Home > The Economics Profession > Mainstream macroeconomics – a complete shambles

Mainstream macroeconomics – a complete shambles

from Lars Syll

Simon Wren-Lewis has a piece on his blog on how teaching macroeconomics after the crisis looks:

I was asked the other day how macroeconomics teaching at Oxford had changed as a result of the Great Recession of 2008-9 … [A]lthough the crisis has added material, nothing has really been thrown away as a consequence of what has happened. We have not, either individually or collectively, decided that the Great Recession implies that some chunk of what we used to teach is clearly wrong and should be jettisoned as a result … As Paul Krugman has pointed out many times, recent developments have in many ways been a vindication of the basic Keynesian model that lies at the heart of any undergraduate macro course … The mess we are currently in is due in part to policy makers ignoring this basic macroeconomic analysis.

This is really gobsmacking.

First of all because I find this rather self-congratulatory and complacent attitude unwarranted. 

But also – re Krugman – because it, at least to my reading, seems to be in bad accordance with what Krugman has repeatedly said after the finance crisis, e. g. in his speach at the Eastern Economic Association:

One can make excuses for the failure of the economics profession to foresee that the 2008 financial crisis would happen. It’s much harder to make such excuses for much of the profession’s failure to realize that such a thing could happen …

[T]o argue, or even to think about, the possibility that the old evils could manifest themselves in new forms would have been to question the whole basis of decades of policy, not to mention the foundations of a very lucrative industry.

We’ve entered a Dark Age of macroeconomics, in which much of the profession has lost its former knowledge, just as barbarian Europe had lost the knowledge of the Greeks and Romans.

How did all this knowledge get lost? … First, success in academic economics came from publishing “hard” papers — meaning papers that used rigorous and preferably difficult mathematics … Successive cohorts of students were trained only in the newly rigorous version of macro, which had lost touch with the field’s previous intellectual achievements …

Some economists are pushing forward with new macroeconomic models … But as I’ve said, our big problem was not lack of models … The biggest problem we had as a profession wasn’t failure to keep up with a changing world, it was failure to remember what our fathers learned.

And re the policymakers ignorance, I would rather say like Keynes:

Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.

As an appendage I can’t restrain myself (having a Ph. D. in both economics and economic history) from citing Brad DeLong‘s complaint about economists obviously not being able – or wanting – to learn from history:

We economists who are steeped in economic and financial history – and aware of the history of economic thought concerning financial crises and their effects – have reason to be proud of our analyses over the past five years. We understood where we were heading, because we knew where we had been …

Those who said that there would be no downturn, or that recovery would be rapid, or that the economy’s real problems were structural, or that supporting the economy would produce inflation (or high short-term interest rates), or that immediate fiscal austerity would be expansionary were wrong. Not just a little wrong. Completely wrong.

Of course, we historically-minded economists are not surprised that they were wrong. We are, however, surprised at how few of them have marked their beliefs to market in any sense. On the contrary, many of them, their reputations under water, have doubled down on those beliefs, apparently in the hope that events will, for once, break their way, and that people might thus be induced to forget their abysmal forecasting track record.

Occasional links has some similar thoughts on the subject:

It is extraordinary to sit here in the midst of the crisis and read the self-satisfied pronouncements of economists about the state of the discipline …

At the level of teaching, where is the history of the theories and debates that have taken place in macroeconomics since at least the publication of John Maynard Keynes’s General Theory? And what about the theories other than the neoclassical and Keynesian versions of IS/LM—where do they fit into the curriculum?

As far as the theory is concerned, what role does uncertainty play in their models? And how do crises occur endogenously, rather than as the result of some exogenous disturbance in either the real or financial side? And what about the role of inequality in determining the level and rates of growth of prices, output, and employment (not to mention the external sector)? And, finally, what’s the explanation of how alternative economic policies are adopted and implemented, other than as irrational mistakes?

[N]either macroeconomics nor microeconomics is in good shape. They weren’t before the crisis began and they’re not now, in the midst of the Second Great Depression. Both areas need to be fundamentally rethought.

Economics in the crisis remains in crisis.

The line of repentant mainstream neoclassical economists ought to be long, and it’s abolutely outrageous that we haven’t seen even one single prominent economist who has had the courage and integrity to admit that he or she got things completely wrong.

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  1. November 24, 2012 at 3:38 am

    I am a teaching PhD. I teach one of two economics classes our business students get. Microeconomics. Although I agree with what you say, where is my alternative? I teach supply and demand, perfect competition, then tell them that model has never existed but we still use it and spend most of the rest of the term on market failures, elasticity and monopolistic competition…….I have never written a paper and probably won’t start at my age. But it sure would be nice to have something to fall back on, a book to use, some synopsis of what I should teach instead……..oh, amazingly enough I also teach ethics at this school LOL…..Of course I could spend the entire term on the financial sector

    • Jims
      November 24, 2012 at 5:29 am

      This a real tragedy of an economic “science”. Those who teach economics think that they are economists. Economist is that who can explain reality, not that who knows textbooks better. Neoclassical textbooks and papers are complete rubbish.
      Don’t ask where are alternatives. Try to explain the world around you yourself. Do not teach students textbooks’ dogma, teach them thinking, which would allow them to explain reality as they see it.

    • Nell
      November 24, 2012 at 9:36 am

      I understand -you would probably get sacked if you moved too far away from conventional economics as well.
      Here is a link to an undergraduate textbook that teaches conventional stuff but also adds criticality. http://www.economics-antitextbook.com/

    • November 25, 2012 at 3:00 am

      if I were still teaching micro or macro I would give these two texts a close look; MICROECONOMICS IN CONTEXT and MACROECONOMICS IN CONTEXT. In the description of MICRO. IN CONTEXT, it says, “Like its companion volume, Macroeconomics in Context, this text includes discussions of historical, institutional, political, and social factors that encourage students to engage with the subject matter.”
      http://www.mesharpe.com/mall/resultsa.asp?Title=Microeconomics+in+Context%2C+Second+Edition

    • November 26, 2012 at 12:28 am

      You might try Demand Side Economics, for both history and theory and a sequence of economists who never bought into the orthodoxy and who many of your students will recognize. No doubt economics is in the Dark Ages, as Krugman says, but it entered back in the 70s and 80s, not in 2008.

      DemandSideBooks.com

  2. November 24, 2012 at 4:49 am

    There are writers such as Brian Hodgkinson and Fred Harrison whose analysis sheds useful light on the subject.

  3. steve
    November 24, 2012 at 5:55 am

    Isnt it somewhat unfair and disingenuous to blame macroeconomists for failing to predict the crisis of 08 when the primary cause of the crisis was the proliferation of derivatives hiding in the murky world of the shadow banking system that fuelled the extraordinary increase in credit that fuelled the housing boom. A macroeconomist has to assume that when the credit rating agencies gave all these derivatives AAA ratings that they were safe. So you see its a bit of a misnomer to blame macroeconomists for not having the foresight to predict that products that had the AAA stamp were in fact junk when its not their job to ensure the integrity of Wall Street, the Government and the credit rating agencies. When the curtain was pulled back and it became apparent that subprime existed on such a huge scale it was the equivalent of a huge external shock to their macroeconomic models – thats is not the same as saying their models didnt work though!

    • robert r locke
      November 25, 2012 at 12:01 pm

      Steve, the primary cause of the financial crisi was not the invention of derivities but the redistribution of wealth in the 1980s that brought about monumental private debt. Investor csapitalism just facilitated the borrowing by being inventive. Macroeconomics avoids the redistribution of income factor, which occured with th maldistriion of incomes to the rich, which spurred the borrowing, and which can only be corrected by redistributinng income again back to the middle classses. Instead we get a shell game frromj macroeconomjics.

      • steve
        November 26, 2012 at 7:44 am

        Robert, That is complete nonsense. Read this excellent piece by Jim Rickards to understand the causes. It was the proliferation of derivatives after the repeal of Glass-Steagle in 1999 that caused it. And the monumental private debt you speak of began to increase hugely directly after 1999 as did real house prices. The numbers dont lie.

        http://www.usnews.com/opinion/blogs/economic-intelligence/2012/08/27/repeal-of-glass-steagall-caused-the-financial-crisis

        http://www.jparsons.net/housingbubble/

      • November 26, 2012 at 1:43 pm

        robert r locke :
        Steve, the primary cause of the financial crisi was not the invention of derivities but the redistribution of wealth in the 1980s that brought about monumental private debt.

        95% of Marx’s work was about the Failures of Capitalism. Marx never knew the laws of rent so his solutions were off-mark. He thought the prime problems of grinding poverty was CAPITAL ignoring LAND. It has been said that if you want to know where something went wrong ask a Marxist. David Harvey does a good job on this, although he he only flirts with land, which was the root of the problem.

        Harvey clearly identifies Reagan and Thatcher in the 80s as guilty. They spouted about the free-market but actually rigged the free-market by rigging the LABOUR aspect, driving down labour costs. They did this by off-shoring manufacturing. When they had done such a good job of it, they then realised the low wages were not enough to people buy the goods to keep matters moving. So they relaxed credit to make it easy for all to buy consumer goods.

        This in the long term was unsustainable. This was one of the facets, along with the values of LAND not being reclaimed by the community, and the gains on land being tax free and going into private pockets, that led to the 2008 crash. Financial institutions used land as collateral.

        Look at this brilliant animation:

      • robert r locke
        November 26, 2012 at 2:57 pm

        # 8. “It was the proliferation of derivatives after the repeal of Glass-Steagle in 1999 that caused it. And the monumental private debt you speak of began to increase hugely directly after 1999 as did real house prices. The numbers dont lie.”

        Private debt skyrocket on a steep climb without any alteration of the steepness of the decline from 150% of GDP to 300% in 210. The redistribution of wealt to he top .01% occured apidly after 1985. See my Management from Hell, 2012.

      • micol
        December 1, 2012 at 3:32 pm

        From what I can tell, the 2008 meltdown was the (final?) consequence of a debt expansion, which began in the early 1970s – some people pick August 15, 1971 as the start date in the US, and which ran on for 37 years with barely a breather.

        The excessive debt creation a) fueled a long consumer boom, b)vastly sped up the indebtedness of both the public and private sector, and c) created a class of wealth based on the control and management of that debt – bank and non-bank/shadow bank. This inherently unstable system was saved from collapse in 1987, 1997, 2001 and 2004 by injections of MORE liquidity to further “extend and pretend” that the debt bubble could be managed. What actually happened in 2008 was that some of the class of beneficiaries of this long bubble themselves became tangled up in this web, and the interconnectedness of this ever smaller population of financial intermediaries (the results of mergers) nearly caused a collapse of the whole edifice.

        If you look at the whole picture of those decades, you find a single thread running through it, which is the advancement and protection of the companies (and their managements) who fed this debt producing beast.

        The externalities created as a consequence of this system (the shrinkage and relative decline of the socially stablizing middle class in the developed world and consequential radicalization of politics) were not intended, but were predicable.

        Now you have a totally corrupted political system which is in hock to the financial markets, with governments trapped into endless rounds of support for “the banks” – to use a shorthand – as the elected officials realize that the illusion of prosperity they have sold to the voters hinges on somehow keeping the debt game going.

        Charles Ponzi would be very much at home in this situation.

    • November 26, 2012 at 1:20 pm

      steve :
      the crisis of 08 when the primary cause of the crisis was the proliferation of derivatives

      Steve this is incorrect. The “root cause” of 2008 was that gains on LAND were tax free. Any good economist will tell you, as people’s real disposable incomes rise, that money ends up in one place, and one place only, the LAND MARKET. As there is growth land values rise. Except, the problem occurred when that increase in land values, that were created by community activity, went into private pockets instead of going into services: highways, hospitals, schools and so on, that created that value in the first place.

      This is the sources of the problem, not bankers, big bonuses, sub-prime mortgages in America and the other excuses they have. This is the heart, the root cause, of the problem of the market economy and we have to address it. There has to be political consensus as the problem is too dire, with nobody playing party politics.

      • robert r locke
        December 1, 2012 at 6:08 pm

        “Any good economist will tell you, as people’s real disposable incomes rise, that money ends up in one place, and one place only, the LAND MARKET.” We have been reading coonstantly on thisi blog that the people’s real disposal income did not rise for 99%, only 1%. But private debt rose considerably. Who do you think got all that inncome but the bankers,brokers, the investment classes.

  4. R.C.
    November 24, 2012 at 6:24 am

    Um, OK. The Brad DeLong quote cited approvingly in this post is the same one that inspired a Steve Keen tirade back in June. Being “steeped in economic and financial history” doesn’t necessarily make one prescient. Sometimes it just makes you a teabag in tepid water.

    http://www.debtdeflation.com/blogs/2012/06/30/what-utter-self-serving-drivel-brad-delong/

    • Dave Raithel
      November 24, 2012 at 4:22 pm

      Thanks for pointing this up. The last time I read a policy thing by De Long, he was trying to add his name in a sequence that included Fischer, Keynes, Minsky, him… as opposed to Smith-Marx-Mellon-Hayek…. The fix needed, he said if I got him, was to re-institute stable long term finance securities. Having no place safe to stuff paper is the problem. Nada about guaranteed work for anyone willing to work at a living wage.

      That said, as an outsider looking in (or askance….) the “failure” of macro is mostly as I learned it. The whole rational expectations project was (from the philosopher’s point of view) to account for the macro by reduction to individual actors. Evidence for the robustness of the reduction is any time sheer chaos does not result. All counter-evidence is explained away. So where we are is close enough to what Krugman (sometimes) says for me to recognize: There are those who still believe that the world would be a better place IF each individual always acted to maximize his good as he finds it; and there are those of us who believe such a proposition is so stupid as to merit no effort of a counter-argument.

  5. Mike Meeropol
    November 24, 2012 at 12:59 pm

    Steve: Macroeconomists (in fact anyone with arithmetic knowledge and a bit of logical training) should have known that the housing bubble was , — well, a bubble. Even I (a total non-finance economist) know that the value of an asset is supposed to be the discounted present value of the stream of revenue it generates. Thus, when the price of housing started to diverge dramatically from rents, everyone should have realized a speculative bubble had begun. I blame journalists and establishment economists for keeping this insight from the general public but once people like Dean Baker and others started sounding the alarm, the argument should have spread.

    On another subject, a new Principles of MACRO textbook (with data focused only the US) by Howard Sherman is about to be published by ME Sharpe. Howard (Truth in packaging — I am his co-author) had utilized the Wesley Mitchell model of capitalist instability to tell the story of the recent business cycles (from 1970 to the present) while teaching mainstream and Keynesian economics, with a good addition of institutionalist and (Sweezy – Sherman) radical economics.

    I urge any teachers of MACRO (micro is harder, I agree) to check it out when it becomes available from the publisher.

    It’s got most everything that a mainstream text would have (but no acceptance of the absurd AS-AD model) but it emphasizes instability and disequilibrium rather than so-called MICRO-FOUNDATIONS. We hope that teachers of macro struggling to be realistic will give it a look — even if their theoretical training will make them ask, “Wesley, who?”

    • steve
      November 24, 2012 at 5:19 pm

      I think it was obvious it was a bubble but nobody including macroeconomists could have evisioned in their wildest dreams the extent of the bubble. ie. that mortgages were being routinely handed out to people with no employment history on an industrial scale, that the banks were leveraging themselves higher and higher thanks to derivatives. This market was opaque(and still is!) so you cant blame macroeconomists for not having the foresight to have predicted the severity of the downturn. What macroeconomists could not have predicted was that the huge scale of the derivatives market was ultimately based on real estate in the form of MBS and CDS. Nobody knew this until the system blew up. They thought derivatives and other “exotic” instruments were based on other types of asset classes.

      To say otherwise is either stupid or dishonest…….

  6. November 24, 2012 at 4:01 pm

    Thjere is a macroeconomics text book that explains the financial crisis of 2007-2008 in terms of Keynes’s liquidity theory [ not the Keynesianism of Samuelson or Krugman, or DeLong, etc]

    Here is what one professor email me about using this textbook::

    Subject: Student Exam Answers after Reading Your Book!

    Paul, it is absolutely glorious being able to teach Intermediate Macro solely from the Post Keynesian perspective. I thought you might be interested in a selection of student answers to the following exam question (particularly as this test was based largely on your text book): “While Post Keynesians see the financial sector as absolutely vital in terms of supplying liquidity to the private sector, they also think it adds yet another instability on top of an already unstable system. How would you solve this? Given the Post Keynesian analysis, what sort of regulations would you create?”

    STUDENT ANSWERS:

    “Making it necessary for mortgage initiators to keep the loans they make tied to their name/balance sheet.”

    “I personally think that repealing the Glass-Steagall Act was stupid…”

    “…establish some sort of market maker to ensure liquidity.”

    “Hold banks responsible for borrower default.”

    “Holders (of financial assets) are required to hold these assets for a minimum amount of time. Although this will decrease the liquidity of these assets, it will also limit the number of ignorant individuals who are disrupting market valuations…”

    They are actually learning something relevant! And they have no idea what IS-LM is–good!
    ————–

    The title of the textbook is POST KEYNESIAN MACROECONOMIC THEORY: SECOND EDITION by Paul Davidson.

    Maybe some heterodox economists ought to try it in their classrooms!

    Paul Davidson

  7. Jims
    November 24, 2012 at 4:23 pm

    In almost every textbook on macroeconomics, after each chapter there is a set of problems – for example calculate what will be GDP growth, unemployment, inflation, etc. And! There are even answers for those problems. Now, look at what is going on in real world, I can say that all those set of problems and textbook’s solutions for them are complete nonsense. Why should students be taught how to calculate utopia indicators?

  8. November 24, 2012 at 7:13 pm

    And then there is the seemingly forgotten wisdom of good old Karl Marx… 8-)

  9. Steve
    November 24, 2012 at 10:52 pm

    Economics needs to be transformed by basing it on the condensed wisdom of the ideas, values and purposes of Faith as in Confidence, Hope, Love and Grace…and policies accurately reflecting the same. This is neither airy religious nonsense nor the equally airy abstractions that currently plague economic and monetary theory. It’s simply recognizing that to have truly humane human systems you have to start with ideas that are adequate enough and accurately describe the abilities and capabilities of the beings who are a part of those systems. And then, because Man is and always will be a flawed and imperfect being, the economic and financial systems need a few common sense regulations that prevent his flawed tendencies from taking root in the system……like we have recently seen. There will be no end to history, but if we do not let the perfect be the enemy f the Good…..it can be a much better future than it has recently been.

  10. November 25, 2012 at 6:18 pm

    Debt Jubilee, Demographics, and Peak Oil

    Gentlemen, the operative model has been there all along and hiding in plain sight from the overwhelming majority economists who are not allowed to learn (anyone who knew is no longer alive to teach it) about the debt (Jubilee) and demographic rhythms of the capitalist Long Wave. The Schumpeterian debt-deflationary Long Wave Trough depression we are now experiencing happens but once in a lifetime.

    When the cumulative differential growth of US private debt to GDP reached an order of exponential magnitude in ’07-’08 from the early ’80s, the Long Wave Downwave reflationary growth phase ended, i.e., debt/GDP could no longer grow. This is simple exponential mathematics.

    To prevent nominal GDP and bank assets from collapsing (as occurred in the 1830s-40s, 1890s, 1930s, and Japan in ’98-’03), we have postponed for four fiscal years the necessary debt-deflationary Jubilee regime by shifting debt growth to the federal gov’t via deficits of more than 10% of private GDP and public debt held by the public now exceeding 110% of private GDP.

    Alas, like the EU, UK, Japan, Australia, Canada, and now China, we are now effectively at the public debt Jubilee point, although few economists recognize it (or will publicly admit it), especially not the venerable Neo-Keynesian Prof. Krugman. This is the real story at the bottom, if you will, of the so-called “fiscal cliff”.

    Upon now reaching the private AND public debt Jubilee thresholds, growth of gov’t spending and real GDP per capita are no longer possible until debt equivalent to 30-40% of GDP is written off and ceases to grow until, or if, wages and production catch up to debt.

    In a debt-money-based financial system and economy dependent upon 5-6% annual growth of debt and positive velocity to prevent nominal GDP from contracting, growth is no longer possible having reached the Jubilee point. Debt must contract and wages rise hereafter. At the modest trend rate of increasing wages to GDP, should it occur, and contracting debt to GDP, it will take a minimum of 9-12 years for the debt-deflationary regime to resolve, including little or no growth of gov’t spending, which implies contracting gov’t spending per capita.

    Prof. Krugman will be shown to be misinformed and misguided when net interest on the federal debt eventually reaches ~25% of federal receipts after Social Security and Medicare receipts, with recessionary deficits/GDP reaching 100% of receipts.

    Again, this is the real story not being discussed (for obvious reasons) with respect to the “fiscal cliff”.

    Then add the global constraint now imposed by Boomer demographics, peak global oil production and exports, and oil at $85-$110/bbl, and global real GDP per capita and gov’t spending will soon cease to grow, as will trade decelerate and eventually contract.

    None of this should have been a surprise to economists, CEOs, politicians, and financial media influentials in the context of the Long Wave demographic and debt rhythms, and now exergetic/biophysical constraints from Peak Oil.

  11. November 26, 2012 at 9:05 am

    When the Queen of England visited the London School of Economics in 2008. She asked a simple question about the looming economic disaster, “why did no one notice it coming?”. Professor Garicano replied, “at every stage everyone was relying on someone else, and all thought they were doing the right thing”. As modern economists use a collection of mangled economics the Queen could not be told the truth.

    Economists 100 Years Ago Colluded to Distort Economics

    A century ago a group of influential economists: John Bates Clark, Frank Knight, Francis Walker, Edward Seligan and Richard Ely, colluded to manipulate the building blocks of classical economics. They had an ideological agenda. The future they shaped is our reality. Their mission was clear to protect the vital interests of the privileged few. To do so they had to conceal the unique qualities of the classical factors of production – LAND.

    A century of economic disasters followed that literally ruined lives. Economics has been a tool for contorting our collective consciousness. The current economic crisis as an example to the pathetic state to which economics has been reduced.

    Modern Economists are Confused

    We handsomely reward economists to fine tune the economy to keep it stable. When boom turns to bust they escape into mysticism. They claim, “occasional slow downs are natural and necessary features of a market economy”. The people we trust to keep the economy on an even keel have no idea what makes an economy explode. Take the central bankers, they pontificated, moving interest rates up and down manipulating the money supply. They didn’t know what they were doing – it was all an illusion.

    The problem lies in some of the theories invented by economists. They do not reflect the real world. They are fictions invented to explain an imaginary market economy. When the economy overheats the imaginary equations turn out to be useless.

    Economists Admit Their Economic Models Do Not Work

    The Daddy of all central bankers was Alan Greenspan, of the US Federal Reserve. He said, “the models do not forecast recession because the parameters are dominated by what happens in normal times when the economy is growing”.

    As the economy crumbled, He said to the US congress, “I discovered a flaw in the model which I perceived as a critical function structure which defines how the world works, I was shocked”. Greenspan’s victims are more than shocked, they are traumatised losing their homes and jobs.

    In failing to raise the warning flags, Greenspan was not alone, economists at the Bank of England also failed to forecast the end of the business cycle. They confessed their economic models break down when the going gets tough. Rachel Lomax, deputy governor of the Bank of England confessed, “When it comes to quantifying the changes in credit conditions, our workhorse economic models still cannot help us very much”.

    If you were caught by surprise when the bottom fell out of the credit market, don’t worry, you were in good company. Leading economists at places like the LSE were also shocked. Professor Sir Charles Woodhart, served on the Bank of England monetary policy committee, he now admits that standard forecast economic models are “effectively pretty useless”.

    Here is an example of the nonsense that can be produced by economic theory. According to the British governments Property Valuation office in Jan 2008, land values will continue to rise until 2013. Six months later the economy had broken down. The graph has been erased from their web site.

    Land Speculators Are the Biggest Gainers

    Who gains from this intellectual mess? One groups of people reap spectacular rewards, property developers, land speculators all reap windfall gains from one asset that sustains us all, LAND.

    In the good times when people go mad buying and selling properties, we lionise these developers. Yet all they doing is cashing in the on the land values others create. Take the case of a cluster of flats adjacent to a prime brownfield site. Their presence gives value to the adjacent site, yet the thousands of residents of the flats will not share in the increased values they help create.

    Banks Fuelled The Property/Land Bubble

    Bankers around the world played their part in the economic crisis pumping up credit to fuel the property bubble. As land values rose bankers even created more money. This was a self inflated bubble of hot air. It had to burst.

    Economists Who Know The Answers Are Ignored

    For the past century economist have messed with our minds. All is not lost. A few economists have been stewards of the precious knowledge of how the economy works. The Nobel prize winning economist Bill Vickry and the California professor, Mason Gaffney. All voices of reason that have been ignored.

    We Need To Force Through Change To Eliminate Vested Interests

    With all the global crisis’s converging, mass unemployment, poverty, riots, terrorism. It is time to make up our minds and stop playing the game that was rigged 100 years ago. If we do not challenge the vested interests that exploit people, all of us, the environment and future generations will pay the ultimate price. Our elected leaders need to deal with the realities on the ground.

  12. November 26, 2012 at 12:47 pm

    robert r locke :Steve, the primary cause of the financial crisis was not the invention of derivatives but the redistribution of wealth in the 1980s that brought about monumental private debt. Investor capitalism just facilitated the borrowing by being inventive. Macroeconomics avoids the redistribution of income factor, which occurred with the mal-distribution of incomes to the rich, which spurred the borrowing, and which can only be corrected by redistributing income again back to the middle classes. Instead we get a shell game from macroeconomics.

    Robert, I found this a very interesting comment, whereas Steve, I feel, is not looking back far enough in history. I am unhappy with it where you say “Macroeconomics avoids the redistribution of income factor” without specifying which macroeconomics you are talking about. That certainly wasn’t true of Keynes’s version and it isn’t true of mine or Bernard Lonergan’s, all three of which involve multiple monetary flow paths in which redistribution is going on all the time, and which cannot be controlled only if we can’t see or have been misled about what is going on.

  13. November 26, 2012 at 1:02 pm

    Henry Law :
    There are writers such as Brian Hodgkinson and Fred Harrison whose analysis sheds useful light on the subject.

    People should take not of these two men very closely as they do get to the “root cause” of the problem and give by far the best solutions. Solutions that near guarantee world-wide crashes will not not re-occur.

    The Forbidden Knowledge

    The forbidden knowledge in economics is the LAND market. There is nothing magical about this. Data about the western European economy tells us that trends repeat every 18 years without fail. Looking at the land market you can see how the health of the economy is progressing. From this information the turning points in the business cycle can be pinpointed.

    The boom bust cycle is programmed into the politics. It used to be a monarchical system, aristocracies economy now it is semi-democratic. The underlying factors are still the same. The best gains are out of LAND, not the stock market, not out of anything else. Over the business cycle the highest capital gains are out of land. That is the secret.

    The way the market is structured at the present time we definitely get a boom after 15 years into the cycle and then a bust because debt is created to over exploit that market and the economy has to come to dip. It has happened every 18 years for the past 200 to 300 years.

    Socialized LAND and Privatized WAGES.

    The socialisation of LAND is recovering for the community the value we collectively create. Changing the taxes by abolishing taxes on earnings and the profits from the investments from our savings. Privatise the wealth that we create. Let people keep what they produce. Collect from the public sector that shared revenue that is chrysalises in the land market as land values, we use that to pay for public services. That’s resocialising what used to be the public revenue and privatising people’s wages.

    This is an Anglo-American phenomenon, unlike the Germans who do not view their homes as their castles and invest in productive activities. The US and UK culture is to regard their house as their castle and their homes as a nest egg/pension fund.

    Political Problem

    It is a political problem. They found that when the Liberal government introduced a land value based tax 100 years ago the House of Lords simply rejected any attempt at reform.

    That culture of making money out of nothing, just by occupying a little bit of land, has seeded through into the democratic system. The UK even has shop workers who have portfolios of buy-to-let properties to make money out of nothing. It is a political problem to inform them that it is against their interests. There hasn’t been the political or moral strength of our statesmen for 100 years to change that corrupt method of distributing income.

    All Become Richer When Taxes Are Raised From Land Values

    In the USA they would be collectively better off by $100s billions per year to share out amongst the population if they made the tax shift from taxing wages and raising revenue from land values. That become an incentive. Everyone becomes richer. In the Tony Blair administration the nation lost wealth and welfare to the tune of one years worth of national income. That pays for a lot of hospitals and schools. Wages would be higher. It takes moral courage by the stewards of our system of government. The people would listen and once informed they would want to make the change.

    Taxing Land Values Give Sustainable Economics

    If we want a sustainable system of economics and want to be able to compete with the Far East on an equal footing over the next business cycle, the only option is to shift taxes off wages and onto the “values” of land. What that would mean? It would mean is that the factory gate products of western Europe would become more affordable in global markets. Without this tax shift, our goods will continually to be undercut by cheap labour produced goods in the Far East.

    This future is not sustainable. This what the G20 economies have driven Europe and North America into. A situation of crisis were we will be able to compete is to change the cost structure. The only we can do that is to implement this tax shift.

    Governments have been abysmal in looking after the interests of the advanced countries. They have exposed Europe and North America to a Far Eastern economy that is going to gobble up most of us. We may be in the doldrums for the next 20 years, because our governments have tried to inflate us out of this depression by the very mechanism that brought us into it in the first place. Debt was the way to maintain living standards, not by producing goods that are of any value but by borrowing and spending.

    That is exactly what governments are still doing, piling debt on debt. They have socialised the private debt of land speculators, putting the burden onto future tax payers. What does that mean to the rest of the business cycle? It means the European and North American economies are not fit for purpose. The G20 economies have failed abysmally to take care of their nations.

    Doldrums Will Continue

    The economy will be in the doldrums for about 10 years, as the Japanese economy in the 1990s and European and North American in the 1930s. Some will make money by latching onto the forbidden knowledge that predicts the trends, but for the rest of us there will be a decline in living standards and lot of unemployment. These situations in the past have led to wars.

    • November 27, 2012 at 10:33 am

      I think though that you cannot ignore the money side. The UK house price exponential boom/bust cycle can be shown to be tied to three stages of credit relaxation. The series is much more revealing if an attempt is made to use ‘reall’ data. Whatever, the LVT solution is far easier to implement than the ‘money’ fix.

      But the politicians prefer to blame it all on supply/demand.

  14. November 26, 2012 at 2:20 pm

    Martin Wolf of the FT wrote:
    Why were resources expunged from neo-classical economics?

    We have had two world-wide crashes since – no coincidence.

    http://blogs.ft.com/martin-wolf-exchange/2010/07/12/why-were-resources-expunged-from-neo-classical-economics/#axzz2DL1gPbfF

    The resulting debate on the link is good. Comments are still open.

    • November 27, 2012 at 10:15 am

      Is it really still open for comments? When I last looked it had been ‘expunged’ from the website and I only found it, because I remembered the title well, by googling. It’s a shame that Wolf doesn’t just repeat the question which still needs discussion. From my memory it was largely ignored by academics – I wonder why.

  15. steve
    November 27, 2012 at 6:58 am

    robert r locke :
    # 8. “It was the proliferation of derivatives after the repeal of Glass-Steagle in 1999 that caused it. And the monumental private debt you speak of began to increase hugely directly after 1999 as did real house prices. The numbers dont lie.”
    Private debt skyrocket on a steep climb without any alteration of the steepness of the decline from 150% of GDP to 300% in 210. The redistribution of wealt to he top .01% occured apidly after 1985. See my Management from Hell, 2012.

    Actually private debt did accelerate sharply after 99:

    http://rwer.wordpress.com/2011/12/30/chart-of-the-day-public-vs-private-us-debt-to-gdp-ratios/

    I agree the our problems began in the 80s but my point is I just dont believe that if Glass-Steagle had not been repealed we would have had the enormous bust of 08. If Glass-Steagle had stayed in place I believe the build up of debt would have been slower and easier to firefight and any bust would have been ALOT smaller and easier to contain. What made the financial crisis of 08 so brutal was the lack of transparency in the derivatives market – this meant banks did not have the liquidity they needed when the pack of cards fell in.

    • November 27, 2012 at 8:57 am

      steve :

      robert r locke :
      # 8. “It was the proliferation of derivatives after the repeal of Glass-Steagle in 1999 that caused it. And the monumental private debt you speak of began to increase hugely directly after 1999 as did real house prices. The numbers dont lie.”
      Private debt skyrocket on a steep climb without any alteration of the steepness of the decline from 150% of GDP to 300% in 210. The redistribution of wealt to he top .01% occured apidly after 1985. See my Management from Hell, 2012.

      Actually private debt did accelerate sharply after 99:
      http://rwer.wordpress.com/2011/12/30/chart-of-the-day-public-vs-private-us-debt-to-gdp-ratios/
      What made the financial crisis of 08 so brutal was the lack of transparency in the derivatives market – this meant banks did not have the liquidity they needed when the pack of cards fell in.

      The pack of cards should not be built to fall. You people are sloshing about on the surface with symptoms. Get to the root causes.

      • steve
        November 27, 2012 at 9:15 pm

        And the root cause was the dismantling of Glass-Steagle. The system prior was far from perfect but its ridiculous to claim that the crisis of 08 would have occurred if Glass-Steagle had stayed in place. The original article was about whether macroeconomist should have foreseen the crisis.

  16. November 27, 2012 at 11:05 am

    Carol Wilcox :
    I think though that you cannot ignore the money side. The UK house price exponential boom/bust cycle can be shown to be tied to three stages of credit relaxation. The series is much more revealing if an attempt is made to use ‘reall’ data. Whatever, the LVT solution is far easier to implement than the ‘money’ fix.

    Carol, the money followed the easy gains. The easy gains were in LAND. If credit is relaxed people naturally borrow to gain quickly with minimum risk – and that is the land market. Land was used as collateral by the lenders. A self inflating bubble with one pumping up the other. It was bound to burst and take all with it.

    But the politicians prefer to blame it all on supply/demand.

    99% of those haven’t got a clue. Read the posts here,. How many have drilled down to root-cause level? They blame derivative, easy credit, etc – all symptoms. Many here I am sure regard land like it is a piece of Capital. Land is not a washing machine or a brick house. LAND is like nothing else you can buy. It sustains us all. It reacts very differently to the markets.

  17. November 27, 2012 at 11:31 am

    Carol Wilcox :
    Is it really still open for comments? When I last looked it had been ‘expunged’ from the website and I only found it, because I remembered the title well, by googling. It’s a shame that Wolf doesn’t just repeat the question which still needs discussion. From my memory it was largely ignored by academics – I wonder why.

    The question Martin Wolf asked was highly relevant.
    Why were resources expunged from neo-classical economics?

    I named the culprits who did it 100 years ago in a post on this thread. They moved LAND, one of the factors of production, into CAPITAL. Land has been moved out of the psyche of the western mind. They regard land like it is a car with no consequences to the economy.

    Few understand where the values in land come from. The values do not fall from the sky. The fact that in the vast majority of cases land increases in value would alert people to find out why and where the value comes from.

    Many here should look at the success of Taiwan which implements Land Value Tax. The country was transformed from a backwater of uneducated peasants in paddy fields with most of the country owned by a few people to a world technological power in a generation.

  18. November 27, 2012 at 11:53 am

    Carol Wilcox :
    The UK house price exponential boom/bust cycle can be shown to be tied to three stages of credit relaxation.

    Solving the root-cause, LAND, will not affect the overall economy even if credit availability goes up and down like a yo-yo.

    The Dot-Com bubble was benign to the economy. Only those involved in it were affected when the bubble popped. When the land market fails those outside are affected greatly. This is the big difference. Few grasp that.

    Most know that the 2008 crash was “property” fuelled. The root cause was LAND, unfortunately many think it was banks that caused it. Few attribute land to the 1929 crash. Yet in the USA land peaked in 1926. If you look at the 18 year land boom-bust cycle, that falls right into the time line before a bust. In the mid 1920s there were many runs on land in Florida and California. Easy credit was around and it was being poured into easy gain land – echoes of 2008.

    • November 27, 2012 at 12:10 pm

      Yes, the dotcom bubble was an interesting phenomenon – it demonstrated that the stock market is not part of the real economy. The land market affects every bit of the economy and it is dysfunctional – it doesn’t allocate to best use. Look in any economics text book and search in vain for a proper definition of land. Where will you find the fact that land is not consumable, that it can be used continuously for various uses without wearing out?. Because land is purely the surface of the planet (and the physical space above and below it). When usable land is kept idle it represents a permanent loss of production and welfare. (I learned that from Mase directly years ago in London.)

      Let’s keep on keeping on about land, John. One day the influential ones will ‘get it’.

      All said, LVT is not a panacea. There are other fundamental economic truths which are not understood.

  19. November 27, 2012 at 12:50 pm

    Carol Wilcox :
    All said, LVT is not a panacea. There are other fundamental economic truths which are not understood.

    LVT by itself is not a panacea. But a great stable base. Geonomics encapsulates more and offers a far firmer base.

    Geonomics:

    1. Uses publicly created value to pay for public services and infrastructure.
    2. Use the values of natural resources to pay for public services and infrastructure.
    3. Does not steal privately created value from the productive.
    4. Does not penalise the productive.
    5. It does not allow publicly created value to be appropriated into private pockets.
    6. Pigovian taxes are used: congestion & pollution charges, tobacco, alcohol, etc.

    As an economic model it is far, far easier to control. The current system is uncontrollable despite all the world’s computers having a go.

    • November 27, 2012 at 12:57 pm

      Yes, it solves the problem of the ownership of one of the means of production, but not the other, capital. As with land, the only people who need to own capital are those who use it, i.e. workers; the rest is money making money.

  20. November 27, 2012 at 1:29 pm

    Carol Wilcox :
    Yes, it solves the problem of the ownership of one of the means of production, but not the other, capital. As with land, the only people who need to own capital are those who use it, i.e. workers; the rest is money making money.

    Geonomics does not take anything into state ownership to solve the problem of “ownership”. It is largely self-controlling allowing the free-market to use a stable base. Capital and Labour have more in common with each other than they think. Even Marx noted that many Capitalists were victims of Land (landowners) having to pay rent for their premises.

    For the free-market to work properly it needs to be monitored to ensure it is not rigged or monopolised.

    • November 27, 2012 at 2:32 pm

      John, workers owning their own capital does not equate to state ownership.

  21. Dave Raithel
    November 27, 2012 at 2:00 pm

    Just to make sure I get the gist of the general opinion above (with some variance of detail about finance) or have missed it entirely: A more stable economy would be one with capitalists and workers but no landlords. And so, to know how we got here is to reverse engineer a model that correctly identifies the causal role that landlords (land owners) play.

  22. November 27, 2012 at 2:16 pm

    Dave Raithel :
    Just to make sure I get the gist of the general opinion above (with some variance of detail about finance) or have missed it entirely: A more stable economy would be one with capitalists and workers but no landlords. And so, to know how we got here is to reverse engineer a model that correctly identifies the causal role that landlords (land owners) play.

    It was quite clear. It is a tax shift. The core is:

    1.>/b> Uses publicly created value to pay for public services and infrastructure.
    2. Use the values of natural resources to pay for public services and infrastructure.
    3. Does not steal privately created value from the productive.
    4. It does not allow publicly created value to be appropriated into private pockets.

    Publicly created value and values of extracted natural resources to pay for public services and infrastructure. That is charging for use of the electromagnetic spectrum, the sea bed, the seas, extraction of lands resources. The biggest example is Saudi Arabia with 1/3 of the world oil it can eliminate Income taxes and the oil revenue to cater for the 8 million people.

    Most countries are not in that position. So income on resources may not be enough. The largest publicly created value is in land values. This value can be captured by using Land Valuation Tax.

    Land ownership stays the same.

  23. November 27, 2012 at 2:43 pm

    Carol Wilcox :
    John, workers owning their own capital does not equate to state ownership.

    Carol, of course.

    Capital is anything man made. Capital in production terms tends to be equipment, plant, etc. A self employed plumber owns his own capital equipment – his large tool collection in his van.

  24. November 27, 2012 at 3:13 pm

    The majority are not self-employed. What do you think the stock market is there for?

  25. November 27, 2012 at 6:48 pm

    John @ #32: “Solving the root-cause, LAND, will not affect the overall economy even if credit availability goes up and down like a yo-yo.”
    John @ #29: The pack of cards should not be built to fall. You people are sloshing about on the surface with symptoms. Get to the root causes”.
    I’m not convinced you are getting to the root cause, John. If anything it is self-glorification, with dominating others or conspicuous ownership the assurance. Marx is getting nearer to the role of banks in the money method here:
    http://www.marxists.org/archive/dunayevskaya/works/1979/outline-capital/ch04.htm
    “In the circulation C-M-C, the money is in the end converted into a commodity, that serves as a use-value; it is spent once for all. In the inverted form, M-C-M, on the contrary, the buyer lays out money in order that, as a seller, he may recover money. By the purchase of his commodity he throws money into circulation, in order to withdraw it again by the sale of the same commodity. He lets the money go, but only with the sly intention of getting it back again. The money, therefore, is not spent, it is merely advanced. [3]
    “3. “When a thing is bought in order to be sold again, the sum employed is called money advanced; when it is bought not to be sold, it may be said to be expended.” — (James Steuart: “Works,” &c. Edited by Gen. Sir James Steuart, his son. Lond., 1805, V. I., p. 274.)”
    The points not developed here is how monetary land etc values can increase unless banks advance the money to facilitate the transaction, and how increasing the money in circulation (and hence all money) by banks creating it “out of thin air” can be anything other than extending our credit limit: indebting us insofar as we use it and in itself empty of use or even honest exchange value.

  26. November 27, 2012 at 7:10 pm

    Grr! Let’s try that copy again with the paragraphs double-spaced:

    John @ #32: “Solving the root-cause, LAND, will not affect the overall economy even if credit availability goes up and down like a yo-yo.”

    John @ #29: The pack of cards should not be built to fall. You people are sloshing about on the surface with symptoms. Get to the root causes”.

    I’m not convinced you are getting to the root cause, John. If anything it is self-glorification, with dominating others or conspicuous ownership the assurance. Marx is getting nearer to the role of banks in the money method here:

    http://www.marxists.org/archive/dunayevskaya/works/1979/outline-capital/ch04.htm

    “In the circulation C-M-C, the money is in the end converted into a commodity, that serves as a use-value; it is spent once for all. In the inverted form, M-C-M, on the contrary, the buyer lays out money in order that, as a seller, he may recover money. By the purchase of his commodity he throws money into circulation, in order to withdraw it again by the sale of the same commodity. He lets the money go, but only with the sly intention of getting it back again. The money, therefore, is not spent, it is merely advanced. [3]

    “3. “When a thing is bought in order to be sold again, the sum employed is called money advanced; when it is bought not to be sold, it may be said to be expended.” — (James Steuart: “Works,” &c. Edited by Gen. Sir James Steuart, his son. Lond., 1805, V. I., p. 274.)”

    The points not developed here is how monetary land etc values can increase unless banks advance the money to facilitate the transaction, and how increasing the money in circulation (and hence all money) by banks creating it “out of thin air” can be anything other than extending our credit limit: indebting us insofar as we use it and in itself empty of use or even honest exchange value.

    • December 2, 2012 at 1:01 pm

      We have created a monster financial industry. Prof Michael Hudson stated that the financial sector is a parasite sector. It relies on other sectors. Other sectors are the productive sectors that create the wealth.

      The root cause of the crash was LAND. Why was it land? Because the gains were free of tax. Land values are created by economic community activity (economic fact) – the gains are in effect stolen by the landowner. Because the gains on LAND are appropriated the bank find it easy to lend on land using LAND as collateral. The lender defaults and he takes the land and it keep rise in price and the gains appropriated (by the banks as well if they get their hands on it). To the banks LAND is a sure-fire winner. It is better than securing a loan of factory plant.

      As been pointed out to you, that the Dot-Com bubble was begin to the economy. It fell and all went along as usual. It never affected me because I wasn’t in it. But when LAND collapsed I was effected – and I am not in that either. So why should LAND effect me? Because people were pouring money in land and the banks thinking land was sure-fire security when used as collateral the LAND market (the pack of cards) collapsed.

      So, ensuring LAND is not used in such a way in the future, it makes sense to reclaim the community created land values, then the LAND market will not be abused. I hear you think “well Dot-Com was abused”, but Capital items are very different to LAND. Land sustains us all. Land reacts to markets very differently.

      The crash exposed skulduggery & theft and lack of control and accountability in the financial sector. This took the focus away from the real root cause, LAND, and the media and those appropriating gains from land made sure that was where the focus stayed. Read the posts on here. Most are sloshing around on the surface.

  27. December 2, 2012 at 1:10 pm

    steve :
    The original article was about whether macroeconomist should have foreseen the crisis.

    Current macroeconomic could not have foreseen the crisis – and never as we all know. It has merged LAND into CAPITAL, as Martin Wolf of the FT notes. It also does not monitor the 18 year LAND boom-bust cycle, so cannot predict a dip in the economy.

    The LAND boom-bust cycle can be eliminated by using Geonomics. Then focusing on the productive side of the economy, away from the parasitical side.

  28. December 2, 2012 at 1:27 pm

    robert r locke :
    “Any good economist will tell you, as people’s real disposable incomes rise, that money ends up in one place, and one place only, the LAND MARKET.”

    We have been reading constantly on this blog that the people’s real disposal income did not rise for 99%, only 1%. But private debt rose considerably. Who do you think got all that income but the bankers,brokers, the investment classes.

    Investment classes? You mean “speculation classes”. Investment and speculation are not the same thing.

    Unsustainable policies are pushed on us, which Greece, Spain and USA and the rest of us have proved that we do not have a sustainable financial system. It is is based on feeding the banks’ addiction to lending for LAND speculation.

    Remove the land speculation by introducing Genomics and stability and sustainability emerges.

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