new issue of Real-World Economics Review

March 27, 2024 Leave a comment

Long Read – Is Bitcoin more energy intensive than mainstream finance?

March 23, 2024 2 comments

from Blair Fix

When it comes to Bitcoin, there’s one thing that almost everyone agrees on: the network sucks up a tremendous amount of energy. But from there, disagreement is the rule.

For critics, Bitcoin’s thirst for energy is self-evidently bad — the equivalent of pouring gasoline in a hole and setting it on fire. But for Bitcoin advocates, the network’s energy gluttony is the necessary price of having a secure digital currency. When judging Bitcoin’s energy demands, the advocates continue, keep in mind that mainstream finance is itself no model of efficiency.

Here, I think the advocates have a point.

If you want to argue that Bitcoin is an energy hog, you’ve got to do more than just point at its energy budget and say ‘bad’. You’ve got to show that this budget is worse than mainstream finance.

On this comparison front, there seems to be a vacuum of good information. For their part, crypto promoters are happy to show that Bitcoin uses less energy than the global banking system. But this result is as unsurprising as it is meaningless. Compared to Bitcoin, global finance operates on a vastly larger scale. So of course it uses more energy.

To be meaningful, any comparison between Bitcoin and mainstream finance must account for the different scales of the two systems. So instead of looking at energy alone, we need to look at energy intensity — the energy per unit of circulating currency. That’s what I’ll do here. In this post, I compare the energy intensity of Bitcoin to the energy intensity of mainstream US finance.

Which system comes out on top? The results may surprise you.

Read more…

Weekend read – The trouble with words

March 16, 2024 6 comments

from Peter Radford

Trying to define something so a discussion can follow without ambiguity in meaning sliding in and muddying things.  Slippery isn’t it?

How about this:

“I sometimes wish we could take the energy expended on these antimacassar hand-me-down “rules” and apply it to working out a way to use awkwardly broad words like inclusion, equity, liberty and racism more clearly. The ever-evolving meanings of these words has a way of creating genuine misunderstandings — try defining “neoliberalism” — to the point of actually impeding communication.”

That’s John McWhorter in the New York Times a couple of days ago.  He teaches linguistics.

Try defining “neoliberalism”?

He’s been chatting too much with his fellow academics in the economics department.  They are the last people to ask.  Neoliberalism is easy to define.  It’s just that its definition keeps offending people who want to be neoliberal without having the recent taint associated with it rub off on them.  Or, at least that’s my opinion.

And when I say neoliberal is easy to define I must remind you that it is a term used most often in discussions about the political-economy of the past forty to fifty years.

Read more…

In a free market, drugs are cheap, government-granted patent monopolies make them expensive

March 14, 2024 Leave a comment

from Dean Baker

This simple point was left out of a Washington Post article on the legal battle surrounding the Biden Administration’s efforts to negotiate lower prices for drugs purchased by Medicare. This point is important because the drug companies are definitely not trying to get the government out of the market, as the industry claims.

The industry is effectively insisting that the government is obligated to give it an unrestricted monopoly for the period of its patent duration. Also, since patent monopolies provide enormous incentives for corruption (they are equivalent to tariffs of many thousand percent, or even tens of thousands percent), drug companies often find ways to game the system and extend effective protection beyond the original patent life.

Anyhow, portraying this as a situation where the industry wants the free market and the Biden administration wants government intervention is 180 degrees at odds with reality. The industry wants very strong government intervention so that it can make big profits.

It’s also worth noting that the amount of money at stake here is potentially enormous. We will spend well over $600 billion this year on drugs. These drugs would likely cost less than $100 billion in a free market. The difference of $500 billion is more than eight times as large as President Biden’s requested funding for Ukraine.

I heard there’s some good shit on TV tonight …

March 13, 2024 Leave a comment

from Lars Syll

I heard there's some good shit on TV tonight. : r/funny

Time is a scarce resource on television. However, if one still — as is so often the case nowadays — uses precious airtime for trivial matters and meaningless ‘entertainment,’ there must be a reason. Television is — still — for a large part of the population one of the primary sources of information and worldview. Thus, filling program schedules with trivialities becomes an effective means to — instead of functioning as an instrument for shaping opinions and fostering reflection — push aside important information that citizens would need to exercise and develop their democratic capabilities.

Television, through its focus on personalities and banalization of various ‘affairs,’ creates a poor environment for real knowledge dissemination. Instead of serious opinion formation, we get demagogic programs where quick-witted, shallow individuals with limited knowledge expound on everything and nothing, but especially on topics they know nothing about. Read more…

Is “greedflation” over?

March 11, 2024 3 comments

from Dean Baker

Peter Coy used his column yesterday to beg President Biden not to use the term “greedflation” to explain the runup in inflation since the pandemic. I am sympathetic to much of his argument, most importantly, the idea that corporations suddenly turned greedy is a bit far out.

As Coy notes, corporations are always greedy. The real question is whether something unusual was going on with corporate profits in the pandemic. There clearly was an increase in profit margins in the pandemic. This was largely due to real shortages created by supply chain problems worldwide.

We can say this with a high degree of certainty because inflation was a worldwide story. This means that the idea that it was due to Biden’s “excessive” stimulus is silly.

While the U.S. is a huge part of the world economy, higher demand here could at most only explain a small fraction of the inflation in countries like the U.K. and Germany. The fact that their inflation has been similar to U.S. inflation since the pandemic, undermines the idea that Biden’s recovery package was the main factor in the U.S. inflation surge.

I have made this argument before and been told that people don’t care about inflation in the U.K. and Germany, they care about inflation here. That’s fine, but as an economist I’m trying to explain causation.

Any fool can look out over the horizon and see the earth is flat, the curvature of the planet is not generally visible in our range of vision. But we know the earth is in fact round, and no serious person is going to insist it is flat.

Similarly, we know inflation was a worldwide phenomenon due to the pandemic. If people want to yell at Biden over it, that is their right, but let’s not pretend that complaint is based in reality.

But let’s get back to “greedflation,” or “sellers’ inflation” the term used by Isabella Weber, the most prominent academic proponent of this view. There can be little doubt that there was a big shift to profits in the pandemic. Here’s the picture on the profit share of corporate income.

Read more…

Why and how economics must change

March 8, 2024 5 comments

from Jayati Ghosh

Economics needs greater humility, a better sense of history, and more diversity

The need for drastic change in the economics discipline has never been so urgent. Humanity faces existential crises, with planetary health and environmental challenges becoming major concerns. The global economy was already limping and fragile before the pandemic; the subsequent recovery has exposed deep and worsening inequalities not just in incomes and assets but in access to basic human needs. The resulting sociopolitical tensions and geopolitical conflicts are creating societies that may soon be dysfunctional to the point of being unlivable. All this requires transformative economic strategies. Yet the discipline’s mainstream persists in doing business as usual, as if tinkering at the margins with minor changes could have any meaningful impact.

There is a long-standing problem. Much of what is presented as received economic wisdom about how economies work and the implications of policies is at best misleading and at worst simply wrong. For decades now, a significant and powerful lobby within the discipline has peddled half-truths and even falsehoods on many critical issues for example, Read more…

“The Political Economy of COVID-19”

March 6, 2024 Leave a comment

 New book from WEA Books

At the beginning of 2020, the outbreak of Covid-19 and the lockdown practices imposed worldwide generated a global economic crisis that challenges the traditional explanations of economic downturns .  Like the economic crisis of 2008, the Covid-19 pandemic crisis was systemic and global, and this collection of essays examines it in a broad geographical and historical context.

Kindle $6.00                  Paperback $14.99
Amazon US   UK   FR  DE   IN    AU    CA

Utility theory — explaining everything and nothing

March 5, 2024 12 comments

from Lars Syll

Despite the rise of behavioral economics, many economists still believe that utility maximization is a good explanation of human behavior. Although evidence from experimental economics and elsewhere has rolled back the assumption that human agents are entirely self-interested, and shown that altruism and cooperation are important, a prominent response has been to modify individual preference functions so that they are “other-regarding”. But even with these modified preference functions, individuals are still maximizing their own utility.

5197ebbdd9c758d5c73657c270f97340Defenders of utility maximization rightly reject critical claims that specific behavioral outcomes undermine this assumption. They do not. But this is a sign of weakness rather than strength. The problem is that utility maximization is unfalsifiable as an explanation of behavior. As I show more fully in my 2013 book entitled From Pleasure Machines to Moral Communities, utility maximization can fit any real-world evidence, including behavior that appears to suggest preference inconsistency.

But note that utility maximization is not a tautology. Tautologies are true by assumption or definition. Utility maximization is not a tautology because it is potentially false. But empirically it is unfalsifiable.

Where does that leave us? Utility maximization can be useful as a heuristic modelling device. But strictly it does not explain any behavior. It does not identify specific causes. It cannot explain any particular behavior because it is consistent with any observable behavior. Its apparent universal power signals weakness, not strength.

Geoff Hodgson

Interesting post from one of yours truly’s favourite economists.  Read more…

Income inequality in the USA increased with each expansion

March 3, 2024 2 comments
inequality-recovery

Pavlina R.Tchemevra is the source of the data for this chart which appeared in September 2014 in the New York Times in an article by Neil Irwin “The Benefits of Economic Expansions Are Increasingly Going to the Richest Americans”.  Can anyone source or provide an updated version of this chart?  

The Commons of Ameland: An Uncommon History.

March 3, 2024 1 comment

There is no ‘tragedy of the Commons.’ But a tragedy of the absence of Commons-as organizations, let’s call it ‘the tragedy of uncommons’, does exist. Below, I will provide the example of the island of Ameland in the Northern Netherlands, in line with the historical examples of successful Commons mentioned by Elinor Ostrom (especially those for Switzerland). 

Ownership is a multi-dimensional concept. Up to the 1795 revolution, the island of Ameland, north of Friesland, was not a part of the Dutch Republic, and ownership relations were somewhat archaic. The best way to understand this is to consider ownership a bundle of rights. In old Dutch deeds, some of these rights were described as “eer en feer, macht en gewalt,” loosely meaning: “political and juridical rights, the rights to sell, rent out and mortgage the land and the right to grow whatever you want”. Since 1704, the wealthy Oranje Nassau family owned the island of Ameland’s higher-level political and juridical rights and the right to rent out the rabbit. They also had the right to rent out lands. But this right was not tied to their ownership of the political and juridical rights but to their additional ownership of a kind of shares in the commons, the ‘achtendelen.’ They do not seem to have had any right to rent out the dunes, the coastal shallows, or, as they were called on the island, ‘Grie’. The rights to rent out these lands were simply not defined. 

The Dutch island of Ameland, according to the De la Rive map, 1731. Note the hayland complexes surrounded by dykes and ditches to keep the cows, grazing on the Grie, out. After 1731, the island became smaller while sand drifts threatened the haylands. The two western hay land complexes were used by ‘Commons’, or the community of farmers, according to distribution of ownership and use rights and duties. The complexes in the middle were characterized by more individual ownership.

Read more…

Complexity and Econ 100

February 29, 2024 Leave a comment

from Maria Alejandra Madi and RWER issue 106

Complexity is characteristic of a system that preserves the differentiation among its constituent elements while also preserving their identity. Complexity also implies dynamic systems, that is to say, open totalities of interrelated parts constantly changing in spacetime. The complexity of a system is related to the coexistence of intertwined parts in spacetime and complexity is intrinsic to real-world natural, economic and social processes (Almeida Filho, 1998). If we are to address contemporary problems of the kind referred to in the introduction both the natural world and human society need to be understood as complex systems, where the latter is nested in the former and interdependencies of different kinds arise.

An economy, similar to other systems, consists of complex networks of agents engaged in ongoing interactions, characterised by competition and cooperation. These agents constitute heterogenous components and are in a constant state of learning, adaptation, coevolution, and potential transformation or elimination, as part of an uninterrupted dynamic process (see Arthur, 1988; Arthur et al., 1997). In an economic system, different agents must work to find solutions to challenges they encounter, act in accordance with what is expected of them by others, and collaborate with one another to construct economic, legal, and social structures. Read more…

The problem with economics — too much maths, too little history

February 27, 2024 7 comments

from Lars Syll

Mainstream economists have always wanted to use their hammer, and so have decided to pretend that the world looks like a nail. Pretending that uncertainty can be reduced to risk and that all activities, relations, processes, and events can be adequately converted to pure numbers, have only contributed to making economics irrelevant and powerless when confronting real-world financial crises and economic havoc.

How do we put an end to this intellectual cataclysm? How do we re-establish credence and trust in economics as a science? Five changes are absolutely decisive.

(1) Stop pretending that we have exact and rigorous answers to everything. Because we don’t. We build models and theories and tell people that we can calculate and foresee the future. But we do this based on mathematical and statistical assumptions that often have little or nothing to do with reality. By pretending that there is no really important difference between model and reality we lull people into thinking that we have things under control. We haven’t! This false feeling of security was one of the factors that contributed to the financial crisis of 2008.

(2) Stop the childish and exaggerated belief in mathematics giving answers to important economic questions. Mathematics gives exact answers to exact questions. But the relevant and interesting questions we face in the economic realm are rarely of that kind. Read more…

Three principal strategies for theorizing a “new economics of ecological limits”

February 26, 2024 1 comment

from Richard Parker and RWER issue 106

Back in the late 1960s, a tiny band of unconventional economists encountered an environmentalism in the midst of radical rethinking. Prompted by Carson’s Silent Spring, capitalism and its science were being accused of major crimes—against nature, our fellow species and humankind itself.  Hiroshima had shattered confidence in the benignity of Progress, especially Progress through Markets and Corporate Science.  Now that skepticism looked around through a wider lens and would soon birth “ecology” with its excoriating indictment of our fundamental relations with Earth.[1]  Herman Daly and John Cobb’s pioneering works, Ken Boulding’s “spaceship earth” argument, and The Club of Rome’s Limits to Growth warnings led the way.  Much has since transpired—nowhere more apparent than in “economics” and the crises today it seeks to address.

Sixty years on, let me name three principal strategies for theorizing a “new economics of ecological limits” that have evolved from that 1960s moment: Read more…

World democracy map

February 23, 2024 3 comments

Game theory — a waste of time on a staggering scale

February 20, 2024 2 comments

from Lars Syll

On the real-world irrelevance of game theory | Real-World Economics Review  BlogWe certainly agree that regularities or models that explain or that give heuristic value over many different cases are highly desirable. But ones that do neither are not — especially if they use up huge resources along the way. When looking at the details, the Prisoner’s Dilemma’s explanatory record so far is poor and its heuristic record mixed at best. The only way to get a reliable sense of what theoretical input would actually be useful is via detailed empirical investigations. What useful contribution — whether explanatory, heuristic or none at all — the Prisoner’s Dilemma makes to such investigations cannot be known until they are tried. Therefore resources would be better directed towards that rather than towards yet more theoretical development or laboratory experiments.

R. Northcott & A. Alexandrova

Game theory is, like mainstream economics in general, model-oriented. There are many reasons for this – the history of the discipline, having ideals coming from the natural sciences (especially physics), the search for universality (explaining as much as possible with as little as possible), rigour, precision, etc. Most mainstream economists and game theorists want to explain social phenomena, structures and patterns, based on the assumption that the agents are acting in an optimizing (rational) way to satisfy given, stable and well-defined goals. Read more…

Internalizing “externalities”

February 18, 2024 1 comment

from Victor Beker and RWER issue 106

There was a time when it was thought that the main task of economics was to assure economic growth. For example, John M. Keynes predicted that “the day is not far off when the Economic Problem will take the back seat where it belongs” (Keynes 1931: 6). Then, once scarcity has been overcome, mankind would devote most of its efforts to real problems, the problems of life and human relations (ibid,).

The impact of economic growth on the Earth environment was not an issue. This is no longer so. The ecological impact of economic activities can no longer be ignored. Ecological sustainability is an imperative if we want to preserve the planet for future generations. Ecological economics is a new subfield which addresses the challenge of introducing the ecological restrictions into economic analysis, trying to provide an integral response to the pressing environmental problems, many of them caused by economic activities.

This collides with the traditional economic point of view of a continuing and unlimited economic growth.

Read more…

“I object to the question on which this volume focuses.”

February 15, 2024 3 comments

from Richard Norgaard and RWER issue 106

I object to the question on which this volume focuses. It assumes that biophysical limits are real and knowable rather than a human construct associated with a particular understanding of how natural systems might behave. Limits have been an extremely useful construct for critiquing the even simpler construct that assumes science and technology can provide unlimited economic growth. Nature, however, has zillions of limits that are crossed all of the time, and not only by people (Giorgos Kallis 2019). Nature is continually changing and reconstructing itself in response to zillions of events. The idea that people can affect nature and have it resiliently return to an historic equilibrium unless we affect it too much is a myth. Yes, nature reconstructs, but never completely, always moving to a new state with every provocation, whether by a weather event, bacterial evolution that resets the balance of larger species, or numerous other changes including those initiated by people. And the idea of limits makes little sense for stock resources which come in ever lower qualities, i.e., ever more tightly bound in the complex natural order.

The idea of limits assumes nature, or discrete components of nature, operate in an equilibrium state to which it returns after being perturbed. If the perturbation is too great, however, pushing the system beyond its limit, well, all hell breaks loose, we really cannot say. In this constructed framing, illustrated by a ball rolling about in a bowl, people obviously need to avoid perturbing nature too much, i.e., pushing the ball out of the bowl. To some extent, we seem to observe such phenomena in ecosystems. We may think of nature as being in equilibrium, or in a disturbed state from which it will recover, or having been pushed beyond recovery, but that is because of how we think, perhaps because of something ingrained in our consciousness. The ball is rolling out of the bowl all of the time, changes occur, but all hell does not break loose.

Read more…

Why economics is an impossible science

February 13, 2024 5 comments

from Lars Syll

In a word, Economics is an Impossible Science because by its own definition the determining conditions of the economy are not economic: they are “exogenous.” Supposedly a science of things, it is by definition without substance, being rather a mode of behavior: the application of scarce means to alternative ends so as to achieve the greatest possible satisfaction—neither means, ends, nor satisfaction substantially specified.stun Exogenous, however, is the culture, all those meanings, values, institutions, and structures, from gender roles, race relations, food preferences, and ethnicities, to technical inventions, legal regulations, political parties, etc., etc. The effect is a never-ending series of new theoretical breakthroughs, each an Economics du jour worthy of a Nobel prize, consisting of the discovery that some relevant little bit of the culture has something to do with it. Only to be soon superseded and forgotten since the continuous development and transformation of the culture, hence of the economy, leaves the Science in its wake. An impossible Science, by its own premises.

Marshall Sahlins

The increasing mathematization of economics has Read more…

Introducing nonlinear and non-equilibrium perspectives into ecological economics

February 12, 2024 1 comment

from Ping Chen and RWER issue 107

Economic Complexity vs. Neoclassical Simplicity

Complexity science originated from astrophysics when Henri Poincaré discovered the three-body problem had no analytical solution in 1899. The discovery and development of deterministic chaos in the 1960s to 1990s found wide evidence that nonlinear deterministic systems only have limited predictability. Ilya Prigogine further recognized the important role of irreversibility in biological evolution since time’s arrow and history inherent to biological evolution works against thermodynamics equilibrium. In reality, non-stationarity is dominant in time series economics but absent in controlled experiments in physics and biology. In this sense economic complexity is more complex than physics and biology. In any case, the study of economic complexity reveals the fundamental flaws of neoclassical simplicity in three ways (Chen 2019, 2024).

First, the three-body problem is radically different from a one-body, two-body, and infinite-body problem. Three and many-body problems are more complex and often without analytical solutions, while in economics the representative agent model, the two-player model in game theory and international finance, and the mean-field model in statistics are all equivalent and deficient as an equilibrium framework. For example, a two-country exchange model can calculate the exchange rate and interest rate parity, but this is not so for three or more major currencies. This is also why the option-pricing model has a fundamental flaw since it is based on a single-particle model of Brownian motion without collective behavior.

Second, nonlinear stochastic processes may have a multi-peak distribution such that high moments cannot be ignored during phase transition, and this is the root of financial crises (a point that will make more sense to readers conversant in finance). The polarized presidential election in the U.S. shows a typical polarization with dual-peak distribution, which is a sign of bifurcation at the cross-point of coming crise. Read more…