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new issue of Economic Thought

October 1, 2014 Leave a comment

Economic Thought - History, Philosophy, and Methodology
An open access, open peer review journal from the World Economics Association

Vol 3, No 2, 2014     Download issue 

J.M. Keynes, F.A. Hayek and the Common Reader
Constantinos Repapis          1          abstract

Reconciling Ricardo’s Comparative Advantage with Smith’s Productivity Theory
Jorge Morales Meoqui          21         abstract

The Theory of the Transnational Corporation at 50+
Grazia Ietto-Gillies          38          abstract

A commentary on Grazia Ietto-Gillies’ paper
John Cantwell           58          abstract

Reply to John Cantwell’s Commentary on Grazia Ietto-Gillies’ paper
Grazia Ietto-Gillies          67          abstract

If ‘Well-Being’ is the Key Concept in Political Economy...
Claudio Gnesutta          70          abstract

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…

The psychological “foundations” for neoclassical economics

September 27, 2014 14 comments

from Neva Goodwin

When I was beginning my studies in this field economist Robert Solow commented to me that the great strength of economics is that it is fully axiomatized; the entire edifice can be deduced from the basic rationality axiom, which says that rational economic man maximizes his utility. The origin of this axiom is often traced back to Smith, whose most widely quoted phrase comes from a passage in which Smith approvingly notes that merchants take what, today, we would call, a protectionist position – doing so, not with any thought for the good of society, but because their security and profit is tied to domestic industry. Thus, he says, the merchant “is in this as in many other cases, led by an invisible hand to promote an end which is no part of his intention.”[1] Excerpts such as this have been used as a justification for the 20th century economic model’s vision of an ideal world in which a society comprised of entirely self-interested economic actors would make the society as a whole better off, and the idea that pursuit of self-interest is the only thing that is done by rational economic actors – and that anything else is irrational. Read more…

A problem that legions of mainstream academic economists have simply ignored (5 charts)

September 24, 2014 11 comments

from David Ruccio

P1-BM854C_OUTLO_G_20130825172704

The Wall Street Journal uses this chart to illustrate a story on a new report issued by Morgan Stanley on “Inequality and Consumption.”* Read more…

Mainstream economics teaching in the late 20th Century

September 20, 2014 12 comments

from Neva Goodwin

There are some true and useful things to be learned in standard 20th century economics, such as the basic concepts of supply and demand intersecting to create wages and prices. However if you ever took an economics course you may have since discovered that many other things also affect prices, such as advertising, or consumers’ lack of information. And wages involve even more complicated human interactions, habits and expectations. These complexities and exceptions don’t get much hearing in introductory courses – and, surprisingly, they get even less at the upper levels, where, instead, progressively more mathematics are imposed on a progressively more abstract picture of an economy. Meanwhile the students are also being taught a lot that is dangerous. Here are some of the take-aways from the standard economics course: Read more…

Revealed preference theory — redundant fuss about almost nothing

September 18, 2014 2 comments

from Lars Syll

Twenty years ago, yours truly had an article in History of Political Economy (no. 25, 1993) on revealed preference theory.

Paul Samuelson wrote a kind letter and informed me that he was the one who had recommended it for publication. But although he liked a lot in it, he also wrote a comment — published in the same volume of HOPE — saying:

Between 1938 and 1947, and since then as Pålsson Syll points out, I have been scrupulously careful not to claim for revealed preference theory novelties and advantages it does not merit. But Pålsson Syll’s readers must not believe that it was all redundant fuss about not very much.

I came to think about this little episode when, prepairing for a lecture on the law of demand, I re-read Stanley Wong’s  minor classic on Samuelson’s revealed preference theory. And I have to admit I still find the theory much fuss about not very much. Read more…

The myth that sold the financial bailout

September 17, 2014 4 comments

from Dean Baker

If there had been political support for massive spending in these areas, the Depression could have ended in 1931 instead of 1941.

Today marks the sixth anniversary of the collapse of Lehman Brothers. The investment bank’s bankruptcy accelerated the financial meltdown that began with the near collapse of the investment bank Bear Stearns in March 2008 (saved by the Federal Reserve and JPMorgan) and picked up steam with Fannie Mae and Freddie Mac going under the week before Lehman’s demise. The day after Lehman failed, the giant insurer AIG was set to collapse, only to be rescued by the Fed.

With the other Wall Street behemoths also on shaky ground, then–Treasury Secretary Henry Paulson ran to Capitol Hill, accompanied by Federal Reserve Chairman Ben Bernanke and New York Fed President Timothy Geithner. Their message was clear: The apocalypse was nigh. They demanded Congress make an open-ended commitment to bail out the banks. In a message repeated endlessly by the punditocracy ever since, the failure to cough up the money would have led to a second Great Depression.

The claim was nonsense then, and it’s even greater nonsense now.  Read more…

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

September 16, 2014 12 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 3 comments

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…

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