from David Ruccio
Cornelia Strawser, in response to Brad DeLong, notes the importance of the declining labor share in U.S. national income.* She then poses a series of questions that, in her view, should be “raised in the academy and in public discourse”: Read more…
An international student call for pluralism in economics
It is not only the world economy that is in crisis. The teaching of economics is in crisis too, and this crisis has consequences far beyond the university walls. What is taught shapes the minds of the next generation of policymakers, and therefore shapes the societies we live in. We, over 65 associations of economics students from over 30 different countries, believe it is time to reconsider the way economics is taught. We are dissatisfied with the dramatic narrowing of the curriculum that has taken place over the last couple of decades. This lack of intellectual diversity does not only restrain education and research. It limits our ability to contend with the multidimensional challenges of the 21st century – from financial stability, to food security and climate change. The real world should be brought back into the classroom, as well as debate and a pluralism of theories and methods. Such change will help renew the discipline and ultimately create a space in which solutions to society’s problems can be generated.
United across borders, we call for a change of course. We do not claim to have the perfect answer, but we have no doubt that economics students will profit from exposure to different perspectives and ideas. Pluralism will not only help to enrich teaching and research and reinvigorate the discipline. More than this, pluralism carries the promise of bringing economics back into the service of society. Three forms of pluralism must be at the core of curricula: Read more…
from Lars Syll
One may wonder how much calibration adds to the knowledge of economic structures and the deep parameters involved … Micro estimates are imputed in general equilibrium models which are confronted with new data, not used for the construction of the imputed parameters … However this procedure to impute parameter values into calibrated models has serious weaknesses …
Second, even where estimates are available from micro-econometric investigations, they cannot be automatically importyed into aggregated general equlibrium models …
Third, calibration hardly contributes to growth of knowledge about ‘deep parameters’. These deep parameters are confronted with a novel context (aggregate time-series), but this is not used for inference on their behalf. Rather, the new context is used to fit the model to presumed ‘laws of motion’ of the economy … Read more…
Financial Times, November 17.
University departments must share the blame
Sir, The FT is far from alone in, once again and for the umpteenth time, decrying the “scandal” that a section of the financial sector – this time the foreign exchange market – has “remained immersed in a culture that subordinates everything to making money” (editorial, November 13). University economics departments cannot escape their share of the blame for this, so crucial have they been in recent years in providing academic justification for this “culture”.
Economics is, according to the orthodoxy now almost totally dominant in these departments, a discipline whose very identity is inseparable from the calculus of maximisation and minimisation. This standpoint is not limited to those of a neoliberal orientation; on the contrary, among its most dogmatic adherents is the outspokenly non-neoliberal Paul Krugman, who states quite simply that the economist is a “maximising-minimising kind of guy”.
Krugman is, however, exceptional in his radical views, and the inevitable bias that results from the exclusion from the economics curriculum of alternative approaches is towards turning out students who are ready-primed for incorporation into the “culture” that is revealed with such depressing regularity every time there is a thorough investigation of financial misdemeanours.
Fortunately, an increasing number of economics students are raising their voices against a curriculum which has become, in effect, little more than an indoctrination into that heinous “culture”.
It is about time the managements of economics departments stopped exploiting their freedom to appoint and promote their staff to perpetuate this situation. Let us hope that the demands of their students and of the wider public can begin to force them once more to open their doors to adherents of alternative approaches, and thus to reflect within themselves the debates on economic issues that rage in the world outside.
University College London and University of Westminster, UK
from Neva Goodwin
Twentieth century economics supported, implicitly when not explicitly, the idea that neither ethics nor history nor the institutions of law or culture were of much economic importance – as long as these things did not get in the way of “free” market functioning. This case was pressed with special vigor from about 1970 to the end of the 20th century by economists from what was known as the Chicago School.
Even early on in this period there began to be concern that individuals acting solely to achieve their personal goals could not be counted on to operate a business in ways that would be good for the business itself. This real-world concern, combined with the dogma that people only act on the basis of self-interest, resulted in various efforts to motivate business leaders by offering rewards for specific markers of success (such as the price of the company’s stock). These efforts had the unintended consequence of escalating compensation of top management in the United States to levels that were many times greater than anything that had previously been considered normal (or were normal in other countries). They also resulted in an increasingly short-term vision on the part of business leaders. Very large scale frauds, Ponzi schemes, tax evasions, and environmental and human costs that businesses externalized during this period have made it increasingly evident that society cannot afford to encourage a culture of economic activity that ignores all normal human motivations except the selfish pursuit of personal gain. Read more…
from Lars Syll
Oxford macroeconomist Simon Wren-Lewis has a post up on his blog on the use of labels in macroeconomics:
Labels are fun, and get attention. They can be a useful shorthand to capture an idea, or related set of ideas … Here are a couple of bold assertions, which I think I believe, and which I will try to justify. First, in academic research terms there is only one meaningful division, between mainstream and heterodox … Second, in macroeconomic policy terms I think there is only one meaningful significant division, between mainstream and anti-Keynesians …
So what do I mean by a meaningful division in academic research terms? I mean speaking a different language. Thanks to the microfoundations revolution in macro, mainstream macroeconomists speak the same language. I can go to a seminar that involves an RBC model with flexible prices and no involuntary unemployment and still contribute and possibly learn something.
Wren-Lewis seems to be überjoyed by the fact that using the same language as real business cycles macroeconomists he can “possibly learn something” from them.
Wonder what …
I’m not sure Wren-Lewis uses the same “language” as James Tobin, but he’s definitely worth listening to: Read more…
As a follow-up to Rethinking Economics rejects INET’s “Core Curriculum” here is an excerpt from a Rethinking Economics blog post back in August by David Wells.
. . . just before the final keynote address, a short video was played in which Robert Johnson, the President of INET, sent his best wishes to the conference and congratulated the organisers – but also suggested at one point that the students should be ‘guided’ by INET.
This is strange. Why should the students be ‘guided’ by INET? Why not the other way around? After all, it is the students who are the instigators of this revolution and who are at the front line, manning the barricades. INET are very active in their own way – the CORE curriculum project is especially interesting – and they supply invaluable funding, including for this conference*, but they are essentially secondary actors on the stage. The protagonists are the students, not just in the UK but all over the world: the ISIPE now has (at least) 65 member associations in 30 countries.
from Neva Goodwin
Herbert Simon received the Nobel Prize in 1978. This fact had little or no influence on subsequent economics textbooks, which sometimes mentioned bounded rationality, but did not reduce their dependence on the old rationality postulate as the foundation for deducing all human behaviour.
Simon was not the first critic to be so dismissed. Decades before behavioral economics came into fashion “alternative” economists were complaining about the unrealism of the neoclassical view of humanity. They especially focused on the fact that, as Smith had so well recognized, people are social animals. Relatively few of our actions are taken completely without regard for what we have seen other people do, or what we expect that other people will think. Even popular books on finance refer to the “herd instinct” in reference to the way investors follow fads and fashions of thought. There appears to be an inborn tendency for people to act as part of some kind of human collective, rather than in isolation. Yet this had no place in the neoclassical understanding of human behaviour.
from Lars Syll
from Lars Syll
The techniques we use affect our thinking in deep and not always conscious ways. This was very much the case in macroeconomics in the decades preceding the crisis. The techniques were best suited to a worldview in which economic fluctuations occurred but were regular, and essentially self correcting. The problem is that we came to believe that this was indeed the way the world worked.
To understand how that view emerged, one has to go back to the so-called rational expectations revolution of the 1970s … These techniques however made sense only under a vision in which economic fluctuations were regular enough so that, by looking at the past, people and firms (and the econometricians who apply statistics to economics) could understand their nature and form expectations of the future, and simple enough so that small shocks had small effects and a shock twice as big as another had twice the effect on economic activity. The reason for this assumption, called linearity, was technical: models with nonlinearities—those in which a small shock, such as a decrease in housing prices, can sometimes have large effects, or in which the effect of a shock depends on the rest of the economic environment—were difficult, if not impossible, to solve under rational expectations.
Thinking about macroeconomics was largely shaped by those assumptions. We in the field did think of the economy as roughly linear, constantly subject to different shocks, constantly fluctuating, but naturally returning to its steady state over time …
From the early 1980s on, most advanced economies experienced what has been dubbed the “Great Moderation,” a steady decrease in the variability of output and its major components—such as consumption and investment … Whatever caused the Great Moderation, for a quarter Century the benign, linear view of fluctuations looked fine.
from Neva Goodwin
Neoclassical economics claims to be based entirely on a view of human nature which is not only morally repugnant, but which also both leaves out a great deal about how people actually do operate, while it brings in seriously contrary-to-fact assumptions about what people are capable of. The latter have included assumptions about consistency (including that preferences change slowly, if at all, and that if A is preferred to B and B is preferred to C, then C cannot be preferred to A); about information (people are able to act as if they have perfect information); about self-knowledge (people know what they want, and are best served by getting what they want); and about influence, or power. The last of these assumptions includes the idea that human wants and preferences are endogenous, generated entirely from within; it ignores the extent to which people’s choices and decisions may be manipulated by those who have an interest in persuading the public to buy certain things, or vote in certain ways. It ignores the reality that market economies are rife with powerful actors who do have such an interest, in both the economic and the political spheres. Read more…
from Dean Baker
The big news item in Washington last week was Attorney General Eric Holder decision to resign. Undoubtedly there are positives to Holder’s tenure as attorney general, but one really big minus is his decision not to prosecute any of the Wall Street crew whose actions helped to prop up the housing bubble. As a result of this failure, the main culprits walked away incredibly wealthy even as most of the country has yet to recover from the damage they caused.
Just to be clear, it is not against the law to be foolish and undoubtedly many of the Wall Streeters were foolish. They likely believed that house prices would just keep rising forever. But the fact that they were foolish doesn’t mean that they didn’t also break the law. It’s likely that most of the Enron felons believed in Enron’s business model. After all, they held millions of dollars of Enron stock. But they still did break the law to make the company appear profitable when it wasn’t.
In the case of the banks, there are specific actions that were committed that violated the law. Mortgage issuers like Countrywide and Ameriquest knowingly issued mortgages based on false information. They then sold these mortgages to investment banks like Citigroup and Goldman Sachs who packaged them into mortgage backed securities. These banks knew that many of the mortgages being put into the pools for these securities did not meet their standards, but passed them along anyhow. And, the bond-rating agencies rated these securities as investment grade, giving many the highest possible ratings, even though they knew their quality did not warrant such ratings. Read more…
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
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
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
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…
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.” 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…
from David Ruccio
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…
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…
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…