one day to pay the ransom of Atahualpa and never reached their destination. Subsequently, in colonial times, hens were sold in Cartagena de Indias, that had been raised on alluvial land and whose gizzards contained tiny lumps of gold. One founder’s lust for gold beset us until recently. As late as the last century, a German mission appointed to study the construction of an interoceanic railroad across the Isthmus of Panama concluded that the project was feasible on one condition: that the rails not be made of iron, which was scarce in the region, but of gold.

Our independence from Spanish domination did not put us beyond the reach of madness. Read more…

Categories: Uncategorized

Sweden hit by deflation — a sad and worrying reminder of the impotence of mainstream economics

April 17, 2014 4 comments

form Lars Syll

Sweden is according to new statistics from  Statistics Sweden in a state of deflation. The inflation rate was -0.6 percent in March.

To a large extent the deflation is caused by tight monetary and fiscal policies  pursued by Sweden’s  Central Bank and the government. With a very defensive fiscal policy and a targeted inflation rate set at a very low level, real inflation has during the last 2-3 years been very close to zero, and now even negative. Another consequence of the austere fiscal and monetary policies is that overall unemployment is still at almost 9 % and youth unemployment close to 26 %.

This is deeply worrying.

So yours truly thought he should give the Swedish Fed and the Swedish finance minister - Anders Borg –  a suggestion for reading …

Zoltan Pozsnar and Paul McCulley have written an absolutely splendid essay on what a liquidity trap means and why mainstream neoclassical economics has nothing to offer in way of solving the problems that it brings along – and why it is so important to get hold of the insights that Fisher, Keynes, Minsky and Krugman have given us on debt-deflation processes and liquidity traps: Read more…

Solar in the EU: triple E.

April 17, 2014 1 comment

The future is solar, as we all know. And the future is here (graphs). Solar panel area tripled in ten years which, as panels are becoming more effective, means that solar power generation must have increased fourfold or something like that. Which is only the beginning. A quick internet search yielded, however, that China and the USA seem to be outgrowing the EU.

An interesting aspect: solar electricity is not only durable – it’s also ‘local’. The modern state is to quite an extent a network state: sewer systems, highway systems, railway systems, the electricity grid, television and telephone networks etcetera. Solar electricity is, though compatible with networks, not necessarily dependent on large, national grids and allows for a more dispersed use of capital (financially as well as physically).

The comparative advantage of the southern EU states is not yet visible in the statistics.

Source: Eurostat, for a number of states no data available.

solar1 Read more…

Categories: Uncategorized

Class Based Economics

April 16, 2014 29 comments

from Peter Radford

Buried somewhere in the pile of stuff I have accumulated as I think about inequality are these statistics:

  1. Of all the income generated between 2009 and 2011 in the US 121% went to the top 1% of income earners
  2. The top 1% owns just over half of all investment assets including 64.4% of all bonds
  3. And, the bottom 90% incurs 72.5% of all debt

Think through the consequences of these numbers.

Basically we have an economy where the top 1% reaps all the rewards; where less well off people constantly fall further behind; and where the top folk lend to the bottom folk so that the less well off can keep on consuming and thus boosting the profits of the businesses the top folk own. This is a nice game for the rich as long as it lasts. Here in the US that would be the past forty years or so.

This is really simple.

It explains why our economic policies focus on preserving creditors, bailing out lenders, and keeping the inflation alarms ringing even when there is no inflation. Those policies benefit Read more…

Krugman on Piketty

April 15, 2014 14 comments

from Edward Fullbrook

Now Paul Krugman has gotten into the Piketty act.  The just published issue of the New York Review of Books features a long  review essay by Krugman (it’s open-access) on Capital in the Twenty-First Century.   Here is how it begins.

Thomas Piketty, professor at the Paris School of Economics, isn’t a household name, although that may change with the English-language publication of his magnificent, sweeping meditation on inequality, Capital in the Twenty-First Century. Yet his influence runs deep. It has become a commonplace to say that we are living in a second Gilded Age—or, as Piketty likes to put it, a second Belle Époque—defined by the incredible rise of the “one percent.” But it has only become a commonplace thanks to Piketty’s work. In particular, he and a few colleagues (notably Anthony Atkinson at Oxford and Emmanuel Saez at Berkeley) have pioneered statistical techniques that make it possible to track the concentration of income and wealth deep into the past—back to the early twentieth century for America and Britain, and all the way to the late eighteenth century for France.

Read more…

INET — marginalizing heterodox economics rather than transforming the discipline

April 15, 2014 1 comment

from Lars Syll

In a report published by The Association for Heterodox Economics, INET is criticized for actually marginalizing heterodox economics:Big-vs-Small

Our main concern is that the positive potential of INET is steadily being closed down. What began as recognition of fundamental problems that require fundamental change is becoming a more modest set of alterations. A sense of failure is, for all intents and purposes, being translated into a context of relative success requiring more limited changes – though these are still being seen as significant. Part of the reason that they are seen as significant is that changes from within mainstream economics do not have to be major in order to appear radical. It is our contention that heterodox economics is being marginalised in this process of ‘change’ and that this is to the detriment of the positive potential for transforming the discipline …

Marginalising heterodoxy creates problems for teaching economics as a discipline in which economists constructively disagree and can be in error. This is important because it is through a conformity that suppresses a continual and diverse critical awareness that economics becomes a dangerous discourse prone to lack of realism, complacency, and dogmatism. Marginalising heterodoxy reduces the potential realisation of the different components of economics one might expect to be transformed as part of a project to transform the discipline …

Read more…

The betrayal of the intellectual

April 15, 2014 1 comment

from Robert Locke

It is very difficult for historians to establish any set of ideas when confronted by people who are historically ignorant.  Recently I wrote, in a the RWER Blog that economics has never established a scientific paradigm  in its discipline.  So the idea that neoclassical economics did and that it is now being challenged is false.  It never did achieve paradigm status.  Twenty-five years ago (1989) I said the same thing in the first two chapters of Management and Higher Education Since 1940 (Cambridge University Press).  In the first chapter, “The New Paradigm,” I wrote about the attempt  Read more…

Categories: Uncategorized
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