from Asad Zaman
Polanyi’s book is widely recognized as among the most deeply original and seminal analyses of the origins and effects of capitalism. In a previous post, I provided a brief summary of the main arguments of Polanyi. Polanyi does not explicitly discuss methodology, but his analysis is based on a methodology radically different from any currently in use in social sciences. This methodology could provide the basis for an entirely new approach to the subject matter. In my paper entitled The Methodology of Polanyi’s Great Transformation, I have articulated central elements of this methodology by showing how Polanyi uses them in his book. I provide a brief summary of the main ideas of the paper here.
Firstly note the Polanyi operates at a meta-theoretical level. The work analyzes emergence of theories as attempts to understand historical experience. This immediately leads to a historical context sensitive analysis, as opposed to current a-historical methods dominant in economics. In what is an extremely interesting twist, Polanyi argues that theories formulated by contemporaries to understand their experience are often wrong. Nonetheless, these theories are used to understand and shape responses to historical circumstances. This mechanism provides substantial room for human agency in influencing history. The key elements of Polanyi’s methodology, extracted from how he has utilized them in his book, are listed as follows: Read more…
Dear mrs. Sekera,
thank you for your very clear and insightful blogpost on this blog about economists and their distorted concept of public goods. But I’m afraid you’re way to positive about at least mainstream macro models and ‘public goods’. Very often – these models do not have a concept of public goods.
Too often, neoclassical ‘macro’ models do not have any logical space for public goods or ‘government consumption’ (i.e. consumption by households produced or financed by the government, like education) at all. Which is daft. My country – the Netherlands - would not even exist without coastal defences. And believe me – we learned about the necessity of well maintained large-scale public coastal defences the
New Orleans hard way (Knibbe, forthcoming). But in the default DSGE (Dynamic Stochastic General Equilibrium) models, public expenditure on coastal defences is, by definition, ‘wasteful’ – as it’s government expenditure. You are attacking Samuelson – but Samuelson in fact crafted his ideas – which as you state do have basic flaws – to combat exactly this kind of thinking! But he failed. This kind of thinking is alive and kicking. And kicking hard – as the over five million unemployed in Spain can testify. Even incorporating the ideas of Samuelson into these models would be a huge step forward – these at least consider the existence of public goods and services.
The Oosterscheldekering coastal defence. Wasteful?
There are endeavours to change this. But the very fact that these articles have to state, in an explicit way, their difference with ‘standard’ neoclassical ‘macro’ by introducing the notion that public expenditure can serve a purpose shows the ‘state of the mainstream art': Read more…
from June Sekera
A year ago last May, the Real World Economics Review blog published my post, “Why Aren’t We Talking About Public Goods?” In that article I argued that we need to revive and reframe the concept of public goods. A concept of public goods is immensely important because:
- The absence of a widely-held, constructive idea of public goods in public discourse denies citizens the ability to have an informed conversation, or to make informed decisions, about things that matter mightily to the quality of their lives and their communities.
- Its absence robs public policy makers, leaders and managers of the concept that is most central to the reason for their being.
- The current economics definition of public goods feeds and supports the marketization and privatization of government, and the consequent undermining of governments’ ability to operate.
Since last May I have met with economists and other social scientists across the US and in the UK and have been in discussion with people responding to my post from several other countries. I have also been conducting further research.
In this post I summarize the results of my discussions and findings to date and offer for consideration some criteria for a possible “instrumental” definition of public goods. Ultimately, an instrumental definition of public goods must be accompanied by a concordant theory of non-market production in the public economy. Both are needed to ground an improved theory and practice of governance.
1. The Existing Definition and Its Inadequacies Read more…
from Lars Syll
The other day yours truly wrote re Krugman‘s dangerous neglect of methodological reflection:
The financial crisis of 2007-08 and its aftermath definitely shows that something has gone terribly wrong with our macroeconomic models, since they obviously did not foresee the collapse or even make it conceivable … Modern mainstream macroeconomics obviously did not anticipate the enormity of the problems that unregulated ‘efficient’ financial markets created. Why? Because it builds on the myth of us knowing the ‘data-generating process’ … Mainstream macroeconomists … want to be able to use their hammer. They decide to pretend that the world looks like a nail and that uncertainty can be reduced to risk. So they construct their mathematical models on that assumption–and the ensuing results are financial crises and economic havoc.
Now Brad DeLong earlier today commented on my critique:
Suppose we decide that we are no longer going to:
Pretend that agents — or economists — know the data-generating process…
Recognize that people are not terribly committed to Bayesianism -– that they do not model probabilities as if they have well-defined priors and all there is is risk…
What do we then do –- what kind of economic arguments do we make–once we have made those decisions?
“What do we then do?” The despair heard in the question reminds me of the first time I met Phil Mirowski. It was twenty years ago, and he had been invited to give a speech on themes from his book More Heat than Light at my economics department in Lund, Sweden. All the neoclassical professors were there. Their theories were totally mangled and no one — absolutely no one — had anything to say even remotely reminiscent of a defense. Being at a nonplus, one of them, in total desperation, finally asked “But what shall we do then?” Read more…
from John Weeks
Against all expectations an economics book became a best seller this year. I illustrate this unlikely occurrence with a true story. One day in London I hailed a taxi near the Houses of Parliament (the workers of the underground system were on strike). I mentioned to the driver that I taught economics at the University of London before retiring several years ago. The driver asked me, have you read this book by a Frenchman named Piketty?
A London taxi driver discussing an economics book 578 pages long (text only) with countless graphics and even a bit of algebra qualifies the book as a “phenomenon” by the dictionary definition, “a fact or situation that is observed to exist or happen, especially one whose cause or explanation is in question”. Very much in question the cause is. I am in the process of writing a review of these 578 pages (plus the occasional excursion into a footnote). At this point I limit myself to speculating over why it has swept all before it, especially since it is certain to be a book that many people buy and almost no one reads.
We find many reviews of Capitalism in the 21st Century (which I shorten to C21C), most from progressives, soft to hard left. The inequality deniers have yet to launch a frontal assault, though a recent blog entry for the Financial Times by Chris Giles is a shot from that direction (see Piketty’s reply). Prominent UK journalist Paul Mason succinctly dismisses the attempted hatchet job (here). 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
The ONS has published new data on British productivity. These show that the unprecedented 5% productivity decline has to quite an extent a lasting nature as it was mainly located in finance and the oil industry, which means that potential GDP also declined with the same amount. According to the ONS,
New analysis of industry contributions to productivity movements since the economic downturn shows large negative contributions from production industries other than manufacturers and from the financial services industry.
See also my take on this from a year ago (including productivity graph). Look also here. Productivity has however started to increase again, which means that potential GDP, though lower than before 2008, is increasing again (Okun’s law) while the surprising increase of British employment is not due to special productivity lowering British labour market mechanics (the British labour market is not special, despite flexibility) but to buoyant demand in non-financial, non-oil sectors (possibly to an extent caused by lower income inequality):
UK labour productivity was little changed in the first quarter of 2014, as growth of labour inputs broadly matched the expansion of economic output. Output per hour grew by 0.2% in the first quarter in service industries, and by 0.5% in production industries
The rise in productivity was to be expected.
from Lars Syll
How far the motives which I have been attributing to the market are strictly rational, I leave it to others to judge. They are best regarded, I think, as an example of how sensitive – over-sensitive if you like – to the near future, about which we may think that we know a little, even the best-informed must be, because, in truth, we know almost nothing about the more remote future …
The ignorance of even the best-informed investor about the more remote future is much greater then his knowledge … But if this is true of the best-informed, the vast majority of those who are concerned with the buying and selling of securities know almost nothing whatever about what they are doing … This is one of the odd characteristics of the Capitalist System under which we live …
It may often profit the wisest to anticipate mob psychology rather than the real trend of events, and to ape unreason proleptically … (The object of speculators) is to re-sell to the mob after a few weeks or at most a few months. It is natural, therefore, that they should be influenced by the cost of borrowing, and still more by their expectations on the basis of past experience of the trend of mob psychology. Thus, so long as the crowd can be relied on to act in a certain way, even if it be misguided, it will be to the advantage of the better informed professional to act in the same way – a short period ahead.
For quite some time Latvia was an austerity and internal devaluation poster child. Lately, however, the voices lauding ultra-unemployment and the crushing of already very low wages have silenced – as wages are rising rapidly. For a time I suspected, cynically, that this wage shock might be a cunning plan of these sly Baltics – once they joined the Euro they increased their wage level (Latvia business economy wages increased at a healthy 7% rate, 2014 Q1 (Eurostat), directly after Latvia joined the Euro), to obtain a free Bratwurst.
But this was probably not the case. According to a new NBER working paper by Cavallo, Neiman and Rigobon, market forces might be at work. Joining the Euro seems to lead to a fast convergence of price levels:
Does membership in a currency union matter for prices and for a country’s real exchange rate? The answer to this question is critical for thinking about the implications of joining (or exiting) a common currency area. This paper is the first to use high-frequency good-level data to demonstrate that the answer is yes, at least for an important subset of consumption goods. We consider the case of Latvia, which recently dropped its pegged exchange rate and joined the euro zone. We analyze the prices of thousands of differentiated goods sold by Zara, the world’s largest clothing retailer. Price dispersion between Latvia and euro zone countries collapsed swiftly following entry to the euro. The percentage of goods with nearly identical prices in Latvia and Germany increased from 6 percent to 89 percent. The median size of price differentials declined from 7 percent to zero.
from Peter Radford
One of the central beliefs held by people who advocate a market based worldview is that, somehow, markets are apolitical, they are antiseptic, they are objective. This is nonsense. It is dangerous nonsense.
That markets work according to rules does not make them objective or even impersonal. Rules are human constructs. Ergo markets are simple extensions of base human attitudes and are thus fraught with all the frailties that encumber all human activity.
The sanitization of markets, by which I mean the constant effort to make them appear “natural” or “neutral” and thus “fair”, is an ideological cover that market ideologues desperately, and successfully, propagate. It is a cover to mask the consequences of this supposed naturalness and to give it the imprint of ethical cleanliness. After all if the outcomes of a market are simply those of nature working her course, who are we too argue?
Economists, or at least orthodox economists, are the great cheerleaders of this ruse to get us all to accept our fate. Over the course of the development of economics much work has been put in to the elucidation of the mechanics of markets. There is an overpowering sense of determinism in the result. Start here, crank the machinery, and let the outcomes just flop out. The market is such that any outcome is “correct”, because left untouched market machinery always hones in on the superior outcome. Thus the current distribution of income “must” be the correct one: the market created it and the market is always, unerringly, right. Read more…
The ECB published a report on the results of the Macro Prudential Research Network. It’s the scientific answer of the ECB to the crisis: what has to change in our view of the economy? Considering the subject the paper, basically a dense abstract of post 2008 ECB research on this subject, is well written, though it’s clearly not intended for people who haven’t finished economics 101 (or 202).
I have read only a few of the many reports cited in this paper. Based upon the little I’ve read and the paper itself the next things can be stated about this potential pathbreaking (it’s intended to be pathbreaking!) piece of economics:
It’s a step away from rational expectations and general equilibrium: good. It tries to model the financial sector using insights of people like Minsky and Kindleberger: good. It does not just pay attention to the flow economy but also to the stock economy (debts, assets like houses): good. It tries to model a financial sector: good. Despite the fact that the monthly monetary statistics of the ECB are totally endogenous by nature and based upon the idea that credit and money are two sides of the same coin (of course they are, as they try to measure the real world), endogenous money still seems to be a bridge too far: bad (but I, or the person who wrote the abstract, might have missed something). Not enough attention is given to the ECB reports on international trade, which again and again show that lowering wages is not the way towards buoyant exports. Lower wages do decrease imports, as domestic expenditure goes down (duh….). But they do not lead to any noticeable break in the long run pattern of export growth (Spain!). The reader should be aware that a ‘VAR’ is a multidimensional moving average. Caveat (again): I did read only a few of the research papers behind this impressing document.
The policy take away: money (and monetary credit) matters. It’s not just a ‘veil’ over the real economy. To be precise: it’s not a ‘classical’ veil. Read Minsky (1992) about this (who bases his view on Schumpeter (1933), Fischer (1934), Keynes (1936), Kindleberger (1978). The insights above are, when push comes to play not exactly fresh and pathbreaking – but a rediscovery of received wisdom. Not too little – but too late. As millions of needless unemployed in the Euro Area can testify.
from Lars Syll
Almost a hundred years after John Maynard Keynes wrote his seminal A Treatise on Probability (1921), it is still very difficult to find mainstream economists that seriously try to incorporate his far-reaching and incisive analysis of induction and evidential weight into their theories and models.
The standard view in economics – and the axiomatic probability theory underlying it – is to a large extent based on the rather simplistic idea that “more is better.” But as Keynes argues – “more of the same” is not what is important when making inductive inferences. It’s rather a question of “more but different.”
Variation, not replication, is at the core of induction. Finding that p(x|y) = p(x|y & w) doesn’t make w “irrelevant.” Knowing that the probability is unchanged when w is present gives p(x|y & w) another evidential weight (“weight of argument”). Running 10 replicative experiments do not make you as “sure” of your inductions as when running 10 000 varied experiments – even if the probability values happen to be the same. Read more…
Is the BIS right to warn about the long run dangers of long-term ultra accommodative monetary policies? Yes. But the BIS is wrong about the Eurozone. Interest rates policies in the Eurozone are not ultra-accommodative. They are only starting to become normally ‘accommodative’ – and not even for everyone. Also, not that long ago (the summer of 2012), ultra tight monetary policy almost led to the disorderly break up of the Euro Area. Eurozone monetary policy has not (repeat: not) led to ‘ultra accommodative’ interest rates and we’re only starting to recover from grave policy mistakes which induced tightening in the midst of the most severe post WW II recession to date.
* though banks have been paying low rates for quite some time now (and even these were increased, back in 2011…)
* it is has only been since some months that the same holds for the governments of, for instance, Spain, Italy and Greece. Rates paid by these countries were, totally unnecessary, immorally and destructively high and a main cause of the present Euro Area mess (graph 1 – as can be seen government rates were 7%-points higher in Italy than in Germany – while at that time inflation and government debt in both countries was about equal
Graph 1. Spread between italian and Spanish government rates and German rates. Courtesy: Erwan Mahé.
). Read more…
Here are some highlights from a strong post from Steve Denning on Forbes blog that condemns Joseph Stiglitz for shielding the “villains”.
Joseph Stiglitz, who this week offers his final entry in the New York Times’ series, The Great Divide, with the conclusion that inequality is not inevitable. The United States that was once a “shining city on a hill” has now become, he writes, “the advanced country with the greatest level of inequality.” In effect, it’s a choice that our society can make one way or the other. As a result of the actions of many individuals, our society has chosen inequality.
And Stiglitz names those responsible for this choice. They include CEOs, bankers, private equity titans, venture capitalists, politicians, deregulators, lobbyists, the Supreme Court, and those who run corporate welfare, the prison system, the high-price justice system and the unequal health system.
The missing villains: economists
Yet there is one category of actor curiously missing from Stiglitz’s list of villains: his fellow economists.
from Dean Baker and Jared Bernstein
There are many policies that can reduce inequality, but there is none as straightforward conceptually and as difficult politically as full employment. The basic point is simple: at low rates of unemployment, the demand for labor allows workers at the middle and bottom of the wage distribution to achieve gains in hourly wages, annual hours of work, and thus income.
Levels of unemployment are not the gift or curse of the gods; they are the result of conscious economic policy. The decision to tolerate high rates of unemployment is a choice. It is one that has enor-mous implications not just for the millions of people who are needlessly unemployed or underemployed but also for tens of millions of workers in the bottom half of the wage distribution whose bar-gaining power is undermined by high unemployment.
Unemployment and Wage Growth
In discussions of inequality and low wages, many on both the left and the right claim that what we need is a better educated workforce. Their argument is that because educated workers are more productive and workers’ pay reflects their productivity, they will earn more if we can persuade them to get more education. However, while more education is generally associated with higher wages, this is just part of the story. In most jobs, the value of workers’ labor depends on the demand for their labor. A retail clerk in a store or a waiter in a restaurant is far more productive, meaning they are generating far more revenue, when business is strong than when it is weak. This means that, in a strong economy, employers can afford to pay a worker with the same level of education and training a higher wage. Read more…
from David Ruccio
According to a new study by Fabian T. Pfeffer, Sheldon Danziger, and Robert F. Schoeni,
Through at least 2013, there are very few signs of significant recovery from the losses in wealth experienced by American families during the Great Recession. Declines in net worth from 2007 to 2009 were large, and the declines continued through 2013. These wealth losses, however, were not distributed equally. While large absolute amounts of wealth were destroyed at the top of the wealth distribution, households at the bottom of the wealth distribution lost the largest share of their wealth. As a result, wealth inequality increased significantly from 2003 through 2013; by some metrics inequality roughly doubled.
from Steve Keen
The European Stability and Growth Pact is based on the principle that stability and growth are enhanced when government deficits are either minimised or eliminated. I want you to dispassionately consider an argument that reaches a different conclusion. It may sound like something you have heard before from others and already dismissed. But bear with me.
When considered from a strictly monetary point of view, an economy can be regarded as having five major sectors: households, firms, the government, the banks, and the external sector. To focus on money flows, I will diverge from mainstream economic theory by treating households as consisting exclusively of workers, while I will combine firms and their owners into the firm sector, and do likewise with banks and their owners. I also treat the central bank as part of the government sector, and I ignore capital and income flows between nations in this simple exposition.
Neither households nor firms can produce money, while the other three sectors are potential sources of money. As is now well known (though this fact is still contested by academic economists), banks create money by making loans:
Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. (Bank of England Quarterly Report 2014 Q1, Money creation in the modern economy.)
Governments can also create money by running a deficit (if it is financed by the central bank, or by bonds sold to banks in return for excess reserves). Money can also be created by running a balance of payments surplus (which in this simple exposition is exclusively a balance of trade surplus).
from Peter Radford
Greg Clarke ends his book “A Farewell to Alms” with a not too encouraging summation about the ability of economists to explain much. Allow me to give you three lengthy quotes:
“In economics, however, we see instead that our ability to describe and predict the economic world reached a peak around 1800. In the years since the Industrial Revolution there has been a progressive and continuing disengagement of economic models from any ability to predict differences of income and wealth across time and across countries and regions.”
“Since then economics has become more professional. Graduate programs have expanded, pouring out a flood of talented economists armed with an ever more sophisticated array of models and statistical methods. But since the Industrial Revolution we have entered a strange new world in which the rococo embellishments of economic theory help little in understanding the pressing questions that the ordinary person asks of economics.”
“Our economic world is one that the deluge of economics journal articles, working papers, and books – devoted to ever more technically detailed studies of capital markets, trade flows, tax incidence,sovereign borrowing risk, corruption indices, rule of law – serves more to obscure than to illuminate. For the economic history of the world constructed in these pages is largely innocent of these staples of the discipline. The great engines of economic life in the sweep of history – demography, technology, and labor efficiency – seem uncoupled from theses quotidian economic concerns.”
It must be frustrating to try to stay within the boundaries of economics and end up having to admit that fully three-quarters of all growth since the Industrial revolution crops up in the standard models of growth as a “residual”. That residual being, as Moses Abromovitz suggested, being a measure of the ignorance of economists. Read more…
from Dean Baker
Many self-styled libertarians have been celebrating the rise of Uber. Their story is that Uber is a dynamic start-up that has managed to disrupt the moribund cab industry. The company now has a market capitalization of $17 billion.
While Uber’s market value probably depends mostly on its ability to evade the regulations that are imposed on its competitors, the company has succeeded in transforming the industry. At the least we are likely to see a modernized regulatory structure that doesn’t saddle cabs with needless regulations and fees.
Unfortunately, the taxi industry is not the only sector of the U.S. economy that can use modernization. The pharmaceutical industry makes the taxi industry look like cutting edge social media. The government imposed barriers to entry in the pharmaceutical industry don’t just raise prices by 20 or 30 percent, as may be the case with taxi fares, they raise prices by a factor or ten, twenty, or even one hundred (that would be 10,000 percent). Read more…
from Lars Syll
Alex Rosenberg — chair of the philosophy department at Duke University, renowned economic methodologist and author of Economics — Mathematical Politics or Science of Diminshing Returns? – had an interesting article on What’s Wrong with Paul Krugman’s Philosophy of Economics in 3:AM Magazine the other day. Writes Rosenberg: Read more…