Break Up Economics — continued

from Peter Radford

What?  Surely not!  How dare he suggest such a thing.

What, you are correct in asking, am I talking about?

The recent speech by a Department of Justice official who dared suggest that it is getting quite difficult to find a truly neutral technocratic expert to give testimony in court.  Imagine the cheek.  How dare he question ‘expertise’.  Especially economic expertise, which is, surely, the gold standard.

Why did he say what he said?

Because academics are apparently so eager to be bought.  Especially those at so-called ‘top’ schools.  And especially those who engage in teaching either business or economics.  Outside consulting contracts and sponsored research have become such an infection that many of the ‘big names’ are tainted by these activities and are not strictly speaking neutral in their opinions.  Or, at least, have the appearance of bias simply by virtue of their non-academic pursuits.

This is hardly a new problem.

Anyone with a half decent memory can recall the lunacy being passed off as research just prior to the Great Recession.  Many, if not most, of the perpetrators of that research as still happily teaching/consulting as if nothing happened.  Protected, most of them, within the walls of tenure they operate with both immunity and impunity, whilst peddling, amongst other things, the fiction that the only way to cure inflation is to hammer the workers.

What is heterodox economics?

from Lars Syll

Based on our interviews, heterodox economics appears to be a positive project, inevitably defined somewhat in terms of the mainstream but not exhaustively so. It is also efficacious, with policy and real-world impact. It is a complex object, not amenable to definition by a single criterion. Its dimensions are partly intellectual, in terms of what it believes. It holds a realist position. It is concerned with asymmetric power relations, in the economy and in the economics discipline, highlights their negative effects, makes explicit the normative character of economics and the economy, and leans towards action which seeks to improve the state of the economy and the discipline. This means it fosters the capacity to deliberate social and ecological goals and norms openly instead of reducing economic reasoning to mathematics or relinquishing thinking to mechanisms that are insulated from debate. Its members see themselves as agents who act against what they perceive to be the unrealistic and monist structures of the mainstream by building alternative structures. These structures embody pluralism, which must include heterodox economics and, perhaps, elements of mainstream economics where these are consistent with the identified features of heterodoxy; and has several pillars, including pedagogic and epistemological. Furthermore, we find the themes of power and pluralism are interwoven with the concern for realism, what we have called realist pluralism. Hence, power and pluralism seem not to be valued in themselves, but in the pursuit of truth …

Rizzo goes for the guild

from Peter Radford

Is it a cult?

Is it a guild?

Both perhaps?

I remember reading sometime not long ago that Steve Levitt was leaving Chicago.  Two things stood out in the article bringing that news:  first, Levitt said he was concerned that economics was becoming irrelevant; second, someone had told him he was not doing ‘proper economics’.

Here’s a clue who that someone was: Heckman.

Then, more recently, the Financial Times editorial page accused the economics discipline of becoming a closed shop.  And like most closed shops it was stifling creative thinking, it was resistant to change, and was generally becoming … irrelevant.

What a shock.

Mario Rizzo then had a letter published in the FT hammering the point home.  Economics is, indeed, a closed shop.  He teaches at NYU and has an inside look at things.

These sorts of rumblings suggest that things are not well within the fortress of mainstream economics.

Good.  Because, from the outside, it’s all looking a bit worn, tired, and generally … irrelevant.

Let’s deal with the obvious first.

Windows in the past. Some words on glass, the importance of repairing broken windows and GDP.

This post was written because of a tweet by David Andalfatto, who wondered why medieval and early modern Europe, a society that built cathedrals, did not show any per capita growth. Per capita growth is an average, and when the rich get richer, it can increase even when the number of poor and destitute increases. The question is: was something like this the case in the time of the cathedrals? I won’t give a definite answer. But I will go beyond ´real´ GDP per capita (ultimately a monetary average) and delve into physical-technological, personalized development. And it´s all about glass (picture: ´Het straatje´ by Vermeer (1658?); at the end for comparison a picture of an 1820 street in Amsterdam).

Rethinking public debt

from Lars Syll

Few issues in politics and economics are nowadays more discussed — and less understood — than public debt. Many raise their voices to urge for reducing the debt, but few explain why and in what way reducing the debt would be conducive to a better economy or a fairer society. And there are no limits to all the — especially macroeconomic — calamities and evils a large public debt is supposed to result in — unemployment, inflation, higher interest rates, lower productivity growth, increased burdens for subsequent generations, etc., etc.

The standard mainstream textbook argument about budget deficits goes something like this: Assume that total output is given. If government expenditures are increased, then this has to be met by an equally large decrease in investment, which can only come forth by rising interest rates. ‘Crowding out’ reduces public saving and causes interest rates to rise. Then, applying the logic of the Solow growth model, it is concluded that (Mankiw, Macroeconomics, 8th ed., p. 221)

the long-run consequences of a reduced saving rate are a lower capital stock and lower national income. This is why many economists are critical of persistent budget deficits.

Now, what’s wrong with this? Everything!

The Chinese threat in critical minerals

from C. P. Chandrasekhar and Jayati Ghosh

It is more than a year since China, reportedly in retaliation to US-driven restrictions on exports of advanced semiconductors and related manufacturing equipment, imposed export controls on two crucial materials—germanium and gallium—that enter into the production of semiconductors and military and communications equipment (advanced microprocessors, fibre-optic products and night-vision goggles).

Imposed in the name of safeguarding “national security and interests”, the restrictions on the exports of these materials from China were viewed with alarm. China accounts for 98 per cent of global production of gallium and for two thirds of imported supplies of germanium in the US market. If these restrictions, requiring prior permission for export based on reporting of likely end uses, results in a shortage of these materials, it could affect the production of strategically important products. Correcting for a shortfall in supply by diversifying to new sources is difficult and definitely time consuming. Seen in the context of the fact that China dominates production in a host of critical minerals the restrictions appeared to be an ominous development.

Diverting class warfare into generational warfare

from Dean Baker

In the last-half century, productivity has outpaced the growth of real compensation for the median worker by more than 40 percent. This means that if workers’ pay had kept pace with productivity, as it did in the three decades after World War II, it would be roughly 40 percent higher than it is today.

This would mean that instead of a typical worker earning $34 an hour, they would be earning close to $48 an hour. That implies an annual wage of $96,000 a year for a worker putting in 40 hours a week for 50 weeks a year.

Getting workers their fair share should be, and to some extent has been, a central issue in political debates. However, there is a continual effort by the media to pull the focus away from within generation inequality, and instead tell young people that their problems stem from their parents and grandparents getting too much money from Social Security, Medicare, and other government programs.

The major media outlets love to highlight absurd stories of generational inequality, with baby boomers ripping off their children and grandchildren through Social Security and Medicare.

Casino capitalism

from Lars Syll

According to Keynes, financial crises are a recurring feature of our economy and are linked to its fundamental financial instability:

It is of the nature of organised investment markets, under the influence of purchasers largely ignorant of what they are buying and of speculators who are more concerned with forecasting the next shift of market sentiment than with a reasonable estimate of the future yield of capital-assets, that, when disillusion falls upon an over-optimistic and over-bought market, it should fall with sudden and even catastrophic force.

Keynes believed that the financial system — necessary for a vibrant market economy by channelling the entrepreneurs’ animal spirits into investments — is also so unstable and sensitive that it easily falls into crisis. The economy is permeated by genuinely uncertain processes and events that result in decision-making often based on incomplete knowledge. The estimates companies make about the future are usually mere guesses. Therefore, they are quickly and heavily influenced by shifts in economic sentiment. The market is thrown between optimism and pessimism. Faced with this uncertainty, people try to do what everyone else does. It is this herd instinct that contributes to the development of countries, which often resembles a by-product of casino activities.

Price Gouging Part Two

from Peter Radford

When you are only concerned with one thing and have only one tool things can go awry quite easily.  So it is with our price theory friends.  They bask in the rigor of their thinking and look askance at the inability of regular folks to grasp the point of the logic of their so-called price mechanism — note the mechanical nature of it all.  The recent spate of snooty commentary aimed at Kamala Harris and her ideas about price gouging are a case in point.  I talked about this a couple of days ago with respect to John Cochrane’s typical in-your-face article praising price gouging.  Cochrane typifies the defiance of a certain sort of economist.  They take pride in being determinedly anti-social and cast aspersions on anyone who dares to cross swords with their wisdom.  Ignorance.  Gimmick.  Populist.  These economists are not short in vocabulary when someone treads heavily on their precious logic.

Which is all it is.  Logic.  Impervious to reality, but impeccable in its coherence.

The current controversy gives us an opportunity to look a bit more carefully at the shortcomings of economics and its obsession with what it calls markets.

How empirical is ’empirical’ macroeconomics?

from Lars Syll

At a first glance, DSGE models seem to imply total ignorance because representative agents (or representative groups of agents with limited heterogeneity) featuring objective utility functions populate the literature. At a second glance, however, it becomes obvious that “methodological individualism” prevails and even dominates. To understand this dominance one only has to once again note that the representative agent has fixed properties only within any given model, or paper. Across papers and across time researchers appeal to a great many varieties of properties of agents rendering the notion of the (heterogeneous) representative agents) with stable preferences absurd.

This variety thus not only causes the arbitrariness described above but also reflects the fact that humans are indeed individuals who cannot be objectified. To put it differently, the underlying fabric of the economy permeates economics even against the more or less explicit will of the researchers concerned.

Christian Mueller

Yes indeed, DSGE models and the idea of a representative agent are “absurd.” Why would one derive policy implications from something that is nothing but a convenient untruth? Still, mainstream economists seem to be impressed by the ‘rigour’ brought to macroeconomics by New-Classical-New-Keynesian DSGE models and its rational expectations and representative agent microfoundations!

It is difficult to see why.

Cochrane on PRICE-GOUGING

from Peter Radford

Price-gouging is now a topic in politics.  Kamala Harris has put it there.  Naturally there has been the predictable outcry of opposition coupled with and equally predictable sneer of disapproval: how could she say something so uneducated?  Has she no grasp of Econ.101?  Oh the illiteracy!

Perhaps even more predictable is that someone like John Cochrane has felt it necessary to write an article in praise of price-gouging.  After all, hard core libertarian economists are proud of their adherence to the often counter-intuitive claims of economic price theory. 

In his words:

“We should praise price-gouging. Yes, pass a new federal law, one that overrides the many state laws against price gouging.”

There’s not much to say.  From within the straightjacket of price theory economists have no ability to comment on the morality of a price.  It is, as they say, what it is.  Provided that said price is a consequence of the playing out of the logic described in economics.  

It all has to do with scarcity.  As Robbins famously put it:

The crisis of knowledge and enlightenment’s imitations

from Asad Zaman and current issue of RWER

Our current environmental predicament is fundamentally a crisis of knowledge, rooted in the Enlightenment’s narrow conceptualization of epistemology. This shift fostered an illusion of objectivity that has since permeated our understanding of the world, particularly in the context of societal dynamics. The Enlightenment’s emphasis on objective knowledge marginalized the subjective realms of emotional intelligence, moral intuition, and diverse lived experiences. This exclusion led to a worldview that erroneously equates scientific rationality with absolute truth, consequently overlooking the multifaceted and nuanced nature of human experience and its interaction with the environment. See Zaman (2015) for a detailed discussion of the deification of science.

To truly integrate heart, soul, and lived experiences into our understanding of the world, we must challenge the very notion of objective knowledge as the sole arbiter of truth, especially in the realm of social sciences. For example, Berger and Luckmann (1966) have argued that truth is a social construct.  Society, when viewed as a collective of lived experiences, presents a spectrum of realities, all equally valid yet inherently diverse. This perspective acknowledges that what is considered ‘objective’ often reflects dominant narratives, sidelining alternative ways of experiencing and understanding the world. By embracing this multiplicity of truths, we open ourselves to a richer, more inclusive understanding of our environment and our place within it.  Such a shift in perspective is crucial for addressing the environmental challenges we face, as it fosters a deeper, empathetic connection with the planet and its diverse inhabitants, moving beyond the exploitation and detachment engendered by the Enlightenment’s limited view.  read more

Amazon blocks advertising of a novel whose narrator is an economist

from Edward Fullbrook

A few years ago, I wrote a novel that was published under a pen name and titled Two American Dreams; Which is yours?  Recently its publisher realized that, although set in the Sixties (mostly in Berkeley) this novel pertains to the coming US presidential election to a remarkable degree.  With that in mind, they submitted to Amazon a standard advertisement for the novel in both its paper and Kindle formats.

Amazon says that such adverts are usually approved within 24 hours, but some can take up to 72.  This one did not get a response for over 160 hours, suggesting that the decision to block it came from higher up.  Amazon’s rejection email said:

• Your ad titled “Two American Dreams: Which is yours?” does not comply with our current Creative Acceptance Policies. Specifically for the following reasons:
  • Your ad contains content or book(s) prohibited from advertising. This may include books about a specific political party, issue, or candidate during an election year. Please review section 4.3 Political books under Book Advertising Guidelines and Acceptance Policies and remove the content or book(s) from your ad. 

However, Amazon is still selling Two American Dreams and still accepting gold stars and reviews for it.

 

“New Keynesian” DSGE models

from Lars Syll

To be fair to academia, it has realized that the pure DSGE model is incapable of explaining observable phenomena so they have introduced numerous amendments, known, oddly, as “imperfections” in the model. Long-term nominal contracts, other labour market frictions, imperfection in credit markets, all these and more are prayed in aid and, either rigorously or more usually ad hoc, introduced into the model, generating lags that mean it can be represented as fitting the data. Most central banks have a modified DSGE model of this kind …

These modified models are often referred to as “New Keynesian”, presumably because the dead cannot sue for defamation.

Gerald Holtham

Yes indeed — “New Keynesianism” is a gross misnomer. The macroeconomics of people like Greg Mankiw has a lot to do with Milton Friedman, Robert Lucas and Thomas Sargent — and very little, or next to nothing, to do with the founder of macroeconomics, John Maynard Keynes.

If macroeconomic models — no matter what ilk —  assume representative actors, rational expectations, market clearing and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypotheses of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. Macroeconomic theorists — regardless of being New Monetarist, New Classical or “New Keynesian” — ought to do some ontological reflection and heed Keynes’ warnings on using thought models in economics:

Manufacturing jobs: unions made them good, not the factories

from Dean Baker

The effort to bring back manufacturing jobs has been a major theme in the 2024 election. Both parties say they consider this a high priority for the next administration. However, there is a notable difference in that the Biden-Harris administration has actively supported an increase in unionization, while the Republicans have indicated, at best, neutrality if not outright hostility towards unions.

This distinction is important in the context of manufacturing jobs. Many people seem to assume that manufacturing jobs are automatically good jobs, paying more than non manufacturing jobs.

While that was true four decades ago, before the massive job loss of manufacturing jobs due to trade, it is not clear this is still the case. The figure below shows the average hourly pay, in 2024 dollars, for production and non supervisory workers in manufacturing and elsewhere in the private sector.[1]

Source: Bureau of Labor Statistics and author’s calculations.

Deirdre McCloskey’s shallow and misleading rhetoric

from Lars Syll

This is not new to most of you of course. You are already steeped in McCloskey’s Rhetoric. Or you ought to be. After all economists are simply telling stories about the economy. Sometimes we are taken in. Sometimes we are not.

Unfortunately McCloskey herself gets a little too caught up in her stories. As in her explanation as to how she can be both a feminist and a free market economist:

“The market is the great liberator of women; it has not been the state, which is after all an instrument of patriarchy … The market is the way out of enslavement from your dad, your husband, or your sons. … The enrichment that has come through allowing markets to operate has been a tremendous part of the learned freedom of the modern women.” — Quoted in “The Changing Face of Economics – Conversations With Cutting Edge Economists” by Colander, Holt, and Rosser

Notice the binary nature of the world in this story. There are only the market (yea!) and the state (boo!). There are no other institutions. Whole swathes of society vanish or are flattened into insignificance. The state is viewed as a villain that the market heroically battles against to advance us all.

It is a ripping tale.

It is shallow and utterly misleading.

Peter Radford

Yours truly can’t but agree with Radford here. That said, however, McCloskey sometimes does get it pretty right:

A review of Dan Davies’ book

from Peter Radford
– a critique of the absurdity of economics

I finally read “The Accountability Machine”, the book by Dan Davies.  It’s worth the effort.  You can read it in a number of ways.  As a peon to cybernetics and Stafford Beer.  As a critique of the absurdity of economics.  As a summary of the development of management theory.  Or as a summary of the ills of neoliberalism.  It’s a mash-up of all those.  It also has the great virtue of being very readable.

Chapter Six will warm the hearts of all you who, like me, relish the opportunity to poke fun at economics as it exists in its more extreme expressions.  A few quotations set the scene perfectly:

“Economists variously describe economics as a subject, a science, a discipline, and even a profession, but it’s really a commitment to certain ways of modeling the world.”

“Depending on political preferences and ideological commitments, they could then go back and make a new model, or declare that the distance [between reality and their model conclusions] represented a failure on the part of reality and suggest a policy to bring the world into line.  It’s not hard to see why these people became influential advisors.”

“As a subject, economics seems to have a fear and disgust of thinking about philosophy and methodology that might be described as Freudian … The vast majority of economists literally don’t know what they’re doing.”

“Consequently, plenty of economists still think that making markets more competitive is a viable substitute for anti-discrimination laws.  It works in the model, as long as you throw away any information that might be relevant to the actual problem.”

“Proving things ‘in the model’ and then acting as if they’re true in the real world is a terrible habit of economists.”

Paul Davidson (1930-2024) In Memoriam

from Lars Syll

Paul Davidson, the co-founder of the Journal of Post Keynesian Economics (JPKE) and a leading Post Keynesian economist, died on June 20, 2024, in Chicago. He was born in Brooklyn, NY, on October 23, 1930, about a year after the Great Crash of 1929. He was a staunch defender of the importance of John Maynard Keynes, whose ideas, he insisted, differed fundamentally from those of the Neo-Keynesians who came to dominate American macroeconomics after World War II. He viewed Keynes as a monetary economist above all, privileging the liquidity preference theory of interest rates over the doctrine of loanable funds and championing fundamental uncertainty as key to understanding the role of money in the real world. He was a strong supporter of Keynes’ radical internationalism, which argued for an international payments system structured to ensure globally balanced trade …

Paul Davidson will be remembered for his persistent emphasis of the importance of fundamental uncertainty, a central feature of economic reality and a critical idea for understanding the role of money in the real world. However, his greatest legacy is associated with his institution building. Without his teaching, his organizing activities, his support of younger scholars, and his cofounding and editorship of the JPKE, the heterodox economics community would be significantly smaller than it is now. Davidson was combative and forceful in his discussions, particularly about Keynes’ legacy. In retrospect, he was a key figure in the preservation of Keynesian ideas, sticking with them when they had fallen out of fashion and when the economics profession had mistakenly moved away from them. Since the Great Financial Crisis of 2008 there has been a considerable rehabilitation of Keynes’ ideas, prompting talk about “the return of the master.” Paul Davidson never abandoned the master, and he was right.

James K. Galbraith, Thomas I. Palley, Matías Vernengo

I absolutely agree with Galbraith et consortes when they write that Paul mostly will be remembered for his persistent emphasis on the importance of fundamental uncertainty.

Some years ago yours truly had an (as always) interesting discussion — on the Real-World Economics Review Blog — with Paul on ergodicity and the differences between Knight and Keynes re uncertainty.

Hudson on Super Imperialism 2

from Asad Zaman and WEA Pedagogy Blog

This is the second post in a sequence explaining post WW2 USA strategies for global dominance. For the previous post, see: Hudson on Super Imperialism 1

U.S. Financial Strategies for Global Dominance 

Introduction: Michael Hudson, in his podcast and writings, provides a profound critique of the U.S.’s economic and financial strategies that have underpinned its global dominance. This blog post explores Hudson’s insights into the transition from surplus to deficit financing, the manipulation of European economies, and the economic warfare against Russia. Combining these topics reveals a comprehensive picture of how the U.S. has maintained its imperial power through financial maneuvers and strategic policies.

Post-WWII Economic Strategies: From Surplus to Deficit Financing

Post-WWII Economic Strategies: After World War II, the United States emerged as the world’s leading economic power, possessing a significant portion of the world’s gold reserves. From 1945 until 1950, the U.S. accumulated even more gold, holding over 70% of the global monetary gold supply. This period marked a time of economic strength and dominance for the U.S., but it also set the stage for future financial strategies.

new issue of RWER

real-world economics review

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Issue no. 108
July 2024

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The creationist foundations of Herman Daly’s steady state economy
John Gowdy and Lisi Krall
2

Data: a critical perspective
Carlos Guerrero de Lizardi
16

Enlightenment Epistemology and the Climate Crisis
Asad Zaman
29

Fabulous Macroeconomics
Gerald Holtham
33

A Tour of the Jevons Paradox. How Energy Efficiency Backfires
Blair Fix
40

A Debtor Countries Club?  The Cartagena Consensus reloaded
Juan Pablo Bohoslavsky and Francisco Cantamutto
41

Why Has Growth Theory Been a Failure?
Bernard C. Beaudreau
63

Socialism, Fascism and Neoliberalism:
Karl Polanyi’s Institutionalism and the Democratic Question in the XXI Century
Manuel Ramon Souza Luz, Renan Veronesi Compagnoli and Ramon Garcia Fernandez
83

Book Review
Proper Economics?
Yannick Slade-Caffarel’s Introduction to Social Positioning Theory
Cambridge Social Ontology: An Introduction to Social Positioning Theory.
Jamie Morgan
103

Board of Editors, past contributors, submissions, etc.
114

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