The U.S. billionaires profiting the most from the pandemic

While Russian billionaires have been the focus of attention due to the ongoing fighting in Ukraine and the ensuing sanctions against Russian individuals and entities, their counterparts in the United States have accumulated an additional $1.7 trillion of net worth since the start of the pandemic two years ago. This marks an increase of 57 percent compared to March 2020 data from Forbes aggregated by U.S.-based organization Americans For Tax Fairness (ATF). As our chart shows, four of the six biggest earners are Big Tech CEOs.
Florian Zandt

Weekend read – Expected utility theory — a severe case of transmogrifying truth

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.

Daniel Kahneman writes — in Thinking, Fast and Slow — that expected utility theory is seriously flawed since it doesn’t take into consideration the basic fact that people’s choices are influenced by changes in their wealth. Where standard microeconomic theory assumes that preferences are stable over time, Kahneman and other behavioural economists have forcefully again and again shown that preferences aren’t fixed, but vary with different reference points. How can a theory that doesn’t allow for people having different reference points from which they consider their options have an almost axiomatic status within economic theory?

The mystery is how a conception of the utility of outcomes that is vulnerable to such obvious counterexamples survived for so long. I can explain it only by a weakness of the scholarly mind … I call it theory-induced blindness: once you have accepted a theory and used it as a tool in your thinking it is extraordinarily difficult to notice its flaws … You give the theory the benefit of the doubt, trusting the community of experts who have accepted it … But they did not pursue the idea to the point of saying, “This theory is seriously wrong because it ignores the fact that utility depends on the history of one’s wealth, not only present wealth.”

On a more economic-theoretical level, information theory — and especially the so-called Kelly criterion — also highlights the problems concerning the neoclassical theory of expected utility.

Per capita CO2 emissions by country

Ethical criteria which hold the sustainability of life at their core

from Fernando García-Quero and Fernando López Castellano and RWER current issue

Overconfidence in the magical thinking of technification, economic growth, the free market, and neoliberal globalization has led many to forget that the state is the main policy architect and actor when facing a crisis. Successful responses to Covid-19 have shown, once again, the central role of states in organizing political measures that foster and maintain the welfare of their populations, through actions to guarantee quarantine, social distancing, mobility restrictions, as well as extraordinary support to manage losses related to the economic downturn.

The role adopted by the states and politics in countries’ performances when tackling COVID-19 is very different from the perspectives that dominate the current agenda of development. SDGs and RCTs, while containing some valid points, abound in efficiency criteria and reduce the fight against poverty and climate change to mere products of the rational or irrational choice of individuals. These discourses divert attention from thoroughly addressing these challenges, and obscure the fact that the key to avoiding poverty is transforming productive structures and achieving an endogenous technological capacity to improve real wages.

Countries where the 1% have the largest share of wealth

Consumer energy prices: stylized post 1960 facts

At this moment, retail energy prices (prices paid by consumers and companies for final use of energy) are, compared with other consumer prices, rising fast. Has this happened before? Yesterdays post shows that in the EU and since 2006 the rise is exceptional. But what shows when we look further back in time? For reasons of convenience and because the USA data stretch back to 1960 while the EU data only stretch back to 1997 I’ve tinkered a little with USA consumer price data. The answer to the question is clear: it has happened before – but the present spell of high energy price inflation (30+% a year) is starting to last exceptionally long. This answer leads to other questions: does, in a historical perspective, the present spell of energy price inflation also lead to a relatively high level of energy prices?

The toll of high energy prices

Inflation is up. A remarkable aspect of todays inflation is the relatively high increase of energy prices (graph), an international phenomenon. Rising prices are a bitch when nominal incomes stay behind, which at the moment is the case in Europe. This leads especially to problems for people with lower incomes who have less money to spare and who spent a relatively larger amount of their income on energy. So, what to do? Should we raise interest rates? Hmmm….

The role of ideology in economicss

One of the purposes – if not the main one – of mimicking physics was to argue that economics is a value-free science as it is argued about the natural sciences.

However, the truth is that every researcher starts her work expecting to arrive at some result. The critical issue is if, in the process of investigation, she is open to consider arriving at a different conclusion although it may contradict her own and her colleagues’ a priori beliefs.

Any individual or social group has a certain set of beliefs and values, a certain weltanschauungen, which permeates their ideas and attitudes. Although they seem quite natural for them, they are prejudices in the sense that they are opinions or feelings formed beforehand without a scientific knowledge to support them.

As Irene van Staveren (2020: 108) points out, “economists are just like people. They try to hold on to their worldview and put in much effort to protect their vested interests as academics, policy advisors, and teachers based on the skills they have acquired and invested in.”

Introducing maldevelopment indices

from Jorge Buzaglo and Leo Buzaglo Olofsgård and RWER current issue

In recent years there has been a proliferation of alternatives to move beyond GDP as an indicator of socio-economic wellbeing. This was most probably due to the growing distrust of GDP as an appropriate metric for measuring the degree of advancement of societies. Another probable reason for the growing GDP disbelief is the ecological crisis rapidly approaching catastrophic levels, and the international opinion and mass mobilization it has given rise to. Ecological disruption is not a subject about which GDP has much to say — although there have been attempts to adjust GDP to allow for the costs of environmental destruction.¹ GDP is not only a socially (distributionally) blind indicator but also an ecologically blind indicator.

The search for alternatives to GDP has even reached the highest bastion of economic orthodoxy, namely the International Monetary Fund (IMF). In a recent article in the IMF’s house organ, Daniel Benjamin and others explain how to measure “the essence of the good life,” and how to find a better gauge of prosperity than GDP (Benjamin et al. 2021, based on Benjamin et al. 2017). Their proposal is “beyond GDP,” both in the sense of abandoning GDP’s economistic approach and also in the sense of abandoning GDP’s objective approach based on observable, measurable physical quantities. The approach is based on subjective, non-observable mental states, as reported by respondents of surveys designed to detect them. The approach is thus methodologically close to that of the World Happiness Report, which is mainly based on the results of the Gallup World Poll.²

The plethora of different attempts to find a better gauge of human progress, and to quantify “the good life” are positive and promising symptoms of an extensive collective search — a wide and intellectually multifaceted attempt to find a new economic and social paradigm. That is, it can be seen as a search for a way out of the present, in many senses flawed system.³

However, the “GDP mentality” is still strong and dominant, and it seems to prevail in the factual choices of most governments and international organizations. This mentality

Recession fears: real and imagined

from Dean Baker

There is a story of a football coach who ran running plays near the end of a game, when he clearly should have been passing. Apparently, he had seen data showing that teams that win, on average, run on a certain number of plays. His team was below this number, so he decided that he had to have more runs if his team was going to win.

This is a classic case of confusing correlation with causation. (For those not familiar with football, when a team is ahead, it generally uses running plays to take lots of time off the clock. They run because they are winning, they don’t win because they run.) This distinction is important when considering various predictions for a recession in the current environment.

There are many features of an economy that we commonly see before a recession. For example, we typically see higher prices for oil, wheat, and other commodities before a recession. We also often see an inverted yield curve, where the interest rate on short-term Treasury debt (e.g., 90-day or 2-year notes) exceed the interest rate on 10-year Treasury bonds.

We are currently seeing a serious run-up in many commodity prices. It’s very plausible that we will see an inverted yield curve in the next year or so. The question is whether this means we should be expecting a recession in the near future?

Expected utility theory — nothing but an ex-hypothesis

from Lars Syll

In mainstream theory, preferences are standardly expressed in the form of a utility function. But although the expected utility theory has been known for a long time to be both theoretically and descriptively inadequate, mainstream economists gladly continue to use it, as though its deficiencies were unknown or unheard of.

What most of them try to do in face of the obvious theoretical and behavioral inadequacies of the expected utility theory, is to marginally mend it. But that cannot be the right attitude when facing scientific anomalies. When models are plainly wrong, you’d better replace them! As Matthew Rabin and Richard Thaler have it in Risk Aversion:

It is time for economists to recognize that expected utility is an ex-hypothesis, so that we can concentrate our energies on the important task of developing better descriptive models of choice under uncertainty.

In his modern classic Risk Aversion and Expected-Utility Theory: A Calibration Theorem Matthew Rabin  writes:

Energy is getting cheaper (cost price). But: who profits?

Does the switch to Green Energy mean that energy will be cheaper? To answer this question we’ll have to answer several sub-questionsfirst: is there a switch to Green Energy? Is capacity used efficiently? And is Green Energy cheap? As I will argue below, looking at the sub questions the answer to the lead question is: yes. But this answer leads to a related question: above, we’re talking about cost prices, which are down. You might have noticed that consumer prices of energy are up. Who’s getting rich?!

Wheat

Will the war in Europe affect availability of wheat, one of the staple foods of the world? One of the economic successes of the last two decades is an increase in the production of wheat which enabled stable average global consumption per capita (at around 68 kg. per year) and a slightly increased used as feed (close to 20% of total production). This was possible because of a surprisingly fast increase of yields per hectare (graph).

Source: FAO-AMIS

The fragility of contemporary capitalism

from C. P. Chandrasekhar

While the world remains preoccupied with the geopolitical and humanitarian fallout of the Russian invasion of Ukraine, its economic consequences are increasingly a matter for concern. Though the two countries at war account for less than two and one half per cent of the world’s population, it emerges that the damage to production within their boundaries and the suspension of their trading relationship with rest of the world threatens a crisis in multiple markets, not least in the markets for food and oil where shortage abound and prices are rising. This is are typical illustrations of the entangled fate of nations in a globalised world economy.

But there is more that the war in Ukraine is showing up. Events in unusual corners of the global economic system illustrate how centralised and financialised markets for goods and services have increased the fragility of contemporary capitalism

New issue of real-world economics review – 99

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issue no. 99
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Keynes’, Piketty’s, and an extensive failure index:Introducing maldevelopment indices Jorge Buzaglo and Leo Buzaglo Olofsgård           2

Externalities, public goods, and infectious diseases Spencer Graves and Douglas Samuelson           25

An essential journey back to the seeds of prosperity in a time of pandemics: Notes for a renewed agenda in development studies Fernando García-Quero and Fernando López Castellano           57

How resource-cheaply could we live well? Ted Trainer            64

The role of the IMF in a changing global landscape Jayati Ghosh           80

MMT, post-Keynesians and currency hierarchy: Notes towards a synthesis Luiz Alberto Vieira            90

Why not sovereign money AND job guarantee? Hongkil Kim and Hunter Griffin            106

Performativity, marketization and market-based central banking Goghie Alexandru-Stefan           125

The mathematics of profit maximization is incorrect Philip George           143

The ‘Great Disinflation’:The importance of the ‘China factor’ is overstated Leon Podkaminer           151

Board of Editors, past contributors, submissions, etc.            157

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Free to trade efficiency?

from Peter Radford

Fascinating.

The war in Europe is messing with some major preconceptions and exposing some as illusions that, perhaps, we would be better off without.

Take, for instance, The Economist magazine’s leader article entitled “Trading with the enemy.”  Here’s the key question the article poses:

“Is it prudent for open societies to conduct normal economic relations with autocratic ones, such as Russia and China, that abuse human rights, endanger security and grow more threatening the richer they get?”

You and I might answer in the negative with a certain ease, but for the Economist and its ilk the question is more nuanced.  After all aren’t freedom and free trade one and the same?  If you stop trading freely aren’t you surrendering your freedom?

The Economist goes on to present its case, which inevitably decries any diminution of free trade, and ends thus:

“Liberal governments need to find a new path that combines openness and security, and prevents the dream of globalization turning sour.”

All well and good.  And predictable.  We must not get in the way of free trade.  Must we?

World map of billionaires

We don’t need a Cold War with China

from Dean Baker

There has been much press around President Biden’s demands that China not support Russia in its invasion of Ukraine. The implication of these demands is that the United States has the ability to punish China economically in a way that imposes more pain on China than on us. That may be true for now, but it’s not clear it will be true much longer, and it may not even prove to be true at present.

It is common to refer to China as the world’s second largest economy, after the United States. However, using a purchasing power parity measure, China’s GDP actually passed US GDP in 2016. The IMF projects that it will be more than one third larger by 2026, the last year of its projection period.

Source: IMF

The purchasing power parity measure, in contrast to the more commonly cited exchange rate measure, applies a common set of prices for all the goods and services produced in both economies.

The irrelevance of the Ramsey growth model

from Lars Syll

So in what sense is this “dynamic stochastic general equilibrium” model firmly grounded in the principles of economic theory? I do not want to be misunderstood. Friends have reminded me that much of the effort of “modern macro” goes into the incorporation of important deviations from the Panglossian assumptions that underlie the simplistic application of the Ramsey model to positive macroeconomics. Research focuses on the implications of wage and price stickiness, gaps and asymmetries of information, long-term contracts, imperfect competition, search, bargaining and other forms of strategic behavior, and so on. That is indeed so, and it is how progress is made.

But this diversity only intensifies my uncomfortable feeling that something is being put over on us, by ourselves. Why do so many of those research papers begin with a bow to the Ramsey model and cling to the basic outline?

Inflation and the War in Europe

Headline as well as ‘core’ consumer price inflation in the EU has increased (graph 1). How to rate these increases? Do we have to jack up interest rates and to restrict spending? Below, I’ll argue that when we try to understand present inflation using a non-neoclassical frame of analyses we do have to take into consideration that:

1. Not all increases are created equal
2. We should not just look at expenditure prices (consumption, investments) but also at factor prices and cost prices (wages, wage costs)
3. We have to look at the short term (purchasing power of household income) but at the medium term, too (prices go up but, for some articles, down too)
4. But Europe is in a full scale war and Wars are Inflationary

What to do? At this moment the EU economy is not ‘overheated’ and inflation as shown in the graph must be rated to be transitory. The War in Europe will however lead, for a number of reasons, to additional inflationary pressures – which can only be countered by civilian investments in food and energy production.