Is public debt — really — a burden on future generations?

April 22, 2019 5 comments

from Lars Syll

The real issue … is not whether it is possible to shift a burden (either in the present or in the future) from some people to other people, but whether it is possible by internal borrowing to shift a real burden from the present generation, in the sense of the present economy as a whole, onto a future generation, in the sense of the future economy as a whole … The latter is impossible because a project that uses up resources needs the resources at the time that it uses them up, and not before or after.

204545_600This basic proposition is true of all projects that use up resources … The proposition holds as long as the project​ is financed internally, so that there are no outsiders to take over the current burden by providing the resources and to hand back the burden in the future by asking for the return of the resources.
It is necessary for economists to keep repeating​ this basic proposition because one of their main duties is to keep warning people against the fallacy of composition. To anyone who sees only a part of the economy it does seem possible to borrow from the future because he tends to assume that what is true of the part is true of the whole.

Abba Lerner

Public debt is normally nothing to fear, especially if it is financed within the country itself (but even foreign loans can be beneficent for the economy if invested in the right way). Read more…

Veblen’s insights come back to haunt us.

April 21, 2019 4 comments

from Ken Zimmerman

Veblen’s “The Theory of the Leisure Class” is even more relevant for events over the last 100 years. But this and most other Veblen research and writing have been systematically buried. Thorstein Veblen’s working life — from 1890 to 1923 — overlapped with America’s first Gilded Age, so named by Mark Twain, whose novel of that title lampooned the greedy corruption of the country’s most leisurely gentlemen (all men). Now, well into America’s second (bigger and better) Gilded Age, in a world of overwhelming inequality, Veblen’s insights come back to haunt us.

A brilliant student and scholar, Veblen studied anthropology, sociology, philosophy, and political economy (out-of-date for what’s now called economics). When Veblen studied economics, he, like most economists was concerned with the actual conditions of ordinary human beings. None would have settled for data from a sham “free market.” Veblen’s first job was at the University of Chicago, the university bought and paid for by John D. Rockefeller the classic robber baron, and leader of the leisure class. Rockefeller called the university “the best investment” he ever made, since he intended to use it to advance the interests of his class and suppress opposition. Read more…

The Great Transformation: poverty on a large scale

April 20, 2019 13 comments

from Maria Alejandra Madi

In the analysis of the economic and social transformations of the nineteenth century, Polanyi noted that the emergence of a market economy pushed to the side the old economic and social systems based on reciprocity and redistribution.  Since then, the market economy has been characterized as an economic system controlled by prices that determine what, how and how much is produced and how is distributed.

As Polanyi explained, the decisions about production and distribution are guided by the economic motive and they do not aim at achieving common welfare. Indeed, in the market economy there are not social considerations in the decisions about production and distribution.

In his well-known book, The Great Transformation, one key-question is: Where do the poor come from? To answer this questionPolanyi described the birth of the market economy and the emergence of the labor market in nineteenth century Western civilization (Polanyi, 1944:87). After land and money had already emerged as commodities, the commodification of labor – that is to say the commodification of human lives – resulted from land appropriations through enclosures. In this historical setting, the process of social change created by the market economy led to the emergence of poverty on a large scale.

Karl Polanyi described the desolation, dehumanization and degradation of human lives as necessary steps for the emergence and expansion of the labor market in a market economy: Read more…

Share of wealth held by the bottom 90% by country

April 19, 2019 5 comments

Graph depicting Share of Wealth Held by the Bottom 90%

Sources: Credit Suisse (aggregating data from national records)
Last updated: May 12, 2016

“This was it seems Nordhaus’ plan all along.”

April 18, 2019 2 comments

from Ken Zimmerman

Bichler and Nitzan get into the details of how “capitalization” is used to deny climate change in their article, ”How to use capitalization to minimize the cost of climate change and win a Nobel for ‘sustainable growth.’” The title says it all. William D. Nordhaus won the Nobel prize in economics for a climate model that minimized the cost of rising global temperatures and undermined the need for urgent action. Nordhaus’ “racket” created low-ball estimates of the costs of future climate change and high-ball estimates of the costs of containing the threat contributed to a lost decade in the fight against climate change, lending intellectual legitimacy to denial and delay. At any time t, the present value (PVt) of future climate change — or, in plain words, the cost to society if it were to bear the brunt of climate change at time t rather than in the future — involves two separate considerations: (1) the estimated cost to be incurred n periods into the future (Ct+n), and (2) the discount rate at which these costs are to be brought back to present value (r). Nordhaus “monkeyed” with both. Vastly overestimating the costs to manage climate change today and underestimating the future cost of climate change effects with a phony-up discount rate. Nordhaus does not have the credentials to achieve the first and can achieve the second only indirectly through an absurd discount rate of 6%. At this rate the present value of $100 of climate change cost incurred 100 years from the present is less than $0.25. So, why act today? It cost us (the planet of us) little to nothing to wait another 20 or 30 years, or even longer. “The nice thing about these discount-rate ‘adjustments’ is that, unlike the commotion stirred by debates over the actual cost of climate change, here there are no messy quarrels with scientists, no raised eyebrows from journalists and no outcries from the cheated public. Only contented politicians and delighted capitalists. This was it seems Nordhaus’ plan all along.  read more

Power: take two

April 17, 2019 9 comments

from Peter Radford

I have been reading Walter Scheidel’s wonderful book “The Great Leveler”, which gives us a very long period perspective on inequality.  Were I to be limited to only two books on inequality, this would be one.  It covers the ebb and flow of inequality over an extremely long time, with extensive discussions on civilizations as diverse as ancient China and ancient Rome.  Anyone who wants to make a serious contribution to the understanding of inequality has to be familiar with Scheidel and his mountain of data.

At the risk of being too brutal to Scheidel’s argument, here is my very brief version of it:

  • Inequality is the norm, not the exception, throughout history
  • Its ebb and flow is dictated more by the impact of warfare and mayhem on society than by social reform or redistributive governance
  • Our current high level of inequality is simply a return to the norm because the devastation of capital during the first half of the twentieth century has now worn off, and the urgency for social reform caused by the two world wars has dissipated

And that’s about it!

What I like about the simplicity of this general idea is that it undermines the logic — at least in my mind — of economic forces being the key determinant of resource allocation. Read more…

WEA Commentaries

April 17, 2019 Leave a comment

WEA Commentaries

Volume 9, Issue No. 1 Download the issue as a PDF       

Please support the WEA by paying a membership fee   or making a small donation

 

Global inequality from 1960 to 2017

April 16, 2019 4 comments

conceived by Jason Hickel   visualization by Huzaifa Zoomkawala

Economics vs. the Natural Sciences: The methodology of “as if”

April 15, 2019 8 comments

from Michael Hudson

What is even more remarkable is the idea that economic assumptions need not have any relationship to reality at all. This attitude is largely responsible for having turned economics into a mock-science, and explains its rather odd use of mathematics. Typical of the modern attitude is the textbook Microeconomics (1964:5) by William Vickery, long-time chairman of Columbia University’s economics department, 1992-93 president of the American Economic Association and winner of the 1997 Nobel Economics Prize. Prof. Vickery informs his students that “pure theory” need be nothing more than a string of tautologies:

Economic theory proper, indeed, is nothing more than a system of logical relations between certain sets of assumptions and the conclusions derived from them. The propositions of economic theory are derived by logical reasoning from these assumptions in exactly the same way as the theorems of geometry are derived from the axioms upon which the system is built.  Read more…

Fear of Floating

April 15, 2019 3 comments

from Asad Zaman

Published in Dawn, Mar 27, 2019, a leading Pakistani newspaper, in context of public debate about moving to a floating exchange rate regime —

In 1971, when Nixon shocked the world by abandoning the convertibility of dollars to gold, he dragged all of us, unwillingly, into the modern era of floating exchange rates. Since then, economic theories have changed. But old habits die hard; economists and policymakers today continue to think and operate as if they live in the old world. This article examines the question of fixed versus floating exchange rate regimes from the new perspective of Modern Monetary Theory (MMT).  read more

Median wealth by country

April 14, 2019 2 comments

Sources: Credit Suisse (aggregating data from national records)
Last updated: May 12, 2016

Radical uncertainty — a question of economic methodology

April 13, 2019 33 comments

from Lars Syll

Between 1920 and 1950, a debate took place which defined the future of economics in the second half of the 20th century. On one side were John Maynard Keynes and Frank Knight; on the other, Frank Ramsey and Jimmie Savage.

UnknownKnight and Keynes believed in the ubiquity of “radical uncertainty”. Not only did we not know what was going to happen, we had a very limited ability to even describe the things that might happen. They distinguished risk, which could be described with the aid of probabilities, from real uncertainty—which could not. In Knight’s world, such uncertainties gave rise to the profit opportunities which were the dynamic of a capitalist economy. Keynes saw these uncertainties as at the root of the inevitable instability in such economies.

Their opponents insisted instead that all uncertainties could be described probabilistically. And their opponents won, not least because their probabilistic world was convenient: it could be described axiomatically and mathematically.

It is difficult to exaggerate the practical consequence of the outcome of that technical argument. To acknowledge the role of radical uncertainty is to knock away the foundations of finance theory and much modern macroeconomics. But the reigning consensus is beset with glaring weaknesses. Keynes and Knight were right, and their opponents wrong. And recognition of that is a necessary preliminary to the rebuilding of a more relevant economic theory.

John Kay

Many economists have over time tried to diagnose what’s the problem behind the ‘intellectual poverty’ that characterizes modern mainstream economics. Read more…

Notes on: power matters

April 12, 2019 15 comments

from Peter Radford

Let’s start with a different approach:

Reality suggests there are many ways in which resources are allocated within an economy, not just one.  Economics, as it now exists in its mainstream or standard form, has withered to study just one: that which takes place in markets — where markets are strictly defined in such a way as to guarantee outcomes compatible with a certain ideological perspective.  As we have discussed before this trajectory for the discipline was deemed essential for the mainstream to construct a logical defense against the mid-1800s criticism of early industrial capitalism.  It continues to act as a defense against more contemporary critiques as well.  In so doing it adopted a hostile and denigrating stance to alternatives.  “Markets good, all else bad” subsequently became a standard mantra, which is why mainstream economics is inherently anti-democratic.  It has no tolerance for anything other than its preferred market mechanisms, and, by obliterating non-market forces from its purview, has steadily retreated from being a “social science” into becoming more of a “pseudo science”.

As a result, there is a clash between an economy as it exists in practice, which is riven through with non-market forces, and an economy as it exists in theoretical principle, in which such difficult things are absent. Read more…

Sweden as a case of MMT

April 11, 2019 5 comments

from Lars Syll

According to the Swedish government official website, “Historically, the Swedish economy suffered from low growth and high inflation,” which the nation overcame with “inventive and courageous reforms” that “succeeded in maintaining control over public spending.

“First, in 1996, a ceiling for public spending was introduced. This was accompanied by the addition of the ‘surplus goal’ … for the government budget.”

dumstrut​Swedish government spending reforms were the consequence of a financial crisis in the early 1990s that saw the economy collapse into three years of recession and the nationalization of two major banks …

From 1971 to the 1990s crisis, Sweden experienced a mash-up of Green New Deal extreme government spending and “Modern Monetary Theory” loose money and enormous deficits. Government spending rose to over 70 percent and deficits rose to over 10 percent of GDP, while inflation soared to double-digit rates.

Sweden has trod the ground U.S. progressives wish to cover, and the only gains came when the social democratic fantasy was unwound.

Douglas Carr / The Hill

Now, this is one of the lousiest pieces of history revisionism I’ve ever come across.  Read more…

Eight billionaires ‘as rich as world’s poorest half’

April 11, 2019 8 comments

Vanishing green shoots

April 10, 2019 1 comment

from C.P. Chandrasekhar and Jayati Ghosh

When the third estimate of US growth in the last quarter of 2018 was released the euphoria exuded by forecasters of global growth even a few months earlier waned. The annualised quarter on quarter growth rate that had risen to a more than comfortable 4.2 per cent in the second quarter of 2018, had fallen to 3.4 and 2.2 per cent in the subsequent two quarters (Chart 1). The quarterly rates measuring growth relative to the corresponding quarter in the previous year after having risen consistently have stagnated (Chart 2). Once again it appears that growth in the US is losing momentum, contrary to the optimistic projections of recovery that figures relating to the periods prior to the last quarter had generated.

This is having repercussions at a policy level too. The Federal Reserve, which after having tapered out its bond purchasing programme had begun raising interest rates, announced that it would not be implementing the further interest rate hikes in 2019 it had declared it was committed to.

There are a number of messages that can be read into these developments, of which four are particularly significant. Read more…

The real debt problem

April 9, 2019 6 comments

from Lars Syll

The ad nauseam repeated claim that our public debt is excessive and that we have to balance the public budget is nothing but absolute nonsense. The harder politicians — usually on the advice of mainstream establishment economists — try to achieve balanced budgets for the public sector, the less likely they are to succeed in their endeavour.darling-let-s-get-deeply-into-debt And the more the citizens have to pay for the concomitant austerity policies these wrong-headed politicians and economists recommend as ‘the sole solution.’

One of the most effective ways of clearing up this most serious of all semantic confusions is to point out that private debt differs from national debt in being external … A variant of the false analogy is the declaration that national debt puts an unfair burden on our children, who are thereby made to pay for our extravagances. Very few economists need to be reminded that if our children or grandchildren repay some of the national debt these payments will be made to our children or grandchildren and to nobody else. Taking them all together​ they will no more be impoverished by making the repayments than they will be enriched by receiving them.

Abba Lerner The Burden of the National Debt (1948)

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. Read more…

Ecological limits and hierarchical power

April 8, 2019 11 comments

from Blair Fix, Shimshon Bichler and Jonathan Nitzan

Nowadays, it is commonplace to claim that the economy overuses our limited material and energy resources (Figure 1) and that this overuse threatens both human society and the biosphere. Other than ant-science cranks, the only ones who seem to deny this claim are mainstream economists (Fullbrook 2019).

In our view, though, this conventional condemnation of the economy is somewhat misleading. Read more…

Mainstream theories of income distribution

April 7, 2019 8 comments

from Lars Syll

rigged_coverMarkets are never just given. Neither God nor nature hands us a worked-out set of rules determining the way property relations are defined, contracts are enforced, or macroeconomic policy is implemented. These matters are determined by policy choices. The elites have written these rules to redistribute income upward. Needless to say, they are not eager to have the rules rewritten — which means they also have no interest in even having them discussed.

But for progressive change to succeed, these rules must be addressed. While modest tweaks to tax and transfer policies can ameliorate the harm done by a regressive market structure, their effect will be limited. The complaint of conservatives — that tampering with market outcomes leads to inefficiencies and unintended outcomes — is largely correct, even if they may exaggerate the size of the distortions from policy interventions. Rather than tinker with badly designed rules, it is far more important to rewrite the rules so that markets lead to progressive and productive outcomes in which the benefits of economic growth and improving technology are broadly shared.

As has become abundantly clear to students of economics these days, mainstream textbook economics has pretty little in common with the real world in which we actually live. Read more…

What’s in a model… (an economic one, that is)

April 6, 2019 8 comments

What’s an economic model? A little semantic intro (don’t worry, we will get to Keynes in a moment)

I work together with biologists, agronomists and even test animal specialists on a regular basis. These people use words like ‘conceptual models’ or ‘even ‘animal model’ all the time. Check this:  ‘Mouse Models of Diabetic Nephropathy‘. Yes, a live animal is considered to be a scientific model. I had to get used to this as this use of the word ‘model’ transcended the boundaries used in the world I came from. But mastering these concepts prooved enightening. Conceptual models are described by Andrew Powell-Morse in the following way:

conceptual model is a representation of a system that uses concepts and ideas to form said representation… a model is intrinsically a thing unto itself, but that model also contains a concept of what that model represents — what a model is, as opposed to what a model represents.  (think of the mouse and diabetes, M.K.) … conceptual modeling is used as a way to describe physical or social aspects of the world in an abstract way. For example, in the realm of software development, a conceptual model may be used to represent the relationships of entities within a database. Whether written down via text or diagrammed visually, such a conceptual model can easily represent abstract concepts of the relationships between objects in the system, such as Users and their relationship to Accounts.

Read more…