Further suggestions for Krugman’s IS-LM reading list

from Lars Syll

The determination of investment is a four-stage process in The General Theory. Money and debts determine an “interest rate”; long-term expectations determine the yield – or expected cash flows – from capital assets and current investment (i.e., the capital stock); the yield and the interest rate enter into the determination of the price of capital assets; and investment is carried to the point where the supply price of investment output equals the capitalized value of the yield. The simple IS-LM framework violates the complexity of the investment-determning process as envisaged by Keynes … 

The state of economics: Krugman is wrong

from Peter Radford

Paul Krugman this morning hammers away at hedge fund managers who, by and large, are complaining about Fed monetary policy, and especially its so-called quantitative easing. The managers are all predicting doom and hyperinflation because of the ongoing ease of Fed policy. It might also have to do with those low interest rates making it harder to earn a living as a hedge manager, but let’s give them the benefit of the doubt. The point is that there are many folks out there who still predict doom based upon the continuance of monetary ease.

Krugman, and others, have long argued that such a view is misguided because an economy mired in the depths – like ours is – does not respond to loose monetary policy the way it would under more ‘normal’ conditions. In particular, no amount of cash whizzing around will cause an inflationary spiral while we are stuck in a liquidity trap. Thus the analysis of the hedge fund managers, which seems to ignore the existence of a liquidity trap, is just wrong and their dire predictions will never be correct.

Case in point: this week’s report that inflation is nonexistent and that consumer prices have edged up only a little over 1% during the last year. Clearly hyperinflation remains a way off. So Krugman’s analysis seems correct, and the hedge fund managers are wrong.

Where I disagree with Krugman in his blog today is his references to the economics profession.

Connecting the dots—or not (Stiglitz or Krugman)

from David Ruccio

Paul Krugman continues to have a hard time c

The 10 most viewed posts of the last 30 days

1. The Reinhart and Rogoff defense of their work is riddled with mistakes, too

2. How Much Unemployment Was Caused by Reinhart and Rogoff’s Arithmetic Mistake?

3. True Keynesianism – Richard Koo edition

4. Reinhart and Rogoff are not being straight

5. Economics textbooks – decades of scientific fraud and incoherence

6. IS-LM is bad economics no matter what Krugman says

7. What causes the share of labor to decrease? 3 graphs.

8. Emerging vs. developed countries’ GDP growth rates 1986 to 2015

9. “Networked minds” require a fundamentally new kind of economics

10. Robert Samuelson finds economics is way too complicated (2 graphs)

Creating an Economics for the 21st Century

guest post from Rob Johnson

In the wake of the 2008 financial crisis, many of our policy makers and top economists are still stumbling in the dark.

One needn’t look far for proof. The symptoms of their failure are everywhere. Financial markets remain too volatile and crises too common. Inequality is raging and increasing around the globe. And environmental damage continues unabated, with rising climate volatility belying claims that we can experience sustained and broad based prosperity without major changes in the global economy.

A key part of this problem – and one that hasn’t been adequately explored – is the economics profession. 

Reinhart-Rogoff one more time: why the 90 percent never should have been taken seriously

from Dean Baker

As a general rule economists are not very good at economics. This is why almost none of them were able to recognize the $8 trillion housing bubble that sank the economy. (No, this isn’t bragging, it only took simple arithmetic and basic logic.) Most economists are unable to conceptualize anything that someone with more standing in the profession did not already write about.

This is the only reason that the Reinhart-Rogoff 90 percent debt-to-GDP threshold was ever taken seriously to begin with. The point that I have tried to make in the past, apparently with little success, is that debt is an arbitrary number. It is not something that is relatively fixed, like the age composition of the population or the supply of land.

The country’s debt is something that can and often is easily altered through simple steps. In this way the debt-to-GDP ratio can be thought of as something like the color of a house. Suppose Reinhart and Rogoff told us that people who lived in blue houses had 40 percent less income than people who lived in houses painted other colors. Presumably people would be skeptical of the results, but if their finding was really true, then we would probably want to encourage people in blue colored houses to paint them a different color.

In effect, Reinhart and Rogoff were making the same sort of claim about debt and GDP. Let me try to explain this in a way that even an economist can understand it.  

Destroying the lair of the budget-balancing cretins

from Dean Baker

By now almost everyone knows of the famous Excel spreadsheet error by Harvard professors Carmen Reinhart and Ken Rogoff. It turns out that the main conclusions from their paper warning of the risks of high public sector debt were driven by miscalculations.

When the data are entered correctly, this hugely influential paper can no longer be used to argue that the United States or other wealthy countries need fear a large growth penalty by running deficits now. There is no obvious reason that governments can’t increase spending on infrastructure, research, education and other services that will both directly improve people’s lives and foster future growth.

With the advocates of austerity on the run this is a great time to pursue the attack. The public should understand that the often expressed concerns about long-term growth, the future, and the well-being of our children are simple fig-leafs for inhumane policies that deny people (a.k.a. the parents of our children) work and redistribute income upward.

Why aren’t we talking about “public goods”? A proposed research agenda

guest post from June Sekera

Public goods pervade the lives of citizens in all advanced democracies.  Yet virtually no one talks about public goods: we rarely hear the term outside of economics classrooms.

In Samuelson’s sixty-year-old formulation, public goods are “non-rivalrous” and “non-excludable and are born of market failure.  In this market-fundamentalist world, public goods are inherently a “problem.”

In the real world, public goods are what governments produce on behalf of their citizens. “The history of civilization,” writes Martin Wolf of the Financial Times, “is a history of public goods”. In the real world, public goods include clean air, clean water, street lights, emergency call service, disaster relief, food and drug safety, public parks and beaches, education, and dozens more, all of which citizens make use of every day and enjoy unthinkingly. Over 90 percent of U S citizens who deny ever receiving benefits from a  government program actually participated in one or more government programs (Social Security, college loans, the child care tax credit and the like), as admirably documented by Suzanne Mettler of Cornell in her research on “the submerged state”.

Awareness of public goods, and their utility and value, is sorely lacking in public discourse.

Economic Thought: Special Issue on Ethics and Economics

Economic Thought - History, Philosophy, and Methodology
An open access, open peer review journal from the World Economics Association
Vol 2, No.1, 2013 – Special Issue on Ethics and Economics

Download issue in full (PDF)

Ontological   Commitments of Ethics and Economics Karey Harrison	Abstract	Download   PDF
Codes of Ethics   for Economists: A Pluralist View Sheila C Dow	Abstract	Download   PDF
No Ethical Issues   in Economics? Stuart Birks	Abstract	Download   PDF
Professional   Economic Ethics: Why Heterodox Economists Should Care George   DeMartino	Abstract	Download   PDF
And the Real   Butchers, Brewers and Bakers? Towards the Integration of Ethics and Economics Riccardo   Baldissone	Abstract	Download   PDF

_________________________________________________________________________________
Volunteers needed to start WEA national chapters. If interested, email nationalchapters@worldeconomicsassociation.org

WEA Young Economists (Facebook Group – 8 days old – 260 members – join today)

WEA online conference: The economics curriculum: towards a radical reformation

The economics curriculum: towards a radical reformation
3d May – 31st May
- a World Economics Association Conference
- with Open Discussion Forum    – http://curriculumconference2013.worldeconomicsassociation.org/

Papers  

Inequality and the current crises

from David Ruccio

Mainstream economists (like Brad DeLong) can’t seem to find any connections between growing inequality and the current crises. But it’s not a problem for Federal Reserve Board Governor Sarah Bloom Raskin.

Yes, this is the same Raskin who recently decided to look beyond capitalism for a solution to the current crises. In an extension of those remarks, she set out to examine how “economic marginalization and financial vulnerability, associated with stagnant wages and rising inequality, contributed to the run-up to the financial crisis and how such marginalization and vulnerability could be relevant in the current recovery.”

Here’s her argument in a nutshell:

Reinhart and Rogoff are not being straight

from Dean Baker

Carmen Reinhart and Ken Rogoff, used their second NYT column in a week, to complain about how they are being treated. Their complaint deserves tears from crocodiles everywhere. They try to present themselves as ivory tower economists who cannot possibly be blamed for the ways in which their work has been used to justify public policy, specifically as a rationale to cut government programs and raise taxes, measures that lead to unemployment in a downturn.

This portrayal is disingenuous in the extreme. Reinhart and Rogoff surely are aware of how their work has been used. They have also encouraged this use in public writings and talks. While it is unfortunate that they have “received hate-filled, even threatening, e-mail messages,” as one who works in the lower-paid corners of policy debates, let me say, welcome to the club.

This column is careful to halfway walk back the main claim of their famous paper, telling us:

Getting business school reform wrong, Why it happened, and what to do about it

from Robert Locke

Post WWII business schools deans, philanthropic foundation bureaucrats (Ford and Carnegie), and businessmen carried through radical reform of US business school curricula in the 1960s to get rid of “unimaginative, non-theoretical, second rate …students,” working in, to use Herbert Simon’s phrase, “a wasteland of vocationalism,” (Khurana, 236). Their goal was to replace the existing curriculum with a scientific education in which neoclassical economics played a “dominant role within the emerging tinplate for disciplines-oriented business studies.” (Khurana, p. 265, Locke, 1989, Management and Higher Education Since 1940) Rakesh Khurana tells this story in detail in his 2007 book, From Higher Aims to Hired Hands (Princeton UP), without much comment, however, about whether the reform, which was thorough, actually succeeded in improving economic performance. I suggest it did not.

Why the Postwar Business School reform

Most histories of this transformation of business studies stress a two step process. First, neo-classical economics imbibed the scientific toolkit that operational research developed during WWII and the Cold War in government agencies and think tanks like the Rand Corporation, therewith claiming to have turned itself into a “prescriptive” science. Then, in a second step, reformers made this new neo-classical economics the dominant force in the subsequent transformation of business school curricula and research.

But the penetration of business schools by neoclassical economics

Robert Samuelson finds economics is way too complicated (2 graphs)

from Dean Baker

That is quite literally what he told us in his column. His second paragraph tells readers:

“Among economists, there is no consensus on policies. Is “austerity” (government spending cuts and tax increases) self-defeating or the unavoidable response to high budget deficits and debt? Can central banks such as the Federal Reserve or the European Central Bank engineer recovery by holding short-term interest rates near zero and by buying massive amounts of bonds (so-called “quantitative easing”)? Or will these policies foster financial speculation, instability and inflation? The public is confused, because economists are divided.”

See, we don’t know what to do, so we just can’t do anything. All those suckers who are unemployed or seeing stagnant wages, well we just don’t know. And the fact that those on the top are getting rich with 60-year high shares of national income, well what can we do about that? It’s just too confusing.

Michigan State students campaign for diversification

ASSOCIATED STUDENTS OF

MICHIGAN STATE UNIVERSITY

GENERAL ASSEMBLY

FORTY-NINTH SESSION

G.A. 49-72

INTRODUCED BY: Nikolovksi SECONDED BY: Goheen

A BILL TO:

ADVOCATE FOR THE DIVERSIFICATION OF THE CURRICULUM WITHIN THE DEPARTMENT OF ECONOMICS

THE ASSOCIATED STUDENTS OF MICHIGAN STATE UNIVERSITY ENACT:

WHEREAS, Since the recent global financial crisis, there has been a heightened debate within academic circles about the varying methods of analyzing economic phenomena. The department of Economics at MSU teaches from a single theoretical framework, widely known as the neoclassical school. This framework is only one perspective among several others which are not taught, and only gives one way of trying to understand our economy; and,

WHEREAS, Economists espousing other theoretical frameworks have given insights into important economic phenomena which have drastic implications for economic policy. Some important analyses include alternative empirical work that consistently explains the process of economic growth and—what is connected—warnings of the global financial crisis prior to its precipitation. These frameworks of thought use completely different methods and assumptions then those that are taught here at MSU; and,

WHEREAS, Students taking Economics within MSU are unlikely to be aware of the debates that go on, because the vast majority of what they do as “economics” is in the form of math problems which takes the assumptions and method of the neoclassical framework as given. Also, because students are often not explicitly made aware of the method and assumptions that underlie the mathematical formalism that they use, there is an appearance of diversity in the topics within the curriculum (e.g. international economics, microeconomics, and macroeconomics). Students should be made aware that there is a basic unity in the methods of neoclassical economics in analyzing these different topics; therefore be it,

RESOLVED, That MSU’s Economics department diversify its curriculum to allow students to engage not only with neoclassical work, but also competing frameworks so that they may be aware of the debates that are going on.

A first recommendation includes giving more explicit recognition of thev underlying method and assumptions of the frameworks that are taught, as well as engaging with the original works of the foundations of the

different schools of economics (e.g. Adam Smith, David Ricardo, Alfred Marshall, Karl Marx, John Maynard Keynes, and Milton Friedman.)

Secondly, working away from using mathematical formalism as an end in itself but recognizing it as a secondary tool, and also allowing for critical and reflective thought through paper writing and in-class debate is also highly recommended.

Error Correction and Ethics

from Peter Radford

You probably have missed it, but there is a major furor within the economics profession concerning the findings of an academic paper written by Carmen Reinhart and Kenneth Rogoff in 2010. The profession issues a torrent of papers annually, most of which remain scarcely read and massively under-appreciated. Probably deservedly so since the sole objective of most is to meet the check-box requirement of publication that dominates academia. This desperation to publish to build reputation and to demonstrate mastery of the subject to a determinedly self-referential peer group is one of the causes of the rapid decline within economics: it encourages ever more fragmentation of the subject into ever less relevant sub-disciplines, and has resulted in a near total elimination of a common understanding – or common memory – of its development.

It has also produced sloppiness.

The R-R paper has now become a cause-celebre of such sloppiness.

This would not normally be worthy of passing along to a broader audience – who cares what academic economists write after all? – were it not for the particular topic that R-R covered. 

Foundations of Paul Samuelson’s Revealed Preference Theory (super wonkish)

from Lars Syll

In 1938 Paul Samuelson offered a replacement for the then accepted theory of utility. The cardinal utility theory was discarded with the following words: “The discrediting of utility as a psychological concept robbed it of its possible virtue as an explanation of human behaviour in other than a circular sense, revealing its emptiness as even a construction” (1938, 61). According to Samuelson, the ordinalist revision of utility theory was, however, not drastic enough. The introduction of the concept of a marginal rate of substitution was considered “an artificial convention in the explanation of price behaviour” (1938, 62). One ought to analyze the consumer’s behaviour without having recourse to the concept of utility at all, since this did not correspond to directly observable phenomena. The old theory was criticized mainly from a methodological point of view, in that it used non-observable concepts and propositions. 

“Inapplicable operations on ordinal, cardinal, and expected utility”

from Issue no. 63 of the real-world economics review

Inapplicable operations on ordinal, cardinal, and expected utility
Jonathan Barzilai   [Dalhousie University, Canada]      download pdf

Editor’s note:

This short paper was originally submitted to World Economics Review, where under its online open review it was for a year subjected to voluminous high calibre critique and author response (available here). As the first reviewer noted: “If the author is right, a substantial part of orthodox economics has to be rejected on purely formal grounds”. The paper’s arguments turn on the application of abstract algebra, a branch of mathematics in which we economists are rarely fluent. The paper asserts:

1. Hick’s and Samuelson’s applications (and those based thereon) of differentiation to ordinal utility are founded on mathematical errors.
2. Expected utility’s scale construction rule is self-contradictory.

By publishing Jonathan Barzilai’s paper in the RWER, it is hoped that one or more mathematicians will bring their expertise to bear on its argument and that the high calibre consideration of the paper by economists will continue in public view. To this end, this post has been placed so that people may comment on the paper. Only comments of an academic nature and directed primarily to the paper will be posted. 

IS-LM is bad economics no matter what Krugman says

from Lars Syll

Paul Krugman has a post up on his blog once again defending “the whole enterprise of Keynes/Hicks macroeconomic theory” and especially his own somewhat idiosyncratic version of IS-LM.

The main problem is simpliciter that there is no such thing as a Keynes-Hicks macroeconomic theory!

So, let us get some things straight.

There is nothing in the post-General Theory writings of Keynes that suggests him considering Hicks’s IS-LM anywhere near a faithful rendering of his thought. In Keynes’s canonical statement of the essence of his theory in the 1937 QJE-article there is nothing to even suggest that Keynes would have thought the existence of a Keynes-Hicks-IS-LM-theory anything but pure nonsense. So of course there can’t be any “vindication for the whole enterprise of Keynes/Hicks macroeconomic theory” – simply because “Keynes/Hicks” never existed.

And it gets even worse! 

Worms, pond scum and economists

from Dean Baker

The effort to blame the awful plight of the young on Social Security and Medicare is picking up steam.

In the last week, there were several pieces in The Washington Post and The New York Times that either implicitly or explicitly blamed older workers and retirees for the bad economic plight facing young people today. There is now a full-court press to cut Social Security and Medicare benefits, ostensibly out of a desire to help young workers today and in the future.