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First Piketty and now Gilens and Page

April 23, 2014 10 comments

from Peter Radford

“When the preferences of economic elites and the stands of organized interest groups are controlled for, the preferences of the average American appear to have only a minuscule, near-zero, statistically non-significant impact upon public policy.” – Martin Gilens & Benjamin Page, ” Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens, forthcoming this Fall

Wow. The second shoe drops.

Whilst we are all absorbing the impact of Piketty – and I repeat: go read it before you comment on capitalism henceforth – in come Gilens and Page with a blockbuster paper that shreds any concept that America is a functioning democracy, where by democracy we mean a state whose policies are influenced by popular sentiment.

We are an oligarchy, with a slew of special interest groups providing a supporting cast to an economic elite who manage to direct policy to their advantage. Not always, but often enough to skew society prodigiously. Having established with their research that American policymaking is dominated by an elite, Gilens and Page end:

“Americans do enjoy many features central to democratic governance, such as regular elections, freedom of speech and association, and widespread (if still contested) franchise. But we believe that if policymaking is dominated by powerful business organizations and a small number of affluent Americans, then America’s claims to being a democratic society are seriously threatened.”

Read more…

Categories: Plutonomy

Paradigm Lost?

April 22, 2014 9 comments

from Peter Radford

The story so far:

Robert Locke asserts that neoclassical economics never attained paradigm status and thus cannot be seen as about to be dethroned from its exalted perch. He also decries the failure of mainstream economics to discuss its failures. This only a few months after an interview conducted by Paul Rosenberg with Edward Fullbrook in the RWER issue #66 in which he discussed the contrast between new and old paradigms in economics, and I may have stirred things up when I used a Thomas Kuhn quote to begin one of my own articles earlier this month.

So is there? Or isn’t there?

Let me try to square the circle.

Clearly there exists in economics some center of gravity. Indeed this center is so large that it appears to engulf most else around it. Economists either acknowledge that the discipline is rife with many voices – these seem to be in the minority – or they simply behave as if the big questions have been settled and that what they do is “economics” without the need to give a more precise definition. These latter are what I suspect Locke would refer to as the “mainstream”.

Equally clearly, at least to those who occupy the center, mainstream economics is a coherent whole. It isn’t just the degree of mathematical formality with which it is expressed, it isn’t just a methodology, nor is it just a set of “laws”, insights” “tools” and what have you. It is all of these packaged together. If a person doesn’t conform to this package then he or she is outside the mainstream and will find it hard, often impossible, to advance professionally or participate in the major arguments of the day.

The boundaries of the center are malleable to a degree. There are factions within it so it is not thoroughly homogenous. But there are sufficient shared traits that, to someone on the outside looking in, the center is manifest. It is manifest enough to exert enormous power over what is or isn’t published. It is manifest enough to dominate what is taught in most schools and universities. It is manifest enough to dominate policy circles and other domains that require input from economists.

It is manifest enough to deserve to thought of as  a paradigm. Read more…

Capital: Piketty and such

April 18, 2014 9 comments

from Peter Radford

I will not pile on any more: the Piketty book is required reading. Enough said.

What strikes me is that his data set is so comprehensive that it ought to end many of those lingering debates within economics. I doubt it will, but it ought to.

I have a few comments I want to make because of his book and the reaction to it.

First: it confirms, in my mind, my argument that economic systems cannot ever be carved out of their historical, social, and political contexts. Not, at least, if the analyst wants to be left with anything at all useful. Studying economics as some abstracted other-worldly stand alone entity is entirely pointless. Pretending that everyday people act in an economic sense without reference to a whole slew of cultural, institutional or other relationships and pressures is just nonsense. Of course they do. We all know that.

I understand that distilling some uniquely “economic” regularities is useful. I understand that establishing certain cause and effects relationships can help us understand society, but, ultimately it is society we are understanding, not just some economic agents roaming about absent any other influences. So anything understood within the domain of economics must then be converted to, or fitted within, the larger picture before it is thought of as having any relevance. Particularly policy relevance.

So it is not enough to build upon micro foundations unless those foundations extend across a diverse realm that includes all the elements at the base of the society being studied. To avoid such an extension is to display an extraordinary and willful narrow mindedness.

With this in mind, I think Piketty’s book is the starting point for a thorough review of economic thought. Including much current heterodox thought which suffers from the same disease as orthodoxy: it is not comprehensive enough to have real value. Read more…

Class Based Economics

April 16, 2014 29 comments

from Peter Radford

Buried somewhere in the pile of stuff I have accumulated as I think about inequality are these statistics:

  1. Of all the income generated between 2009 and 2011 in the US 121% went to the top 1% of income earners
  2. The top 1% owns just over half of all investment assets including 64.4% of all bonds
  3. And, the bottom 90% incurs 72.5% of all debt

Think through the consequences of these numbers.

Basically we have an economy where the top 1% reaps all the rewards; where less well off people constantly fall further behind; and where the top folk lend to the bottom folk so that the less well off can keep on consuming and thus boosting the profits of the businesses the top folk own. This is a nice game for the rich as long as it lasts. Here in the US that would be the past forty years or so.

This is really simple.

It explains why our economic policies focus on preserving creditors, bailing out lenders, and keeping the inflation alarms ringing even when there is no inflation. Those policies benefit Read more…

Reformist Economics

April 2, 2014 16 comments

from Peter Radford

“… the act of judgement that leads scientists to reject a previously accepted theory is always based upon more than a comparison of that theory with the world. The decision to reject one paradigm is always the decision to accept another, and the judgement leading to that decision involves the comparison of both paradigms with nature and with each other.” – Thomas Kuhn, The Structure of Scientific Revolutions

I will break my recent silence – I am still burrowing down into the issue of inequality – to make a comment on the skepticism I see concerning the Institute for New Economic Thinking.

It is justified.

Let’s think about this a moment.

If we are to set up an institute to support change, provoke discussion, and otherwise meddle about with the established way of thinking, and thus to earn the moniker of “newness”, we ought not to pack our agendas with a steady stream of establishment figures. That is not the way to revolution. It might, however, be the way to raise esteem and thus get the institution media attention. Read more…

Categories: George Soros' INET

Inequality

March 1, 2014 9 comments

from Peter Radford

I am preparing a talk on inequality here in America, and so have been re-reading the Piketty and Saez work. Amongst the more eye-opening facts I have come across is the assertion, by Saez, that the surge in the top 1% incomes is so large that the growth of the bottom 99% amounts to only half the average [mean].

Think about that for a moment.

It would be like walking into a room full of people two feet tall with one thirty footer in the corner. The mean average is meaningless in such circumstances. We are all taught that in statistics class, but to come across such an egregious example in a dataset as large as all US tax returns is astonishing. Read more…

Is medicine a model for ethics in economics?

February 24, 2014 7 comments

from Peter Radford

A recent correspondent asks whether medicine could act as a template for the importation of ethical standards into economics. On balance I don’t think it can. Here’s why:

Medicine consists of a practical part that faces outward towards its customers. We call those customers patients. From the earliest times medicine has adopted the credo ‘first do no harm’ which forms the ethical bedrock for all subsequent standards. This is relatively easy to do since ‘doing harm’ is quite quickly identified. Even then such an ethical background failed to stop the development and implementation of some outrageous and harmful medical techniques. In the modern era the ‘doing no harm’ ethic has allowed the creation of a number of rules that govern doctor activity and provide a measure of protection to patients. Those rules are enforced by various governing bodies that not only establish and monitor the rules, but also govern the very process that allows someone to call themselves a doctor in the first place. This governance structure gives practical medicine a coherence and shape that are identifiable by the public, and ensures that the profession recognizes it relationship with society at large. Read more…

Adam Smith – Socialist?

February 19, 2014 11 comments

from Peter Radford

No, not really, but almost. Here’s a couple of quotes – both from “The Wealth of Nations” – that would not sit well in contemporary right wing American politics:

“Our merchants and masters complain much of the bad effects of high wages in raising the price and lessening the sale of goods. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.”

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

The second gets quotes a fair bit because it seems to be a significant cautionary note when considered alongside the rest of “The Wealth Of Nations” in its broadly understood role as a peon to free market capitalism. We all know that Smith was way too sophisticated to be so easily bracketed, but you rarely come across the many such cautions he issued alongside his near mythological reference to what we call the invisible hand. Read more…

Categories: Uncategorized

Do over?

February 11, 2014 3 comments

from Peter Radford

You would have thought that, after all this time, economics would change. Or be changing. Or even be hinting at the possibility of changing. However, while there are a few encouraging signs, there is precious little sign of said motion inside the citadels that dominate the discipline. We still have a profession stuck in a most unprofessional rut, pursuing thinking that reflects not the world around it, but itself.

So, let me say it again: economists are, by and large, more interested in economics than in economies. They spend much more time on trying to display mathematical virtuosity than in trying to get to grips with the world around them. Even those who give the real world space to intrude into their thinking wrap it up in strange and unrepresentative ways.

Let me make this plain to those of you who follow the sport from a distance: most economists make their reputations nowadays by being steeped in the latest mathematics and by being capable of producing supremely logical, tightly wound models that conform to the discipline’s rules and to what the discipline thinks of as important. The relevance of an actual economy – for example the US between 2007 and now – is not considered if it does not allow the wizardry to be displayed. Read more…

A point is reached … when a continuously modified hypothesis becomes difficult to entertain seriously.”

February 9, 2014 5 comments

from Peter Radford

I came across this whilst reading Sharon McGrayne’s history of Bayesian theory, its a quote attributed to the statistician Jerome Cornfield:

“A point is reached … when a continuously modified hypothesis becomes difficult to entertain seriously.”

How apt.

For much of economics.

Looking back over the history of the development of economic theory, more precisely theories since we have such an abundance of them, we cannot but be struck by one constancy: that they are all updated regularly. This updating is not to replace them because they have proven to be incorrect, but to modify them sufficiently to prolong their life despite the evidence. It is, apparently, intellectually cheaper to tinker than to replace.

This is especially true of the array of ideas that loosely can be called neoclassical theory. It is a mishmash of ideas that are known to be false or highly questionable or utterly divorced from reality, yet are still used as a basis for thinking and modeling economies. It is an archeologists dream.  Read more…

Opportunity Class

February 5, 2014 4 comments

from Peter Radford

America is in such a funk nowadays that sometimes it can get exasperating. The disconnect between what average people believe and hope for, and what seems to dominate our political class is gaping wide open. To me the cause for this disconnect is obvious, and our rampant inequality sits squarely at the heart of the problem. Yet getting some of my erstwhile progressive friends to utter the word inequality has proven to be extremely difficult.

Why?

Because, to their ear it renders a harsh image of envy. And, as we are all taught, since America has no class system, and since America is the land of opportunity, and since in America hard work can get you anything, envy is simply that: a venal sentiment that debases the person harboring it and signifies that they are, somehow, un-American.

This is, of course, twaddle.

Until we are able to talk about inequality without immediately plunging into apologies for being envious we are stuck with what appears to be our favorite surrogate: opportunity. We need, apparently, to restore opportunity in this land of opportunity. Presumably between now and that restoration we are the land of something else, but we won’t give it a name just in case it sounds bad.  Read more…

Categories: inequality

Distribution and all that

January 25, 2014 3 comments

from Peter Radford

Rumor has it that Obama’s next State of The Union address will focus heavily on inequality which has become quite a vogue issue in some Washington DC circles. I doubt anything will come of his speech, these obligatory speeches get swamped by politics the moment they end, but it will be interesting to hear what he has to say, because it is, as you all now, an issue that I have been prattling on about for some time now.

Let’s take a look at some background.

All economies, ours included, ration stuff. That’s what they do. In more polite circles this rationing is called allocation or distribution. We don’t use the rationing word because it makes people uneasy and conjures up Soviet era images of bureaucrats mucking around in the minutiae of our lives in ways we resent.

But rationing is rationing by any other name.

By this I mean that the economy and its institutions, and particularly its rules, set the context within which we all buy and sell things, and acquire what we can from the very long list of the things that we want. Read more…

Skill or dumb luck?

January 9, 2014 19 comments

from Peter Radford

Both.

Be very wary of anyone who claims that their wealth is the result of great skill. Or even hard work. Luck had to play a part. Usually a very significant part. And dumb luck ought not be the basis upon which we build intelligent, caring, or stable societies.

Be wary, also, of arguments against popular policies that include references to envy or jealousy. Being opposed to plutocracy does not necessarily imply either. Those arguments are old and have been used to undermine the moral authority of populism since democracy first reared its ugly head and disrupted the ease with which our leaders could syphon off wealth for their own enjoyment.

The two go hand in hand.

Populists will be accused of devaluing hard work and skill, and of stirring up the evil sentiment of envy that is presumed to lie close to the surface in the squalid and uneducated minds of the masses. By being both an advocate of sloth and jealousy a populist is easily and summarily dismissed as being irrelevant to policy discussions and properly ignored by serious analysts everywhere,

Where being serious means combining allegiance to the economic status quo with a suitable level of puritanical moral self-abuse.  Read more…

Categories: ethics

Quote of the day #3

December 22, 2013 4 comments

from Peter Radford

Ronald Coase asks the big question in his 1937 paper “The Nature of the Firm”:

“Within a firm, … market transactions are eliminated and in place of … exchange transactions is substituted the entrepreneur-co-ordinator who directs production. It is clear that these are alternative methods of co-ordinating production, Yet, having regard to the fact that if production is regulated by price movements, production could be carried on without any organization at all, well might we ask, why is there any organization?”

To which, or at least in part answer to, G.B. Richardson responded with this in his 1960 book “Information and Investment”:

“there is, in fact, a genuine gap in our theoretical presentation of the working of the competitive economy. The theory of the maintenance or attainment of equilibrium under perfectly competitive conditions fails to account for the process for the adjustment in terms of investment decisions by individual entrepreneurs, who have expectations which they could reasonably be presumed to form, on the basis of information which can be reasonably be presumed to be available”

What both Coase and Richardson are trying to get at is the implausibility, or perhaps the impossibility of, the very heart of what is now called orthodox economic theory.

The problem is this: Read more…

The Lucas Mystique

December 19, 2013 3 comments

from Peter Radford

There is this thing in economics called the Lucas Critique. You see it pop up every so often and hear it referred to in revered tones. It is, apparently, very important and very, very, insightful. It has a lot to do with the state of economics today. Which, as you know, I think of as being lamentable.

What is this Critique?

Well, in a nutshell, it says that there are special features of an economy that are “deep”, by which it means they don’t move about in the face of policy changes. Other features, presumably the “shallow” ones do. This is important because it implies that policy makers have to be sure that the things they are trying to influence don’t slip and slide about too much in reaction to their policies and, in effect, neutralize those policies. In short: Lucas says people take policy into account, make suitable adjustments, and thus render some – if not all – policies ineffective.

Not quite. The only policies that are ineffective are those that are based on those “shallow” features. Which, it turns out, happens to be pretty much anything Keynesian.  Read more…

When is a contract a contract?

December 10, 2013 1 comment

from Peter Radford

Dean Baker complains about AIG bonuses being honored because they’re contracts, whereas Detroit and, possibly, Chicago city employees pensions are in line to be slashed despite being contracts.

Such is life in a plutocracy.

This really ought not surprise anyone. The rules for the elite are, and have always been, different. A contract to pay the CEO of a large financial company that had to be saved by taxpayers and whose activities contributes mightily to the enormous economic crisis we are still trying to leave behind is considered sacrosanct. After all it is a contract. And we know what that means. Well it means we have to pay up even though its morally repugnant, smacks of corruption, and is just plain daft. The contract has to stay.

But those workers out in Detroit, they contributed to the problems Detroit had. They pretty much drove it into bankruptcy because of their padded employee benefits and wages. Chicago looks like it’s going down the same road. Those contracts are the cause of the problem. The city has every right to break the contract as part of its bankruptcy proceedings. In this case the contract is repugnant, possibly corrupted by unions influence, and is just plain daft. It has to go.

It used to be comforting to think that the saying “one rule for the rich, another for the poor” was just that: a saying. We could all pretend that America was a land of equal laws, even though we all knew deep down that rich folk can always get away with stuff we can’t. Read more…

Categories: Plutonomy

Quote[s] Of The Day #2

November 17, 2013 1 comment

from Peter Radford

From Norbert Weiner in his “Cybernetics” published in 1961:

“We are swimming upstream against a great torrent of disorganization, which tends to reduce everything to the heat death of equilibrium and sameness … In this, our main obligation is to establish arbitrary enclaves of order and system … Like the Red Queen, we cannot stay where we are without running as fast as we can.”

From Leon Brillouin in his “Science and Information Theory” published in 1956:

“The earth is not a closed system, and life feeds upon energy and negative entropy leaking into the earth system … The cycle reads: first, creation of unstable equilibriums (rules, food, waterfalls, etc.); then use of these reserves by all living creatures.”

Note the dates. These are old books. The ideas are hardly novel. Nor are they exactly controversial.

Economists have made the study of economies more tractable – some would say they have simplified things – by sealing off all the exits and entrances so as to prevent novelty from disrupting their analysis. Read more…

Inequality is political

November 14, 2013 30 comments

from Peter Radford

Let me end the week by tying a few things together. Bear with me.

First, I have spent some time talking about inequality. I see this as our greatest long term issue, but more in terms of politics than economics. Why? Because the extent of inequality in society is something we choose through our political action or inaction. There will always be some degree of inequality. I see that a a fact of life. Asymmetries abound. Inconsistencies, mistakes, and plain dumb luck all conspire to make the distribution of society’s spoils a very lumpy and uneven affair. This we cannot change. But we can, I believe, expand or contract the difference between top and bottom if we so choose. There is no “natural” level of inequality, it is entirely a function of policy.

With that said, I see our current level as both morally unacceptable and socially disruptive.

I will leave the moral commentary as self explanatory: there is no way our CEO’s can justify their disproportionate share of the spoils. It was not long ago that they were satisfied with much less. Only in the past few decades has it become socially acceptable for them to rake in what they do now.

As for the social impact, I see two vectors through which damage is done. Read more…

Categories: Political Economy

Occupy Economics

November 12, 2013 11 comments

from Peter Radford

Forgive me for my exasperation.

There are too many disparate efforts to rethink economics, conferences on this, and papers on that. I admire each and every one. I support whole heartedly any attempt to shake economics from its irrelevant torpor. But all this fractured effort is achieving nothing. It cannot succeed in the face of the depth of resistance in most university economics departments and the fear that academics seem to have of open action.

I can understand that many sympathetic academics may want to shun action, after all they have livelihoods at stake. But I ask: what is a career in economics worth if that economics is toxic? Those with the greatest stake in the subject are the students who have yet to choose which path to take. It is their action that needs to be facilitated and made secure.

For it is their open action that will change things.  Read more…

Unequal austerity and its economics

November 7, 2013 23 comments

from Peter Radford

Inequality is much discussed nowadays. Pundits of all political stripes are weighing in on its causes and on its effects. As usual there is no agreement. So, also as usual, I suspect there will be no action.

This is not a new problem, nor is it trivial. The steadily increasing privilege afforded capital – higher profits, dividends, and rents, and the consequent steady erosion of the rewards to work – wages and salaries, have been accumulating beneath the surface for decades. I believe that in the years ahead the emergence of our highly unequal society will be the hallmark of the entire Reaganite era.

I don’t think this problem is as complicated as some people make it out to be. It is a direct consequence of the shift in the dominant economic theory that infuses our decision making across all relevant domains of activity in our economy. It was an intentional consequence. It was not, as Bill Gross tries to make sound, a happy accident of being alive at the right moment. If you’re  capitalist that is. If you’re a regular worker, then tough.

What happened?

Well, back before the shift took place the dominant economic theory guiding decision making was the post-war version of Keynesianism. It seemed to explain things well, and seemed to produce excellent results: the western world bounced back from its wartime trauma and produced a golden age of growth that propelled living standards, wages, and profits all together.

Then it hit a snag. Read more…

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