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rwer-issue-62

Real-World Economics Review
Issue no. 62, 15 December 2012

You can download the whole issue as a pdf document by clicking here

In this issue:

Economics

A radical reformation of economics education           2
Jack Reardon      download pdf

To observe or not to observe:
Complementary pluralism in physics and economics          20
Edward Fullbrook      download pdf

Trend, randomness, and noise: Exogenous vs. endogenous           29
explanation in complex heterodox analysis      download pdf
Yinan Tang, Wolfram Elsner, Torsten Heinrich, Ping Chen

Rational expectations – a fallacious foundation           34
for macroeconomics in a non-ergodic world
Lars Syll      download pdf

Rethinking economics: Logical gaps – empirical to the real world           51
Stuart Birks      download pdf

Laboratory experimentation in economics           68
Dimitrios Koumparoulis      download pdf

Some developments in the economic scientific community          83
and the situation in Germany
Arne Heise      download pdf

Economy and Society

The Fiscal Cliff – Lessons from the 1930s  (Report to US Congress)           98
Steve Keen      download pdf

Breakdown of the capacity for collective agency:           112
The leitmotif of our times
Korkut Alp Ertürk      download pdf

Surviving progress: Managing the collective risks of civilization           121
Mark Jablonowski      download pdf

Financial capitalism – at odds with democracy           132
Wolfram Elsner      download pdf

A hot wheels idea for looking at the distribution           160
of household wealth in Mexico 1984-2010
Carlos Guerrero de Lizardi      download pdf

Instant comments – You may post comments on papers in this issue at the bottom of this post.

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  1. December 15, 2012 at 2:53 pm

    Professor Reardon’s sensitivity to the criticism conveyed by students required to study economic theory divorced from the real world draws attention to the need for a return to political economy as the path to an interdisciplinary understanding of how societies (and economies) function. I was one of those students who began my graduate education in economics but soon became frustrated by its over-reliance on mathematics. I found a much higher level of fulfillment earning a master of liberal arts degree. That educational experience contributed to my development of course material to teach political economy as developed by its masters — Turgot, Smith, Ricardo, Mill, George and others — and a second (year long) course offering a critical examination of the “History of Economic Theory and Policy.” I am more than happy to provide the course modules (in Powerpoint form) and my lecture notes to anyone who has an interest in exploring this interdisciplinary approach.

    • Dominik S
      May 16, 2013 at 8:07 pm

      Please provide them to me! I also addressed you on facebook!

      • May 18, 2013 at 9:07 pm

        Happy to. Best to send me an email at scimail@comcast.net. I can then respond sending a few modules at a time as email attachments.

      • Asad Zaman
        May 20, 2013 at 1:08 am

        Dear Professor Dodson,
        I tried to email at the address you provided, but got the following result:
        Delivery to the following recipients was aborted after 1 second(s):

        * ejdodson@comcast.net
        I am very interested in your course notes for:

        “History of Economic Theory and Policy.”

        The project that interests me, and seems close to what you have developed, is to study economic theories in the light of the needs of the powerful at the time. Following the Power/Knowledge theme of Foucault, it seems that theories were developed to serve particular political groups and that when theories are presented in their historical context, this becomes especially obvious. I am attaching a paper which develops this idea in a limited context, but I think the same exercise would be very useful on a grander scale — to show how neoclassical emerged in the service of the interests of the top 1%.

        My paper is entitled: Anti-Poor Policies and Anti-Poor Philosophies, and can be downloaded from:

        https://sites.google.com/site/azcurrentresearch/home/general-topics/anti

        Another paper on the same theme is: Power/Knowledge and Economic Theories: download from:

        https://sites.google.com/site/azcurrentresearch/home/general-topics/power

      • May 20, 2013 at 1:23 am

        While away on travel, my email account was hacked and messages were sent by a spammer using my email as sender. Returning on Friday I discovered the problem and yesterday created a new email account, as follows: edod08034@comcast.net. If you email me at the new email address I will be more than happy to forward you the PowerPoint modules I have developed, which you can edit as you like for your own use.

  2. December 15, 2012 at 3:46 pm

    I have been using a flow chart language in animation, with voice narration, to acceleration comprehension of basic concepts:

    This is part of a larger project to place economics in the larger framework of ecological systems theory.

    • December 19, 2012 at 11:34 am

      A pity this link has been removed, as the omissions (like the creation of money and the division of the household economy between the working and shadow economies) showed up just as clearly as the neo-classical economics. Arnold’s graphics were good, if not his economics.

  3. December 16, 2012 at 12:05 pm

    John Marsh, in his unjustly neglected recent book “Class Dismissed,” challenges the piety of proposing “education” as the locus of social change. Education, in both concept and practice, has served as a thin snake oil to cover the predations of the corporate supersystem – no book or training can serve as a substitute for the actual conditions of a decent life.
    Sorry, professor – “education” has been a trillion-dollar failure which promises more empty credentialing, filling the available elite slots with Rumsfeld and Blankfein and keeping the indebted rabble blaming their own numerically established, graded inadequacies.

    • Edward J. Dodson
      December 16, 2012 at 8:54 pm

      What I suggest to Martin is an expansion on my earlier comment; namely, that economics as its has evolved as a separate discipline not only fails to educate people on how the world really works, its theoretical origins were (and are) never meant to be objectively scientific. On the one hand were economics professors chosen because of their ideological perspective in defense of the status quo. Opposed to them were economics professors who accepted the criticisms Marx brought against the system Marx incorrectly described as capitalism. What political economy has demonstrated from its earliest teaching is the role played by forms of entrenched privilege in both wealth production and its distribution. And, there has been no greater form of privilege than the private appropriation of the rent in all of its various forms.

      Teaching political economy, I am in a position to challenge the values relating to private property in nature that most people hold without much conscious thought. Long before any socialist wrote on the subject, John Locke provided us with a remarkably clear exploration into the subject. Others followed and have never really stopped attempting to broaden the public dialogue beyond the narrow left-right paradigms.

  4. December 16, 2012 at 10:22 pm

    Professor Reardon’s prerequisites for an economics degree are bereft of a most important subject, basic ecology, which would wisely be followed by at least one basic course in ecological economics. Stern’s (2006; Stern Review on the Economics of Climate Change) observation that “climate change is the greatest and widest-ranging market failure ever seen” would be better grasped by a student with an ecological background. That biodiversity facilitates ecosystem services, the life support services of the planet, and that there is a fundamental conflict between economic growth and biodiversity conservation (Czech 2000; Wildlife Society Bulletin 28(1):4-14) needs to be understood by all budding economists. And trophic theory, easily understood from an ecological perspective, also applies to an economy. Perhaps most importantly are concepts such as limiting factor, Liebig’s Law of the minimum, and thermodynamics, which all emphasize that limits ultimately affect everything we do socially, economically, and ecologically. The neoclassical dogma of infinite economic growth and its impossibility on a planet with finite resources, cannot be fully grasped without a background of physics and ecology. The recent update to The Limits to Growth by Turner (GAIA 21/2(2012): 116 – 124) gives some evidence of that.

  5. sergio
    December 18, 2012 at 11:11 am

    I would like to introduce a paper related to problems of economics education.

    http://www.acer.edu.au/documents/AJE_51-1_Jones_c.pdf

  6. December 18, 2012 at 9:02 pm

    Dear Prof. Fullbrook,

    I read with great interest your recent article “To observe or not to observe: Complementary pluralism in physics and economics” published in the issue 62 of the Real-World Economics Review. As a trained physicist with strong interest in economics and econophysics, I allowed myself to write this message to on comment some aspects of your interesting article.

    The four physicists you cited had indeed important ideas about pluralism, but the physicist of the past who wrote most clearly and extensively on this respect was in fact Ludwig Boltzmann. At the end of the 19th century some physicists were strongly opposed to the atomic theory, of which Boltzmann was strongly in favour. He felt that if physicists were allowed to remove the atomic theory from the realm of accepted theories, physics would had fallen into a dogmatic state. He then wrote several papers discussing the nature of the scientific theories, basically elaborating greatly on previous ideas from Kant, Maxwell and Hertz. The next generations of physicists, like Einstein, Feynman and de Broglie, knowingly or unknowingly, basically repeated what Boltzmann stated in the last decade of the 19th century. The core of Boltzmann’s thinking is known today as “theoretical pluralism”.

    As a physicist working in cosmology (and now in econophysics as well), I have experienced from time to time a certain degree of dogmatic thinking in my own area of research, though such dogmatism is much weaker, bearing absolutely no comparison to what goes on in economics regarding the dominance of neoclassical economic thinking. For this reason I wrote in collaboration two papers focused on physics, but whose ideas I believe can be perfectly applicable to what goes on right now in economics. In both papers one can find a summary of Boltzmann’s thinking regarding the points you raised in your paper. They can be found at the arXiv, as below:

    – “Dogmatism and Theoretical Pluralism in Modern Cosmology”, http://arxiv.org/abs/physics/9806011

    – “Boltzmann’s Concept of Reality”, http://arxiv.org/abs/physics/0701308

    It is my hope that this e-mail may be useful in calling your attention to Boltzmann’s thinking, which in my view is still of enormous significance not only to physics, but science in general and, especially now, to economics.

    Best regards,

    Marcelo Byrro Ribeiro
    Instituto de Física
    Universidade Federal do Rio de Janeiro

    • December 18, 2012 at 9:11 pm

      Dear Marcelo,

      I much appreciate receiving you email, and I am in the process of printing out your and Videira’s two papers.

      If you will give me your permission, I would like to post your email as a comment on http://rwer.wordpress.com/2012/12/14/rwer-issue-62-2/

      I was vaguely aware of Boltzmann’s role but have never read him. I probably will now.

      Thank you for your interest, and I am looking forward to reading your papers.

      Kind regards,
      Edward

  7. Jorge Buzaglo
    December 19, 2012 at 3:40 pm

    On: “Some developments in the economic scientific community and the situation in Germany.” It would seem that German professors — particularly, German economics professors — went further than their colleagues in other countries, when it comes to the degree of conformism, opportunism, and spinelessness. I do not know why, but the case of Victor Klemperer comes to my mind. Victor Klemperer was a German professor, dismissed from his university in 1935 for being Jewish (he remained in Germany, and what he went through is a gripping story, see reference at the end). In August 16, 1936, he wrote in his diary:
    “If there should ever be another time and the fate of the defeated was in my hands, I would let the people run and even many of the leaders, who perhaps had honest intentions and did not know what they were doing. But the intellectuals I would let them all be hanged, and the professors three feet higher than the other.” (My translation from the Swedish version of: Ich will Zeugnis ablegen bis zum letzten. Tagebücher 1933–1945. Version in English: I shall bear witness: the diaries of Victor Klemperer, 1933-41.)

  8. December 19, 2012 at 11:23 pm

    On the same paper, its Lakatosian opening looked hopeful, but its conclusions hardly lived up to his. Extracts from Lakatos, I and Musgrave A, eds: Criticism and the Growth of Knowledge”, 1970, Cambridge.

    “In [his] pluralistic model the clash is not between ‘theories and facts’ but between two high-level theories: between an interpretive theory to provide the facts and an explanatory theory to explain them. … the problem is how to repair an inconsistency between the explanatory theory under test and the – explicit or hidden – interpretive theories; or of you wish, the problem is which theory to consider the interpretive one and which the explanatory one which tentatively explains them.” [p.129].

    “The idea of competing scientific research programmes leads us to the problem: how are research programmes eliminated? … a degenerating problemshift is no more a sufficient reason to eliminate a research programme than some old-fashioned ‘refutation’ or a Kuhnian ‘crisis’. Can there be any objective (as opposed to socio-psychological) reason to reject a program, that is, to eliminate its hard core and its programme for constructing protective belts? Our answer, in outline, is provided by a rival research programme which … supersedes it by a further display of heuristic power. However, [this] strongly depends on how we construe ‘factual novelty’. … After [the theory of Brownian motion] what had previously seemed a speculative reinterpretation of old facts (about heat etc) turned out to be a discovery of novel facts (about atoms)”. [pp.155, 157].

    “I hope I have shown that continuity in science, the tenacity of some theories, the rationality of a certain amount of dogmatism, can only be explained if we construe science as a battleground of research programmes rather than of isolated theories. … Mature science consists of research programmes in which not only novel facts but, in an important sense, also novel auxiliary theories, are anticipated; mature science – unlike pedestrian trial and error – has heuristic power. Let us remember that in the positive heuristic of a powerful research program there is, right at the start, a general outline of how to build the protective belts: this heuristic power generates the autonomy of theoretical science”. [p.175].

    Economics can hardly be said to have a Lakatosian protective belt, since its interpretive “auxilliary theories” amount at best to nonsensical assertions and at worst to deliberate obscuration. If its protective belt is made up of superannuated economists as well as blather, the obvious answer is to hit it below the belt by joining with non-economists to articulate defensible interpretations of the economy with which to teach the young and open the eyes of financiers and politicians.

    On this site I have myself suggested a string of increasingly comprehensive and radically different interpretations, starting from the circulation of money and the localisation of energy in sub-atomic particles; drawing on historical data and analogies with central heating, electricity, telephony, cybernetic (invisible hand) control servos, indexed information systems and multi-purpose computer systems. Mature [auxilliary] theories of and methodologies for electrical and information systems (which include humanity) already exist. If this means nothing to economists, don’t give up. How about trying German engineers?

  9. December 27, 2012 at 11:06 am

    On Edward Fullbrook’s To observe or not …

    An interesting and useful discussion, and I have just a comment on one point. You say you would oppose the elimination of neoclassical theory because “in its limited way it offers insights into economic phenomena”.

    Does it? I have been at a loss to think of a situation in which it might provide a usefully accurate description. Perhaps a farmers’ market, where one can have reasonably complete knowledge of products and prices, and where increasing returns do not obviously operate, and where some approximation to maximising utility might apply (modified by the inconvenience of detailed comparisons of everything), but why do we need a theory for that?

    My point is that plurality in physics is tolerated because different theories are usefully accurate in different domains: quantum mechanics for the very small, relativity for the very large. Their useful accuracy within their domain is well demonstrated. It’s just that neither is usefully accurate in the other’s domain.

    I think neoclassicists would have to demonstrate some domain of useful accuracy in order for their theory to be included in a useful curriculum.

    Another very pertinent comparison with physics. The neoclassical theory was modelled after the theory of perfect gases, which assumed atoms are simple bouncing balls or points. Physicists soon established (by comparing with observations) that this theory is usefully accurate for a gas well above its boiling point, but hopeless below. To describe liquids, or solids, one needs the complicated atomic interactions of quantum mechanics.

    To describe many aspects of observable economies, one needs to assume people more complicated than homo economicus (not to mention incomplete knowledge, increasing returns, delayed feedbacks … ). I’m not aware of neoclassicists ever demonstrating a domain in which their bizarre abstractions give a useful description, in the way physicists demonstrated the usefulness of perfect gas theory.

  10. Asad Zaman
    January 12, 2013 at 3:13 pm

    I would to strongly endorse Jack Reardon;s suggestion that we shift to using the term “Real World Economists” instead of heterodox — this second word defines us with reference to mainstream orthodoxy and accepts second class citizenship. Instead of neoclassical, we should call it fantasy or fairlyland economics. I have described neoclassical economics as follows in my essay on “Islamic Economics: A Survey of the Literature:” (available from SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1282786

    “To evaluate the effects of economic actions, neoclassical economists refer to a fairytale world populated entirely by cold, calculating and callous people. In this world, everyone is perfectly informed about all possibilities; there are no transaction, communication or transportation costs; and everyone calculates, to the last penny, the actions which will be most beneficial to their selfish interests. Economic policies are evaluated solely in terms of their effects on the wealth of these imaginary individuals living in this never-never land. In social and political arenas, the wonders of this imaginary world are idealized and promoted, and aggressive actions to change the world to bring it closer to this ideal have been advocated and undertaken. The realization that it will never actually be achieved does not discourage followers of this economic ideology from attempting to bring the world closer to their dreams.”

    In the passage above, the words “cold, callous, and calculating” are not just alliterative. Cold refers to the idea the consumers have no emotions — they dont make impulse purchases, they dont respond to advertising which plays on different emotions such as vanity, etc. Callous refers to the idea that they have no empathy, and do not take into consideration the effects of their actions on others. Calculating refers to the assumed maximization behavior. In my paper on “The Empirical Evidence Against Utility Theory” (to be published in International Journal for Pluralism in Economics & Education” I have surveyed the huge amount of empirical evidence against these assumptions. This paper is also available from SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2033641;

    • Bruce E. Woych
      January 13, 2013 at 1:49 pm

      Resources also available from an interdisciplinary “evidence base” :

      http://papers.ssrn.com/sol3/JELJOUR_Results.cfm?form_name=journalbrowse&journal_id=2126256

      SSRN eLibrary Search Results
      Singapore Management University School of Law Legal Studies Research Paper Series

      SINGAPORE MANAGEMENT UNIVERSITY SCHOOL OF LAW LEGAL STUDIES RESEARCH PAPER SERIES
      View Papers: http://www.ssrn.com/link/Singapore-Mgmt-U-LEG.html
      Subscribe: http://hq.ssrn.com/jourInvite.cfm?link=Singapore-Mgmt-U-LEG

      Founded in 2007, the Singapore Management University School of Law is a young and vibrant community of academics, students and alumni whose mission is to build a collegial team of excellent researchers and teachers to nurture lawyers who will lead and serve the community with distinction. The SMU School of Law is helmed by a dynamic and international faculty with a diverse range of research interests, ranging from the private law of obligations, international trade law, international criminal justice, to note just a few. The Singapore Management University School of Law eJournal contains abstracts, works in progress, and published papers from our faculty and visiting scholars. The papers are published electronically and are available online or through email distribution.

  11. Bruce E. Woych
    January 13, 2013 at 2:24 pm

    The contemporary professional myopia that plagues economics is a chronic misalignment with scope and scale under a bounded rationality of meta-econ-metric cosmologies. The polemics in Economics is a history of bounded reasoning, and that systemic has been largely towards the service of a “how to” rule of order (under the guise of a search for laws in general). In short, we miss the forest for the trees.
    For instance:
    “In 1943, in an analysis of Hitler’s programme in the Quarterly Journal of Economics, the word ‘privatisation’ entered the academic literature for the first time. The author, Sidney Merlin, wrote that the Nazi Party ‘facilitates the accumulation of private fortunes and industrial empires by its foremost members and collaborators through “privatisation” and other measures, thereby intensifying centralisation of economic affairs and government in an increasingly narrow group that may for all practical purposes be termed the national socialist elite’.The gung-ho free marketeers who rode to power with Thatcher in 1979 don’t seem to have been aware of the Nazi prelude, although they would have known of later privatisations in Pinochet’s Chile.”

    http://www.lrb.co.uk/v34/n17/james-meek/how-we-happened-to-sell-off-our-electricity.

    While these “recurrences” are observable in time (history), no one dare state that the process (re-named) of privatization is one of conquest and consolidation not of normative industry and finance. We miss the process entirely.

    Economics without history, and deep history at that; is an assessment of entrenchment in theories that are outcome based to begin with. Take a look at the cultural and social foundations of the major theorists and their contextual situations that establish their frames of reference. Austrian aristocrats and British class establishing “rules” to interpret “society” and humanity itself? A little due diligence would serve at least if ‘critical” assessments are so difficult to ascertain. What economics requires is a bit of reverse engineering, followed by a bit of re-engineering with a critical eye to the destructions as well as the constructions of society. The World is burning out…ladies & gentleman…wake up and smell the smoke!
    —————————————————————————————————————
    I am partial to a work by Karl Pribram 1983
    A History of Economic Reasoning
    John Hopkins University Press.
    The question is why after 30 years it has not been followed and elaborated with a more intensive investigation up to par with today’s standards?

  12. Kihano
    March 29, 2013 at 1:19 pm

    I have red the paper “To observe or not to observe: Complementary pluralism in physics and economics” by Edward Fullbrook and would like to add something or to extend the topic a little bit further.
    I am a physicist myself and it is completely clear for me that economics, unfortunately, is not a science, but ideology. I completely agree with the author, that yes, it is the capability of the economics to alter the behavior of the people and the state policies that prevents its development as science. I also completely agree that different groups of the society are differently affected by different policies. There is no need to be Sherlock Holms to see the culprits, those who benefit from the current state of the affairs, and the victims – those who loose. It may not be so obvious how the benefitting group influences the works of the economists. In my country we have a proverb “The one, who pays the musician, determines the music.” The financing of science most often uses the projects principle, and it is this principle which selects where the sponsored activity will go. The different deliverables of the natural and social sciences determine the success of the first, and the failure of the last. I think the divergence between the economics and the scientific approach grew immensely due to the need of some social groups to rebut Karl Marx, especially after the October revolution in Russia and later the creation of the USSR. Misses and Hayek have been among the most active in this area. May be you know, Hayek had very peculiar opinion on who should rule the world. After the soviet victory in the SWW, he saw the distribution of his (or Austrian school’s) ideas did not spread sufficiently so he tried to organize a society and network of conservative/neoliberal think-tanks to promote the now prevalent economic beliefs. The network got momentum in 60s when it got strong financial support from certain social group. Today this network is extremely strong and penetrated most universities and governments.
    There is an anthropologist study of this phenomena in my country “La “main invisable” de la transition : Think tanks et transition démocratique en Bulgarie après 1989” http://www.worldcat.org/title/main-invisable-de-la-transition-think-tanks-et-transition-democratique-en-bulgarie-apres-1989/oclc/495284348 , but it is worldwide.
    Thus, if the university researchers may try to defend their independence, the people in the think-tanks usually agree to follow the think-tank policy by joining. Anyway, even university researchers have common projects with business and receive financing from it. And finally, if you graduated economics, especially with excellence, this means you have already accepted the dogma. You need only to repeat it to get respect and benefits from the business.
    Thus, yes, the economics is ideology, but it is a class ideology. Yes, I know, the class straggle topic is a taboo in the developed countries and especially in USA, but it is a reality. And rather ugly reality, since one of the two sides has lost, but the other still jumps on it with both feet.

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