According to the data in the chart by Max Roser, Brian Nolan, and Stefan Thewissen, every decile of the Greek population lost ground after the global financial crash and austerity measures were imposed in that country.
from David Ruccio
The Wall Street Journal notes that workers wages in the United States are lower today than they were back in 1972.
In particular, both average real weekly earnings and real hourly earnings of production and nonsupervisory workers peaked in October 1972 (“when Richard Nixon won re-election, Eugene Cernan became the last man to walk on the moon and the Dow Jones Industrial Average closed above 1,000 for the first time”) and they still haven’t reached that level more than four decades later. Read more…
Look here for part 1 of this series, about money. Today: market fundamentalism. The posts are supposed to be succinct, to look at the issues from the angle of the economic statistician.
Today: market fundamentalism.
There are, in my view, three main strands of market fundamentalism in DSGE-macro models:
1) The idea that market prices are ‘optimal’, especially when we’re in equilibrium (whatever that is)
2) The idea that non market production, especially government production like lots of education or health care, is essentially worthless
3) The idea that markets are not just very dynamic and creative (which surprisingly does not seem to be very interesting to the DSGE economists) but that a market system leads to some kind of optimal general equilibrium or (taking the models at face value) is at least not totally inconsistent with such a situation.
Ad 1) We use purchased capital goods and durable consumer goods plus ‘intermediate inputs’ plus unpaid labour plus market exchange plus public goods to achieve our aims. Think of using you car to buy groceries. In this case, only the groceries and the gasoline used have ‘market prices’ and are included in the model. Aside: I define market prices as monetary prices which are set before a transaction takes place. ‘Shadow prices’, like the assumed monetary value of the time it takes to buy groceries, are not market prices, as no exchange between two parties takes place and as the price used to calculate the monetary value of this time might by set by an economist studying this behaviour – but it is not set ex ante by the person buying groceries. Which makes it a far cry from a real life monetary market price. The same hold for depreciation of (in this case) the car, which (though purchased as a market article) is used in a non-market, non-monetary surrounding. The costs can be calculated – but many people do not really do this, while, more important in this case, these costs are not (part of) the market price of buying groceries, as this price simply does not exist as a market price (yes, I know, the internet is changing this but the internet is also leading to the demarketing of many services). Long story short: the assumption that society is one big market and only transactions based upon market prices add to ‘social utility’ is silly and wrong (even when we could define social utility, which we can’t). Monetary market prices which, by definition, are set ex ante do guide our behaviour – but only part of it. Wonkish: ironically, it was Gary Becker (“the man who put a shadow price upon everything”) who showed that even in the case of markets and market prices you don’t have to assume rationality to derive downward sloping demand curves, which means that even if our society only consisted of markets and we were in equilibrium-la-la-land there is no deductive reason to assume that these prices are in any way optimal.
How do statisticians treat this? The National Accounts only look at the flow of monetary spending and disregard the use of consumer durables and non-paid labour. A large exception to this: housing services of owner occupied houses are seen as production, using a shadow price: the capital aspect of household labour is to a large extent covered by these accounts. Statistics of hours and time use however do exist and are used by economic statisticians, look for one example at this Levy Institute publication about labour time, unpaid labour and household production in Turkey. There clearly is no statistical reason to restrict the definition of social utility (whatever that definition is, does anybody have a source?) to market purchases.
Ad 2) Introductory remark: a much more eloquent elaboration of the same point along a somewhat different line is made by the very sharp June Sekera. According to DSGE models, a nurse paid by a private hospital does add to social utility (whatever that is) but the money earned by a nurse paid by the UK National Health Service is ‘wasteful expenditure’. You don’t believe this? It’s indeed not a necessary part of DSGE models but despite this almost all DSGE models assume this. Look here and here. Assuming this makes comparison of different countries almost impossible for economists using DSGE models, as health care is largely nationalized in a country like the UK (and therewith by assumption considered to be wasteful expenditure) while this is not the case in the USA – you really are comparing inconsistent sets of data when you restrict consumption to household consumption expenditure. Fortunately, economists have developed the concept of AIC, Actual Individual Consumption, which corrects for such differences between countries (and shows that differences in the level of consumption when corrected for these differences as well as for differences in price levels are much smaller than indicated by consumer spending). The point: there is no need at all to restrict our concept of non wasteful expenditure to market purchases. But neoclassical economists still do this – government expenditure is wasteful by definition. Even the dikes, without which my country simply would not exist, are a total waste… (mind that after every major flood (1570,1717, 1825, 1953) not just the dikes themselves were improved but the way they were financed too – more taxation and monetization and less private and local ownership and responsibility. To be clear: I totally want to discuss if private education is more effective and/or efficient than public education. But that’s not the point – according to the market fundamentalist models, public education adds nothing.
Ad 3) Do market systems tend to equilibrium? No, says Roger Farmer, who looks at the development of USA GDP (1955-2014) and discovers that there are persistent differences between the very long-term growth rate and long term growth rates. This might, however be explained by supply side changes of the economy. No, say Hendry and Mizon, who look at UK unemployment in the long run (1860-2011): there are inexplicable and large differences in the short and medium term level of unemployment. No, says Knibbe, who looks at the rate of investment in present day rich countries in the long run (1820-2010). There are very large differences in short as well as long-term rates of investment – and there does not seem to be any way in wich a market economy on its own adapts to large declines. Neither exports nor private consumption nor government consumption seems to fill the demand gap left by a decline in the investment rate in market-response way (the pattern of investment seems to be related in some way the Hendry/Mizon unemployment data). Now, somebody might succeed in explaining these empirical patterns using a DSGE model. As far as I know, this has not happened yet. The whole DSGE endeavour lacks empirical discipline and is, contrary to the scientific idea, not based upon independent estimates of variables like social utility (whatever that may be, indeed).
from Lars Syll
Abstraction is the most valuable ladder of any science. In the social sciences, as Marx forcefully argued, it is all the more indispensable since there ‘the force of abstraction’ must compensate for the impossibility of using microscopes or chemical reactions. However, the task of science is not to climb up the easiest ladder and remain there forever distilling and redistilling the same pure stuff. Standard economics, by opposing any suggestions that the economic process may consist of something more than a jigsaw puzzle with all its elements given, has identified itself with dogmatism. And this is a privilegium odiosum that has dwarfed the understanding of the economic process wherever it has been exercised.
Bringing economics back into liberal academic life.April 16, 2015.http://www.ft.com/cms/s/0/99799262-e293-11e4-ba33-00144feab7de.html#ixzz3XTazf200
Sir, The moribund orthodoxy that currently exercises such an inflexible grip on university economics departments will, as Wolfgang Münchau comments, inevitably face a challenge, and this “will come from outside the discipline and will be brutal” (“Macroeconomists need new tools to challenge consensus”, April 13). The orthodoxy has brought this dismal prospect on itself through the brutality with which it has purged those departments of any other school of thought than its own.
Indeed, in its extreme version, the orthodoxy’s doctrine holds quite simply that there are “no schools of thought in economics”, a totalitarian assertion all too true in most economics departments today, so ruthless has been the purge of alternatives. As a result, the different approaches to economic issues of Adam Smith, Bentham, Ricardo, Marshall, Keynes, Friedman and so on are all relegated to the fringe subject of the “history of economic thought”.
from Dean Baker
The Labor Department reported the U.S. economy created 126,000 jobs in March. This was a sharp slowdown from the 290,000 average over the prior three months. This relatively weak jobs report led many economic analysts to comment that the economy may not be as strong as they had believed.
This reassessment is welcome, but it really raises the question of why so many professional economists and economic reporters could be so badly mistaken about the strength of the economy. There never was much basis for claiming a boom in the U.S. economy and the people claiming otherwise were relying on a very selective reading of the data.
Just starting with the most basic measure, real GDP in the United States grew at just a 2.2 percent annual rate in the fourth quarter of 2014. This is a pace roughly in line with most estimates of the economy’s potential rate of growth. This means that the economy was just keeping up with the growth in its potential, filling none of the large gap between potential GDP and actual GDP that still persists from the 2008–2009 recession. Read more…
from Lars Syll
In their new book, Mastering ‘Metrics: The Path from Cause to Effect, Joshua D. Angrist and Jörn-Steffen Pischke write:
Our first line of attack on the causality problem is a randomized experiment, often called a randomized trial. In a randomized trial, researchers change the causal variables of interest … for a group selected using something like a coin toss. By changing circumstances randomly, we make it highly likely that the variable of interest is unrelated to the many other factors determining the outcomes we want to study. Random assignment isn’t the same as holding everything else fixed, but it has the same effect. Random manipulation makes other things equal hold on average across the groups that did and did not experience manipulation. As we explain … ‘on average’ is usually good enough.
Angrist and Pischke may “dream of the trials we’d like to do” and consider “the notion of an ideal experiment” something that “disciplines our approach to econometric research,” but to maintain that ‘on average’ is “usually good enough” is an allegation that in my view is rather unwarranted, and for many reasons.
First of all it amounts to nothing but hand waving to simpliciter assume, without argumentation, that it is tenable to treat social agents and relations as homogeneous and interchangeable entities. Read more…
from David Ruccio
Labros Skartsis has written a labour of love: “Greek vehicle & machine manufacturers 1800 to present. A Pictorial history“. One would maybe expect a rather thin book – but it isn’t. Skartsis wrote voluminous “tribute to a large number of engineers, designers and entrepreneurs whose efforts could soon be completely forgotten”. The tone of the volume is, understandably, somewhat desperate. Since 1981, when Greece entered the European Union, the history of Greek manufacturing is mainly a history of decline. Despite this, the book shows that Greece does have an engineering and designing tradition, even though the Greek themselves seem to be pretty indifferent about this. And even when manufacturing in Greece is finally, after almost seven years of fast decline, rebounding at least a little (graph).
Skartsis poses the question why Greece isn’t more of a manufacturing powerhouse, despite the significant tradition. According to him this is not caused by a high wage level but by lack of a manufacturing culture and manufacturing oriented policies. His introduction: Read more…
Lars Pålsson Syll
A wonderful set of clearly written and highly informative essays by a scholar who is knowledgeable, critical and sharp enough to see how things really are in the discipline, and honest and brave enough to say how things are. A must read especially for those truly concerned and/or puzzled about the state of modern economics.
from Edward Fullbrook
For me three economists stand out historically as having been the most effective at building resistance to the dominance of scientism in economics. Keynes of course is one, and the other two are Bernard Guerrien and Tony Lawson, Guerrien because he was the intellectual and moral force behind Autisme Economie which, among other things, gave rise to the RWER; and Lawson because his papers, books and seminars have inspired, joined and intellectually fortified thousands.
It is notable that all three of these economists were or were on their way to becoming professional mathematicians before switching to economics. When still in his twenties, Keynes’ mathematical genius was already publicly celebrated, most notably by Whitehead and Russell, and he had already published what was to become for his first discipline a classic work. Guerrien’s first PhD was in mathematics, and Lawson was doing a PhD in mathematics at Cambridge when its economics department lured him over in an attempt to boost its mathematical competence.
The significance for me of Keynes, Guerrien and Lawson being mathematicians first and economists second is that it meant that they were not even for an hour taken in or intimidated by the aggressive scientism of neoclassical economists, and this has enabled them to write analytically about the dominant scientism with a quiet straightforwardness that is beyond the reach of most of us.
An example of this kind of writing that I am talking about is the short essay below that in 2002 Guerrien published in what is now the Real-World Economics Review. Read more…
from Lars Syll
The general equilibrium approach starts with individual decisions. It assumes that trades are voluntary and that there exist mutually advantageous opportunities of exchange. Up to here, everyone can agree. The problem lies in the next step. At this point, let us folllow David Kreps’s (1990) reasoning in his A Course in Microeconomic Theory. Kreps asks the reader to “imagine consumers wandering around a large market square” with different kinds of food in their bags. When two of them meet, “they examine what each has to offer, to see if they can arrange a mutually agreeable trade. To be precise, we might imagine that at every chance meeting of this sort, the two flip a coin and depending on the outcome, one is allowed to propose an exchange, which the other may either accept or reject. The rule is that you can’t eat until you leave the market square, so consumers wait until they are sat- isfied with what they possess” (196). Read more…
from David Ruccio
Harvard economics professor Sendhil Mullainathan is worried that too many of his students are taking jobs in finance. He should be worried for other reasons, too.
Mullainathan’s concern stems from the idea that much of the activity in the financial sector involves “rent-seeking”:
Instead of creating wealth, rent seekers simply transfer it — from others to themselves. . .
The economists Eric Budish at the Booth School of Business and Peter Cramton at the University of Maryland, and John J. Shim, a Ph.D. candidate at Booth, have shown in a study how extreme this financial gold rush has become in at least one corner of the financial world. From 2005 to 2011, they found that the duration of arbitrage opportunities in the Chicago Mercantile Exchange and the New York Stock Exchange declined from a median of 97 milliseconds to seven milliseconds. No doubt that’s an achievement, but correcting mispricing at this speed is unlikely to have any real social benefit: What serious investment is being guided by prices at the millisecond level? Short-term arbitrage, while lucrative, seems to be mainly rent-seeking.
This kind of rent-seeking behavior is widespread in other parts of finance. Banks sometimes make money by using hidden fees rather than adding true value. Debt collection agencies may use unscrupulous practices. Lenders to poor people buying used cars can make profits with business models that encourage high rates of default — making money by taking advantage of people’s overconfidence about what cars they can afford and by repossessing vehicles. These kinds of practices may be both lucrative — and socially pernicious.
from Lars Syll
As no one interested in macroeconomics has failed to notice, Ben Bernanke is having a debate with Larry Summers on what’s behind the slow recovery of growth rates since the financial crisis of 2007.
To Bernanke it’s basically a question of a savings glut.
To Summers it’s basically a question of a secular decline in the level of investment.
To me the debate is actually a non-starter, since they both rely on a loanable funds theory and a Wicksellian notion of a “natural” rate of interest — ideas that have been known to be dead wrong for at least 80 years …
On this site, we’ve occasionally criticized neoclassical ‘DSGE’ (Dynamic Stochastic General Equilibrium) macro models. Time for a round-up (comments welcome). This succinct round-up will not be an extensive discussion but will only provide some resources and, important, pay explicit attention to economic statistics which, as a rule, are conceptually much more consistent with Post-Keynesian and sometimes classical and Austrian economics than with neoclassical ‘macro’. I’ll use the next taxonomy to do this:
* Land, Labour, Capital
* Interest and portfolio’s
* Market fundamentalism
Update: because of comments the next items are added:
* The intertemporral government budget constraint
Money. The way Eurozone statisticians estimate ‘money’ can be found in this older 1999 ECB manual, which is consistent with the way Japanese, British or USA statisticians estimate ‘money’ as well as with newer manuals, which however do take recent institutional changes into account (shadow banking). Read more…
And another German economist did not bother to check the data. According to Ekhatimerini,
Additional Eurozone assistance to indebted Greece is dependent on Athens improving the state of its finances, German central bank executive Andreas Dombret said in Johannesburg on Friday. “Further assistance can only be granted to Greece if it applies sound public finances.
According to the facts (Eurostat, four quarter rolling average), the Greek government deficit is not only much smaller than the Spanish deficit but also smaller than the Dutch deficit. And the decline of the Greek deficit was 1,5 times as large as the Spanish and the Dutch decline combined…
from Steve Keen
A Twitter follower accused me of being “a little nasty” with my last blog post. He was right, and I don’t apologize.
I’ve spent 40 years trying to highlight just how limited the dominant ideas in economics are. But even I didn’t fully appreciate how tiny the intellectual gene pool behind these ideas was.
Then, as I started to write a post on the economic issues in the Bernanke-Summers debate, I re-read Summers’ original secular stagnation post and realized that, not merely were the ideas coming from a single perspective, most of the major proponents of these ideas came not only from the same University (MIT), and even the same seminar (Class 14462, conducted by Stanley Fisher).
Think of the dominant names in economics and there are a few obvious entries: Ben Bernanke; Larry Summers; Paul Krugman; Olivier Blanchard; Ken Rogoff. Summers acknowledged all of them (bar Krugman) as classmates from Stanley Fisher’s seminar, while Krugman did his PhD at MIT (as did the other dominant macro textbook author—and ex-advisor to George W. Bush and Mitt Romney—Gregory Mankiw). Read more…
from Peter Radford
There are many billions of people in the world. There are tens, if not hundreds, of business firms. There are hundreds, if not thousands, of government and quasi government agencies. And there are a multitude of other organizations scattered about the global economy. All these are actors on the economic stage. They generate an incalculable number of relationships built around their multiplicity of desires, needs, and resource endowments. They barter. They exchange. They self-employ. They employ others. They sell. They buy. They consume. Some produce for their own consumption. Some produce for others. Some make their income as rentiers. Others work. They all change through time as they adapt to and interact with each other. They all learn. Read more…
Spanish job growth in 2014 was high in a comparative as well as in a historical perspective (graph 1) and, after the ‘Great Depression’ sized decline in employment caused by the financial crisis and the housing bust, of course very welcome (source: Eurostat). Job growth seems to be fairly balanced. Manufacturing (including utilities) and the ‘broad’ government sector (including health and education, which, though partly private, are always and everywhere heavily influenced by public arrangements and finance) added about 100.000 jobs (graph 2). The big winner was the leisure sector (tourism, hospitality, recreation, arts etcetera). Agriculture did bad. Will Brussels agree with an increasing number of ‘broad government’ jobs? According to neoclassical macro models popular in Brussels and Frankfurt, government health and education jobs add nothing of value… Read more…
from Lars Syll
Brad DeLong asks why the New Keynesian (NK) model, which was originally put forth as simply a means of demonstrating how sticky prices within an RBC framework could produce Keynesian effects, has managed to become the workhorse of modern macro, despite its many empirical deficiencies …
I think this has two implications for those who want to question the microfoundations hegemony. The first is that the discussion needs to be about methodology, rather than individual models. Deficiencies with particular microfounded models, like the NK model, are generally well understood, and from a microfoundations point of view simply provide an agenda for more research. Second, lack of familiarity with methodology means that this discussion cannot presume knowledge that is not there … That makes discussion difficult, but I’m not sure it makes it impossible.