Economics textbooks are not only written for students. At two critical points in the history of economic thought textbooks have played significant roles in defining the field, not only for what is taught, but more importantly (in terms of real world outcomes) for the understanding of the economy that is used by politicians, policy makers, and the public, when it votes its approval or disapproval of how the government is affecting the economy.
This started in the 1890s, when Alfred Marshall wrote the first edition of his text, called Principles of Economics. It went through 8 editions, the last being published in 1920. For a large part of the English-speaking world Marshall’s textbook continued to define the field (especially the microeconomics basics) until the middle of the 20th century, when it was replaced by Paul Samuelson’s Economics (first published in 1948). That set the standard for about the next 60 years.
Virtually all economies are currently growing both physically and financially, within a global envelope that is finite, non-growing and materially closed. A prevailing view, such as within the OECD and UNEP, is that the physical growth of throughput can be decoupled from the non-physical (financial) growth of GDP through innovation, which is commonly branded as “green growth” or “sustainable growth”. This view is also reflected, for example, in policy proposals for the next United Nations Climate Change Conference that emphasize decoupling emissions from growth (European Commission 2014). Two forms of decoupling are discussed in the literature: With relative decoupling, the growth of environmental impacts slows down relative to GDP due to efficiency improvements. With absolute decoupling, the environmental impact decreases as GDP grows.
To perpetuate a growing GDP under conditions of absolute biophysical limits will require—it is argued—compensation in terms of absolute decoupling of both the inflows from and the outflows into the environment. Relative decoupling will not suffice; it will merely delay the point in time when one or more limits are reached. Moreover, absolute decoupling will have to be achieved on a global scale, because improvements in one part of the world might be achieved when production and associated ecological impacts are moved offshore.
If we give up the assumption (2) that agents have no power over the states of the world, and consider that there is a time interval between the action taken and the outcome, other options become available for them. An individual (or a firm) can know what the impact on the world will be of other actions, taken after what we call here the “decision” in the strict sense has been adopted. Let’s suppose a lapse of time divided into two periods, t0 – t1 and t1 – t2. In t0 a subject takes the decision a1, assuming the prevailing state of the world along t0 – t2 will be S1 (the one in which c1 is expected). But then, he does not stay idle, but undertakes some additional actions b1…… bn, designed to produce (or help to create) the needed state S1. These actions, additional to (and successive of) the initial decision, are aimed at the transformation of reality in a precise way in order to get de desired result. We may call them validating actions.
A good example of validating action is propaganda, which tries to install at the top of the agents’ preferences a product whose production has already been decided (or has already been finished).
There are clear signs about what needs to be done to diminish the effect that financialization has on income distribution. It is obvious that the solution to the problem of excessive and wildly mal-distributed incomes is not to set up ethics courses for MBA students at Harvard, London, the Chicago Business School, and elsewhere (Locke, 2011b). Solutions require the adoption of new public policies and legal-institutional change. They involve politics and are about grasping power. Nor should political control be sought primarily in underdeveloped and/or developing countries, where financialization wreaks havoc. The West is not driven by some financialization monolith; there are strong advanced economies, as the German example shows, and a political base, even within the business community, that is ready to oppose this juggernaut. To choose is simple: If people want to keep out undesirables from their community why just pass anti-immigrant or vagrancy laws; they need also to stop rich financial interlopers in private equity firms from buying local firms and using bankruptcy statutes to deprive employees of their pension and benefit plans. They also need, like the Germans do, to give employee representatives on supervisory boards a voice in setting the salaries of top management and in firm governance, so that they can resist acquisitions and takeovers. It won’t be easy; witness American workers’ (under intense pressure from Republicans and the business community) recent rejection of the union at Volkswagen’s plant in Tennessee, which spoiled the company’s attempt to introduce a works council in the plant (Volkswagen is fully unionized with works councils included in its governance everywhere in its worldwide operations, except Tennessee).
The German ‘Statistisches Bundesamt’ has published new, revised data on German economic growth. These data clearly show a slightly less rosy picture (in fact: a more gloomy picture) than previous data. Germany unequivocally experienced the feared ‘double dip’ in 2012/2013 – and we can’t even exclude a triple dip (a dip being defined as two subsequent quarters showing a decline of production). This despite record low interest rates! Which of course means that Schauble and Merkel are wrong: contractionary policies are not expansionary, they are, as they are intended to be, contractionary (why is this for many people so difficult to understand…). Even when domestic interest rates are low.
I do not really expect a double dip: extra-Eurozone orders for manufacturing showed an extra-ordinary increase of +10% (mainly investment goods which, considering the size of the German economy, is HUGE). This increase even compensated the recent dismal development of domestic orders. But a little historical perspective is in order: total orders are still way lower than in 2007… Fortunately, the labour market is still doing reasonably well, the number of jobs increases with about 0,8% a year (which is to an extent caused by people working ever fewer hours, on average – if that’s voluntary that’s a good thing). We can’t however be sure that foreign, extra EU orders will keep compensating rapidly declining German retail sales. German domestic demand still seems to be sub par. Domestic demand has to revive and the number of jobs will have to grow with at least 2% a year. Raise those wages (with an additional 1% for a number of years), cut those taxes.
By the way. Last year, German government wealth declined more than a little – because, well, mainly something with banks.
For industrial systems, a low throughput of matter and energy implies a smaller ecological footprint and greater life expectancy and durability of goods and infrastructure; a high throughput implies more depletion of resources that will need to be renewed and more waste that will need to be disposed of (Meadows and Wright 2008). System dynamics and thermodynamics tell us that a tolerable rate of throughput and entropic transformation is ultimately dictated by the natural system, not by economics or engineering.
A possible task for engineering, within limits, would be to maximise the durability of stocks by minimising inflows of low entropy natural resources and by minimising outflows of high entropy waste and emissions. The role that industrial societies have assigned to technology is, however, much more Herculean. We have asked it to simultaneously and boundlessly minimise environmental impacts and maximise economic growth. In 1966, Kenneth Boulding suggested: “We are very far from having made the moral, political, and psychological adjustments which are implied in this transition from the illimitable plane to the closed sphere” (Boulding 1966: 2-3). How far are we now, almost half a century later?
We have indeed come round in a circle. The whole vision of the working of the macrosystem presented, in terms of the AD/AS model, by far too many contemporary textbooks, is essentially pre-Keynesian. Monetary spending may fluctuate, but whether or not such fluctuations affect employment and output is said to depend on reactions affecting real wages. Slow adjustment of money wages to price changes is held to account for cyclical variations in employment and output. With respect to the longer term, it is presumed that real wages return to their proper full-employment level. There are then no obstacles on the side of demand to prevent re-establishment of the ‘natural’ (full employment) level of activity. The pale shadow of Keynesian theory in the ADAS model – the AD curve – has nothing to do with the values of output and employment at equilibrium, only with the price level.
from David Ruccio
The core of my argument is that many sequences of events that are presented as mechanisms (i.e., as sequences of events organized in a stable way and leading to results known beforehand) in theoretical models are actually socially constructed by the presence (often tacit) of regulations and institutions that eliminate otherwise alternative options. My argument is against the alleged naturalness of social sequences modeled within theoretical models. These sequences do not reflect social laws (like physical laws), or mechanisms in the usual sense of the term (used in current mechanismic literature). When they are represented within theoretical models, they are not much more than modeled representations of truncated processes, which are open-ended in reality. Theoretical mechanisms are obtained assuming as “natural” and given (i.e., unchangeable as a matter of principle) institutional features that are actually historically determined and perfectly modifiable.
The value of capitals. Does Airbnb drive house price increases in London, Berlin, Dublin and Amsterdam?
Since 2008, economic statistics have twisted my mind, again and again. One of the weird patterns shown by the data are comparatively very large and fast house price increases in capitals.
Look here for London.
Look here for Berlin
Look here for Dublin
Look here for Amsterdam
Look here for Paris
Is this caused by a large and fast increase in gross rental yields of houses enabled by the site Airbnb, which makes it a lot easier for international tourists to rent houses from individual owners, which leads to a rapid increase of potential gross rental yields of existing houses? According to a recent article in De Volkskrant, a Dutch newspaper, this is at least one of the reasons why house prices are increasing in Amsterdam, not just because individuals are enabled to let their houses but also because new companies are very rapidly using Airbnb to enter this market (especially in the center of cities) which leads to house price increases – increases which are consistent with the fact that tourism is one of the few growth sectors in Europe, at the moment. Look also here, for Venice (Italy).
If this hypothesis is right, these price increases are no sign of a property bubble.
from Lars Syll
I’ve never yet been able to understand why the economics profession was/is so impressed by the Arrow-Debreu results. They establish that in an extremely abstract model of an economy, there exists a unique equilibrium with certain properties. The assumptions required to obtain the result make this economy utterly unlike anything in the real world. In effect, it tells us nothing at all. So why pay any attention to it? The attention, I suspect, must come from some prior fascination with the idea of competitive equilibrium, and a desire to see the world through that lens, a desire that is more powerful than the desire to understand the real world itself. This fascination really does hold a kind of deranging power over economic theorists, so powerful that they lose the ability to think in even minimally logical terms; they fail to distinguish necessary from sufficient conditions, and manage to overlook the issue of the stability of equilibria.
Almost a century and a half after Léon Walras founded neoclassical general equilibrium theory, economists still have not been able to show that markets move economies to equilibria. Read more…
After re-unification, the German unemployment rate has been way too high for way too long. Look here for excellent data from ‘der Spiegel’, a German weekly. Comparing the 1991-2013 unemployment data with the 1950-1960 period of the ‘Wirtschaftswunder’, when the initially very high unemployment rate declined rapidly for 10 years in a stretch, the post re-unification era was a time of massive policy failings. Unemployment rates either increased or were stagnant for 14 years in a stretch. Neither the monetary union between West- and East-Germany nor the subsequent ‘internal devaluation’ policies (needed because the implied exchange rate of the East-German ‘mark was way too high to begin with while subsequent developments led to an inflation shock in 1992-1994 which, alas, was not offset by external devaluation) led to any kind of rapid decline of unemployment. To the contrary. More succesful economic policies would have led to lower unemployment and higher investment rates – is it too much to expect at least a temporary increase in the German investment rate after re-unification? It did not happen.
Smith’s commitment to “equity” for the working class was behind the vehemence of his opposition to mercantilist (“business economics”) arguments for policies that would protect or promote the profits of producers and intermediaries. Smith saw such pro-business arguments—which arguably persist as the core of neoliberalism (Harvey 2007)—whether for direct subsidies or competition-restricting regulations, as an intellectually bankrupt and often morally corrupt rhetorical veil for what were actually “taxes” upon the poor (what we now call “rents”). Such taxes are unjust and outrageous because they violate fair play both in the deceptive rhetoric by which they are advanced and by harming the interests of one group in society (generally, the poor and voiceless) to further the interests of another (unsurprisingly, the rich and politically connected). Smith explicitly moralised the point,
To hurt in any degree the interest of any one order of citizens, for no other purpose but to promote that of some other, is evidently contrary to that justice and equality of treatment which the sovereign owes to all the different orders of his subjects (WN IV.viii.30).
from Peter Radford
“Yes, much of micro can be derived rigorously from individual maximization plus equilibrium; but why, exactly, does that make it right?”
In fact it makes it wrong.
Individual maximization is a pipe dream that only exists in the heads of utopian economists. And equilibrium. Have you ever seen one? Seriously? Neither have I.
Add the two together and you have a wonderfully coherent, internally consistent, beautiful system that portrays nothing. It looks good. It is vacuous nonetheless.
To think that good macro has to be built on this vaporware is just awesomely foolish.
Yet, apparently, according to luminaries like Robert Lucas, “good” economics is built precisely on such vapor.
No wonder “real economics” is of little to no value.
Maybe we should try real world economics.
From: Erwan Mahé (guest post)
29 August 2014
Mr Draghi’s speech at the Jackson Hole symposium was definitely the highlight of late last week. A lot of ink has already been spent about it, and I preferred to wait a bit before expressing myself on the matter. I was especially waiting for the inevitable response of our German friends, who did not disappoint us, with German finance minister Schauble’s declaration this morning that the “ECB’s Draghi has been “over-interpreted.”
While I do not want to “over-interpret” anything our central bank chief says during his pilgrimages to the Grand Teton National Park, where the Siberian scenes of Rocky 4 were filmed, I think it important to understand it in full. After all, his comments appear just as significant as those made during his whatever it takes speech in the summer of 2012. The parallel appears all the more worthwhile, since I remember, the day before Mr Draghi pronounced his famous words, my own intervention at the same meeting to explain the ECB’s ability to reverse the situation before a gathering of American investors, terrorized as the European experiment appeared on the verge of collapse. My argument that no ECB chief would allow the eurozone to implode under his leadership was met a mix of scepticism and irony. Some Texas hedge fund managers bet on the zone’s implosion and claimed that the ECB’s efforts to oppose “free market forces” would meet the same fate as the BoE’s unsuccessful attempt to defend the pound sterling in 1992. Super Mario’s dramatic statement provided sweet revenge and some new diligent readers. Read more…
from David Ruccio
In Europe, there is no need for lower pensions. Maybe for shorter pensions – not for lower pensions. But before starting to think about shorter pensions we first have to get unemployment down and activity rates up. The present combination of high (youth) unemployment and ever lower pensions is a fricking disaster for young and old alike – which is aggravated by cutting entitlements.
The population of the European Union is ageing. This is a problem: we will have to take care of a steeply increasing number of people with Alzheimer and comparable debilitating, care-intensive diseases. But there is, at least during the next decades, no entitlement problem. Pensions can be paid – there is no lack of labour in the European Union, it’s not a supply side problem. At this moment, unemployment is 11,5%. This can and should go down to 3 or 4%. All kind of models used to calculate the burden of pension entitlements assume, in an implicit or explicit way, ‘full employment’. These models can and should be discarded as Mario Draghi is right: we’re far away from full employment – further than pre-2008 type of models. On top of this, productivity in low or medium productivity countries like Spain, Greece, the UK and even more so in Poland and Romania can increase with 2 to 3% a year for an extended period. On top of that, broad ‘U6′ unemployment’ is much higher than official ‘U3′ unemployment. Also, ‘activity ratio’s’ can increase (even when accounting for ‘broad unemployed’). Hey, these are already increasing in a spectacular fashion (graph), all kinds of ideas about structural rigidities preventing this are bogus (employment ratios can however often still easily double). It’s not a supply side problem.
from Peter Radford
This is a bit of a rant. Please bear with me.
I rarely do this, but here’s a link to one of my favorite economics blogs:
The problem with all this self-criticism is that many of the people doing the dissing are responsible for the disarray they are criticizing. A different view is that none of them saw fit to make enough noise to change things.
This may unfair of me.
Notice also that much of this criticism is dated. The wheels have been coming off economics for a long time, yet inertia is sufficient to prevent change.
This may also be unfair of me.
But, ask yourself: where else in our economy could so much analytical ineptitude be tolerated for so long? Where else could repeated failure be fobbed off so easily? Where else could so much fraction, discord, and general incoherence be treated as a “profession”?
If some of the so-called heterodox alternatives to the dominant theories were so compelling surely they would have been more widely accepted. It is not enough to carp about other people’s evident failings – and believe me, as a relative outsider those failings are glaringly evident – because I believe those who complain have a responsibility to build the better alternative. Read more…
France is doing relatively well (graph 1). It clearly escaped the historical unique decline of productivity which took place in the UK (more on this below). And though it did not increase its productivity lead over Germany – it did keep its lead (graph 2).
Despite this clear success of French economic policies and its high rate of productivity, a sign of an effective economic system, France gets a bad press. ‘The Economist’ starts an article about French education with the sentence ‘Wary of competition when it comes to global markets..’. And Tyler Cowen sees France as one of the countries with enhanced risk of secular stagnation, soon to be left behind by history. What a nonsense. Dacia, a Romanian brand of cars owned by Renault, has by far the best quality/safety/size/price combination of all cars on sale in my country. And at least according to this test, the Dacia Sandero is the most dependable European car Read more…
from Peter Radford
Yes it is.
The explanation is found in the genesis of classical economics and then in its idealization of the marketplace.
At its onset the modern neo-liberal project was a search for a way of organizing civil society without that organization being imposed in what had hitherto been an overt political, that is power relationship, sense. Thus the literature in the late 1700′s is brimming with applause for what we would now call the market as a method of coordination. In contemporary thinking we seem to forget that the market back then was seen as a supreme organizing principle for all social activity since the then burgeoning economy was the major issue calling for analysis. The market was posited as an alternative to the prior traditional political problem solution to allocation because it allowed the emerging commercial class to locate itself within a social structure facing great stress. The older regime had no space for commerce as it was being redefined – starting with a redefinition of the word itself. Older societies were based on long established, hierarchical, and unvarying governance of all aspects of life, including what we now describe as economic activity. That governance was centered in traditional sources of power. It was thus deeply political, although people at that time would not have referred to it in that way. Read more…