from Lars Syll
We are storytellers, operating much of the time in worlds of make believe. We do not find that the realm of imagination and ideas is an alternative to, or retreat from, practical reality. On the contrary, it is the only way we have found to think seriously about reality. In a way, there is nothing more to this method than maintaining the conviction … that imagination and ideas matter … there is no practical alternative”
Robert Lucas (1988) What Economists Do
Sounds great, doesn’t it? And here’s an example of the outcome of that serious think about reality … Read more…
In the sense that there now exists in the economics profession an implicit and perverse intellectual hierarchy which is premised on the understanding that the less of what you do is related to the real world, the cleverer you are. So, if you are really clever, you would do mathematical modelling of a kind that has nothing to do with the real world. You would do something on the Turing machine [a theoretical computing device] or on information cascade or some such thing. If you are a little less clever, you would do econometrics, and if you are not even that clever, you would work on monetary policy or development economics. And, if you are not even that good, you would do economic history. But if you are the worst, you would go around factories interviewing managers. So, the leadership of the profession is moving towards abstraction for the sake of abstraction.
This has resulted in the shutting down of courses such as the history of economics, history of economic thought, philosophy of economics and other such fields. Basically, teaching economics has become like one of the other trades, like becoming a plumber or a bricklayer, as if it is about providing students with a set of skills which they can apply. There is no encouragement of critical thinking or teaching of real-world issues.
A Cyprus style money destruction ‘solution’ for Greece is still in the cards – and I’m afraid that the continued monetary inaction of the ECB brings it closer. One might cry ‘moral hazard’ about guaranteed ‘Emergency Liduidity Assitance’ (ELA, or QE which actually works) from the ‘Eurosystem’ to the Greek banks but on this blog we did warn about the dire consequences of ECB inaction in 2011 and 2012. And we were right: these consequences – increasing deflation and crisis, higher debts compared with income – materialized and the ECB has to face its responsibilities for its inaction. Mind that, at this moment, Greece has a surplus on the current account and a primary government while it leads the other austerity countries by a lap when it comes to cutting wages, employment and entitlements and reforming the labour market. It did do its austerity homework (which is of course why its economy is in tatters). Be that as it may: until the ECB comes to its economic senses the already gasping Greek economy is increasingly smothered. And Greece will have to do a ‘Münchhausen’ to pull itself out of the monetary mire. Which is not entirely impossible, though the banks won’t like it. See graph 1.
A relatively quick short- as well as long-term fix is to increase the ‘moneyness’ and liquidity of ‘receivables’. Irish companies managed, compared with Spanish companies, to mitigate the Irish liquidity crunch by increasing the amount of receivables on their balance sheets (remember, interest rates are very low, which helps). In the end these debts have to be paid but a monetary easing of 70% of GDP, as in the Irish case, would not be bad, in Greece. The Greek government can increase the moneyness of ‘receivables’ by moving them up in the bankruptcy pecking order (they will have to get preferential treatment compared with bank debts), by enabling companies to use them (with a ‘haircut’) to pay tax arrears, by using smart technology and algorithms to enable ‘clearing’ (a matching problem). This increase of moneyness will also increase the asset value of receivables, which will make Greek companies more willing to keep them on their balance sheets.In the end, Euro’s will still be needed, but that’s why ELA was invented.
from Lars Syll
By the early 1980s it was already common knowledge among people I hung out with that the only way to get non-crazy macroeconomics published was to wrap sensible assumptions about output and employment in something else, something that involved rational expectations and intertemporal stuff and made the paper respectable. And yes, that was conscious knowledge, which shaped the kinds of papers we wrote.
More or less says it all, doesn’t it?
And for those of us who do not want to play according these sickening hypocritical rules — well, here’s one good alternative.
from Lars Syll
In econometrics one often gets the feeling that many of its practitioners think of it as a kind of automatic inferential machine: input data and out comes casual knowledge. This is like pulling a rabbit from a hat. Great — but first you have to put the rabbit in the hat. And this is where assumptions come in to the picture.
As social scientists — and economists — we have to confront the all-important question of how to handle uncertainty and randomness. Should we define randomness with probability? If we do, we have to accept that to speak of randomness we also have to presuppose the existence of nomological probability machines, since probabilities cannot be spoken of – and actually, to be strict, do not at all exist – without specifying such system-contexts.
Accepting a domain of probability theory and a sample space of “infinite populations” — which is legion in modern econometrics — also implies that judgments are made on the basis of observations that are actually never made! Infinitely repeated trials or samplings never take place in the real world. So that cannot be a sound inductive basis for a science with aspirations of explaining real-world socio-economic processes, structures or events. It’s not tenable. Read more…
from Mark Weisbrot
Greece has been dragged through a lot of mud in the media over the past few years because previous governments overborrowed, and that contributed to the initial crisis that – we should remember – Spain, Portugal, Italy and almost everyone else in the eurozone had to go through. But the initial crisis could have been resolved relatively quickly. In the United States, which was hit by the explosion of an $8 trillion housing bubble, our recession lasted just 18 months. In Greece it has been six years, with a loss of a quarter of its national income, and more than 25 percent unemployment (and twice that for youth).
By now it is clear not only to the majority of economists, but to most people who are paying attention that this long depression was not only unnecessary but caused directly by bad policies. Read more…
from Peter Radford
Beware of the possible snark in the following:
One of the possibilities you face when you commit to writing about something is that you get called names. Sometimes you are called wrong. And sometimes when you are called wrong, you are indeed wrong. Such is life. We learn.
This is not one of those times.
Because I am right.
Anyway, this time I have been called wrong because I asked that we raise a collective voice to ask questions about economics. I made no substantive claim in my call for questions. I just asked for questions and then did claim that the resultant conversation would/could be interesting. I thought this was uncontroversial. Read more…
Since 2007, the increase of the wealth of Dutch pension funds has been much larger than the value of the entire government debt. The Dutch are however still cutting pensions as the ‘risk free rate’ used to discount future obligations is decreasing. Between 1992 and 2014, average return on investment was a whopping 7,9%. In the future, this will be quite a bit lower (Back of the envelope: lower inflation:-2%. Lower increase of population: -0,5% Lower economic growth: -0,5%). The ‘risk free rate’ (which is hardly risk free, as it changes all the time) is however supposed to be 1,9% – while the real rate of return in 2014 was 14,5%….The point is that many households or building corporations (who, in the Netherlands, own a lot of houses), are eager to re-finance their mortgage and loans with a 3% new loan (which is about 50% higher than the 1,9% rate). No, that’s not risk free either. But helping households to refinance might be a less risk strategy, in a macro-economic sense, than cutting pensions. Read more…
Minimum wages in European austerity countries: Greece is different (but not as you are made to expect)
In Januari 2015, Germany introduced a new economy wide minimum wage of Euro 1473,–, about the same level of the Irish minimum wage and slightly higher than the French level. The mimimum wage in Greece is 684,–, considerable higher than the 390,– Estonian level but clearly below the 757,– Spanish level. See these Eurostat data. The Eurostat statisticians point out that Greece was the only country to decrease its minimum wage between 2008 and 2015 (-19%). It is interesting to compare Greece with other austerity countries, which are supposed to be a shining example for Greece. Lowering the minimum wage is clearly not a silver bullet when it comes to job growth. Read more…
Where is our economic system going? What about our societies? How did we get here? And what next?
The current situation reveals not only an economic crisis but also a deep crisis of economic thought. There are many causes for this situation, and solutions can only be found through theoretical, practical and political inventiveness with our critical faculties to the fore. But, whilst such voices do exist, they have been silenced as far as orthodox economics is concerned. Simply put, there are profoud institutional barriers to the emergence and presentation of original thinking, but this blocked creativity could be released through a simple and immediate political solution. Establishing in French universities a new section, entitled Economics and Society, would allow a new way of thinking in economics.
Madam Minister, you recently decided to create this new section promoting the study of economic facts with a renewed perspective within rather than apart from social sciences. You did so because you know how much the research in economics and its teaching, but also public debate, are suffocated by the monopoly of ideas imposed by a dominant school of thought that failed to anticipate or even to allow for, let alone understand and respond to this crisis.
The proposal for this new section, and your commendable approval for it, unleashed such a backlash from the established orthodoxy that it seemed to persuade you to withdraw your support.
For these reasons, by reaffirming your support for this petition for pluralism in economics, we demand that you publish the decree that you already signed in order finally to create this new section.
Economics needs pluralism now!
You can sign this petition here http://assoeconomiepolitique.org/petition-pluralism-now/
4,559 people have already signed it, but they need lots more. You can read the names at the petition sight.
from Peter Radford
The French Republican thinker Charles Péguy once said:
“One must always say what one sees. But especially — and this is the hard part — one must always see what one sees.”
The ability to see something and not see it simultaneously seems to be a major characteristic of orthodox economists.
Thus involuntary unemployment melts into thin air as its offensive existence is not only offensive to civility, but is, more importantly, offensive to the ideological basis of orthodoxy. For if markets always exert their magical powers, and if the people caught up within them act [hyper] rationally, and if, and so on and so on, then anyone without a job is someone who doesn’t want a job. That person prefers a life of leisure to one of work, no matter how impecunious they are.
That orthodox economists must see involuntary unemployment is surely undeniable. That they don’t see it because of the jaundice of orthodoxy that afflicts them is, I think Péguy would agree, an affront to reality.
Likewise with uncertainty: Read more…
from David Ruccio
As readers know, there are few things I take more seriously than economic representations and the power of ideas.
As I argued in my book, representations of the economy (including, of course, issues of inequality) are produced and disseminated in many different discursive forms and social sites, only one of which is the academic discipline of economics. We also find them in academic disciplines other than economics (such as anthropology, sociology, cultural studies, and so on) and in many places outside the academy (including in literature, from Balzac to DeLillo). Read more…
from Lars Syll
Deflationary policies are deflationary. To a large extent the deflation is caused by tight monetary and fiscal policies pursued by ECB. With a very defensive fiscal policy and a targeted inflation rate set at a very low level, real inflation has during the last couple of years been negative. Another consequence of the austere fiscal and monetary policies is that overall unemployment is stuck at an enormously high level.
This is deeply worrying.
So here’s a suggestion for reading …
Zoltan Pozsnar and Paul McCulley have written an absolutely splendid essay on what a liquidity trap means and why mainstream neoclassical economics has nothing to offer in way of solving the problems that it brings along – and why it is so important to get hold of the insights that Fisher, Keynes, and Minsky have given us on debt-deflation processes and liquidity traps: Read more…
Well, heterodox is relative, isn’t it? The Pope is a heterodox if you are a Greek or a Russia. I don’t particularly like it but wouldn’t mind if people use it as an easy way of saying that I am not a neoclassical economist. But, as I have explained in my latest book (Economics: The User’s Guide), I don’t entirely subscribe to one school or another. I have been influenced by many different schools. I believe—not only for political reasons but for intellectual reasons too—we need pluralism in economics. Different schools have different methodological approaches, have different interests (some more interested in production, while others are more interested in exchange, for instance) or make different political and ethical assumptions. We need all of them to understand fully the complexity of the world.
from Lars Syll
I came to think about this dictum when today reading yet another piece on Piketty — this time on his refusal to use the term “human capital” in his inequality analysis.
I think there are many good reasons not to include human capital in economic analyses. Let me just give one — perhaps analytically the most important one — reason and elaborate a little on that. Read more…
from Asad Zaman
from Peter Radford
There’s been a lot of excitement about changing the substance of economics and the way it is taught. Rightly so. But that, it seems to me, just begs the question: “What is economics?” Or, rather, it begs a series of questions. None of us can pretend to have the answer since the answer is surely to be found in the collective voice of those who are interested enough to respond. Social intelligence is a more robust repository of ‘truth’ than any single intelligence can ever be.
What are the questions? Tell me.
Once we have a good set of questions, let’s then survey our friends and colleagues to get answers. Oh. And let’s restrict ourselves to limited space. Those answers must be short. Let’s say a few paragraphs at the very most.
Once we have the questions and all the answers we can assemble them as a collective voice.
A hundred or so answers to, say, fifteen good questions would give us a very quick but deep insight into the state of economics.
Let’s not place any limits on ourselves just yet – other than the need for brevity.
So go ahead. Add your voice to the collective.
Here, you will find the list with the Greeks government reform proposals.
Update (14:21 CET):
(A) There is no such thing as a blueprint for an effective ‘mixed’ economy. The effective functioning of markets and the government (including taxes and spending) is based upon consistency with historically contingency. What works in the West-Germany might not work in (former) East-Germany.
(B) With this in mind, the Greek proposals seem better designed than the measures in the Cypriot Memorandum of Understanding. The Greek proposals are much less bank centered – and therewith more balanced (more bluntly: the Greek plan admits that there are actually people living in Greece).They also take the crisis into account, not just as a shock to the banking system but to the entire Greek society (and therewith the eurozone…)
(C) At least to me the Greek measures seem to be more practical and to the point than the Cypriot ones which are either incredibly vague or overly precise (see points i and m on p. 46: abolishing the siësta, with a table with office times attached). But this requires a thorough point by point comparison.
(D) The Greek proposal is less depenndent on the use of phrases like ‘comprehensive reforms’, ‘sustainable improvement’, ‘relevant elements’, ‘necessary amendments’, ‘appropriate level’, ‘effective intervention’, ‘appropriately differentiated’, ‘promptly published’ (nice one!), ‘adequate and accurate information’ etcetera, etcetera. Whisfull phrasing.
(E) The Greek proposals are more revolutionary than the Cypriot MoU, surely when it comes to taxes, the efficiency of government and the broadening of the tax basis. They may, however, also be more consistent with historically contingency – and therwith with the evolutionary survival of Greek society.
And the Cypriot government of course has: “to allow for efficient seizure of property collateral”. Please, read Dean Baker on ‘right to rent‘.