from David Ruccio
from Lars Syll
In discussing macroeconomics’ Faustian bargain, Simon [Wren-Lewis] asks:
“By putting all our macroeconomic model building eggs in one microfounded basket, have we significantly slowed down the pace at which macroeconomists can say something helpful about the rapidly changing real world?”
Let me deepen this question by pointing to five newish facts about the “real world” which any good, useful macro theory should be compatible with. Read more…
from Peter Radford
No, not really, but almost. Here’s a couple of quotes – both from “The Wealth of Nations” – that would not sit well in contemporary right wing American politics:
“Our merchants and masters complain much of the bad effects of high wages in raising the price and lessening the sale of goods. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.”
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
The second gets quotes a fair bit because it seems to be a significant cautionary note when considered alongside the rest of “The Wealth Of Nations” in its broadly understood role as a peon to free market capitalism. We all know that Smith was way too sophisticated to be so easily bracketed, but you rarely come across the many such cautions he issued alongside his near mythological reference to what we call the invisible hand. Read more…
from Lars Syll
Are macro-economists doomed to always “fight the last war”? Are they doomed to always be explaining the last problem we had, even as a completely different problem is building on the horizon?
Well, maybe. But I think the hope is that microfoundations might prevent this. If you can really figure out some timeless rules that describe the behavior of consumers, firms, financial markets, governments, etc., then you might be able to predict problems before they happen. So far, that dream has not been realized. But maybe the current round of “financial friction macro” will produce something more timeless. I hope so.
Noah Smith (emphasis added)
So there we have it! This is nothing but the age-old machine dream of neoclassical economics — an epistemologically founded cyborg dream that disregards the fundamental ontological fact that economies and societies are open — not closed — systems. Read more…
from David Ruccio
From Edward Fullbrook
Asad Zaman has just published an illuminating paper related both to Bryant Chen and Judea Pearl’s recent RWER paper “Regression and causation: a critical examination of econometrics textbooks” and to topics frequently discussed on this blog. Titled “Methodological Mistakes and Econometric Consequences”, Zaman’s paper appears in the current issue of the International Econometric Review. Here is an open-access link to the paper and below is its introduction.
The rise and fall of logical positivism is the most spectacular philosophical story of the twentieth century. Rising to prominence in the second quarter of the twentieth century, it swept away all contenders, and became widely accepted throughout the academia. Logical positivism provided a particular understanding of the nature of knowledge, as well as that of science and of scientific methodology. The foundations of the social sciences were re-formulated in the light of this new understanding of what science is. Later on, it became clear that the central tenets of the positivist philosophy were wrong. Logical positivism had a “spectacular crash,” and there was some dispute about who had “killed” logical positivism1. As a logical consequence, it became necessary to re-examine the foundations of the social science, and to find new bases on which to re-construct them. This has occurred to differing degrees in different disciplines. One of the most recalcitrant has been economics. As discussed in Zaman (2011), the foundations of economics continue to be based on erroneous logical positivist ideas, and hence require radical revisions. Read more…
‘Danser med Drenge’ (Dancing with drive) is world famous in Denmark. Here, their signature song from 1991, ‘Hvorlænge vil du ydmyge dig?’.
Greg Mankiw, writer of a best-selling macro textbook and ardent defender of the 0,1%, writes in a recent column titled ‘Yes, the wealthy can be deserving’:
“Those who work in banking, venture capital and other financial firms are in charge of allocating the economy’s investment resources.” Emphasis added.
Aside from the loanable funds fallacy implicit in this statement and aside from the malinvestments during the housing bubble there is something very wrong with this statement. Basic accounting theory tells us that the investment resources for a company are equal to:
(depreciation +after tax profits) + (net borrowing) – (net financial investments) + (disinvestments)
The point: those who work in small and medium as well as large companies are, as total cash flow is quite an amount of money, in charge of a very large part of the economy’s investment resources and bank lending is only a limited part of these resources.
Mankiw however goes on to state that the bankers: Read more…
from Jim Stanford
My union Unifor is currently undertaking an important “Rights at Work” campaign, which involves a national tour of meetings with our officers and local leaders and stewards, followed by a membership canvass and community outreach effort, all aimed at beating back the current attack on fundamental labour rights coming from conservatives at all levels in Canada. So far the campaign has had a very strong reception. Ontario will be a key battleground, of course, since the future of the Rand Formula will be decided in the next election (as early as this spring), but similar attacks on labour rights are being experienced at the federal level and in many other provinces.
A key argument in winning this battle will be showing how important unions and collective bargaining are to the health of broader society. This helps to defeat conservative attempts to portray organized labour as self-interested and removed from the overall workforce. In our materials and presentations we have been marshalling arguments to show that unions lift up wages, standards, and security for all workers, not just their own members, through their influence on the actions of non-union employers, their influence on policy and politics, and their ability to provide a collective voice for workers’ interests on all issues.
The powerpoint show we are presenting on our leadership tour makes many of these arguments. In our internal dress rehearsals, however, my colleague Jordan Brennan suggested that a graph comparing poverty or inequality rates across countries, and linking those differences to unionization, might help tell the story. He was right, and we included a simple scatter plot in our show, which has consequently generated many inquiries. So I will use this blog entry to describe the data more fully and formally, and consider its implications. Read more…
By 1914, South-Africa was the world’s top producer of gold. The increase of, mainly, South African gold production is supposed to have ended the 1873-1896 deflation, which indicates that its monetary role was crucial. But who produced this gold and at what price? What kind of labour system was used? And what where the long-term consequences of gold production?
The gold was initially produced by cheap black migrant flexworkers from, initially, all over Southern Africa as the Cape Colony (2,5 million inhabitants in 1900) and the South African Republic (1,4 million inhabitants in 1900) were far too small to supply enough labour. The number of labourers rose from about 14.000 around 1890 to around 100.000 in 1900, almost 300.000 in 1939 (and even that was not enough to prevent deflation…) to an 480.000 all-time high in 1986. Labour continued to be cheap (at least up to 1970), but especially after 1970 labour increasingly came from South Africa alone. The short and long-term social and economic consequences of the system of migrant labour were not exactly benign, the Apartheid system can i.m.o to an extent even be understood as a conscious effort to use a migrant labour system to extract rent and surplus value. Below, some excerpts from: J.S. Harington, N.D. McGlashan, and E.Z. Chelkowska, ‘A century of migrant labour in the gold mines of South Africa‘, The Journal of the South African Institute of Mining and Metallurgy March 2004 pp. 65-71. Read more…
from Lars Syll
As yours truly has reported repeatedly lately, university students all over Europe are increasingly beginning to question if the kind of economics they are taught — mainstream neoclassical economics — really is of any value. Some have even started to question if economics really is a science. Two Nobel laureates in economics — Robert Shiller and Paul Krugman — have responded.
This is Robert Shiller‘s view:
Critics of “economic sciences” sometimes refer to the development of a “pseudoscience” of economics, arguing that it uses the trappings of science, like dense mathematics, but only for show. For example, in his 2004 book Fooled by Randomness, Nassim Nicholas Taleb said of economic sciences: “You can disguise charlatanism under the weight of equations, and nobody can catch you since there is no such thing as a controlled experiment” …
My belief is that economics is somewhat more vulnerable than the physical sciences to models whose validity will never be clear, because the necessity for approximation is much stronger than in the physical sciences, especially given that the models describe people rather than magnetic resonances or fundamental particles. People can just change their minds and behave completely differently. They even have neuroses and identity problems, complex phenomena that the field of behavioral economics is finding relevant to understanding economic outcomes.
Source, via @izakaminska
When Peter Leurs started Triplemining with a few friends in 2011, the primary goal wasn’t to make money.
Just as being rewarded with freshly minted bitcoins is merely an inducement to convince people to actively maintain the network, Leurs argues his Belgium-based mining pool is a labor of love aimed at protecting the network, rather than a pathway to earning virtual millions:
“We currently operate our pool as a hobby, and we do it out of ideology,” he told me. “We’re not making any profits on our pool, we can barely pay for the five servers we are currently operating to run the pool (and that’s excluding the backup servers). We are putting tons of energy in handling support mails and working on our servers just to keep our pool up and running. We’re all doing this unpaid and after our full-time day jobs. Other pools are ran by people doing this as a full-time job as they earn enough of profits by running the pool (or indirectly by selling related services). We are doing this as a hobby, to ensure that Bitcoin remains properly protected.”
Triplemining only has about 1,000 users actively mining on a regular basis, but they’re able to discover a block every few days. At the current exchange rate, that single block could be cashed out for just over $22,000 U.S. Divided a thousand ways, that’s not a huge amount of money—not enough to retire on, certainly—but it covers the cost of running the machines and justifies having to wake up at 4am every so often when the system crashes
On his Marginal Revolution blog Tyler Cowen states:
High debt means higher payments to banks and other intermediaries, and so that money need not disappear from the stream of aggregate demand. Investment is AD too, and more generally AD theories based on short-term changes in the distribution of wealth have not generally succeeded in the past (with apologies to Michael Kalecki). It is true that wealth redistribution will induce sectoral reallocations, perhaps significant ones, but then a debt-collapse theory requires a lot of the predictions of sectoral shift theories. At least for the recent crisis that is not obviously going to do the trick, even if sectoral shifts have been underrated by a lot of Keynesian commentators
That’s vaguely right when you’ve borrowed from a pension fund or your dad.
That’s flat-out wrong when you’ve borrowed from an MFI, a ‘Monetary financial Institution’ or a bank with a government license to create money. To be precise: with a licence to create money with an implicit 1:1 exchange rate with legal tender as you can use it to pay your taxes or to buy paper money at this rate and as the law stipulates that this money can be used at a 1:1 rate to pay down all Euro nominated debts – Euro’s created by Deutsche Bank can be used to pay down debt owed to Banco Santander or to Bol.com at a 1:1 rate.
When you pay back your debt to an MFI the asset side as well as the liability side of the balance sheet shrinks with the same amount as respectively the liability side and the asset side of the household or company which pays back the debt. And the money has gone – into thin air. In the case of a pension fund, however, only the composition of the asset side changes as ‘debt’ assets are changed for ‘money’ assets.
Normally, this enables the bank to lend more as it has a ‘shorter’ balance sheet. In times of balance sheet recessions and deleveraging, however, households and firms want to borrow less. And banks want to lend less. And the government imposes stricter rules (no 120% but ‘only’ 105% ltv ratio mortgages in the Netherlands for instance…). Which means that the bank does not lend more which means that the decline of the amount of money is not compensated by new loans. The amount of money decreases. The money does disappear from the stream of aggregate demand. To be more precise: it does disappear from the MFI balance sheets which has a negative influence on the flow of funds which has a negative influence on aggregate demand, remember that final expenditure is only part of the flow of funds, another part consists of expenditure with, to use Keynes his phrase, a ‘zero elasticity of production’ as it does not lead to the production of new goods and services.
In the case of the pension fund, the pension fund will however invest this money in something, be it in real investments with a positive elasticity of production (which i.e. leads to higher aggregate demand) or in financial investments, like German Bunds (which i.e. does not lead to higher aggregate demand, or only veryvery indirectly).
Loanable funds is out, endogenous money is in.
And quadruple entry accounting is in, too.
And real, ‘final demand’ investments are not the same thing as financial, ‘zero elasticity of production’ investments. Building a road is not the same thing as buying 2013 Vatican stamps. Or Bunds.
But maybe I misread Tyler Cown. I mean, he wrote: ‘that money need not disappear’ (emphasis added). Maybe he was just writing about pension funds and other non-MFI financial institutions.
To the uninitiated reader the previous post, by Peter Radford, might seem eloquent albeit a little hyperbolic. It is eloquent. It is not hyperbolic. Peter states: ‘The relevance of an actual economy – for example the US between 2007 and now – is not considered if it does not allow the wizardry to be displayed.’ ‘That can’t be right’ the casual observer might think – but it is.
Peters’ idea that many people who call themselves macroeconomists are not talking about the economy but about ‘economics’, i.e. about the logical arguments of other economists, is, when put to the test, totally true. Below, excerpts from two independent reviews of a new book aimed at explaining this kind of thinking and written by one of these economists, as well as a reply to one of these reviews by this economist. It seems that the book (which I did not read) shies away from everything which can be measured and instead talks about the inner world of a rather selected group of economists – which can be explained without any serious discussion of macro economic concepts and variables.
from Peter Radford
You would have thought that, after all this time, economics would change. Or be changing. Or even be hinting at the possibility of changing. However, while there are a few encouraging signs, there is precious little sign of said motion inside the citadels that dominate the discipline. We still have a profession stuck in a most unprofessional rut, pursuing thinking that reflects not the world around it, but itself.
So, let me say it again: economists are, by and large, more interested in economics than in economies. They spend much more time on trying to display mathematical virtuosity than in trying to get to grips with the world around them. Even those who give the real world space to intrude into their thinking wrap it up in strange and unrepresentative ways.
Let me make this plain to those of you who follow the sport from a distance: most economists make their reputations nowadays by being steeped in the latest mathematics and by being capable of producing supremely logical, tightly wound models that conform to the discipline’s rules and to what the discipline thinks of as important. The relevance of an actual economy – for example the US between 2007 and now – is not considered if it does not allow the wizardry to be displayed. Read more…
from Dean Baker
Economists are not very good at economics. We know this because we had a huge housing bubble that collapsed, which almost none of them saw. The pre-crash projections from the Congressional Budget Office imply that this downturn has already cost us more than $7.6 trillion, or $25,000 per person. This could have been prevented if we had economists in policy positions who understood how the economy worked.
But even if economists aren’t very good at dealing with the economy, they still can provide value to society. In particular they can be a great source of entertainment. That’s how we should view the story that robots will take all of our jobs and leave most of the population unemployed.
This story has become a popular theme lately among Washington policy types. There are important people from across the political spectrum running around town wringing their hands over the prospect that the economy may not provide jobs for large segments of the labor force.
The first aspect of this story that should impress people is that many of the same people have been wringing their hands about the exact opposite problem, most likely without even knowing it. Read more…
In which I dare to disagree with the German constitutional court. Muddled writing, misreading of the treaties and lousy economics.
Recently, the German constitutional court gave its verdict on the OMT, the Outright Monetary Purchases of the ECB. Short summary: OMT stinks.
The problem with the verdict: I do agree that the Eurozone has a democratic black hole. Which is enough reason to profoundly change the Eurosystem. But aside of this the fundamentals behind the ruling are based upon lousy economics, discredited ideas, lack of knowledge of the facts and a clear misreading of the treaties. And the court uses muddled writing to score its point.
Let’s delve a little into the details of the verdict.
1. Lack of knowledge of the facts. The court states: Read more…
from Lars Syll
What is science? One brief definition runs: “A systematic knowledge of the physical or material world.”
Most definitions emphasize the two elements in this definition: (1) “systematic knowledge” about (2) the real world. Without pushing this definitional question to its metaphysical limits, I merely want to suggest that if economics is to be a science, it must not only develop analytical tools but must also apply them to a world that is now observable or that can be made observable through improved methods of observation and measurement. Or in the words of the Hungarian mathematical economist Janos Kornai, “In the real sciences, the criterion is not whether the proposition is logically true and tautologically deducible from earlier assumptions. The criterion of ‘truth’ is, whether or not the proposition corresponds to reality” … Read more…
During the beginning of his career, Jaques Brel recorded some songs in Dutch. Here, ‘Mijn vlakke land’ (Le plat pays), about Flanders.