The Association for Heterodox Economics welcomes student initiatives for fundamental reform of the economics curriculum, as do our post-Keynesian colleagues (Letters, 19 November). Heterodox economists, drawing on a range of theorists, including Keynes, Marx, Minsky and others, have consistently argued for greater pluralism in both economics curricula and economics research evaluation. We recognise the clear benefits of pluralism in economics: it encourages, by exposing them to alternative perspectives, the development of students’ critical thinking and judgment. Read more…
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…
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.
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…
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…
from Lars Syll
But I am unfamiliar with the methods involved and it may be that my impression that nothing emerges at the end which has not been introduced expressly or tacitly at the beginning is quite wrong … It seems to me essential in an article of this sort to put in the fullest and most explicit manner at the beginning the assumptions which are made and the methods by which the price indexes are derived; and then to state at the end what substantially novel conclusions has been arrived at …
I cannot persuade myself that this sort of treatment of economic theory has anything significant to contribute. I suspect it of being nothing better than a contraption proceeding from premises which are not stated with precision to conclusions which have no clear application … [This creates] a mass of symbolism which covers up all kinds of unstated special assumptions.
Letter from Keynes to Frisch 28 November 1935
from Lars Syll
Paul Samuelson once claimed that the ergodic hypothesis is essential for advancing economics from the realm of history to the realm of science.
from Peter Radford
Paul Krugman, with whom I do not always agree, asks two very pertinent questions:
“Were the freshwater guys always just pretending to do something like science, when it was always politics? Is there simply too much money and too much vested interest behind their point of view?”
Let’s set aside our differences for a moment and unite behind those questions.
Yes. It was always politics.
Yes. There is simply too much money and too much vested interest behind their point of view.
Orthodox economics is a sham as a science. It is an ideology masquerading as science. How else can we describe a body of thought that appears totally inflexible and immune to contradictory evidence? It does not adjust. It’s believers do not learn. They preach. They proselytize. Their theory lies exposed for all to see as a mere prop for a particular point of view. A point of view that justifies inequality of outcomes and mean spirited indifference to the plight of vast swathes of our fellow citizens in the name of pseudo-efficiencies in the allocation of our collective resources. These supposed efficiencies are neither observable nor measurable in the real world, but only within the enclosed, cramped spaces of models specially created to produce a very limited and desired outcome. Desired, that is, by those who value extreme individualism over community, excessive competition over cooperation, and an almost pathological belief in rational behavior over human cognitive frailty. Read more…
from Dean Baker
It has been a bit more than a year since the Excel Spreadsheet error that shook the world. For those who may have missed it, in April of 2013, Thomas Herndon, a University of Massachusetts graduate student in economics, found an error in the calculations of Harvard Professors Carmen Reinhart and Ken Rogoff on the relationship between government debt and economic growth.
Reinhart and Rogoff had done analysis showing that countries experienced sharply slower growth once their debt to GDP ratio exceeded 90 percent. With the United States and many European countries reaching debt to GDP ratios in this 90 percent range, Reinhart-Rogoff’s work was seen as a warning alarm. It was taken as providing evidence that they would have to reduce spending and/or raise taxes to get or stay below the 90 percent cutoff.
Political leaders and central bankers around the world were happy to trumpet the Reinhart-Rogoff findings. The story was that cutting deficits may slow growth in the short-term, and seriously hurt those directly affected by the cuts such as laid off government workers, but it was essential medicine for sustaining a healthy economy.
The spreadsheet error uncovered by Herndon, and analyzed in a paper co-authored with two University of Massachusetts professors, Michael Ash and Robert Pollin, showed that the Reinhart and Rogoff story was not true. Working off the spreadsheet that Reinhart and Rogoff had created, they showed there was no 90 percent cliff. Reinhart and Rogoff’s cliff depended both on the spreadsheet error and also a peculiar way of aggregating growth rates across countries. Read more…
from Lars Syll
In a report published by The Association for Heterodox Economics, INET is criticized for actually marginalizing heterodox economics:
Our main concern is that the positive potential of INET is steadily being closed down. What began as recognition of fundamental problems that require fundamental change is becoming a more modest set of alterations. A sense of failure is, for all intents and purposes, being translated into a context of relative success requiring more limited changes – though these are still being seen as significant. Part of the reason that they are seen as significant is that changes from within mainstream economics do not have to be major in order to appear radical. It is our contention that heterodox economics is being marginalised in this process of ‘change’ and that this is to the detriment of the positive potential for transforming the discipline …
Marginalising heterodoxy creates problems for teaching economics as a discipline in which economists constructively disagree and can be in error. This is important because it is through a conformity that suppresses a continual and diverse critical awareness that economics becomes a dangerous discourse prone to lack of realism, complacency, and dogmatism. Marginalising heterodoxy reduces the potential realisation of the different components of economics one might expect to be transformed as part of a project to transform the discipline …
Below is an excerpt from a theRealNews.com interview today with Heiner Flassbeck
JAY: Now, we’ve talked a bit about this before, and I know this issue of exchange rates is quite complicated. There’s many factors involved. But one of the main factors, it seems to me, if I’m understanding it correctly, is interest rates are so low in the United States because the Fed is making sure they stay as low as possible, but to a large extent because there’s so little real demand in the United States, wages are so stagnant and so low, that they’re doing everything they can to kind of keep, you know, as much as they can, boosting the economy with cheap credit. And then this has global consequences, not just American domestic consequences. Do I have it right?
FLASSBECK: Yeah, that’s one thing, that’s one factor that’s very important. But, as I said before, it’s not only the U.S. We have zero interest rates in Japan. When the U.S. still had higher interest rate, the hedge funds went through Japan, borrowed money in Japan, and carried it to Brazil and other countries. So it’s always–there’s always a low interest rate country. Or it was done through Switzerland. So it’s not important how it is done. Read more…
from The Guardian
The Post-Crash Economics Society at Manchester University. Photograph: Jon Super for the Guardian
from David Ruccio
Readers will remember the China syndrome: the fear of a nuclear meltdown in the West, in which reactor components melt through their containment structures and into the underlying earth, “all the way to China.” Now, to judge by Paul Krugman’s latest, the fear seems to be running in the opposite direction: the fear is that an economic meltdown in China will make its way “all the way to the West.”
The fact is, mainstream economists in the West have a particularly difficult time making sense of the Chinese economy, based on the fear that the West has failed in its mission to show China and the rest of the world its future. Last year, it was Daron Acemoglu who worried that the development of capitalism in China was based not on a “happy connection between prosperity and democracy” but, instead, on a system in which “rulers have been able to deliver strong economic growth without surrendering political and social control.” Krugman’s fear is a bit different: that the period of massive investment based on low wages is coming to an end and what China needs, but is failing to engineer, is an increase in private consumption. Read more…
Students at the London School of Economics have organized for this coming a weekend a rather large 3-day conference on Rethinking Economics. I am posting below the conference agenda, not with the illusion that this event is within easy geographical reach of most of this blog’s readership, but rather as an example of the sort of initiative that economics students around the world can take and increasingly are taking.
Rethinking Economics: London
Fri 28th June – Sun 30th June, London School of Economics
a conference to demystify, diversify and reinvigorate economics for imaginative citizens, students, academics, and professionals, including those with no previous training in economics to launch a collaborative network of economic rethinkers
Book workshops now to avoid disappointment: http://www.rethinkecon.co.uk/#!tickets/c1tbo
To be opened by Read more…
from Lars Syll
Noah Smith has a post up on his blog questioning that people like Dean Baker, Dirk Bezemer, Nouriel Roubini, Barkley Rosser and in particular Steve Keen really – in any essential meaning of the word – “predicted” the latest financial-economic crisis, the one that we are still living through (that mainstream economists didn’t, we know). It makes me come to think of (wonder why …) what James K. Galbraith wrote a couple of years ago in The NEA Higher Education Journal:
Leading active members of today’s economics profession… have formed themselves into a kind of Politburo for correct economic thinking. Read more…
from Norbert Häring
If you read the May Monthly Bulletin of the European Central Bank, you could be forgiven for thinking that the ECB has simply missed the widely publicized April debate around the mistakes Carmen Reinhart and Ken Rogoff made in the data analysis which formed the basis for the 90%-debt-level-threshold story. That story says that if the public debt to gdp ratio starts to exceed 90% growth goes down markedly. The ECB writes on page 95:
“Empirical literature has increasingly shown that high levels of debt (both public and private) are detrimental to growth. Some of these studies derive implicit thresholds for debt ratios and find that, beyond a certain level of debt which is maintained for a number of years, there is evidence that GDP growth remains subdued. While there is significant uncertainty surrounding such threshold estimates, there appears to be some empirical evidence that, on average, levels of public or private sector debt above 90% of GDP impair an economy’s growth.11”
However, Read more…
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 … Read more…
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. Read more…
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
|Ontological Commitments of Ethics and Economics
|Codes of Ethics for Economists: A Pluralist View
Sheila C Dow
|No Ethical Issues in Economics?
|Professional Economic Ethics: Why Heterodox Economists Should Care
|And the Real Butchers, Brewers and Bakers? Towards the Integration of Ethics and Economics
Volunteers needed to start WEA national chapters. If interested, email email@example.com
WEA Young Economists (Facebook Group – 8 days old – 260 members – join today)
from David Ruccio
Ecuador’s president Rafael Correa [ht: ke] has been elected to a third term in power.
What policies has your government pursued in order to reduce inequality?
Latin America holds the grim title of most unequal region in the world, and the Andean countries are the most unequal part of that region. This is why it was crazy to apply the neoliberal system, supposedly based on competition and the liberation of the market, in countries like Ecuador in recent decades. What competition were they talking about? It was a massacre. Now we are reducing inequality, and poverty with it, through a combination of four things. Firstly, making the rich pay more taxes. We have instituted a much more progressive taxation system, and people now actually pay their taxes—collection has doubled. These resources, together with oil revenues and the money saved by reducing the debt burden, can be devoted to education, health and so on. This is the second point: giving equality of opportunities. People no longer have to pay for healthcare or education, which were quite expensive for the poor—school enrolment cost $25 per child, but is now completely free; some children are given books and uniforms too.
Thirdly, Read more…
from Lars Syll
Last year Bank of England’s Andrew G Haldane and Benjamin Nelson presented a paper with the title Tails of the unexpected. The main message of the paper was that we should no let us be fooled by randomness:
For almost a century, the world of economics and finance has been dominated by randomness. Much of modern economic theory describes behaviour by a random walk, whether financial behaviour such as asset prices (Cochrane (2001)) or economic behaviour such as consumption (Hall (1978)). Much of modern econometric theory is likewise underpinned by the assumption of randomness in variables and estimated error terms (Hayashi (2000)).
But as Nassim Taleb reminded us, it is possible to be Fooled by Randomness (Taleb (2001)). For Taleb, the origin of this mistake was the ubiquity in economics and finance of a particular way of describing the distribution of possible real world outcomes. For non-nerds, this distribution is often called the bell-curve. For nerds, it is the normal distribution. For nerds who like to show-off, the distribution is Gaussian. Read more…
from Dean Baker
Every January the public is treated to tales of the World Economic Forum, a gathering of the world’s rich and a select few who are invited there to educate and/or entertain them. Most of us will never have the honor of getting on the inside, so we must rely on media accounts to give us the picture. It turns out that these accounts might be more informative than intended.
Reuters reported on a talk given by Clinton Treasury Secretary and former Obama National Economic Adviser Larry Summers. According to the Reuters account, Summers said:
In 1993, here’s what the situation was: Capital costs were really high, the trade deficit was really big, and if you looked at a graph of average wages and the productivity of American workers, those two graphs lay on top of each other. So, bringing down the deficit, reducing capital costs, raising investment, spurring productivity growth, was the right and natural central strategy for spurring growth. That was what Bob Rubin advised Bill Clinton, that was the advice Bill Clinton followed, and they were right.
This segment is so striking because it is completely wrong in a very big way. Read more…