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 Dean Baker
A widely held view in elite circles is that the rapid rise in inequality in the United States over the last three decades is an unfortunate side-effect of technological progress. In this story, technology has had the effect of eliminating tens of millions of middle wage jobs for factor workers, bookkeepers, and similar occupations.
These were jobs where people with limited education used to be able to raise a family with a middle class standard of living. However computers, and now robots and other technological innovations are rapidly reducing the need for such work. As a result, the remaining jobs in these sectors are likely to pay less and many people who would have otherwise worked at middle wage jobs must instead crowd into the lower paying sector of the labor market.
This story is comforting to elites because it means that inequality is something that happened, not something they did. They won out because they had the skills and intelligence to succeed in a dynamic economy, whereas the huge mass of workers that are falling behind did not. In this story the best we can do for the left behinds is empathy and education. We can increase their opportunities to upgrade their skills in the hope that more of them may be able to join the winners.
That’s a nice story, but the evidence doesn’t support it. Read more…
Today, the Bank for International Settlements (BIS) published a new and improved edition of their international house and land prices database. That’s a great thing and shows the progress of the science of economics! We need those prices to describe as well as to analyse our economies:
1) By far the larger part of household debt consists of mortgage debt, which means that house prices are indispensable for the analysis of as well net wealth of households as well as household behaviour. And, as mortgage debt is the single most important kind of ‘real economy’ asset on the balance sheets of banks the same holds for banks.
2) As (a) house prices have (at least up to 2008) increased in many countries while (b)at least up to 2008 house ownership also increased in many countries, the importance of the value of houses has increased. Read more…
from Lars Syll
As is well-known, Keynes used to criticize the more traditional economics for making the fallacy of composition, which basically consists of the false belief that the whole is nothing but the sum of its parts. Keynes argued that in the society and in the economy this was not the case, and that a fortiori an adequate analysis of society and economy couldn’t proceed by just adding up the acts and decisions of individuals. The whole is more than a sum of parts. This fact shows up already when orthodox – neoclassical – economics tries to argue for the existence of The Law of Demand – when the price of a commodity falls, the demand for it will increase – on the aggregate. Although it may be said that one succeeds in establishing The Law for single individuals it soon turned out – in the Sonnenschein-Mantel-Debreu theorem firmly established already in 1976 – that it wasn’t possible to extend The Law of Demand to apply on the market level, unless one made ridiculously unrealistic assumptions such as individuals all having homothetic preferences – which actually implies that all individuals have identical preferences. Read more…
What should central banks do? Do they have to control inflation by targeting the amount of money? Should they ‘lean against the wind’ when it comes to bubbles? Or is ‘inflation targeting’ the silver bullet of central bank policies? A case can be made that central banks should ‘lean against the wind’ when it comes to credit: they should discourage ‘unproductive’ lending (i.e. lending to buy assets, including existing houses), though ‘macro prudential’ tax policies might be a better tool to do this and. And, surely in case of a severe crisis, they should encourage productive lending by banks to households, companies and yes, also the government. Any way, ‘credit to the private sector’ seems to be a much better indicator of the state of the business cycle than the supply of money or inflation. The dot.com bubble and the housing bubble were not characterized by high consumer price inflatin (the target variable of the ECB) or, in the case of the dot com bubble, by high money growth. They were both characterized by high credit growth (the difference between M-3 money and credit to the private sector is, at the moment, especially caused by lending to non-Eurozone companies). Oh, and this is the time to be resolute and credible, when it comes to this, as Kocherlakota understands. Via @cigolo.
from Paul Davidson
What is Bitcoin? According to Modern Money Theory, bitcoin can not be money since it is not accepted in payment of taxes by any government — nor is it issued by any government via the governed purchase of goods and/or services from the private sector. So what is bitcoin in terms of MMT? I do not know what MMT proponents would respond to this query?
For Post Keynesian liquidity theory of money, the answer is clear.
In Post Keynesian monetary theory money is anything that will settle a legal contractual obligation.
And by the civil law of contracts, the government determines what settles a legal monetary contractual obligation.
Thus not only legal tender but also checks drawn on a bank account (but not financial securities such as stocks) can legally settle any legal contractual obligation (since the government regulates banks to assure that bank deposit liabilities are a “tap” issue that is immediately transferable into legal tender). And the government is the enforcer of legal contractual obligations.
Individuals can make all sorts of production and exchange (purchase) agreements among themselves — but only it calls for a money transfer to discharge the obligation, these contracts are not legal contracts. Thus I can agree to cut my neighbors lawn and he can agree to wash my car in exchange — but this agreement is not legally enforceable.
Bitcoin will not remain a liquid asset unless there is an institution [ a market maker] who will maintain orderliness. Read more…
In an interesting and important recent Voxeu article Pınar Yeşin states, about lending in a foreign currency (emphasis added),
While foreign currency loans offer some advantages to borrowers – such as lower interest rates and longer maturities compared to domestic currency loans – they also carry a significant exchange rate risk. A sharp depreciation of the domestic currency can prevent unhedged borrowers from being able to service their foreign currency loans. As a result, these loans could create a substantial systemic risk to the European banking sector. Banks could fail jointly as a result of their exposure to unhedged households and non-financial firms which default on their loans when the domestic currency depreciates sharply.
Policymakers and international institutions have recognised the systemic risk that foreign currency loans pose to the European banking sector. For example, the European Systemic Risk Board (ESRB), an independent institution monitoring financial stability within the EU, made an official recommendation on lending in foreign currency on November 22, 2011. In particular, the ESRB stated that “Excessive foreign currency lending may produce significant systemic risks for those member states and may create conditions for negative cross-border spillover effects.”
But the real problem is not lending in a foreign currency. The real problem is borrowing a foreign currency.
One of the problems with economics (as well as economists) is an undue focus on the financial sector (including pension funds) and financial assets. And the larger problem of a monetary crisis is not the systemic risk to the banking sectors and an increase in non-performing assets (which are problems in their own right, to be sure) but households and non-financial companies which have to default. It´s not about banks. It´s about families and households. As Stiglitz, Sen and Fitoussi argue, economic statistics have to become more household oriented to enable a shift of economic thinking towards the important questions. Which, according to Mahé, Schrijvers and me, is entirely possible when it comes to monetary statistics. Even when it is, as in this case, about the original sin in economics – borrowing in a currency which your country does not control. Which in this case also means that it´s not about protecting the value of the assets of the financial sector (i.e. protecting wealth and creditors) but about guaranteeing the circular flow of money and income (i.e. protecting the income of households and companies which, by the way, is better for the banks too).
1) According to Keynes,
“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”
Book 3, Chapter 10, Section 6 pg.129 “The General Theory..”
2) According to the Guardian,
Missing: hard drive containing Bitcoins worth £4m in Newport landfill siteA digital ‘wallet’ containing 7,500 Bitcoins that James Howells generated on his laptop is buried under four feet of rubbish
Buried somewhere under four feet of mud and rubbish, in the Docksway landfill site near Newport, Wales, in a space about the size of a football pitch is a computer hard drive worth more than £4m.
It belonged to James Howells, who threw it out when he was clearing up his desk in mid-summer and discovered the part, rescued from a defunct Dell laptop. He found it in a drawer and put it in a bin.
And then last Friday he realised that it held a digital wallet with 7,500 Bitcoins created for almost nothing in 2009 – and then worth about the same.
Today, the Irish statistical institute published data on employment growth in Ireland: a solid +3%, year on year. This news is about as good as it can be.
It is puzzling. Very puzzling. Such rates of employment growth are normally consistent with economic growth of 4 to 5% and, during a recovery, even with rates of 5 to 6% as companies at first can use existing ´slack´ to cater to additional demand.
And there isn´t even a recovery, in Ireland. Read more…
from Edward Fullbrook
The case for Lawson’s significance that I argued five years ago and appears below seems to me even truer today.
Tony Lawson has become a major figure of intellectual controversy on the back of juxtaposing two relatively simple and seemingly innocuous ideas. In two books and over fifty papers he has argued:
- that success in science depends on finding and using methods, including modes of reasoning, appropriate to the nature of the phenomena being studied, and
- that there are important differences between the nature of the objects of study of natural sciences and those of social science.
Taken together, these two ideas lead to the conclusion that the methods found to be successful in natural sciences are generally not the ones that should be used in social science.
By relentlessly focusing on this pair of ideas, Lawson has in a short space of time changed one of economics’ key conversations. His chapter, “A Realist Theory for Economics”, published in Roger Backhouse’s 1994 landmark collection New Directions in Economics Methodology, stands out like someone standing alone at a party. As recently as then the ideas of three thinkers, none of them economists, none social scientists and all of them dead, dominated economics’ literature on methodology. The index of Backhouse’s wonderful book powerfully illustrates this. It lists 47 pages that refer to Thomas Kuhn, 69 to Karl Popper and 73 to Imre Lakatos. Twelve of the book’s sixteen chapters (excluding Lawson’s) refer to one or more of the three and eight, as well as the back cover, to all three. Lawson does not refer to any of them. More significant, Lawson’s key reference point is ontology, a word that, except in the Introduction when Backhouse is introducing his collection’s odd man out, appears in none of the other chapters. Notably, when Lawson first uses “ontology” he feels it necessary, despite his highly specialized audience, to explain what the word means: “enquiry into the nature of being, of what exists, including the nature of the objects of study.” [Lawson 1994, p. 257]
Thirteen years later and anyone in economics who knows anything about methodology knows what “ontology” means. Read more…
1) From Voxeu the real crowding out: ´When housing prices increase, banks on average reduce commercial lending and increase interest rates, leading related firms to cut back on investment`
2) From the Slack Wire more about secular stagnation. Are there hidden forces in our economies which tend to drive demand below output and production? Can these be counteracted by targeting an (unobservable) ´natural rate of interest´? Or do we need something else?
I think this conversation is a step forward for mainstream macroeconomic thought. There are further steps still to take. In this post I describe what, for me, are the positive elements of this new conversation. In subsequent posts, I will talk about the right way of analyzing these questions more systematically — in terms of a Harrod-type growth model — and about the wrong way — in terms of the natural rate of interest.
3) Hey, it is SME week (in case you didn´t know already!). To celebrate this, Eurostat published data on the amount of Micro (less than 10 persons), Small and Medium (10-250) and Large non-financial enterprises (>250) Non-financial enterprises. Just like in the days of Adam Smith, the large majority of enterprises are Micro (albeit less so in Germany). But unlike the situation in the eighteenth century there are quite some companies with more than 10 persons and even more than 250 persons, which already shows when we look at the number of people employed by these companies but even more so when we look at their share in total turnover (and some people state that this does not square with the neoclassical theory of the firm…).
4) And the ECB published a study on differences in export behaviour between small and large French companies. When you compare them with humans the export behaviour of these small companies resembles the dating behaviour of teenagers (a lot of ´churning´, as it is called in the study) while large companies tend to have much more steady relationships.
from Edward Fullbrook
Last year at a cocktail party at an IDEAs’s conference in India I was introduced to the recently retired editor of a leading Indian newspaper. When he asked me what newspapers I read regularly and I answered the Guardian and the Observer, he replied that his favourite columnist in the whole world wrote for those papers. I said so also does mine. Inevitably we warmed to each other when our number-ones turned out to be the same: John Naughton.
What is especially odd about this – the editor’s background was also economics – is that Naughton’s one and only topic is IT. But I have finally found a way to justify plugging him on this economics blog. Here is his column from yesterday’s Observer.
What’s Twitter’s real value? Don’t ask an economist.A national economy is an unimaginably complex system. And yet we compress all its complexity into a single measure, and then focus obsessively on that. If you want a metaphor for this, think of King Kong spending most of his time staring at a pinhead, worrying about whether it is moving or not. That pinhead is GDP or, to give it its full moniker, gross domestic product. Read more…
1) Hookers. Watch the whole thing, till the very end.
2) Once again: the Baltics. They still serve as an example, for some people, despite 20% declines in unemployment which, up till now, have been lasting. No Singapore style 4% increase of employment a year in sight. Economic growth is stalling. Why are they still popular, amongst some people? Look at these comparative EU data on government expenditure on various kinds of social protection (spoiler: they do not exactly have the highest expenditure (expressed as a % of GDP) of all EU countries)
3) A quite readable albeit slightly grumpy ´Told you so´ (in 1991, 1992, 1993, 1994, 1995, 1996…) bubble-ology piece by L. Randall Wray. But again, it´s good that economists are coming to their senses. Read more…
One of the problems of the economics curriculum is that very little attention is paid to measurement. And indeed, academic economists generally know little about this as most measurement is carried out by specialized statistical institutes. What about the history of this regrettable situation? The French economist Malinvaud (and long time head of the French statistical institute INSEE) has a nice metric on how USA economists increasingly dismissed empirical economics (let alone actual measurement) and turned to a-empirical ´high theory´ littered will ill-defined variables instead:
at the Cowles Commission: Rise and Maturity
Abstracted from the Cowles Fiftieth Anniversary Volume
Considering the contribution of the Cowles research institute to the development of econometrics, one has little choice but to focus on one major achievement, the building of the simultaneous-equation methodology. It is not necessary to demonstrate the indisputable fact that this methodology was conceived and elaborated at the Cowles Commission in the forties. Neither does one need to insist on the long-standing significance of this achievement nor on its central place in any education or reflection concerning statistical inference about economic phenomena. More interesting is the question of how research at Cowles during the first 15 years of its existence led to this result and how further econometric research here during the last 30 years relates to the simultaneous-equation achievement.
For 20 years, the motto of the Cowles Commission, printed on its monographs and reports, was Lord Kelvin’s sentence, “Science is measurement.” This might suggest that the main emphasis was then given to econometrics and that, from the beginning, research was devoted to the subject that matured in the forties.
The facts are not so simple. In the first place, during the first years a good deal of attention was devoted to direct measurement, as distinct from inference based on available statistical measures. Read more…
from Lars Syll
Paul Krugman had a post up on his blog a while ago where he argued that “Keynesian” macroeconomics more than anything else “made economics the model-oriented field it has become.” In Krugman’s eyes, Keynes was a “pretty klutzy modeler,” and it was only thanks to Samuelson’s famous 45-degree diagram and Hicks’s IS-LM that things got into place. Although admitting that economists have a tendency to use ”excessive math” and “equate hard math with quality” he still vehemently defends — and always have — the mathematization of economics:
I’ve seen quite a lot of what economics without math and models looks like — and it’s not good.
Sure, “New Keynesian” economists like Krugman — and their forerunners, “Keynesian” economists like Paul Samuelson and the young John Hicks — certainly have contributed to making economics more mathematical and “model-oriented.”
But if these math-is-the-message-modelers aren’t able to show that the mechanisms or causes that they isolate and handle in their mathematically formalized macromodels are stable in the sense that they do not change when we “export” them to our “target systems,” these mathematical models do only hold under ceteris paribus conditions and are consequently of limited value to our understandings, explanations or predictions of real economic systems. Or as the eminently quotable Keynes wrote already in Treatise on Probability (1921): Read more…
from David Ruccio
from The Guardian
The Post-Crash Economics Society at Manchester University. Photograph: Jon Super for the Guardian
Larry Summers is puzzled by the fact that the increase in borrowing and lending during the aughts did not lead to higher inflation and lower unemployment. Hmmm. Did we all forget that the USA current account deficit increased to an almost Spanish 6% of GDP during these same aughts (to go down to 3%, within months, after Lehman)? And inflation did increase during the booms, at least when you look at metrics which also include prices of investments and especially of ´new residential investment´, like the gross domestic purchases index (ex. food and energy) of the Bureau of Economic Analysis (BEA). The metric of choice of the Fed, the PCE consumer prices index ex. food and energy, indeed does not show any kind of bubble related increases. But the domestic purchases index does. I discovered, by the way, that the BEA also calculates a GDP deflator excluding food and energy. Looking at these broader indexes also shows that disinflation has been considerable after Lehman or at least much larger than indicated by the PCE index.
“A revolt against the orthodoxy has been smouldering for years and now seems to have gone critical.”
Orthodox economists have failed their own market testStudents are demanding alternatives to a free-market dogma with a disastrous record. That’s something we all need
From any rational point of view, orthodox economics is in serious trouble. Its champions not only failed to foresee the greatest crash for 80 years, but insisted such crises were a thing of the past. More than that, some of its leading lights played a key role in designing the disastrous financial derivatives that helped trigger the meltdown in the first place.
Plenty were paid propagandists for the banks and hedge funds that tipped us off their speculative cliff. Acclaimed figures in a discipline that claims to be scientific hailed a “great moderation” of market volatility in the runup to an explosion of unprecedented volatility. Others, such as the Nobel prizewinner Robert Lucas, insisted that economics had solved the “central problem of depression prevention”.
Any other profession that had proved so spectacularly wrong and caused such devastation would surely be in disgrace. You might even imagine the free-market economists who dominate our universities and advise governments and banks would be rethinking their theories and considering alternatives.
After all, the large majority of economists who predicted the crisis rejected the dominant neoclassical thinking: from Dean Baker and Steve Keen to Ann Pettifor, Paul Krugman and David Harvey. Whether . . . . continue reading here
From the ECB site a paper by Marcel Timmer, Bart Los, Robert Stehrer and Gaaitzen de Vries (University of Groningen and the Vienna Institute for International Economic Studies Studies) on the relation between gross exports and income. Production chains have become international which means that causes and consequences of gross exports have to be understood from an international and not from a national perspective:
The paper presents four main findings
exports are not domestic incomes. Stong export performance of some EU countries does not translate into income growth. Gross exports overestimate the competitiveness of countries that rely heavily on imported intermediates, such as Germany and small open economies. Read more…