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

April 23, 2014 Leave a comment

from Lars Syll

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

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

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

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

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

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

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

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

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

More effective remedies for inequality than Piketty’s

April 19, 2014 22 comments

from Geoff Davies

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

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

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

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

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

April 17, 2014 4 comments

form Lars Syll

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

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

This is deeply worrying.

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

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

INET — marginalizing heterodox economics rather than transforming the discipline

April 15, 2014 1 comment

from Lars Syll

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

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

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

Read more…

The betrayal of the intellectual

April 15, 2014 1 comment

from Robert Locke

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

Categories: Uncategorized

A Pedagogical Paradox

April 12, 2014 15 comments

from Asad Zaman and the WEA Pedagogy Blog

What is really strange is the contrast between the strength of the arguments against conventional economics, and difficulties involved in teaching common sense. It is like someone who has been convinced that day is night, and great effort is involved in pointing out the sun to him. I sometimes give the following example.

Look at that old lady purchasing tomatoes. You know what she is doing? She is differentiating a multivariate utility function and setting up a simultaneous equations system of first order conditions. Now she is solving the nonlinear system. Fantastic, she just solved it to find the utility maximizing purchase under budget constraints is exactly 12.8 oz of tomatoes. Alas, she cannot slice them with such precision, and does not know the integer programming techniques required to solve the more complex optimization problems. OOPS, she miscounted the money she paid, and did not notice the change in the budget constraint when the greengrocer shortchanged her.

While this is usually good for a few laughs, especially from deeply indoctrinated students, because we are poking fun at the sacred principle of utility maximization, there is a serious point involved. Our personal experience, observations of others behavior, and general knowledge of how markets and shopping works, provide overwhelming evidence against microeconomic theory of consumer behavior. Yet we set it all aside when we read Samuelson. If a Nobel prize winner said so, it must be right. My survey which provides a summary of this evidence is linked below:
The Empirical Evidence Against Neoclassical Utility Theory: A Review of the Literature” [with Mehmet Karacuka] International Journal for Pluralism and Economics Education Vol. 3 (4) 2012, p 366-414

As a group, why are we such complete failures at persuading the public of something which is plain as the sun? I have the following hypotheses:  read more here

 

A simple proposal to kill high frequency trading in the stock market

April 11, 2014 5 comments

from Trond Andresen

Due to technological possiblities, success in stock market trading has increasingly become dependent on being at the front of a rat race in software, computing capacity and fast optical cable connections. While the firms whose stock is traded obviously do not change their prospects over time horizons shorter than days or even months, to win in the stock selling and buying game, today you have to act and react on a time scale of fractions of milliseconds. Automated high frequency trading (HFT) enables this. This race has now become so absurd that even the business press and financial regulators and pundits have become critical to it. One technical measure against HFT that has been implemented by a new stock exchange, IEX, is that all traffic go through a roll of cable (!) that delays the signals so much that HFT trading cannot profit parasitically from orders given to that exchange.

Here follows a simple proposal which does not depend on any changes to physical infrastructure, can be mandated by regulators and implemented easily at any exchange, and which enables not only the blocking of trading on millisecond scales, but can remove trading on any time scale that is considered too short. Being implemented as software, it also has the advantage that its parameters can be easily adjusted based on how the system performs. This solution does not presuppose any transaction fee, and it impacts small and big trade(r)s in the same way. Read more…

Categories: Uncategorized

Economics textbooks on ‘capital’ — how to get away with scientific fraud

April 11, 2014 Leave a comment

from Lars Syll

It is important, for the record, to recognize that key participants in the debate openly admitted their mistakes. Samuelson’s seventh edition of Economics was purged of errors. Levhari and Samuelson published a paper which began, ‘We wish to make it clear for the record that the nonreswitching theorem associated with us is definitely false’ … Leland Yeager and I jointly published a note acknowledging his earlier error and attempting to resolve the conflict between our theoretical perspectives … However, the damage had been done, and  Cambridge, UK, ‘declared victory’: Levhari was wrong, Samuelson was wrong, Solow was wrong, MIT was wrong and therefore neoclassical economics was wrong. As a result there are some groups of economists who have abandoned neoclassical economics for their own refinements of classical economics. In the United States, on the other hand, mainstream economics goes on as if the controversy had never occurred. Macroeconomics textbooks discuss ‘capital’ as if it were a well-defined concept — which it is not, except in a very special one-capital-good world (or under other unrealistically restrictive conditions). The problems of heterogeneous capital goods have also been ignored in the ‘rational expectations revolution’ and in virtually all metric work.
Edwin Burmeister

burmeister

 

The capital controversy — when ignorance is bliss

April 8, 2014 1 comment

from Lars Syll

The production function has been a powerful instrument of miseducation.   The student of economic theory is taught to write Q = f(L, K) where L is a quantity of labor, K a quantity of capital and Q a rate of output of commodities. He is instructed to assume all workers alike, and to measure L in man-hours of labor; he is told something about the index-number problem in choosing a unit of output; and then he is hurried on to the next question,  in the hope that he will forget to ask in what units K is measured. Before he ever does ask, he has become a professor, and so sloppy habits of thought are handed on from one generation to the next.
Joan Robinson The Production Function and the Theory of Capital (1953)

joan

 

 

Is economics ripe for disruption?

April 6, 2014 11 comments

from Lars Syll

It was, of all people, Elizabeth Windsor who laid the charge most forcefully. Opening a new building at the LSE, weeks after Lehman Brothers imploded, she asked one of the dons why no one had seen the meltdown coming. In the years since, it has often seemed as if students are more serious than their lecturers about pursuing the monarch’s concern.

disrupt

Undergraduates at Sheffield and Cambridge have set out to rattle the foundation stones of their discipline. In Manchester, they went further, organising the Post-Crash Economics Society and securing more eclectic instruction, through a new Bubbles, Panics and Crashes module. Covering the former Fed boss, Ben Bernanke, as well as the interwar Marxist, Kalecki, the course was not reducible to right or left. It offered something closer to economics as understood in Keynes’s Cambridge. Manchester, however, has now declined to accredit the course, and instead opted to pull the plug …

The failure to spot the crisis raised wider questions about the discipline’s usefulness. It can shelter behind unavoidable ambiguities regarding the price of both labour and capital. Will workers respond to income tax cuts by striving for the extra earnings they can now keep or by skiving, on the basis that they can now afford to take more time off? Do high interest rates induce savers to scrimp or encourage them to go out and blow their extra return? No one can say without interrogating the data – which good economists do try to do. But hopes of clear answers are retarded by departments that treat the subject as a branch of applied mathematics, and by practitioners less concerned with the insight than the arithmetical tractability of their models.

These shortcomings go back to “the marginal revolution”, which jettisoned the dynamic, sweeping preoccupations of 19th century classical political economy in favour of a narrower but more precise concern with movements between market equilibrium. But the big questions that concerned Mill, Marx and Smith are now rearing their heads afresh …

Now Thomas Piketty – who spent long years, during which the mainstream neglected inequality, mapping the distribution of income – is making waves with Capital in the 21st Century. Nodding at Marx, that title helps explain the attention, but his decidedly classical emphasis on historical dynamics in determining who gets what resonates in a world where an increasing proportion of citizens are feeling fleeced by the elite. The tide of intellectual history is on the side of Manchester’s students.

The Guardian

Bubbles, Panics and Crashes module cancelled

April 3, 2014 5 comments

from today’s Guardian

Manchester University move to scrap banking crash module angers students

Course leaders cancelled the Bubbles, Panics and Crashes module developed as counterpoint to free-market teaching
Manchester University students

Joe Earle, front and centre, says students are upset by what they believe are the university’s attempts to obstruct teaching of alternative economic perspectives. Photograph: John Super

 

Manchester University bosses came under fire from angry economics students after they scrapped a groundbreaking course that examined the effects of the 2008 banking crash.

In an escalation of the crisis gripping university economics departments, the course leaders cancelled the Bubbles, Panics and Crashes module developed to answer protests at the dominance of orthodox free-market teaching.

Read more…

Rational expectations metaphysics

April 3, 2014 2 comments

from Lars Syll

It is now claimed by this group of American monetarists that the … proper cognition of the economy enables rational expectations to be formed which will prevent all but ‘surprise’ departures from an equilibrium path and will, therefore, render nugatory any attempt to reduce unemployment below its ‘natural’ level even in the short run. The centrepiece of this argument is that both workers and employers realise that the quantity theory of money is correct and that wages and prices must rise in the same proportion as the money supply. As a result, it is argued that increased expenditure will cause increases in wages and prices directly without affecting real variables such as output, employment or the real wage rate. They contend that they will base their expectations not on a projection of past trends in the price level or one of its time derivatives (such a procedure would usually be ‘irrational’) but on the ‘correct’ understanding of the economy which takes changing trends into account …

Read more…

Today’s headlines

April 1, 2014 3 comments

“Paul Davidson has converted to Monetarism”

 “Paul Krugman admits that he has never read Keynes’ ‘General Theory’, but promises to give it a go this summer” 

“Chicago University’s Economics Department has offered Steve Keen a chair” 

“The NCTers and MMTers kiss and makeup” 

“Alan Greenspan and Robert Lucas ask to be forgiven for facilitating the GFC” 

“James Galbraith announces that his real father was Milton Friedman” 

“George Soros’ INET announces that henceforth it will support grassroots reform of the economics profession” 

“Joan Robinson has been reincarnated as an app promoting Prince William” 

“Edward Fullbrook was seen at a conference”

Is INET nothing but a Trojan horse of the financial oligarchy?

March 30, 2014 6 comments

from Lars Syll

inet-logo-blue

So far, the history and the actions of the Institute for New Economic Thinking, founded by George Soros and other members of the financial establishment, are compatible with the hypothesis that it might be a Trojan horse of the financial oligarchy, meant to control the movement for reform of economics. However, despite some limited evidence to the contrary, it is also still compatible with the counter-hypothesis that it is a bona fide effort to push such reform to the benefit of society at large. A restrictive policy of supporting independent initiatives with the same stated goals, and a recent tendency toward the promotion of the less radical reformist ideas make it opportune to monitor the activities of INET with an open but skeptical mind.

Norbert Häring

Yours truly can’t but concur. And obviously there are others also having doubts about INET:

Read more…

Categories: George Soros' INET

IS-LM vs. Minsky

March 26, 2014 1 comment

from Lars Syll

As we all know, Paul Krugman and some other more or less unorthodox mainstream economists keeps on arguing that IS-LM is a valid model for analyzing modern economies.

Yours truly disagrees. In this article I want to focus on why IS-LM doesn’t adequately reflect the width and depth of Keynes’s insights on the workings of modern market economies and why we have so much more to learn from Hyman Minsky than a “brilliantly silly” gadget like the IS-LM model.

Almost nothing in the post-General Theory writings of Keynes 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 famous 1937 Quarterly Journal of Economics 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. John Hicks, the man who invented IS-LM in his 1937 Econometrica review of Keynes’ General Theory — “Mr. Keynes and the ‘Classics’. A Suggested Interpretation” — returned to it in an article in 1980 — “IS-LM: an explanation” — in Journal of Post Keynesian Economics. Self-critically he wrote that ”the only way in which IS-LM analysis usefully survives — as anything more than a classroom gadget, to be superseded, later on, by something better — is in application to a particular kind of causal analysis, where the use of equilibrium methods, even a drastic use of equilibrium methods, is not inappropriate.” What Hicks acknowledges in 1980 is basically that his original IS-LM model ignored significant parts of Keynes’ theory. IS-LM is inherently a temporary general equilibrium model. However — much of the discussions we have in macroeconomics is about timing and the speed of relative adjustments of quantities, commodity prices and wages — on which IS-LM doesn’t have much to say.

Read more…

George Soros‘ INET: An institute to improve the world or a Trojan horse of the financial oligarchy?

March 25, 2014 8 comments

from Norbert Haering

Let’s assume that there is a financial oligarchy which exerts strong political influence due to the vast amounts of money it controls. Let’s further assume that this financial oligarchy has succeeded in having financial markets deregulated and that this has enabled the financial industry to expand their business massively. Then, in some near or far future, their artfully constructed financial edifice breaks down, because it cannot be hidden any more that the accumulated claims cannot be serviced by the real economy That might be due, for example, to millions of people having bought overly expensive houses on credit without having the income necessary to service this debt. This is the kind of situation we are interested in.

If such a situation occurs, the leading figures of that financial oligarchy might recall that there has been a financial crisis in the 1930s of similar origin, and that during and after this crisis, laws were passed which broke the power of the financial oligarchy and taxed their profits steeply. They might remember that it took their forbearers decades to reestablish the favorable state of the late 1920s, with deregulated finance and very low taxes on incomes and estates, even huge ones.

The financial oligarchy might also recollect that economics is their most important ally in shaping public opinion and policies in their favor. To prevent a loss of power as it happened hence, they might want to make sure first that economics will not challenge the notion of leaving financial markets mostly to themselves and will continue to downplay the role of money and the power of the financial oligarchy, and of power in general.

Read more…

Categories: George Soros' INET

Don’t blame the victims, Mr.Weidmann!

March 25, 2014 Leave a comment

from Norbert Haering

A working paper published by the European Central Bank (ECB) shows that strong wage increases have not been the cause for the troubles of the euro zone’s crisis countries. Rather, capital flows have caused bloated house and asset prices and exaggerated construction activity and unsustainable economic activity in general, which in turn has pushed up wages. This diagnosis flies in the face of the of the story often retold by the ECB and other European policy makers that peripheral countries lost their competitiveness, because they did allow exaggerated wage increases for many years, and that declining wages are the appropriate cure for a crisis caused in this way.

Even countries not in crisis are expected to increase their competitiveness, according to the Euro Plus Pact, signed in March 2011 by 23 countries.

It is all the more embarrassing, that two members of the Competitiveness Research Network of the ECB and other central banks and international organizations have published a paper called “The Euro Plus Pact: Competitiveness and External Capital Flows in the EU Countries” in the ECB’s working paper series, which shows that the focus on labor cost is mistaken, because the diagnosis behind it has it the wrong way round. Hubert Gabrisch of the German research institute IWH and Karsten Staehr of Estonia’s central bank find in their empirical analysis for the years 1995 to 2012 that increases in the current account deficit exerted a clear positive influence on subsequent wage increases, but not the other way round.

Read more…

Categories: The Economy

Despite some BIS-economists, deleveraging does matter

March 24, 2014 1 comment

from Norbert Haering

Outstanding credit to the private sector in the euro area has been shrinking for a while now. It is shrinking fast in several peripheral countries and the European Central Bank (ECB) seems unable or unwilling to do anything about it. Given that the economy of the euro area is barely crawling out of recession and that inflation is predicted to be significantly below the central banks’ target rate for the next two years at least, this seems troublesome. Two economists of the Bank for International Settlements (BIS) help out with a study called “Credit and Growth After Financial Crises”: The authors claim: „We find that declining bank credit to the private sector will not necessarily constrain the economic recovery after output has bottomed out following a financial crisis.”  So if there should be a problem, it is not because of a credit crunch or anything like that, we learn. To obtain their result, BIS-economists Előd Takáts and Christian Upper examine data from 39 financial crises, which were preceded by credit booms. “In these crises the change in bank credit, either in real terms or relative to GDP, consistently did not correlate with growth during the first two years of the recovery”, they write.

Thus, against the consensus, deleveraging need not hold back the upswing, is their contention. By extension, this means that even if all sectors of the economy are deleveraging, government may also reduce the deficit or pay down debt, without necessarily causing trouble.

The trouble is, the BIS-economists use an entirely inadequate method for coming to their conclusion, and they even seem to do so knowingly.   Read more…

Categories: The Economy

Trickle-up economics

March 20, 2014 5 comments

from Lars Syll

1aquote-trickle-down-fraud

Inequality continues to grow all over the world — so don’t even for a second think that this is only an American problem! Read more…

The ultimatum game — the ultimate empirical evidence neoclassical economics is wrong (with video)

March 18, 2014 Leave a comment

from Lars Syll

Given that a normative theory is defined as a theory prescribing how a rational agent should act, neoclassical economic theory certainly has to be considered a normative theory. The problem is — besides that it standardly assumes not only rationality and selfishness, but also  e. g. common knowledge of people’s utility functions — that loads of research show that people almost never act in accordance with the theory:

There is a tendency among economists to think of themselves, and the agents in their models, as having hard hearts … Homo economicus is usually assumed to care about wealth more than such issues as fairness and justice. In contrast, many economists think of other social scientists (and the agents in their models) as “softies.” The research on ultimatum games belies such easy characterisations. There is a “soft” tendency among the Allocators to choose 50-50 allocations, even when the risk of rejection is eliminated. Yet the behavior of Recipients, while inconsistent with economic models, is remarkably hard-nosed. They say, in effect, “Take your offer of epsilon and shove it!” Read more…

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