Economic history — a victim of economics imperialism

December 18, 2017 2 comments

from Lars Syll

Economic history was one of the first fields to succumb at least partially to so-called economics imperialism, the phenomenon through which the methods and models of economic theory have taken over other social scientific subject fields.  The economic historian’s craft, which probably always tended to err in any case towards retrospective reassurance that things were never as bad as they appeared at the time, was thus at least to some extent overwritten by the economic theorist’s often unflinching faith in the universal applicability of their explanatory models …

ecimpIn its orthodox form at least, economic theory reduces all behaviour to that which is consistent with the solution to a partial differential equation.  Such equations will no longer typically be visible in the resulting model, because to say that they are hardly at the cutting-edge of mathematical sophistication is obviously a rather big understatement.  But the presence of economic agents who act slavishly in this way is likely to be a necessary feature of those models.  They are always either maximising or minimising something, akin to the position of turning points of mathematical functions taking the form y = f(x).  No challenge is permitted to this conception of agency, because it is simply assumed that nature has ordained the economic agent to act in this way.  If they are not either maximising or minimising something, then they cannot be considered to have acted economically at all.

Economic history written through the perspective of this style of orthodox economic theory consequently has all of its behavioural uncertainty removed at the point of origin.  Historical uncertainty may still be admissible, but what of the scope for fleshing out the feelings of alienation that so often follow from being caught in a moment of intense historical uncertainty?  Presumably this has to be severely curtailed if every economic agent at every moment of time is blessed with pure certainty of behaviour.

Matthew Watson

Central banking: Edward Harris on why raising interest rates in an overleveraged economy is very risky

December 17, 2017 3 comments

Even more about central banking. Why so much? Partly because people are writing very good stuff about it (like the AAA piece from Edward Harris below (excerpt)). Partly because we seem to see the end of the era of ‘pure’ inflation targeting. And (part of this last trend?) partly because soon Merkel and Macron will sit together to redesign the Eurosystem. Previous posts: ideas of Willem Buiter, Richard Werner, Thomas Mayer excerpts from a recent paper by Mike Konczal and Josh Mason and ideas from the German Handelsblatt shadow council.

As the Federal Reserve meets today [last week: M.K.] to decide how to communicate its messaging on future rate hikes and balance sheet reduction, financial stability will play a key role. Yesterday, I wrote about the Bank of International Settlements new warnings on financial stability. And just this morning, I read a piece from Goldman Sachs Asset Management EMEA division head Andrew Wilson, warning that the risk of overheating was real. So let’s put some framing around this issue and ask how the Fed reacts as the data come in down the line.

In the past decade on Credit Writedowns, I have had a lot of good commentary from different writers on financial stability. And most of it is based around Hyman Minsky’s Financial Instability Hypothesis. Read more…

Do Purchasing Power Parity exchange rates mislead on incomes? The case of China

December 17, 2017 Leave a comment

from C.P. Chandrasekhar and Jayati Ghosh

Ever since Larry Summers and Alan Heston produced what become known as the “Penn World Tables” comparing prices and thereby the purchasing power of currencies across countries, the urge to use some deflator of market exchange rates to compare incomes across countries has been strong. The economic theory behind this is that exchange rate comparisons of less-developed economies consistently undervalue the non-traded goods sector, especially labour-intensive and relatively cheap services, and therefore underestimate real incomes in these developing economies. In some cases, this can be quite significant. In larger emerging markets like China and India, the conversion factors have been so large (up to four times) that China became the second largest economy in the world and India the sixth largest, on the underlying basis that their currencies command several times more goods and services than are reflected in the market exchange rates.

The International Comparison Project (ICP) now managed by the World Bank is the culmination of this attempt to draw more realistic comparisons of income: an estimation of GDP across countries and over time, based on periodic surveys and with some rough attempts at normalising for the basket of goods and services whose prices are compared. This results in PPP exchange rates, which have become the standard way of comparing incomes across countries and over time, and provide the underpinning for all estimates of international inequality.   Read more…

Don’t worry?!

December 16, 2017 6 comments

from Daivd Ruccio

Liberal mainstream economists all seem to be lip-synching Bobby McFerrin these days.

Worried about automation? Be happy, write Laura Tyson and Susan Lund, since “these marvelous new technologies promise higher productivity, greater efficiency, and more safety, flexibility, and convenience.”

Worried about the different positions in current debates about economic policy? Be happy, writes Justin Wolfers, and rely on the statistics produced by government agencies and financial firms and the opinions of mainstream economists.

Me, I remain worried and I have no reason to accept mainstream economists’ advice for being happy.

Sure, new forms of automation might lead to higher productivity and much else that Tyson and Lund find so alluring. But who’s going to benefit? If we go by the last few decades, large corporations and wealthy individuals are the ones who are going to capture most of the gains from the new technologies. Everyone else, as I have written, is going to be forced to have the freedom to either search for new jobs or deal with the fundamental transformation of the jobs they manage to keep.  Read more…

Why not make the rich compete?

December 15, 2017 3 comments

from Dean Baker

I’m glad to see the debate that Max Sawicky has touched off with his review of Steve Teles and Brink Lindsey’s new book, The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase InequalityThe book, and the resulting debate, raises the question: can an attack on rent-seeking by the rich be the basis for a progressive agenda? This is a debate I’ve played some role in getting started, with several books, most recently Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.

In my view, it’s an area of enormous potential, and it presents the only plausible path forward for progressive politics in the US and elsewhere.

The basic logic of the argument is that markets are pretty much infinitely malleable. The government sets rules that can lead to relatively equal outcomes or can lead to enormous inequality. In the last four decades, the Right has managed to use its control of the rule-setting process to engineer an enormous upward redistribution of income. The process involved the leadership of both political parties, so it’s certainly not a story in which right-wing Republicans exclusively can be seen as the villains.

Since there’s nothing intrinsic to the market that caused this upward redistribution, it doesn’t make sense to talk about using the government to rein in the market. Reversing the upward redistribution will in some cases involve more government, but in some cases it will require less. Most importantly, it will require that the government act differently when structuring markets.   Read more…

On the non-applicability of statistical models

December 14, 2017 9 comments

from Lars Syll

Eminent statistician David Salsburg is rightfully very critical of the way social scientists — including economists and econometricians — uncritically and without arguments have come to simply assume that they can apply probability distributions from statistical theory on their own area of research:

9780805071344We assume there is an abstract space of elementary things called ‘events’ … If a measure on the abstract space of events fulfils​ certain axioms, then it is a probability. To use probability in real life, we have to identify this space of events and do so with sufficient specificity to allow us to actually calculate probability measurements on that space … Unless we can identify [this] abstract space, the probability statements that emerge from statistical analyses will have many different and sometimes contrary meanings …

Kolmogorov established the mathematical meaning of probability: Probability is a measure of sets in an abstract space of events. All the mathematical properties of probability can be derived from this definition. When we wish to apply probability to real life, we need to identify that abstract space of events for the particular problem at hand … It is not well established when statistical methods are used for observational studies … If we cannot identify the space of events that generate the probabilities being calculated, then one model is no more valid than another … As statistical models are used more and more for observational studies to assist in social decisions by government and advocacy groups, this fundamental failure to be able to derive probabilities without ambiguity will cast doubt on the usefulness of these methods.

Wise words well worth pondering on.

As long as economists and statisticians cannot really identify their statistical models with real-world phenomena there is no real warrant for taking their statistical inferences seriously.   Read more…

What are business schools for?

December 14, 2017 27 comments

from Robert Locke

In his 1927 book, Julien Benda, wrote about the Treason of the Intellectuals (la trahison des clercs) One reviewer (Roger Kimball) noted:

“From the time of the pre-Socratics, intellectuals were a breed apart. They were non-materialistic knowledge-seekers who believed in a universal humanism and represented a cornerstone of civilized society. According to Benda, this all began to change in the early twentieth century. In Europe in the 1920s, intellectuals began abandoning their attachment to traditional philosophical and scholarly ideals, and instead glorified particularisms and moral relativism.”

Benda used the term clercs advisedly, as a special brotherhood, charged with knowledge seeking, who like the monks in the “dark” ages got civilization through barbarism, as the art historian Kenneth Clarke put it, “by the skin of its teeth.”

The subject recurred when Thorstein Veblen, in 1918, criticized the movement to create schools of commerce (business schools) in US higher education, as a return from civilization to barbarism.

John Kent in “The Business School in the Corporation of Higher Learning in the USA,” notes that Veblen

In The Higher Learning in America, speculated on the prospects of the schools of commerce within the American university.

“Specifically he postulated that (a) instruction in the field of commercial training may fall into a more rigidly drawn curriculum, that diverges from the ways of scientific inquiry (b) the college of commerce would divert funds from legitimate university uses, (c) create a bias hostile to scholarly and scientific work and (d) train graduates who would have better skills to predation on the community.”   Read more…

The ECB shadow council on the ideal ECB. Inflation targeting: out. Financial cycle: in.

December 13, 2017 1 comment

Some years ago, Cladio Borio from the BIS introduced the ‘financial cycle’. Here, a Borio/Lowe paper from 2002. What’s the financial cycle? From the twenties of the twentieth century onwards Wesley Mitchell and the NBER (National Bureau of Economic Research) perfected the (monthly) measurement of the classical business cycle (a still ongoing project). The concept of this business cycle of the ‘flow’ economy was and is the cornerstone of much macro-economic theorizing. ‘Chicago style economists’ rationalized the idea that low and stable inflation (1) could be engineered by the central bank and (2) was enough to control this business cycle. The idea of Borio (and others) is that, next to this cycle, there also is a financial cycle related to credit and assets, mainly houses which can not be tamed by low and stable inflation. This idea, while not entirely new (Minsky!), seems to have gotten traction when we look at responses of members of the Handelsblatt ‘Shadowcouncil’ of the ECB. See about this also Willem Buiter, Richard WernerThomas Mayer  and Mike Konczal and Josh Mason

Shadow ECB Council Sees Changes to ECB Mandate Shadow ECB Council favors sweeping changes to the ECB’s mandate to account for some of the mistakes in the policies of the past. Some members favor a dual mandate that includes employment, but most pushed for upgrading the importance of financial stability Read more…

Shopping Frenzy in the New China

December 13, 2017 Leave a comment

from C. P. Chandrasekhar

In an otherwise gloomy world economic environment, a new kind of record given the media bizarre cause to cheer: the value of online sales notched up by Chinese e-commerce giant Alibaba on a single discount sales day. Global business headlines screamed that in its annual sale on Singles’ Day, 11 November 2017, Alibaba had registered a record sales value of 168.2 billion yuan or $25.3 billion.  Singles’ Day, or 11 November, was, because of its 11/11 aspect, reportedly chosen around 25 years ago by students of Nanjing University to celebrate the fact of being single. Using what has evolved to become a hugely popular and secular celebration, Alibaba in 2009 decided to make the day into a discount shopping day like Black Friday and Cyber Monday (the Friday and Monday after Thanksgiving) in the US, to tap into the rising consumerism of a well-to-do middle class. In the process the celebrations in China on November 11 every year have gone the way they have for most festivals in today’s neoliberal world. Besides eating and drinking, people shop to celebrate.   Read more…

Consistency is the …

December 12, 2017 11 comments

from Peter Radford

Well, at least I am being consistent. Whether that’s being a good thing or not I will leave to you to figure out.

David Brooks set me off on a rant a few days ago, and he’s doing it again. I have to stop reading his columns. Last time it was about the rotting Republican Party: Brooks is one of those people who realized way too late that the GOP of yore disappeared long ago and has been replaced by a mash-up of far right cause driven groups smeared together with a good dose of corporatism. A good example being Trump who managed to win the last election by appealing to enough disgruntled and disaffected voters with exhilarating visions of smashing up the ossified Washington consensus and replacing it with something more responsive to everyday voter needs. Except, as we now know, Trump is every inch a corporatist and has absolutely no intention of following through on his promises. I must admit I admire the loyalty of his supporters who have yet to realize the extent of his betrayal of their support. It must be that they mistake the cloud of dust raise by his myopic corporate driven incompetence for the tearing down of what was there before. Even the giveaway of the tax plan hasn’t shaken made the message sink in: Trump is out for himself, not them.

In any case, back to Brooks.  Read more…

More papers from WEA online conference – Economic Philosophy: Complexities in Economics

December 12, 2017 1 comment

Complexity in the theory of economic evolution of Thorstein Veblen: an introduction
João Vitor Oliveira da Silva
Thorstein Veblen is a classic author, recognized for his writings on institutions and economic change. The complexity perspective, on the other hand, is a relatively contemporary approach for studying a considerable range of phenomena both in natural and social sciences. …
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The evolutionary dimension of Hayek’s thought: cultural selection and spontaneous order
Loranna Buzzo
The project’s basic axis the notion of order and cultural evolution by selection at the thought of Hayek. However, to highlight this aspect was necessary to analyze many other aspects of his work, as well as enter in the literature …
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Autonomous agents and economic complexities: a philosophical excursion
Greg Hill
This paper develops a conception of autonomous agents who, lacking the ready-made and complete list of possible states afforded their DSGE counterparts, must envision their own ―state space.‖ Such agents can and must do more than perform constrained optimization exercises; …
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Complexity and Economics
Victor A. Beker
Nobody will discuss that the economy constitutes a very complex system. The traditional approach to understanding it has been to reduce complexities to simple rules and behaviors, abstracting of many features of the real economy. An alternative to reductionism consists …
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Profit warning: there will be blood

December 11, 2017 3 comments

from Shimshon Bichler and Jonathan Nitzan

We have just updated the charts in our 2014 RWER paper ‘Still About Oil?’, and the picture they portray reads like a capitalist call for arms.

Beginning in the late 1980s, we suggested that, since the late 1960s, the Middle East was greatly influenced by the capitalized power of a Weapondollar-Petrodollar Coalition – a loose coalition comprising the leading oil companies, the OPEC cartel, armament contractors, engineering firms and large financial institutions – whose differential accumulation benefitted from and in turn helped fuel and sustain Middle East ‘energy conflicts’. These conflicts, we argued, reverberated far beyond the region: they affected the ups and downs of global growth, the gyrations of inflation and, in some important respects, the very evolution of the capitalist mode of power. And this impact, it seems to us, is now being called into question.

Over the past few years, oil incomes have crashed. Figure 1 shows that the leading oil firms – approximated by a ‘Petro-Core’ of listed companies – have seen their net profit in constant dollars plummet by over 90 per cent, falling from record highs in the early 2010s to lows last seen in the 1950s. The situation for OPEC is not much better. The organization’s overall petroleum exports, which reached record levels in the early 2010s, are now down by nearly two-thirds. The impact of this decline is greatly exacerbated by the organization’s rapid population growth – roughly 350 per cent over the past 55 years. Taking this latter growth into account means that, on a per capita basis, oil exports, expressed in constant dollars, are now back to where they were in the early 1970s, before the first oil crisis.   Read more…

Mike Konczal and Josh Mason on the Ideal Central Bank

December 10, 2017 4 comments

We’re publishing some expert ideas about the future of the ECB and monetary policy. Three days ago some ideas of Willem Buiter were published, two days ago some ideas from Richard Werner and yesterday ideas from Thomas Mayer. Today some excerpts from a recent paper by Mike Konczal and Josh Mason. They are not part of the Handelsblatt Shadowcouncil but their ideas often tally with those already published:

  • Pure ‘inflation targeting’ is (mortally?) compromised
  • Hence, central banks are overburdened and need to share responsibility for stable economic and financial development with (other parts of) the government
  • But there are serious coordination issues (this looms larger in the Eurozone than in the USA) with regard to management of monetary/fiscal policy as well as with regard to macro and micro allocation of credit
  • ‘Credit guidance’ (which the government is already doing, think for instance about the deductability of mortgage interest in many countries) has to be rebooted and aimed at long-term productive investment. Opinions differ about the exact shape of this.
  • But it does mean that increased democratic and social accountability is important

There are substantial policy questions about the ways in which the Federal Reserve stimulates the economy by hitting the gas pedal or brake, by way of increasing or decreasing the single interest rate, is consistent with larger economic goals, including ensuring financial stability, fostering productive investment and good jobs, and directing society’s resources toward urgent social problems, such as climate change. In particular, we review recent proposals for modifying the inflation target of monetary policy and for allowing the overnight interest rate to move below zero. Read more…

Keynote papers from WEA online conference – Economic Philosophy: Complexities in Economics

December 10, 2017 2 comments

Strategies in relation to complexities: From neoclassical cost-benefit analysis to positional analysis
Peter Söderbaum
In this essay neoclassical Cost-Benefit Analysis (CBA) is criticized as beinng too simplistic and also too specific in ideological terms. Positional Analysis (PA) is advocated as an alternative based on a definition of economics in terms of multidimensional analysis and …  More    13 Comments

A Cognitive Behavioral Modelling for Coping with Intractable Complex Phenomena in Economics and Social Science: Deep Complexity
Robert Delorme
It is argued in this paper that there is an issue of complex phenomenal intractability in economics, in particular, and in social science in general, and that it is unduly neglected in theorizing in these areas. This intractability is complex … More      32 Comments

Robert Lucas — nonsense on stilts

December 10, 2017 6 comments

from Lars Syll

In Michel De Vroey’s version of the history of macroeconomics, Robert Lucas’ declaration of the need for macroeconomics to be pursued only within ‘equilibrium discipline’ and declaring equilibrium to exist as a postulate, is hailed as a ‘Copernican revolution.’ Equilibrium is not to be considered something that characterises real economies, but rather ‘a property of the way we look at things.’ De Vroey  — approvingly — notices that this — as well as Lucas’ banning of disequilibrium as referring to ‘unintelligible behaviour’ — ‘amounts to shrinking the pretence of equilibrium theory.’

Mirabile dictu!

Is it really a feasible methodology for economists to make a sharp divide between theory and reality, and then — like De Vroey and Lucas — treat the divide as something recommendable and good? I think not.

Fortunately, there are other economists with a less devoted hagiographic attitude towards Lucas and his nonsense on stilts.

Read more…

Thomas Mayer on the ideal European Central Bank

December 9, 2017 13 comments

We’re publishing some expert ideas about the future of the ECB (and hence Euro money). Two days ago some ideas of Willem Buiter were published, yesterday we published some ideas from Richard Werner. Today some ideas by Thomas Mayer. Beware the last sentence.

EMU is incomplete and dysfunctional The European Monetary Union (EMU) is incomplete and dysfunctional. First, it is incomplete, because the quality of book money created by banks through credit extension differs from country to country (depending on the quality of the banks’ credit portfolios and the financial capacity of the governments to support weak banks in their jurisdiction). We have a paper currency union (as euro notes are the same in all member countries), but no monetary union (as deposits differ). Second, EMU is dysfunctional, because the monetary policy of inflation targeting pursued by the ECB has broken down. Since the Phillips curve no longer works, the central banks has lost control over inflation. The ECB-“Insiders” (policy makers and their loyal “watchers”) of course deny that the emperor has no clothes and hope that the Philipps curve would come back at some point. This amounts to a denial of reality. Against this background, I propose first to complete EMU by introducing a safe bank deposit, i.e., a deposit fully backed by reserve money deposits at the central bank. The safe deposit would turn deposits (like bank notes) into complete substitutes across countries (anyone wanting to read more on this can find it here. Second, I propose that the ECB abandon the policy of inflation targeting and adopt a rule for the expansion of reserve money (which would of course translate into the expansion of the safe deposit). The rate of expansion should reflect the expected nominal growth rate of the economy. This rate could only be altered with a two thirds majority in the Governing Council on the basis of an assessment of any structural changes that are expected to change the long-term growth rate of the economy. I am aware that there would be no room for pro-active monetary policy in this regime. In my view, this is its biggest advantage.

Mit freundlichen Grüßen Dr. Thomas Mayer.

How Uber money dominates and distorts economic research on ride-hailing platforms

December 9, 2017 3 comments

from Norbert Häring

Ride-hailing platform operator Uber is often accused of undermining labor market regulations and of overpricing in times of peak demand by “surge prcies”. Uber counters such accusations not only with high-profile lobbyists, but also with the help of top-notch economists, who cooperate in exchange for exclusive data and lucrative consultancy assignments. Even reputable journals publish such sponsored analyisis as if it was science.

A recent paper by renowned MIT professor Joshua Angrist with Sydnee Caldwell and Uber Research Director Jonathan V. Hall  comes to the favorable conclusion that drivers benefit greatly from the fact that Uber exists. Also Princeton economist Alan B. Krueger, former chairman of the Council of Economic Advisors of the US president, wrote a paper on Uber, under contract with Uber together with Uber-Mann Hall an essay on the “An Analysis of the Labor Market for Uber’s Driver Partners in the United States” which makes the company appear as a very good employer.

The survey of “Uber driver partners” on which they heavily rely, was done by a firm hired by Uber for the purpose of producing a PR-brochure. The way it is done – and used by Kruger and Hall is highly problematic and hardly scientific. Severe biases are not mentioned, let alone addressed. One such bias: No disaffected drivers, who have left Uber, are included.

Kruger and Hall do not point out that Uber cut compensation for drivers in many markets after the end of the investigation period. He would not have any reliable data for that, Krueger said upon request for comment.  Read more…

How low can it go?

December 8, 2017 6 comments

from David Ruccio

labor share

The United States is now more than eight years out from the end of the Great Recession and the one-side nature of the recovery is, or at least should be, clear for all to see.   Read more…

Richard Werner on the Ideal ‘European’ Central Bank

December 8, 2017 4 comments

As I stated yesterday we will publish some ideas about the future of the ECB. Yesterday some ideas of Willem Buiter were published. He wanted to abolish national central banks, to change the mandate, more transparency and an end to the prohibition of monetary financing. Today: Richard Werner. He warns us that it’s not just about the central bank but also about the ‘normal’ banks. More localism is needed. And the ‘tool’ credit guidance plus more localized banking may be more important than a mandate: let decentralized decisions rule money creation (as long as it is not for purchasing existing assets)!

The ideal central bank does not have the legal status of ECB or Reichsbank [the pre-1946 central bank of Germany, M.K.], but that of the Bundesbank

In my analysis of the ECB, published first in 2003 in my bestseller ‘Princes of the Yen: Japan’s Central Bankers and the Transformation of the Economy’ as chapter 19, and published in 2006 here, I pointed out that the ECB had not, in fact, been modelled on the Bundesbank, as had been variously claimed. Read more…

Tax cuts boost growth, and other things they tell children

December 7, 2017 Leave a comment

from Dean Baker

It is a bit incredible that we are again being told that tax cuts directed primarily toward the wealthy will create a surge of investment and growth, thereby benefitting everyone. The Republicans may have the power to push their tax cut through Congress, but the claim that ordinary workers will benefit is not the sort of thing that serious people should take seriously.

The GOP’s basic story is that a cut in the corporate income tax will lead to a huge burst of investment. More investment will lead to gains in productivity, which will allow workers to have higher pay.

There are theoretical models that show this sort of result. But there are also all sorts of assumptions in these models that clearly do not correspond to the real world.

In these models, investment is highly responsive to changes in the after-tax profit rate. But we know this is not the case in the real world. This is demonstrated most immediately by the fact that investment is currently relatively weak.

The real world conflicts with these models since the after-tax profit rate has soared in the last 15 years as the before-tax profit share of income hit its highest level in 50 years. (In the models, investment doesn’t care if the after-tax profit rate goes up because of lower taxes or higher before-tax profits.) If a surge in profit rates due to higher before-tax profits didn’t lead to an investment boom, why would anyone think that a further increase in profit rates due to lower taxes would spur investment?  Read more…