The 10 most viewed posts of the last 30 days

1. The Reinhart and Rogoff defense of their work is riddled with mistakes, too

2. How Much Unemployment Was Caused by Reinhart and Rogoff’s Arithmetic Mistake?

3. True Keynesianism – Richard Koo edition

4. Reinhart and Rogoff are not being straight

5. Economics textbooks – decades of scientific fraud and incoherence

6. IS-LM is bad economics no matter what Krugman says

7. What causes the share of labor to decrease? 3 graphs.

8. Emerging vs. developed countries’ GDP growth rates 1986 to 2015

9. “Networked minds” require a fundamentally new kind of economics

10. Robert Samuelson finds economics is way too complicated (2 graphs)

Creating an Economics for the 21st Century

guest post from Rob Johnson

In the wake of the 2008 financial crisis, many of our policy makers and top economists are still stumbling in the dark.

One needn’t look far for proof. The symptoms of their failure are everywhere. Financial markets remain too volatile and crises too common. Inequality is raging and increasing around the globe. And environmental damage continues unabated, with rising climate volatility belying claims that we can experience sustained and broad based prosperity without major changes in the global economy.

A key part of this problem – and one that hasn’t been adequately explored – is the economics profession. 

Why aren’t we talking about “public goods”? A proposed research agenda

guest post from June Sekera

Public goods pervade the lives of citizens in all advanced democracies.  Yet virtually no one talks about public goods: we rarely hear the term outside of economics classrooms.

In Samuelson’s sixty-year-old formulation, public goods are “non-rivalrous” and “non-excludable and are born of market failure.  In this market-fundamentalist world, public goods are inherently a “problem.”

In the real world, public goods are what governments produce on behalf of their citizens. “The history of civilization,” writes Martin Wolf of the Financial Times, “is a history of public goods”. In the real world, public goods include clean air, clean water, street lights, emergency call service, disaster relief, food and drug safety, public parks and beaches, education, and dozens more, all of which citizens make use of every day and enjoy unthinkingly. Over 90 percent of U S citizens who deny ever receiving benefits from a  government program actually participated in one or more government programs (Social Security, college loans, the child care tax credit and the like), as admirably documented by Suzanne Mettler of Cornell in her research on “the submerged state”.

Awareness of public goods, and their utility and value, is sorely lacking in public discourse.

Getting business school reform wrong, Why it happened, and what to do about it

from Robert Locke

Post WWII business schools deans, philanthropic foundation bureaucrats (Ford and Carnegie), and businessmen carried through radical reform of US business school curricula in the 1960s to get rid of “unimaginative, non-theoretical, second rate …students,” working in, to use Herbert Simon’s phrase, “a wasteland of vocationalism,” (Khurana, 236). Their goal was to replace the existing curriculum with a scientific education in which neoclassical economics played a “dominant role within the emerging tinplate for disciplines-oriented business studies.” (Khurana, p. 265, Locke, 1989, Management and Higher Education Since 1940) Rakesh Khurana tells this story in detail in his 2007 book, From Higher Aims to Hired Hands (Princeton UP), without much comment, however, about whether the reform, which was thorough, actually succeeded in improving economic performance. I suggest it did not.

Why the Postwar Business School reform

Most histories of this transformation of business studies stress a two step process. First, neo-classical economics imbibed the scientific toolkit that operational research developed during WWII and the Cold War in government agencies and think tanks like the Rand Corporation, therewith claiming to have turned itself into a “prescriptive” science. Then, in a second step, reformers made this new neo-classical economics the dominant force in the subsequent transformation of business school curricula and research.

But the penetration of business schools by neoclassical economics

Robert Samuelson finds economics is way too complicated (2 graphs)

from Dean Baker

That is quite literally what he told us in his column. His second paragraph tells readers:

“Among economists, there is no consensus on policies. Is “austerity” (government spending cuts and tax increases) self-defeating or the unavoidable response to high budget deficits and debt? Can central banks such as the Federal Reserve or the European Central Bank engineer recovery by holding short-term interest rates near zero and by buying massive amounts of bonds (so-called “quantitative easing”)? Or will these policies foster financial speculation, instability and inflation? The public is confused, because economists are divided.”

See, we don’t know what to do, so we just can’t do anything. All those suckers who are unemployed or seeing stagnant wages, well we just don’t know. And the fact that those on the top are getting rich with 60-year high shares of national income, well what can we do about that? It’s just too confusing.

Michigan State students campaign for diversification

ASSOCIATED STUDENTS OF

MICHIGAN STATE UNIVERSITY

GENERAL ASSEMBLY

FORTY-NINTH SESSION

G.A. 49-72

INTRODUCED BY: Nikolovksi SECONDED BY: Goheen

A BILL TO:

ADVOCATE FOR THE DIVERSIFICATION OF THE CURRICULUM WITHIN THE DEPARTMENT OF ECONOMICS

THE ASSOCIATED STUDENTS OF MICHIGAN STATE UNIVERSITY ENACT:

WHEREAS, Since the recent global financial crisis, there has been a heightened debate within academic circles about the varying methods of analyzing economic phenomena. The department of Economics at MSU teaches from a single theoretical framework, widely known as the neoclassical school. This framework is only one perspective among several others which are not taught, and only gives one way of trying to understand our economy; and,

WHEREAS, Economists espousing other theoretical frameworks have given insights into important economic phenomena which have drastic implications for economic policy. Some important analyses include alternative empirical work that consistently explains the process of economic growth and—what is connected—warnings of the global financial crisis prior to its precipitation. These frameworks of thought use completely different methods and assumptions then those that are taught here at MSU; and,

WHEREAS, Students taking Economics within MSU are unlikely to be aware of the debates that go on, because the vast majority of what they do as “economics” is in the form of math problems which takes the assumptions and method of the neoclassical framework as given. Also, because students are often not explicitly made aware of the method and assumptions that underlie the mathematical formalism that they use, there is an appearance of diversity in the topics within the curriculum (e.g. international economics, microeconomics, and macroeconomics). Students should be made aware that there is a basic unity in the methods of neoclassical economics in analyzing these different topics; therefore be it,

RESOLVED, That MSU’s Economics department diversify its curriculum to allow students to engage not only with neoclassical work, but also competing frameworks so that they may be aware of the debates that are going on.

A first recommendation includes giving more explicit recognition of thev underlying method and assumptions of the frameworks that are taught, as well as engaging with the original works of the foundations of the

different schools of economics (e.g. Adam Smith, David Ricardo, Alfred Marshall, Karl Marx, John Maynard Keynes, and Milton Friedman.)

Secondly, working away from using mathematical formalism as an end in itself but recognizing it as a secondary tool, and also allowing for critical and reflective thought through paper writing and in-class debate is also highly recommended.

“Networked minds” require a fundamentally new kind of economics

Below is a guest post from Christian Waloszek, a “young scholar” I met at INET’s Hong Kong conference earlier this month.  It summarizes an interesting and unusual paper which he co-authored and that relates to things discussed on this blog. http://www.nature.com/srep/2013/130319/srep01480/full/srep01480.html 

“Networked Minds” Require A Fundamentally New Kind of Economics

 In their computer simulations of human evolution, scientists at ETH Zurich find the emergence of the “homo socialis” with “other-regarding” preferences. The results explain some intriguing findings in experimental economics and call for a new economic theory of “networked minds”.

Economics has a beautiful body of theory. But does it describe real markets? Doubts have come up not only in the wake of the financial crisis, since financial crashes should not occur according to the then established theories. Since ages, economic theory is based on concepts such as efficient markets and the “homo economicus”, i.e. the assumption of competitively optimizing individuals and firms. It was believed that any behavior deviating from this would create disadvantages and, hence, be eliminated by natural selection. But experimental evidence from behavioral economics show that, on average, people behave more fairness-oriented and other-regarding than expected. A new theory by scientists from ETH Zurich now explains why.

Is global finance finally shrinking?

from Jayati Ghosh

It is obvious that the recent boom in global capitalism had witnessed massive over-extension of finance. What has been described as “financialisation” reflected not only the ever-greater penetration of finance capital into more activities of the real economy and involvement in critical markets such as those for commodity futures that affect traded prices of food and fuel.

But did this actually change from 2008? Is it the case that the global financial crisis and its ramifications have actually had some effect in causing this financial froth to subside? A new report from the McKinsey Global Institute based on its database of financial assets in 183 countries across the world suggests that this might be the case. , but also huge and volatile movements of capital across national borders. By 2007, global stocks of financial assets (both equity and debt stocks) amounted to $206 trillion. This meant that financial assets were more than 4 times the maximal estimate of GDP in developed countries in that year, and nearly twice the value of GDP in developing countries. 

Foundations of Paul Samuelson’s Revealed Preference Theory (super wonkish)

from Lars Syll

In 1938 Paul Samuelson offered a replacement for the then accepted theory of utility. The cardinal utility theory was discarded with the following words: “The discrediting of utility as a psychological concept robbed it of its possible virtue as an explanation of human behaviour in other than a circular sense, revealing its emptiness as even a construction” (1938, 61). According to Samuelson, the ordinalist revision of utility theory was, however, not drastic enough. The introduction of the concept of a marginal rate of substitution was considered “an artificial convention in the explanation of price behaviour” (1938, 62). One ought to analyze the consumer’s behaviour without having recourse to the concept of utility at all, since this did not correspond to directly observable phenomena. The old theory was criticized mainly from a methodological point of view, in that it used non-observable concepts and propositions. 

issue no. 63 of real-world economics review

Issue no. 63,  25  March  2012

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

In this issue:

The veil of deception over money           2
Norbert Häring           download pdf

Ultra easy monetary policy and the law of unintended consequences           19
William White            download pdf

Civilizing capitalism           57
Erik Reinert           download pdf

Looking at the right metrics in the right way – Two kinds of models           73
Merijn Knibbe           download pdf

Crisis and methodology: Some heterodox misunderstandings          98
Egmont Kakarot-Handtke          download pdf

Inapplicable operations on ordinal, cardinal, and expected utility          118
Jonathan Barzilai          download pdf

Reduced work hours as a means of slowing climate change         124
David Rosnick          download pdf

Electronic money and Modern Monetary Theory          135
Trond Andresen          download pdf

Productivity, unemployment and the Rule of Eight          142
Alan Taylor Harvey          download pdf

What I would like economic majors to know          147
David Hemenway          download pdf

Past, contributors, submissions and etc.          155

“Inapplicable operations on ordinal, cardinal, and expected utility”

from Issue no. 63 of the real-world economics review

Inapplicable operations on ordinal, cardinal, and expected utility
Jonathan Barzilai   [Dalhousie University, Canada]      download pdf

Editor’s note:

This short paper was originally submitted to World Economics Review, where under its online open review it was for a year subjected to voluminous high calibre critique and author response (available here). As the first reviewer noted: “If the author is right, a substantial part of orthodox economics has to be rejected on purely formal grounds”. The paper’s arguments turn on the application of abstract algebra, a branch of mathematics in which we economists are rarely fluent. The paper asserts:

1. Hick’s and Samuelson’s applications (and those based thereon) of differentiation to ordinal utility are founded on mathematical errors.
2. Expected utility’s scale construction rule is self-contradictory.

By publishing Jonathan Barzilai’s paper in the RWER, it is hoped that one or more mathematicians will bring their expertise to bear on its argument and that the high calibre consideration of the paper by economists will continue in public view. To this end, this post has been placed so that people may comment on the paper. Only comments of an academic nature and directed primarily to the paper will be posted. 

IS-LM is bad economics no matter what Krugman says

from Lars Syll

Paul Krugman has a post up on his blog once again defending “the whole enterprise of Keynes/Hicks macroeconomic theory” and especially his own somewhat idiosyncratic version of IS-LM.

The main problem is simpliciter that there is no such thing as a Keynes-Hicks macroeconomic theory!

So, let us get some things straight.

There is nothing in the post-General Theory writings of Keynes that suggests him considering Hicks’s IS-LM anywhere near a faithful rendering of his thought. In Keynes’s canonical statement of the essence of his theory in the 1937 QJE-article there is nothing to even suggest that Keynes would have thought the existence of a Keynes-Hicks-IS-LM-theory anything but pure nonsense. So of course there can’t be any “vindication for the whole enterprise of Keynes/Hicks macroeconomic theory” – simply because “Keynes/Hicks” never existed.

And it gets even worse! 

Inequality and well-being

from Lars Syll

Source

Sweden hit by deflation

from Lars Syll

Sweden is according to new statistics from the Statistics Sweden now in a state of deflation. The inflation rate was -0.2 percent in February, down from 0.0 percent in January. The inflation rate according to CPIF was 0.9 percent in February 2013, and HICP has increased by 0.5 percent since February of 2012.

So yours truly thought he should give 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:  

Rigour is no substitute for relevance and realism

from Lars Syll

The mathematization of economics since WW II has made mainstream – neoclassical – economists more or less obsessed with formal, deductive-axiomatic models. Confronted with the critique that they do not solve real problems, they often react as Saint-Exupéry‘s Great Geographer, who, in response to the questions posed by The Little Prince, says that he is too occupied with his scientific work to be be able to say anything about reality. Confronting economic theory’s lack of relevance and ability to tackle real probems, one retreats into the wonderful world of economic models. One goes into the “shack of tools” – as my old mentor Erik Dahmén used to say – and stays there. While the economic problems in the world around us steadily increase, one is rather happily playing along with the latest toys in the mathematical toolbox.

Paul Krugman has been having similar critical thoughts on our “queen of social science”. In a blogpost called Irregular Economics he writes: 

IS-LM – here we go again

from Lars Syll

What is Paul Krugman‘s favourite macroeconomic model – IS-LM – all about? Steve Keen gives a pedagogical exposition.

Inequalities in Asia – Call for papers for WEA online conference

Call for papers for the Inequalities in Asia conference

Inequalities in Asia

It is generally recognized that inequalities of various kinds have been exacerbated during the period of globalization. This is true of global/regional inequalities as well as within-country disparities, except in a few countries where very conscious policies have been taken to reverse this. Concerns with growing inequality extend well beyond issues of justice and fairness, since the degree of economic inequality also affects social cohesion and political instability, and can also have negative implications for economic growth and sustainability.

This conference will focus on various aspects of inequality in South, Southeast and East Asia from the broader perspective of examining their interlinkages with other economic, social and political processes. This region is known to have been among the most dynamic in terms of income growth as well as structural change, and the evidence of increasing inequalities is also marked in several major countries of the region.

The broad themes to be covered are noted below (I-VII). In addition, some more specific questions that could be taken up in individual papers are mentioned, but these should be seen only as indicative suggestions. Papers that consider other aspects that are not explicitly noted here are also welcome. 

Book Stalls at WEA online conferences – £10 per book

World Economic Association Book Stalls

Individual WEA members can advertise their conference-related books for a fee of £10 on the websites of WEA conferences: http://www.worldeconomicsassociation.org/conferences/ .

Conference leaders and authors of accepted papers will have their conference-related books advertised free of charge.

Please send the following to wea.curriculum2013@gmail.com:

• High resolution image of the book cover (preferably JPEG format)
• A URL of the preferred place where the book can be bought

Please pay at:

http://www.worldeconomicsassociation.org/advertising/

Amartya Sen on the disappointing state of modern economics

from Lars Syll

Interviewed by Olaf Storbeck and Dorit Hess, Nobel laureate Amartya Sen makes some interesting remarks on the state of modern economics:

Question: Professor Sen, do you have the impression that economists and economic policy makers are learning the right lessons from the most severe economic and financial crisis since the Great Depression?  

David Cameron’s bad date in Delhi

from Jayati Ghosh

Suddenly India is being wooed again. In the space of a few days, both François Hollande and David Cameron have turned up on its doorstep with palms outstretched in the search for business contracts. It will have come as a soothing balm to an Indian government facing increasing disillusion at home and growing cynicism on the part of investors abroad.
In their foreign dealings, Indian policymakers must feel as if they are on a seesaw with changing partners of varying weights on the other side. There was a period, especially in the last decade, when theyIndia’s policymakers could do no wrong in the eyes of global capital and western powers. Then, the same policies that were celebrated as causes of India’s fantastic dynamism were discovered to have resulted in corruption, cronyism and growing inequalities. Popular revolts against these conditions forced even the global media to sit up and take note. And now, suddenly, India is acceptable again. Even the more unpleasant elements such as Narendra Modi – once shunned following the pogrom of Muslims in Gujarat, where he was chief minister – are brought in from the cold.