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Krugman and Mankiw on loanable funds — so wrong, so wrong

September 16, 2014 5 comments

from Lars Syll

Earlier this autumn yours truly was invited to participate in the New York Rethinking Economics conference. A busy schedule didn’t allow me to “go over there.” Fortunately some of the debates and presentations have been made available on the web, as for example here . Listening a couple of minutes into that video one can hear Paul Krugman strongly defending the loanable funds theory.

Unfortunately this is not an exception among “New Keynesian” economists.

Neglecting anything resembling a real-world finance system, Greg Mankiw — in the 8th edition of his intermediate textbook Macroeconomics — has appended a new chapter to the other nineteen chapters where finance more or less is equated to the neoclassical thought-construction of a “market for loanable funds.”

On the subject of financial crises he admits that Read more…

Why work became so bad for so many?

September 15, 2014 2 comments

from  Maria Alejandra Madi and the WEA Pedagogy Blog

Global business has been overwhelmed by the financialisation of wealth. Beyond financial and “rationalization” strategies, social conflicts and tensions have been strengthened as labor relations need to be adjusted to capital mobility and short-run returns.  In this historical setting, it is worth noting that, in spite of the enormous literature on financial development and inequality, few attempts have been successful in rethinking the intersection between contemporary financial and labor markets in Economics Curriculum.

Indeed, in the current context of “institutionalized short-termism”, the expansion of global finance contributes to the redefinition of labor relations. Investors and managers have enlarged profits in the context of a  business model that favors downsizing and cost reduction at the expense of employment. As labor costs are frequently considered large expense items, corporations must tightly managed and documented those costs in order to minimize risk of non-compliance, particularly public companies. Accordingly the Global Labor Union IUF,  the current global business scenario fosters changing working conditions that result from:  read more

How we got here: Adam Smith minus Karl Marx; Keynes tortured by Samuelson

September 13, 2014 6 comments

from Neva Goodwin

Adam Smith, generally regarded as the begetter of modern economic theory, stressed issues of growth and distribution, based on an image of smoothly functioning markets. The pieces of Smith’s legacy that remained significant for what I will refer to as 20th century economics (though I will focus especially on the second half of the past century) were the emphasis on growth, and admiration for markets. This truncated legacy greatly reduced the emphasis on distribution, while also missing Smith’s concern that markets might not always function optimally. He especially pointed to monopolistic behavior as a problem, and supported various kinds of government intervention to keep the market on track. Ignoring these caveats, 20th century economists pursued the optimistic program of modeling a world in which perfect markets lead to optimum social outcomes.

The classical economists – those holding the stage approximately until Marshall’s time – also included Karl Marx, whose concerns for inequality and class conflict were shared by Smith (though they expressed themselves very differently).  Read more…

Krugman on Minsky

September 11, 2014 1 comment

from Lars Syll

Paul Krugman has often been criticized by people like yours truly and other Minskyites for getting things pretty wrong on  the economics of Hyman Minsky.

When Krugman has responded to the critique, by himself rather gratuitously portrayed as about “What Minsky Really Meant” or “What Keynes Really Meant,” the over all conclusion is — “Krugman Doesn’t Care.”

The reason given for this rather debonair attitude seems to be that history of economic thought may be OK, but what really counts is if reading Minsky — or Keynes — give birth to new and interesting insights and ideas. Economics is not religion, and to simply refer to authority is not an accepted way of arguing in science.

Although I have a lot of sympathy for Krugman’s view on authority, there is a somewhat disturbing and unbecoming coquetting in his attitude towards the great forerunners he is discussing  — as his rather controversial speech at Cambridge, commemorating the 75th anniversary of Keynes’ General Theory, bears evidence of.

Sometimes — and this goes not only for children — it is easier to see things if you can stand on the shoulders of elders and giants. If Krugman took his time and really studied Keynes and Minsky, I’m sure even he would learn a lot. Read more…

The content of standard introductory economics courses

September 8, 2014 7 comments

Economics textbooks are not only written for students. At two critical points in the history of economic thought textbooks have played significant roles in defining the field, not only for what is taught, but more importantly (in terms of real world outcomes) for the understanding of the economy that is used by politicians, policy makers, and the public, when it votes its approval or disapproval of how the government is affecting the economy.

This started in the 1890s, when Alfred Marshall wrote the first edition of his text, called Principles of Economics. It went through 8 editions, the last being published in 1920. For a large part of the English-speaking world Marshall’s textbook continued to define the field (especially the microeconomics basics) until the middle of the 20th century, when it was replaced by Paul Samuelson’s Economics (first published in 1948). That set the standard for about the next 60 years.

Read more…

The Arrow-Debreu obsession

August 31, 2014 22 comments

from Lars Syll

I’ve never yet been able to understand why the economics profession was/is so impressed by the Arrow-Debreu results. They establish that in an extremely abstract model of an economy, there exists a unique equilibrium with certain properties. The assumptions required to obtain the result make this economy utterly unlike anything in the real world. In effect, it tells us nothing at all.what if So why pay any attention to it? The attention, I suspect, must come from some prior fascination with the idea of competitive equilibrium, and a desire to see the world through that lens, a desire that is more powerful than the desire to understand the real world itself. This fascination really does hold a kind of deranging power over economic theorists, so powerful that they lose the ability to think in even minimally logical terms; they fail to distinguish necessary from sufficient conditions, and manage to overlook the issue of the stability of equilibria.

Mark Buchanan

Almost a century and a half after Léon Walras founded neoclassical general equilibrium theory, economists still have not been able to show that markets move economies to equilibria. 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…

Econometric forecasting — a retrospective assessment

August 21, 2014 5 comments

from Lars Syll

There have been over four decades of econometric research on business cycles … The formalization has undeniably improved the scientific strength of business cycle measures …

But the significance of the formalization becomes more difficult to identify when it is assessed from the applied perspective, especially when the success rate in ex-ante forecasts of recessions is used as a key criterion. The fact that the onset of the 2008 financial-crisis-triggered recession was predicted by only a few ‘Wise Owls’ … while missed by regular forecasters armed with various models serves us as the latest warning that the efficiency of the formalization might be far from optimal. Remarkably, not only has the performance of time-series data-driven econometric models been off the track this time, so has that of the whole bunch of theory-rich macro dynamic models developed in the wake of the rational expectations movement, which derived its fame mainly from exploiting the forecast failures of the macro-econometric models of the mid-1970s recession.

The limits of econometric forecasting has, as noted by Qin, been critically pointed out many times before.

Trygve Haavelmo — with the completion (in 1958) of the twenty-fifth volume of Econometrica – assessed the the role of econometrics in the advancement of economics, and although mainly positive of the “repair work” and “clearing-up work” done, Haavelmo also found some grounds for despair: Read more…

Robert Rubin and Martin Feldstein discover bubbles

August 19, 2014 2 comments

from Dean Baker

Last week Martin Feldstein and Robert Rubin made their case for the gold medal in the economic policy category of the “show no shame” contest. Their entry took the form of a joint op-ed in the Wall Street Journal warning that the Fed needs to take seriously the risk of asset bubbles growing in financial markets.

Those familiar with Feldstein and Rubin will instantly appreciate the bold audacity of this entry. They are, respectively, the leading intellectual lights of the Republican and Democratic Party economic policy establishments.

Feldstein was the chair of the Council of Economic Advisors under President Reagan. He also was president of the National Bureau of Economic Research for thirty years and a professor and chair of economics department at Harvard. Almost all of the country’s top conservative economists have either directly studied with Feldstein or one of his protégées.

Robert Rubin was instrumental in creating a solid Democratic base among the Wall Street set. He was rewarded for his efforts with top positions in the Clinton administration, including a stint as Treasury Secretary from 1995 to 1998. Larry Summers and Timothy Geithner both advanced under his tutelage and he continues to be a source of economic wisdom for President Obama and other top figures in the party.

Given their enormous stature, Feldstein and Rubin undoubtedly expected their joint bubble warning to have considerable weight in economic policy circles. Of course this raises the obvious question, why couldn’t Feldstein and Rubin have joined hands to issue this sort of bubble warning ten years ago in 2004 about the housing bubble? If they used their influence to get a column about the dangers of the housing bubble in the Wall Street Journal in the summer of 2004 it might have saved the country and the world an enormous amount of pain.    Read more…

On the importance of validating assumptions in statistics and econometrics

August 17, 2014 Leave a comment

from Lars Syll

In Andrew Gelman’s and Jennifer Hill’s Data Analysis Using Regression and Multilevel/Hierarchical Models, the authors list the assumptions of the linear regression model. On top of the list is validity and additivity/linearity, followed by different assumptions pertaining to error charateristics.

Yours truly can’t but concur, especially on the “decreasing order of importance” of the assumptions. But then, of course, one really has to wonder why econometrics textbooks — almost invariably — turn this order of importance upside-down and don’t have more thorough discussions on the overriding importance of Gelman/Hill’s two first points …

Since econometrics doesn’t content itself with only making “optimal predictions,” but also aspires to explain things in terms of causes and effects, econometricians need loads of assumptions — and most important of these are validity and  additivity.

Let me take the opportunity to cite one of my favourite introductory statistics textbooks on one further reason these assumptions are made — and why they ought to be much more argued for on both epistemological and ontological grounds when used (emphasis added):  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…

Foot-in-mouth disease — Ayn Rand and Alan Greenspan

August 6, 2014 4 comments

from Lars Syll

Now, I don’t care to discuss the alleged complaints American Indians have against this country. I believe, with good reason, the most unsympathetic Hollywood portrayal of Indians and what they did to the white man. They had no right to a country merely because they were born here and then acted like savages. The white man did not conquer this country …

Since the Indians did not have the concept of property or property rights—they didn’t have a settled society, they had predominantly nomadic tribal “cultures”—they didn’t have rights to the land, and there was no reason for anyone to grant them rights that they had not conceived of and were not using …

What were they fighting for, in opposing the white man on this continent? For their wish to continue a primitive existence; for their “right” to keep part of the earth untouched—to keep everybody out so they could live like animals or cavemen. Any European who brought with him an element of civilization had the right to take over this continent, and it’s great that some of them did. The racist Indians today—those who condemn America—do not respect individual rights.

Ayn Rand,  Address To The Graduating Class Of The United States Military Academy at West Point, 1974

Read more…

Why doesn’t Krugman listen to Krugman?

August 1, 2014 7 comments

from Lars Syll

Paul Krugman wonders why no one listens to academic economists …

Listening_TitleOne answer is that economists don’t listen to themselves. More precisely, liberal economists like Krugman who want the state to take a more active role in managing the economy, continue to teach an economic theory that has no place for activist policy.

Let me give a concrete example.

One of Krugman’s bugaboos is the persistence of claims that expansionary monetary policy must lead to higher inflation. Even after 5-plus years of ultra-loose policy with no rising inflation in sight, we keep hearing that since so “much money has been created…, there should already be considerable inflation” … As an empirical matter, of course, Krugman is right. But where could someone have gotten this idea that an increase in the money supply must always lead to higher inflation? Perhaps from an undergraduate economics class? Very possibly — if that class used Krugman’s textbook.

Here’s what Krugman’s International Economics says about money and inflation: Read more…

New Keynesianism as a Club

July 28, 2014 4 comments

from Thomas Palley

Club, noun. 1. An association or organization dedicated to a particular interest or activity. 2. A heavy stick with a thick end, especially one used as a weapon.

Paul Krugman’s economic analysis is always stimulating and insightful, but there is one issue on which I think he persistently falls short. That issue is his account of New Keynesianism’s theoretical originality and intellectual impact. This is illustrated in his recent reply to a note of mine on the theory of the Phillips curve in which he writes: “I do believe that Palley is on the right track here, because it’s pretty much the same track a number of us have been following for the past few years.”

While I very much welcome his approval, his comment also strikes me as a little misleading. The model of nominal wage rigidity and the Phillips curve that I described comes from my 1990 dissertation, was published in March 1994, and has been followed by substantial further published research. That research also introduces ideas which are not part of the New Keynesian model and are needed to explain the Phillips curve in a higher inflation environment.

Similar precedence issues hold for scholarship on debt-driven business cycles, financial instability, the problem of debt-deflation in recessions and depressions, and the endogenous credit-driven nature of the money supply. These are all topics my colleagues and I, working in the Post- and old Keynesian traditions, have been writing about for years – No, decades! Read more…

Categories: economics profession

Is a more inclusive and sustainable development possible in Brazil? – a WEA online conference:

July 25, 2014 Leave a comment

This conference on sustainable development is now open and you are invited to leave comments on the papers on the conference site.
click here to leave comments

For an introduction to the background to the conference and the themes of the call for papers click here ›

THR PAPERS  Read more…

Cheap talk at the Fed

July 22, 2014 2 comments

from Dean Baker

Federal Reserve Board Chair Janet Yellen made waves in her Congressional testimony last week when she argued that social media and biotech stocks were over-valued. She also said that the price of junk bonds was out of line with historic experience. By making these assertions in a highly visible public forum, Yellen was using the power of the Fed’s megaphone to stem the growth of incipient bubbles. This is an approach that some of us have advocated for close to twenty years.

Before examining the merits of this approach, it is worth noting the remarkable transformation in the Fed’s view on its role in containing bubbles. Just a decade ago, then Fed Chair Alan Greenspan told an adoring audience at the American Economic Association that the best thing the Fed could do with bubbles was to let them run their course and then pick up the pieces after they burst. He argued that the Fed’s approach to the stock bubble vindicated this route. Apparently it did not bother him, or most of the people in the audience, that the economy was at the time experiencing its longest period without net job growth since the Great Depression.

The Fed’s view on bubbles has evolved enormously. Most top Fed officials now recognize the need to take steps to prevent financial bubbles from growing to the point that their collapse would jeopardize the health of the economy. However there are two very different routes proposed for containing bubbles. Read more…

The Phillips Curve: Missing the obvious and looking in all the wrong places

July 18, 2014 Leave a comment

from Thomas Palley

There is an old story about a policeman who sees a drunk looking for something under a streetlight and asks what he is looking for. The drunk replies he has lost his car keys and the policeman joins in the search. A few minutes later the policeman asks if he is sure he lost them here and the drunk replies “No, I lost them in the park.” The policeman then asks “So why are you looking here?” to which the drunk replies “Because this is where the light is.”That story has much relevance for the economics profession’s approach to the Phillips curve.

Recently, there has been another flare-up in discussion of the Phillips curve involving Paul Krugman [Here], Chris House [Here], and Simon Wren-Lewis [Here]. It is précised by Mark Thoma [Here].

The question triggering the discussion is can Phillips curve (PC) theory account for inflation and the non-emergence of sustained deflation in the Great Recession? Four approaches are considered: (1) the original PC without inflation expectations; (2) the adaptive inflation expectations augmented PC; (3) the rational inflation expectations new classical vertical PC; and (4) the new Keynesian “sluggish price adjustment” PC that embeds a mix of lagged inflation and forward looking rational inflation expectations. The conclusion seems to be the original PC does best with regard to recent inflation experience but, of course, it fails with regard to past experience.

There is another obvious explanation that has been over-looked by mainstream economists for nearly forty years because they have preferred to keep looking under the “lamppost” of their conventional constructions. That alternative explanation rests on a combination of downward nominal wage rigidity plus incomplete incorporation of inflation expectations in a multi-sector economy. Read more…

Categories: economics profession

Krugman and Mankiw on the loanable funds theory — so wrong, so wrong

July 17, 2014 6 comments

from Lars Syll

Last year Dirk Ehnts had an interesting post up where he took Paul Krugman to task for still being married to the loanable funds theory.

Unfortunately this is not an exception among “New Keynesian” economists.

Neglecting anything resembling a real-world finance system, Greg Mankiw — in the 8th edition of his intermediate textbook Macroeconomics — has appended a new chapter to the other nineteen chapters where finance more or less is equated to the neoclassical thought-construction of a “market for loanable funds.”

On the subject of financial crises he admits that

perhaps we should view speculative excess and its ramifications as an inherent feature of market economies … but preventing them entirely may be too much to ask given our current knowledge.

This is of course self-evident for all of us who understand that both ontologically and epistemologically founded uncertainty makes any such hopes totally unfounded. But it’s rather odd to read this in a book that bases its models on assumptions of rational expectations, representative actors and dynamically stochastic general equilibrium – assumptions that convey the view that markets – give or take a few rigidities and menu costs – are efficient! For being one of many neoclassical economists so proud of their (unreal, yes, but) consistent models, Mankiw here certainly is flagrantly inconsistent! Read more…

Categories: economics profession
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