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Economic theory creates the world we live in, and the rules we live by.

December 19, 2014 Leave a comment

How does it happen that we have given our quiet assent to a situation where the richest 85 individuals have more money than the bottom 3.5 billion? Where vultures wait for starving children to die, while others eat luxurious meals on private resort islands? Where horrendous military and commercial crimes leading to deaths, misery, and deprivations of millions are routinely committed by highly educated men with multimillion dollar salaries in luxury corporate and government suites?

A core component of the answer to these critical questions is that we have been educated to believe that this is a normal state of affairs, which comes about through the operation of iron laws of economics. Economic theories currently being taught in universities all over the world are an essential pillar which sustains the economic system currently in operation. These theories state that we (human beings) are cold, callous, and calculating. Microeconomic theory says rational individuals are concerned only with their own consumption. They are callous; completely indifferent to the needs of others. They maximize, calculating personal benefits to the last penny. They are cold – their decisions are not swayed by emotions of any kind. All this theorizing is not without power – it creates the world we live in, and the rules we live by.

Asad Zaman

Meme wars at the AEA conference

December 18, 2014 1 comment

This January, the rebel economists at Adbusters will head to the American Economic Association conference in Boston to throw off some much-needed sparks. As the largest annual gathering of economists in the U.S., and a magnet for media attention, the AEA conference is the perfect location to light brush fires in people’s minds, stoke debate, and inspire new flare ups of campus activism. From the workshops to the hallways, we’ll shake things up and challenge the dead-end status-quo with the subversive memes and mind-bombs of a new pluralist economics for the 21st century. We’re looking for a few good rebel economists – from students, to educators and beyond – to join in the fun!

Here are the details:

Read more…

Categories: New vs. Old Paradigm

On the limits of cross-country regressions

December 18, 2014 1 comment

from Lars Syll

Endogeneity problems are of course nothing new in growth regressions. But what is special here is that policy endogeneity is not just an econometric nuisance, but typically an integral part of the null hypothesis that is being tested. The supposition that governments are trying to achieve some economic or political objective is at the core of the theoretical framework that is subjected to empirical tests. In such a setting, treating policy as if it were exogenous or random is problematic not just from an econometric standpoint, but also conceptually …

escherThe cross-national variation we observe in government ownership is unlikely to be random by the very logic of the theories that are tested. Under the developmental perspective, this variation will be driven by the magnitude of the financial market failures that need to be addressed and the governments’ capacity to do so effectively. Under the political motive, the variation will be generated by the degree of “honesty” or “corruption” of political leaders. I show in this paper that the cross-national association between performance and policy will have a very different interpretation depending on which of these fundamental drivers dominate. Unfortunately, none of these drivers is likely to be observable to the analyst. In such a setting the estimated coefficient on state ownership is not informative about either the positive or the normative questions at stake. It cannot help us distinguish between the develop-mental and political views, because the estimated coefficient on government ownership will be negative in both cases.

Dani Rodrik

Categories: methodology, Uncategorized

2 paperbacks from the WEA

December 17, 2014 Leave a comment

Amazon US $18.00 – Amazon UK £12.50                     Amazon US $17.10 – Amazon UK £ 12.00

                      Read more…

Categories: Uncategorized

Proper use of math in economics

December 17, 2014 5 comments

from Lars Syll

13.1a Alfred Marshall27. ii. 06
My dear Bowley,

I have not been able to lay my hands on any notes as to Mathematico-economics that would be of any use to you: and I have very indistinct memories of what I used to think on the subject. I never read mathematics now: in fact I have forgotten even how to integrate a good many things.

But I know I had a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules — (1) Use mathematics as a short-hand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3. This last I did often.  Read more…

Categories: methodology, Uncategorized

“This real-world attribute straightforwardly invalidates Walras’s Law”

December 16, 2014 Leave a comment

. . . the totality of all goods cannot be traded by the totality of all agents at every single trading moment. Momentary analysis thus facilitates the recognition of an important real-world attribute: continual trade in different goods among different traders.

This real-world attribute straightforwardly invalidates Walras’s Law, understood as the necessary equality of the total value of goods brought to market and the total value of goods taken away from the market at its close. Walras’s Law does not describe an intrinsic quality of market exchange, but results from the stylisation of a single trading round per period during which a given set of agents seeks to trade a given and uniformly priced set of goods among each other. Hence when the identities of goods and traders are in continual flux, as they are in the real world, Walras’s Law fails (Tsiang, 1966). The scrapping of one arbitrarily chosen market facilitated by Walras’s Law has, unsurprisingly, no imaginable counterpart in economic reality. It is an absurdity. Yet it continues to be invoked (e.g. by Brunnermeier and Sannikov, 2011) while textbook LM theory also still employs it to rid itself of the bond market.

Piet-Hein van Eeghen
http://www.paecon.net/PAEReview/issue67/Eeghen67.pdf

Categories: New vs. Old Paradigm

Why growth?

December 15, 2014 7 comments

World War Two was followed by a period of economic growth. Yet in 1968 many young people in developed Western nations were questioning the lifestyles provided by their societies. They wanted a more meaningful lifestyle, and recognised that it had become physically possible to provide universal social services and good living conditions, including well-paid employment for all with liberal conditions and ample leisure time within a workweek of 30-35 hours. The leisure society beckoned.

At the same time, through the late 1960s and the decade of the 1970s, a considerable body of information described looming global problems. Since evidently all was not well, many decided to search deeper, to ask the major questions of the time and find the answers. Modern society, with its rapacious desire for never-ending growth, was foolishly pushing against limits on a finite planet while increasing inequality and joblessness within a consumer society tightly controlled by ubiquitous advertising.  Read more…

The static analysis of the supply and demand model

December 14, 2014 2 comments

Note that the supply and demand model is, like much of economics, based on static analysis. Consequently the focus will be on the market equilibrium. It is based on the idea that you have a scenario within which you can have as much costless adjustment as required to achieve some final end state which will be the equilibrium (issues of existence and uniqueness aside). This does not reflect the real world. In reality, there is a starting point, A. This is more than just an initial resource endowment. It also specifies an application of those resources, for example producing and consuming goods and services at some rate of output (as we are actually moving through time). There is also a path to be taken to the endpoint.  Read more…

Categories: methodology

A case study of Harvard Business School ethics

December 12, 2014 Leave a comment

from David Ruccio

Screen-Shot-2014-12-09-at-8.46

Or, in this case, only at Harvard. . .  Read more…

Categories: ethics

Energy conflicts and differential profits: an update

December 11, 2014 3 comments

from Shimshon Bichler and Jonathan Nitzan

During the late 1980s and early 1990s, we identified a new phenomenon that we called ‘energy conflicts’ and showed that these conflicts were intimately linked to the differential profitability of the leading oil companies. Figure 1 below, which was first published in 1995, adds new data to bring this connection up to­ date.[2] 

BichlerNitzan1 Read more…

Categories: Uncategorized

The rise and fall of debate in economics

December 9, 2014 9 comments

http://www.joefrancis.info/economics-debate/

New data illustrate the extent to which economists have stopped discussing each other’s work.

Once upon a time, economists regularly used to publicly criticise each other’s work in academic journals. But not any more.

In Figure 1 I have illustrated the degree to which economists have stopped debating. The data have been culled from Jstor, the online database of academic journals. To estimate the number of debating articles for each year, I searched for articles with “comment”, “reply”, and/or “rejoinder” in their titles, as these are the key words used to indicate a comment on someone else’s article and a reply to that comment. I did the search for the five most prestigious economics journals. I then used the total number of articles in those five journals in each year as the denominator.

Economics debate

Figure 1 shows how there was a dramatic increase in the level of debate in economics from the 1920s through the 1960s. Then, however, there was an equally dramatic fall. At the peak level, in 1968, fully 22 per cent of the articles published in these journals appear to have been related to debate. By 2013, however, just 2 per cent were.

Why did this rise and fall happen? Read more here

Deception and democracy: convincing the masses to help the rich

December 8, 2014 2 comments

from Asad Zaman and the WEA Pedagogy Blog

There is widespread agreement on the proposition that people act according to their self-interest. Marx went further to suggest that people subscribe to ideologies conforming to their class interests. For example, agricultural laborers would believe in land reforms, while big landlords would believe that small farms are inefficient. Gradually the weight of strong empirical evidence has led me to understanding that this proposition is false. Large segments of the population can be brought to believe in, and act according to, ideologies extremely harmful to their self interest. As Dani Rodrik has written in “How the Rich Rule”, political scientists Gilens & Page found that on issues where there was a conflict between the interest of the elite and that of the public, Congress voted in favor of the elite and against the public interest. In the past, the elites have enforced their interests by the use of power. In a democratic age, the same effect is achieved by the use of propaganda. This is striking because the propaganda must convince the public to act against their own self-interest, in favor of the ruling elites. It would seem that you can fool most of the people most of the time. Here is some empirical evidence for my thesis:  read more

Categories: Political Economy

Rigour vs. relevance

December 7, 2014 1 comment

from Lars Syll

significance_cartoon

Categories: methodology

Reforming economics: pluralism is not enough

December 5, 2014 26 comments

from Geoff Davies

Much of the current discussion of reforming economics focusses on the need for pluralism, particularly in teaching curricula, and very recently again on RWER.  Pluralist teaching is seen as challenging, because heterodox economic ideas are diverse, have little coherence, and are to a significant extent mutually incompatible.

This theme crops up frequently in discussions on RWER.  Now Cameron Murray, in the first issue of Inside, published by the Institute for Dynamic Economic Analysis, proposes to identify over-arching themes that can bring out the relationships among the various approaches.  This is commendable but it will not, on its own, result in a reformed economics.

I think the perceived difficulty of teaching heterodox economics comes from expecting too much from the exercise.  It will result in better-educated economists, and that is a very good thing.  Breaking the academic dominance of neoclassical economics would also be a very good thing.  However coherence in economics will not result from trimming and hammering existing fragmented ideas into a new box. Read more…

Categories: New vs. Old Paradigm

Bayesianism — a ‘patently absurd’ approach to science

December 4, 2014 1 comment

from Lars Syll

Back in 1991, when I earned my first Ph.D. — with a dissertation on decision making and rationality in social choice theory and game theory — yours truly concluded that “repeatedly it seems as though mathematical tractability and elegance — rather than realism and relevance — have been the most applied guidelines for the behavioural assumptions being made. On a political and social level it is doubtful if the methodological individualism, ahistoricity and formalism they are advocating are especially valid.”

steer-clear-of-scientologyThis, of course, was like swearing in church. My mainstream neoclassical colleagues were — to say the least — not exactly überjoyed.

The decision theoretical approach I perhaps was most critical of, was the one building on the then reawakened Bayesian subjectivist interpretation of probability.

One of my inspirations when working on the dissertation was Henry E. Kyburg, and I still think his critique is the ultimate take-down of Bayesian hubris (emphasis added): Read more…

Categories: econometrics, methodology

Calling all rebel economists!

December 3, 2014 4 comments

from Richard Wolff 

This project is important and long-overdue to undo the narrow orthodoxy that has suffocated diversity and heterogeneity and social criticism within the discipline (sic) of economics. I am glad to spread word about it.  

Calling all Rebel Economists!  

After smothering progress for decades, the mainstream stranglehold on economic thought is finally slipping. With the recent rise of student protest movements like the International Student Initiative for Pluralism in Economics (ISIPE), the demand for real-real world economics is at an all-time high, and a strategic spark may be all it takes for this growing discontent to explode into a global campus revolution. 

This January, the rebel economists at Adbusters will head to the American Economic Association conference in Boston to throw off some much-needed sparks. As the largest annual gathering of economists in the U.S., and a magnet for media attention, the AEA conference is the perfect location to light brush fires in people’s minds, stoke debate, and inspire new flare ups of campus activism. From the workshops to the hallways, we’ll shake things up and challenge the dead-end status-quo with the subversive memes and mind-bombs of a new pluralist economics for the 21st century. We’re looking for a few good rebel economists – from students, to educators and beyond – to join in the fun! 

Here are the details:

Read more…

Categories: New vs. Old Paradigm

The Ramsey-Keynes dispute

December 1, 2014 7 comments

from Lars Syll

Neoclassical economics nowadays usually assumes that agents that have to make choices under conditions of uncertainty behave according to Bayesian rules, axiomatized by Ramsey (1931) and Savage (1954) – that is, they maximize expected utility with respect to some subjective probability measure that is continually updated according to Bayes theorem. If not, they are supposed to be irrational, and ultimately – via some “Dutch book” or “money pump”argument – susceptible to being ruined by some clever “bookie”.

calvin-math-atheist3-2Bayesianism reduces questions of rationality to questions of internal consistency (coherence) of beliefs, but – even granted this questionable reductionism – do rational agents really have to be Bayesian? As I have been arguing elsewhere (e. g. here, here and here) there is no strong warrant for believing so.

In many of the situations that are relevant to economics one could argue that there is simply not enough of adequate and relevant information to ground beliefs of a probabilistic kind, and that in those situations it is not really possible, in any relevant way, to represent an individual’s beliefs in a single probability measure. Read more…

Categories: methodology

Lying, cheating bankers are not born; they’re created.

November 29, 2014 2 comments

from David Ruccio

Lying, cheating bankers are not born; they’re created.

That’s the conclusion of the new study by Alain CohnErnst Fehr, and Michel André Maréchal, “Business culture and dishonesty in the banking industry,” published in Science.

In other words, all of the various dishonest behaviors of bankers in recent years—from manipulating the foreign exchange market, LIBOR, and the gold market to mis-selling interest-rate swaps, mortgage backed securities, and credit-default swaps—for which some bankers have been fined but none of them jailed, can be attributed to the fact that “being a banker” made people more likely to cheat.

Their study is based on the idea that individuals have multiple social identities. Read more…

Categories: Uncategorized

The teaching of economics is in crisis.

November 24, 2014 7 comments

An international student call for pluralism in economics

It is not only the world economy that is in crisis. The teaching of economics is in crisis too, and this crisis has consequences far beyond the university walls. What is taught shapes the minds of the next generation of policymakers, and therefore shapes the societies we live in. We, over 65 associations of economics students from over 30 different countries, believe it is time to reconsider the way economics is taught. We are dissatisfied with the dramatic narrowing of the curriculum that has taken place over the last couple of decades. This lack of intellectual diversity does not only restrain education and research. It limits our ability to contend with the multidimensional challenges of the 21st century – from financial stability, to food security and climate change. The real world should be brought back into the classroom, as well as debate and a pluralism of theories and methods. Such change will help renew the discipline and ultimately create a space in which solutions to society’s problems can be generated. 

United across borders, we call for a change of course. We do not claim to have the perfect answer, but we have no doubt that economics students will profit from exposure to different perspectives and ideas. Pluralism will not only help to enrich teaching and research and reinvigorate the discipline. More than this, pluralism carries the promise of bringing economics back into the service of society. Three forms of pluralism must be at the core of curricula:  Read more…

How can we resolve the apparent conflict in Friedman’s views?

November 24, 2014 9 comments

from Asad Zaman

Friedman & Scwhartz famously blame the contraction in the money supply for the Great Depression of 1929. However, their own data shows that money supply, prices and wages all fell by about 30% over the four year period following the Great Depression. So according to the quantity theory, there should have been no real effect from this contraction.

My question is the following: How can we resolve the apparent conflict in Friedman’s views, who both holds the Fed responsible for not preventing the Great Depression, and who also argues that the quantity theory is valid?
Categories: depression
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