from David Ruccio
My better half has insisted for years that I not be too hard on Paul Krugman. The enemy of my enemy. Popular Front. And all that. . .
But enough is enough.
I simply can’t let Krugman [ht: br] get away with writing off a large part of contemporary economic discourse (not to mention of the history of economic thought) and with his declaration that Larry Summers has “laid down what amounts to a very radical manifesto” (not to mention the fact that I was forced to waste the better part of a quarter of an hour this morning listening to Summers’s talk in honor of Stanley Fischer at the IMF Economic Forum, during which he announces that he’s finally discovered the possibility that the current level of economic stagnation may persist for some time).
Krugman may want to curse Summers out of professional jealousy. Me, I want to curse the lot of them—not only the MIT family but mainstream economists generally—for their utter cluelessness when it comes to making sense of (and maybe, eventually, actually doing something about) the current crises of capitalism.
So, what is he up to? Read more…
from Lars Syll
Although the expected utility theory is obviously both theoretically and descriptively inadequate, colleagues and microeconomics textbook writers all over the world gladly continue to use it, as though its deficiencies were unknown or unheard of.
Not even Robert Frank — in one of my favourite intermediate textbooks on microeconomics — manages to get it quite right on this issue: Read more…
Update: Just learned that the SPD and the CDU/CSU have agreed to introduce a national minimumwage in Germany of about 8,50/hour, as well as, as I understood it, a higher pension for women who raised their children alone.
From the Statistisches Bundesamt: (no direct link to the article, only to the opening page of the website which means that in a few days the link won’t show the article anymore)
Germany does not have a national minimum wage – it’s considered to be a sectoral and not a national matter. The number of economic sectors where employers and unions have agreed on a legal minimum wage is on the increase, especially after 2006. Wages vary between 7,00 and 14,50 Euro an hour, look here for the branches. There are also some regional differences.
Number of sectors with a legally binding minimum wage
‘Secular stagnation’ is the talk of the town at the moment. It was one of the mayor interests of Paul Sweezy. Here, part of a 1982 lecture with a rather concise conclusion.
Let me digress for a moment to point out that the fact that the overall performance of the economy in recent years has not been much worse than it actually has been, or as bad as it was in the 1930s, is largely owing to three causes: (1) the much greater role of government spending and government deficits; (2) the enormous growth of consumer debt, including residential mortgage debt, especially during the 1970s; and (3) the ballooning of the financial sector of the economy which, apart from the growth of debt as such, includes an explosion of all kinds of speculation, old and new, which in turn generates more than a mere trickledown of purchasing power into the “real” economy, mostly in the form of increased demand for luxury goods. These are important forces counteracting stagnation as long as they last, but there is always the danger that if carried too far they will erupt in an old-fashioned panic of a kind we haven’t seen since the 1929–33 period. Read more…
from Peter Radford
From Norbert Weiner in his “Cybernetics” published in 1961:
“We are swimming upstream against a great torrent of disorganization, which tends to reduce everything to the heat death of equilibrium and sameness … In this, our main obligation is to establish arbitrary enclaves of order and system … Like the Red Queen, we cannot stay where we are without running as fast as we can.”
From Leon Brillouin in his “Science and Information Theory” published in 1956:
“The earth is not a closed system, and life feeds upon energy and negative entropy leaking into the earth system … The cycle reads: first, creation of unstable equilibriums (rules, food, waterfalls, etc.); then use of these reserves by all living creatures.”
Note the dates. These are old books. The ideas are hardly novel. Nor are they exactly controversial.
Economists have made the study of economies more tractable – some would say they have simplified things – by sealing off all the exits and entrances so as to prevent novelty from disrupting their analysis. Read more…
from Lars Syll
The dogma that macroeconomics must have ‘rigorous microfoundations’ requires us to adopt a micro-reduction strategy that has so often failed when attempted in other areas of scientific research. If it were to be made compulsory for economists it would bring about the euthanasia of macroeconomic theory …
I [J. E. King]begin the book by taking issue with the spatial metaphor on which the case for microfoundations rests, and argue that in economics the relationship between macro and micro should be seen as a horizontal, not a vertical, one. The photograph on the cover makes the point very nicely: a bridge is NOT a foundation …
In the book I draw on an extensive literature in the philosophy of science to show how micro-reduction has failed, over and over again, in other areas of scientific thought. I make special reference to the unsuccessful ‘methodological individualism’ project in the social sciences in the 1950s and 1960s, and to Richard Dawkins’s more recent ‘hierarchical reductionism’, an abortive attempt to reduce the life sciences to propositions about the ‘selfish gene’ … I then explore the emergence of support for microfoundations in the literature of macroeconomics since the 1930s, distinguishing authors who supported the dogma without using the term from those who used the term without intending to support the dogma. I have a lot to say about the opponents of microfoundations, inside and (especially) outside the mainstream: Post Keynesians, institutionalists, Old Keynesians and even some Austrians. On this issue there are some surprises: Robert Solow is on the side of the angels, but so too is Milton Friedman, while many heterodox economists who really should have known better have instead given inadvertent comfort to the mainstream enemy. I show that most economic methodologists have been critical of microfoundations, and for very good reasons, but they have been very largely ignored by economic theorists of all persuasions. I conclude the book by reiterating the case for a (semi-)autonomous science of macroeconomics, whose practitioners will cooperate with their microeconomist colleagues without being subservient
from David Ruccio
Two concept proposals: from neoclassical economics to neoliberal economics and from neoliberalism to plutocratism
from Deniz Kellecioglu
It is important to talk about concepts that reflect reality. This is especially true if we are concerned about people’s emancipation – it is easier to struggle when your nemeses are conceptualised and visible. In my opinion, one of the greatest obstacles of recent history is the evasive and concealed character of hegemony.
In our context of economics, it has been obvious for a while that we can no longer use the term neoclassical economics (NCE) to describe the current mainstream economics (theory and education). NCE has been so distorted and so disfigured over the past decades that it no longer reflects mainstream theoretical narratives (see Lawson 2013 for a recent discussion). From one perspective, as the economist Joan Robinson talked about “bastard Keynesianism” in the 1960s, we have now a “bastard Neoclassicism”. This followed from an elite capture and customisation of NCE. The fundamental flaws of NCE, as we real-world economists see it, were actually sources of strength for the elites and elite-oriented individuals. The basics of NCE functioned brilliantly to advance their perspectives, interests and power (not only economical and political, but also social and cultural). A “free” world is wonderful if you start with a stronger upper hand, i.e. unequal point of departures. Because NCE was moulded at the hands of neoliberal forces, I think it should now be called neoliberal economics. Read more…
The BIS (Bank for International Settlements) does not explicitly mention a land tax. But their recent study on ‘non-interest policy tools’ to stabilise house prices yields that such a tax on the ‘location, location, location’ value of houses might, together with abolishing interest deductions, be what we need (emphasis added):
Using data from 57 countries spanning more than three decades, this paper investigates the effectiveness of nine non-interest rate policy tools, including macroprudential measures, in stabilising house prices and housing credit. In conventional panel regressions, housing credit growth is significantly affected by changes in the maximum debt-service-to-income (DSTI) ratio, the maximum loan-to-value ratio, limits on exposure to the housing sector and housing-related taxes. But only the DSTI ratio limit has a significant effect on housing credit growth when we use mean group and panel event study methods. Among the policies considered, a change in housing-related taxes is the only policy tool with a discernible impact on house price appreciation.
One of the favorite dictims of the economist Tyler Cowen is that ‘we are not as rich as we thought we were‘. Which, in a time of decreasing house prices and increasing amounts of non performing loans, is of course right on the spot. On his ‘marginal revolution‘ blog he gives a nice example of this, which also shows how this problem can be solved:
A group of Occupy Wall Street activists has bought almost $15m of Americans’ personal debt over the last year as part of the Rolling Jubilee project to help people pay off their outstanding credit.
Rolling Jubilee, set up by Occupy’s Strike Debt group following the street protests that swept the world in 2011, launched on 15 November 2012. The group purchases personal debt cheaply from banks before “abolishing” it, freeing individuals from their bills.
By purchasing the debt at knockdown prices the group has managed to free $14,734,569.87 of personal debt, mainly medical debt, spending only $400,000
Solving the problem clearly needs a ‘quadruple accounting’ approach! The debts do not only have to be written down or removed from the balance sheet of the lender, as is the case in Spain at the moment. They also have to be written down or redeemed on the balance sheet of the debtor – which at this moment does not seem to be happening in Spain. Banks write down the debts but evicted former house owners still have to pay (which is starting to lead to a revolutionary situation, revolution in the classical sense of a sudden non-parliamentary de facto change in ownership rights).
The realisation that the ultimate solution of this problem requires legally binding write downs on the debtors balance sheets too however seems to lead to quite some agony and pain, in the case of Cowen resulting in grumpy comments: “why not just send the money to even poorer individuals”. Anyway – contrary to the statement of Cowen this is not about the amount or the market value of the debt – it is about the fact that as long as you’re having a debt which you can’t pay, even when it’s a tiny amount, a lender can still continue to squeeze you to the end of your days, which is what the Irish central bank proposes to do with evicted house owners (yes, I know that USA bankruptcy laws are more debtor friendly). Let’s face it: many of the present debts won’t be paid. Let’s redeem them and finally go on with our lives, instead of pretending that bankrupt unemployed evicted homeowners will pay our pensions.
As we’re not as poor as we think we are.
Inflation, economic models with only one consumer good and another fallacy of composition (yes, wonkish again)
Update 15/11/2013: today on Voxeu an article about the same subject which in fact states that the idea that central bank inflation targets anchor inflation expectations and therewith actual inflation can be classified as an elegant case of ‘ὕβρις’.
According to the very influential New Area Wide Model of the European Central Bank the Eurozone can be described by assuming that:
there is a set of three representative domestic final-good firms which combine the purchases of domestically-produced intermediate goods with purchases of imported intermediate goods into three distinct non-tradable goods, namely a private consumption good, a private investment good and a public consumption good.
Yes, there is only one consumption good. And there is no difference between Germany and Spain and current account balances inside the Eurozone do not matter…(I told you these kind of models were simplistic…). But the point: one good has of course also only one price. Inflation is in such a model implicitly defined as the change of this single price.
In reality consumer price inflation, as targeted and ‘perceived’ by the central banks and estimated by statisticians, is of course a weighted average of the positive and sometimes negative changes of many individual prices. Which means that perceptions of inflation might, among other reasons because of a kind of fallacy of composition, differ between economic sectors like the central bank and households. Read more…
from Peter Radford
Let me end the week by tying a few things together. Bear with me.
First, I have spent some time talking about inequality. I see this as our greatest long term issue, but more in terms of politics than economics. Why? Because the extent of inequality in society is something we choose through our political action or inaction. There will always be some degree of inequality. I see that a a fact of life. Asymmetries abound. Inconsistencies, mistakes, and plain dumb luck all conspire to make the distribution of society’s spoils a very lumpy and uneven affair. This we cannot change. But we can, I believe, expand or contract the difference between top and bottom if we so choose. There is no “natural” level of inequality, it is entirely a function of policy.
With that said, I see our current level as both morally unacceptable and socially disruptive.
I will leave the moral commentary as self explanatory: there is no way our CEO’s can justify their disproportionate share of the spoils. It was not long ago that they were satisfied with much less. Only in the past few decades has it become socially acceptable for them to rake in what they do now.
As for the social impact, I see two vectors through which damage is done. Read more…
from Lars Syll
Ricardian equivalence is taught in every graduate school in the country. It is also sheer nonsense.
Joseph E. Stiglitz, twitter
Rational expectations is taught in every graduate school all around the world. It is also sheer nonsense.
Lars P. Syll, twitter
from Peter Radford
Forgive me for my exasperation.
There are too many disparate efforts to rethink economics, conferences on this, and papers on that. I admire each and every one. I support whole heartedly any attempt to shake economics from its irrelevant torpor. But all this fractured effort is achieving nothing. It cannot succeed in the face of the depth of resistance in most university economics departments and the fear that academics seem to have of open action.
I can understand that many sympathetic academics may want to shun action, after all they have livelihoods at stake. But I ask: what is a career in economics worth if that economics is toxic? Those with the greatest stake in the subject are the students who have yet to choose which path to take. It is their action that needs to be facilitated and made secure.
For it is their open action that will change things. Read more…
from Lars Syll
If at some time my skeleton should come to be used by a teacher of osteology to illustrate his lectures, will his students seek to infer my capacities for thinking, feeling, and deciding from a study of my bones? If they do, and any report of their proceedings should reach the Elysian Fields, I shall be much distressed, for they will be using a model which entirely ignores the greater number of relevant variables, and all of the important ones. Yet this is what ‘rational expectations’ does to economics.
G. L. S. Shackle
Oxford professor Simon Wren-Lewis is not pleased with heterodox critiques of the rational expectations hypothesis. And he seems to be especially annoyed with yours truly, who “does write very eloquently,” but only “appeal to the occasional young economist, who is inclined to believe that only the radical overthrow of orthodoxy will suffice.”
Since I have already put forward a rather detailed theoretical-methodological critique of the rational expectations hypothesis in Rational expectations – a fallacious foundation for macroeconomics in a non-ergodic world (real-world economics review, issue 62, 2012), I’m not going to recapitulate the arguments here, but rather limit myself to elaborate on a couple of the rather unwarranted allegations Wren-Lewis puts forward in his attempt at rescuing the rational expectations hypothesis from the critique. Read more…
from Lars Syll
Economics has long had the ambition to become an “exact science”. Indeed, Walras, usually recognised as the father of modern economic theory, said in his Lettre no. 1454 to Hermann Laurent in Jaffe (1965):
“All these results are marvels of the simple application of the language of mathematics to the quantitative notion of need or utility. Refine this application as much as you will but you can be sure that the economic laws that result from it are just as rational, just as precise and just as incontrovertible as were the laws of astronomy at the end of the 17th century.”
Are ‘rational expectation’ economists right and does everybody have the same concept and perception of inflation?
One of the implicit core assumptions of rational expectations economics is that everybody shares the same concept of the variables used in the model. People might not be really aware of the concepts they use but when push comes to play their behaviour can be modelled as if they use the same concepts, which of course happen to be the particular concepts of choice of the economist who makes a particular rational expectations model. One of the key variables in these model is inflation. But instead of assuming that you just don’t have to investigate reality one might look at the actual perceptions of inflation of for instance the central bank on one side and households on the other side. And true economists have done exactly that. And it turns out there are large differences, not just between concepts but even between the operationalisation of inflation when we look at, for instance, the ECB at one side and households at the other side. The ECB officially looks at consumer price inflation as measured by the HICP-metric in the medium term (i.e. five to eight years). But what do households do, according to the carefull scientists of the ONS?
1. when considering the price change of a product or service, individuals do not necessarily consider the price change between the current and base period, as is the case in the CPI or RPI. Rather, they choose a point of reference for comparison with the current price. This may be the price paid for the item when last bought, or an average price of the product over a series of recent purchases. Further, individuals do not consider a price change in terms of a monetary value but only consider whether prices have increased or decreased when compared to their point of reference. So, for example, when asked to consider inflation of petrol prices, an individual may remember only that the price has increased since the last time they re-fuelled their car
2. individuals place more weight on price increases than price decreases
3. inflation is perceived more powerfully for frequently bought goods that have increased in price (and inversely, a reduction in the price of goods bought infrequently will scarcely be noticed)
Especially the last point is ab-so-lu-te-ly killing for rational expectation economics.
from Lars Syll
Deductivist modeling endeavours and an overly simplistic use of statistical and econometric tools are sure signs of the explanatory hubris that still haunts neoclassical mainstream economics.
Update: Chris Dillow makes the same basic point using other data
Margaret Thatcher famously knew the price of a loaf of bread. Experience might have taught her the hard way that people do not react to abstract aggregates or averages – but to local prices. Think of the ‘Thatcher the milk snatcher‘ episode. Economic statisticians, who incorporate new ideas generally much faster than academic economists, have established a metric to estimate this ‘frequent out of pocket’ (froop) expenditures inflation, which incorporates the prices of items like bread, broccoli, and, of course, gasoline. And differences between households are important, too: consumer price inflation is, in the Netherlands, at the moment 1,6%. But when you are a non-smoking, non-drinking house owner it’s 0,6%. I’m not a representative consumer – and nobody is. Look here for an ONS article which spells this out – these ideas should be common knowledge among economists by now.