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DSGE is a plutocratic tool

November 8, 2014 14 comments

from Peter Radford

Hah! That caught your attention.

People who criticize General Equilibrium – henceforth GE – often fail to mention one of its major benefits to mainstream economists, one that explains its tenacity despite its obvious irrelevance as a real economic artifact.

This is that it is a weapon that allows economists to expunge politics from their subject.

Ever since Adam Smith’s fateful reference to the invisible hand, economists have been obsessed with finding an alternative to overt power relationships as a way to distribute resources and hence wealth in a social setting. Any conversations about power relationships invokes politics, since the latter is the rightful study of said relationships. This would establish political theory as a competitor to economic theory as a source of social welfare allocation. It would also alert the democratic citizenry to the positive role they can play in that allocation.

Economists have long tried to rid their subject of the supposed taint of overt politics and thus establish as a purer – in their eyes – and more scientific subject. Presumably this is because they see the study of politics as somehow unscientific.

But behind this so-called scientific agenda lurks a shadowy figure: it is the rejection by classical economists and their heirs of democracy. After all democracy is the tyranny of the masses, which to those struggling to throw off the tyranny of autocracy was an equal evil. If democracy is to be denied, if the masses are to be kept away from deciding the allocation of wealth, then some other force has to be located that can accomplish allocation in a less tyrannical way.  Read more…

Categories: New vs. Old Paradigm

Stagnation

October 28, 2014 5 comments

from Peter Radford

I will keep this short: I have been taken aback by all the talk about the apparent onset of something called secular stagnation. Today’s Financial Times gives us another dose of it in an article by Gavin Davies. The basic argument seems to be that since both population growth and worker productivity are declining somewhat in the biggest economies we ought expect those economies to grow more slowly than in the past. This shift downwards is a sharp break with what orthodox economists had assumed the norm to be: that economies would chug along nicely because productivity is driven by technology change, and because populations have been relatively stable.

The downscaling is said to fit with the empirical evidence, and in particular with the trends that seem to have set in since around 1980.

In other words, a sputtering economic performance over the past few decades is seen as proof that we now live in more constrained times, where limited growth puts a cap on our latitude in dealing with economic issues. People drawing this conclusion almost inevitably then jump into discussions of how this reduced latitude implies a more austere role for government, and – naturally – that everyday folks just will have to manage on less.

I have a slightly different perspective.  Read more…

Categories: The Economy

Why no labor controversy?

October 22, 2014 6 comments

from Peter Radford

The familiar so-called “capital controversies” a few decades ago were never fully resolved. This is mainly because the losers of that battle eventually won the war and so were able to overlook their loss. They carried on with a muddled view of what capital actually is and ignored the impact of that muddle as if it were unimportant.

Whichever side you are on in that debate – which still emerges from the shadows now and again – I have a question: why no labor controversy?

Surely labor is as muddled a concept as capital.

If our problem with capital is supposed to be its multitudinous expression in concrete terms – is it a machine? is it money? is it simply a bookkeeping entry on a balance sheet? is it a factory? and so on – then labor too is a similar multitude.

Is labor simply an energy source?

After all people do “work” in the old fashioned sense of that word. They lift, bend, move, and otherwise translate energy into work as they go about business. Labor is thus an energy input.

Is labor a source of skill? Read more…

Categories: New vs. Old Paradigm

Study the shocks

October 3, 2014 12 comments

from Peter Radford

A system in motion stays in motion. A system at rest stays at rest.

Good so far.

But: our question is a little more interesting. We want to know how the system began to move. We want to know about those moments of change. When you think about it, or when you’re not a mainstream economist, it is precisely those changes that attract your attention.

In this context it is always hilarious to be reminded of the way in which mainstream economics sees the world. It postulates an economy chugging along merrily following a path smoothly, fully determined by a combination of where it came from and a number of internal factors, and hermetically sealed off from the hurly burly around it.

To make sure that the path is smooth, mainstream theorists get rid of all the nasty stuff that could cause things to misbehave. Like people. Real people are an inconvenience, so they’re kicked out and replaced by a single representative chosen, presumably, for his or her astonishing likeness to economists. Business firms are tossed out as well. They too are represented by a single suitably cleansed and correct representative. The single firm and the single person then interact. Well, that is they interact within the confines of mainstream theory. This means they behave according to a few very simple and specially chosen rules that preclude any cheating, conniving, cooperation, or generally demeaning activity that  would discredit an economist. They are also endowed with astonishing powers of calculation. This is probably why they were chosen. I know its why I wasn’t chosen. I don’t know enough, and I am hopeless at all those lightning fast calculations. Were I the representative person inside the mainstream model I would probably send it hurtling off track so quickly it would explode before we all moved more than one time period forward. I am just clueless at knowing my preferences and trying to keep them consistent with what they were a few years ago, or with what they will be a few years hence. And I have a hard time keeping track of my taxes so I have no clue when I should stop buying food in order to save enough to pay them in the future. I think.  Read more…

Categories: New vs. Old Paradigm

Wittgenstein’s Silence?

September 30, 2014 7 comments

from Peter Radford

Because it is pointless adding to an already over stuffed vacuum.

Economics as currently construed is a discussion about a small percentage of all economic activity. It is therefore incapable of making a contribution to improve the daily lives and/or prosperity of people whose lives are not totally included within the purview of its theorized domain.

Herbert Simon estimated that approximately 80% of all economic activity takes place outside of anything resembling the markets that economics talks about. The vast majority of transacting and economic interaction takes place either in the home or at work. These two places are where people come across economic activity more frequently than in markets. They are also two territories that economists rarely, if ever, explore.

And when people do enter a space that looks like a market they do so more often than not as a complete price taker. When was the last time you haggled over the price of toothpaste?

So the stylized markets that so besot economists are merely the edge of economic reality, not the center.  Read more…

More self-criticism

August 29, 2014 1 comment

from Peter Radford

And while I am on the subject I see Krugman makes the case that “real economics”, aka supreme belief in market magic, may well not be that real after all. Then he throws this in:

“Yes, much of micro can be derived rigorously from individual maximization plus equilibrium; but why, exactly, does that make it right?”

Well.

In fact it makes it wrong.

Individual maximization is a pipe dream that only exists in the heads of utopian economists. And equilibrium. Have you ever seen one? Seriously? Neither have I.

Add the two together and you have a wonderfully coherent, internally consistent, beautiful system that portrays nothing. It looks good. It is vacuous nonetheless.

To think that good macro has to be built on this vaporware is just awesomely foolish.

Yet, apparently, according to luminaries like Robert Lucas, “good” economics is built precisely on such vapor.

No wonder “real economics” is of little to no value.

Maybe we should try real world economics.

Self criticism in economics

August 26, 2014 17 comments

from Peter Radford

This is a bit of a rant. Please bear with me.

I rarely do this, but here’s a link to one of my favorite economics blogs:

Unlearning Economics:Economists Dissing Economics

The problem with all this self-criticism is that many of the people doing the dissing are responsible for the disarray they are criticizing. A different view is that none of them saw fit to make enough noise to change things.

This may unfair of me.

Notice also that much of this criticism is dated. The wheels have been coming off economics for a long time, yet inertia is sufficient to prevent change.

This may also be unfair of me.

But, ask yourself: where else in our economy could so much analytical ineptitude be tolerated for so long? Where else could repeated failure be fobbed off so easily? Where else could so much fraction, discord, and general incoherence be treated as a “profession”?

If some of the so-called heterodox alternatives to the dominant theories were so compelling surely they would have been more widely accepted. It is not enough to carp about other people’s evident failings – and believe me, as a relative outsider those failings are glaringly evident – because I believe those who complain have a responsibility to build the better alternative. Read more…

Is economic orthodoxy anti-democracy?

August 23, 2014 10 comments

from Peter Radford

Yes it is.

The explanation is found in the genesis of classical economics and then in its idealization of the marketplace.

At its onset the modern neo-liberal project was a search for a way of organizing civil society without that organization being imposed in what had hitherto been an overt political, that is power relationship, sense. Thus the literature in the late 1700′s is brimming with applause for what we would now call the market as a method of coordination. In contemporary thinking we seem to forget that the market back then was seen as a supreme organizing principle for all social activity since the then burgeoning economy was the major issue calling for analysis. The market was posited as an alternative to the prior traditional political problem solution to allocation because it allowed the emerging commercial class to locate itself within a social structure facing great stress. The older regime had no space for commerce as it was being redefined – starting with a redefinition of the word itself. Older societies were based on long established, hierarchical, and unvarying governance of all aspects of life, including what we now describe as economic activity. That governance was centered in traditional sources of power. It was thus deeply political, although people at that time would not have referred to it in that way. Read more…

Unsound on equality

August 15, 2014 Leave a comment

from Peter Radford

In a recent speech I gave on inequality, I described the relevance of economics in a series of quotes thusly:

“Political economy you think is an enquiry into the nature and causes of wealth – I think it should rather be called an enquiry into the laws which determine the division of the produce of industry amongst the classes who concur in its formation” ~ Ricardo to Malthus correspondence, quoted in Sraffa, 1951

“The real scientific study of the distribution of wealth has, we must confess, scarcely yet begun. The conventional academic study of the so-called theory of distribution into rent, interest, wages, and profit is only remotely related to the subject. This subject, the causes and cures for the actual distribution of capital and income among real persons, is one of the many now in need of our best efforts as scientific students of society” ~ Irving Fisher, 1919

“Does Inequality in the distribution of income increase or decrease in the course of a country’s economic growth? What factors determine the secular level and trends of income inequalities? … These are broad questions in a field of study that has been plagued by looseness in definitions, unusual scarcity of data, and pressures of strongly held opinions.” ~ Kuznets, 1955

“I am wandering away from my usual concerns briefly to discuss an even more nagging and pervasive tradeoff, that between inequality and efficiency. It is in my view, our biggest socioeconomic tradeoff, and it plagues us in dozens of dimensions of social policy.” ~ Okun, 1975

“Of the tendencies that are harmful to sound economics, the most seductive, and my opinion the most poisonous, is to focus on questions of distribution … The potential for improving the lives of poor people by finding different ways of distributing current production is nothing [italics in original] compared to the apparent limitless potential of increasing production.” ~ Lucas, 2004

“Equality lacks relevance if the poor are growing richer.” McCloskey, 2014

The journey from being actively concerned, through a somewhat guilty admission of a lack of progress, to a stab at a general idea, thence to the notion of inequality as a cost of seeking growth, only to arrive, finally, at a patronizing dismissal of the entire topic is an arc of embarrassing failure.
Read more…

Various Thoughts

July 15, 2014 2 comments

from Peter Radford

There is no point is bashing away at old economics or old economists. They are what they are. And it isn’t as if there is a compelling alternative to orthodoxy, if there were we wouldn’t be in this never ending and unproductive cycle of throwing stones at the establishment.

I think we all ought take comfort in the fact that a few decades ago things were so much different. The generation that trashed economics was on the rise and on the outside once. There are great reputations to be made fixing and updating the entire enterprise. In a business where incentives are so lauded, I imagine the incentive of fame should bring a savior soon enough.

Meanwhile it was sobering to read:

“The modern industrial system is no longer essentially a market system. It is planned in part by large firms and in part by the modern state. It must be planned, because modern technology and organization can flourish only in a stable environment, a condition the market cannot satisfy.” – J.K. Galbraith, “The New Industrial State”

Looking back at the state-of-the-art analysis concerning business organization in the first post-war decades we find a picture so discordant with modern business theory that it is hard to connect the two. There was a distinct feeling back then that the complexity of a modern economy would overwhelm the ability of the simple structures of a market and that long and complicated production processes therefore needed to be set within a controlled environment. That environment being a bureaucratic and centrally planned “meso-economy” called a business firm. Read more…

Clockwork Justice?

July 4, 2014 6 comments

from Peter Radford

One of the central beliefs held by people who advocate a market based worldview is that, somehow, markets are apolitical, they are antiseptic, they are objective. This is nonsense. It is dangerous nonsense.

That markets work according to rules does not make them objective or even impersonal. Rules are human constructs. Ergo markets are simple extensions of base human attitudes and are thus fraught with all the frailties that encumber all human activity.

The sanitization of markets, by which I mean the constant effort to make them appear “natural” or “neutral” and thus “fair”, is an ideological cover that market ideologues desperately, and successfully, propagate. It is a cover to mask the consequences of this supposed naturalness and to give it the imprint of ethical cleanliness. After all if the outcomes of a market are simply those of nature working her course, who are we too argue?

Economists, or at least orthodox economists, are the great cheerleaders of this ruse to get us all to accept our fate. Over the course of the development of economics much work has been put in to the elucidation of the mechanics of markets. There is an overpowering sense of determinism in the result. Start here, crank the machinery, and let the outcomes just flop out. The market is such that any outcome is “correct”, because left untouched market machinery always hones in on the superior outcome. Thus the current distribution of income “must” be the correct one: the market created it and the market is always, unerringly, right. Read more…

Can economists explain much?

July 1, 2014 12 comments

from Peter Radford

Greg Clarke ends his book “A Farewell to Alms” with a not too encouraging summation about the ability of economists to explain much. Allow me to give you three lengthy quotes:

“In economics, however, we see instead that our ability to describe and predict the economic world reached a peak around 1800. In the years since the Industrial Revolution there has been a progressive and continuing disengagement of economic models from any ability to predict differences of income and wealth across time and across countries and regions.”

“Since then economics has become more professional. Graduate programs have expanded, pouring out a flood of talented economists armed with an ever more sophisticated array of models and statistical methods. But since the Industrial Revolution we have entered a strange new world in which the rococo embellishments of economic theory help little in understanding the pressing questions that the ordinary person asks of economics.”

“Our economic world is one that the deluge of economics journal articles, working papers, and books – devoted to ever more technically detailed studies of capital markets, trade flows, tax incidence,sovereign borrowing risk, corruption indices, rule of law – serves more to obscure than to illuminate. For the economic history of the world constructed in these pages is largely innocent of these staples of the discipline. The great engines of economic life in the sweep of history – demography, technology, and labor efficiency – seem uncoupled from theses quotidian economic concerns.”

It must be frustrating to try to stay within the boundaries of economics and end up having to admit that fully three-quarters of all growth since the Industrial revolution crops up in the standard models of growth as a “residual”. That residual being, as Moses Abromovitz suggested, being a measure of the ignorance of economists.  Read more…

Mystery Growth Theory

June 24, 2014 7 comments

from Peter Radford

I have been reading Gregory Clark’s brief history of the world economy “A Farewell to Alms” as part of my continuing reading on inequality. Somehow I think I need to know more about the entire arc of growth in our modern era and inevitably that means reading more about the great mystery of the surge in living standards since about 1750. Clark gives me a fairly standard view. He divides history into two distinct positions. An older “Malthusian” era, where growth was negligible, and a modern era dominated by “innovation”.

On page 197 he tells us:

“For, although modern economies are deeply complex machines, they have at heart a surprisingly simple structure. We can construct a simple model of this complex economy and in that model catch all the features that are relevant to understanding growth.”

That ought to encourage us all.

A simple model – how economists love those – but all inclusive.

Read on: Read more…

Equality

May 21, 2014 21 comments

from Peter Radford

All the justified fuss over inequality in recent months begs a rather significant question doesn’t it? If we are all so vexed over inequality we must have some yardstick or some more ideal state we could call equality. What is it?

The problem I have is that equality almost immediately disappears into a fog.

There are very few of us who would argue for the blandness of total equality. That seems to be as inhuman as extreme inequality. After all we are all very different and thus there is an inherent tendency towards lumpiness in society. Some people will always outperform others whilst some will underperform. Some will be richer and others poorer. This much is so simple we can move on quickly. After all we don’t want to fall into the trap that has ensnared orthodox economists: they cannot do their work without expunging humanity from their equations. Else all that lumpiness gets in the way of the smooth operation of maximization, efficiency, and rationality. So they sweep it away peremptorily by making absurd assumptions and then pretend to have discovered something of extreme value about humanity. Ridiculous, I know, but they plod on stupidly despite it.

So what is equality in the context of our discussion of inequality?  Read more…

Think like an economist?

May 13, 2014 11 comments

from Peter Radford

Perhaps we are all asking too much. The burden is just too heavy a load. One point of entry too limited. A single, albeit determined, band of thinkers too narrow, too isolated, or too specialized to give us all that we want.

I am talking about economics of course.

We, that is society at large, want economists to deliver us from the great cycles and risks that seem to bedevil what we call the economy. This last crisis, the Great Recession, has plunged economics into a frenzy of introspection, self-analysis, and denial all at once. It has frozen the discipline into large well entrenched camps each holding ideas that appear to be economics, but which are often so contradictory that some of us are left believing the discipline no longer exists as a coherent body of thought. If ever it did so exist.

So do we ask too much?

Can one body of thought handle all the big questions that economies generate?  Read more…

Science or Politics?

May 9, 2014 4 comments

from Peter Radford

Paul Krugman, with whom I do not always agree, asks two very pertinent questions:

“Were the freshwater guys always just pretending to do something like science, when it was always politics? Is there simply too much money and too much vested interest behind their point of view?”

Let’s set aside our differences for a moment and unite behind those questions.

Yes. It was always politics.

Yes. There is simply too much money and too much vested interest behind their point of view.

Orthodox economics is a sham as a science. It is an ideology masquerading as science. How else can we describe a body of thought that appears totally inflexible and immune to contradictory evidence? It does not adjust. It’s believers do not learn. They preach. They proselytize. Their theory lies exposed for all to see as a mere prop for a particular point of view. A point of view that justifies inequality of outcomes and mean spirited indifference to the plight of vast swathes of our fellow citizens in the name of pseudo-efficiencies in the allocation of our collective resources. These supposed efficiencies are neither observable nor measurable in the real world, but only within the enclosed, cramped spaces of models specially created to produce a very limited and desired outcome. Desired, that is, by those who value extreme individualism over community, excessive competition over cooperation, and an almost pathological belief in rational behavior over human cognitive frailty. Read more…

Affluent Rules

May 9, 2014 4 comments

from Peter Radford

A couple of weeks ago I led off an article with a quote from a new Gilens and Page paper – linked to in the article. Subsequently I have acquired and waded through the Gilens book “Affluence & Influence”.

Time for a few more quotes, all from page 81 of the aforementioned book:

“The complete lack of government responsiveness to the preferences of the poor is disturbing and seems consistent with the most cynical views of American politics. These results indicate that when preferences between the well-off and the poor diverge, government policy bears absolutely no relationship to the degree of support or opposition among the poor.” 

“For those proposed policy changes on which middle- and high-income respondents’ preferences diverge by at least 10 percentage points, policy responsiveness for the 90th percentile remains strong … but is indistinguishable from zero for the 50th percentile”

“But when their views differ from those of more affluent Americans, government policy appears to be fairly responsive to the well-off and virtually unrelated to the desires of low- and middle-income citizens.”

In the context of our ongoing debate over inequality I think these quotes stand for themselves. Read more…

Categories: inequality, Plutonomy

Irving Fisher and inequality

May 4, 2014 9 comments

from Peter Radford

“The real scientific study of the distribution of wealth has, we must confess, scarcely begun. The conventional academic study of the so-called theory of distribution into rent, interest, wages, and profits is only remotely related to the subject. This subject, the causes and cures for the actual distribution of capital and income among real persons, is one of the many now in need of our best efforts as scientific students of society.”  Irving Fisher, President’s address to the American Economic Association, 1919

Later in that same speech he gave us his opinion of patrimonial capitalism:

“I believe that it is very bad public policy for the living to allow the dead so large and unregulated an influence over us.”

That sentiment has now reappeared as Piketty’s call not to allow the past to devour the future.

With respect to the “right” to create inheritances via wills Fisher points us to Chief Justice Coleridge of England: Read more…

Moving On

April 29, 2014 13 comments

from Peter Radford

We now live, whether we have grasped that fact or not, in a post-Piketty era. This will seem silly to many of you who have toiled at the coal face of progressive issues for years, but I think it is something worth reflecting on. It isn’t us who need to be convinced. It is all those who have denied or avoided reality.

Something has changed.

Robert Locke, with whom I am having a rather public dialog with says this with regard to my note earlier about Piketty and the new Gilens & Page study:

“Peter, having convictions confirmed by numbers is nice, but for people who have lived observant lives since 1980, they just amount to “a penetrating glimpse into the obvious.” We need hopeful suggestions about how American public opinion can be effectively mobilized to institute an economic democracy. What books or articles, or people, should we listen to or read to effect that? We need to enter into a penetrating discuss[sic] about how change is managed. It won’t be easy. We had the abolitionists before the Civil War. Did they get rid of slavery? We had the Progressive movement at the beginning of the 20th century but it produced managerialism,not democracy. The people most effective in getting change done are the enemies of economic democracy. The system we have today is the result of their post1970 quite efficient transformational work.”

I do not want to raise Piketty to too exalted a status, but we ought to recognize his achievement, and that his effort is part of a much larger research scheme involving many others. This new era exists because we now have a massive dataset, thoroughly and transparently compiled across nations and through time sufficient to act as a foundation for a pivot away from the thinking of these past four decades.  Read more…

First Piketty and now Gilens and Page

April 23, 2014 27 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
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