Not with a bang but with a (prolonged) whimper

November 17, 2017 Leave a comment

from Jayati Ghosh

It is probably obvious to everyone that global capitalism is in dire straits, notwithstanding the brave talking up of output recovery that now characterises almost every meeting of the international governing elite. Even so, discussions of the end of capitalism still typically seem overstated and futile, not least because those hoping and mobilising for bringing in an alternative system are everywhere so scattered, weak and demoralised. In effect, capitalism is the only game in town, which is why even in its current debilitated and even decrepit state, it fears no rivals.

But maybe that is really not the point. Maybe economic systems can die without actually being killed by other competing systems. “How will capitalism end?” is the title of a brilliant book by the German thinker Wolfgang Streeck. (Verso, London 2016, published in India by Juggernaut Books.) It provides a cogent and persuasive critique of the nature of contemporary capitalism, and describes its ongoing extended demise, without surrendering to any optimism that as it fails to deliver even in terms of its own logic, all the nastiness and injustice it has generated must inevitably change for the better.

As may be fitting for a work with this combination of scope and profundity, it is difficult to pigeonhole either the author or the book into simple disciplinary categories. It straddles economics, politics and sociology, with forays into moral philosophy: in other words, political economy at its best. But even if it is beautifully written, it makes for tough reading – simply because the message is so stark, at once depressingly dystopic and terrifyingly plausible.   Read more…

Desperately seeking a link between wages and productivity

November 17, 2017 4 comments

from David Ruccio


Everyone, it seems, now agrees that there’s a fundamental problem concerning wages and productivity in the United States: since the 1970s, productivity growth has far outpaced the growth in workers’ wages.*

Even Larry Summers—who, along with his coauthor Anna Stansbury, presented an analysis of the relationship between pay and productivity last Thursday at a conference on the “Policy Implications of Sustained Low Productivity Growth” sponsored by the Peterson Institute for International Economics.

Thus, Summers and Stansbury (pdf) concur with the emerging consensus,   Read more…

Completing the Circle: From GD ’29 to GFC ’07

November 16, 2017 1 comment

from Asad Zaman

Karl Marx said that “The advance of capitalist production develops a working class which by education, tradition and habit looks upon the requirements of that mode of production as self-evident natural laws.” Modern economic theory is a tool of central importance in making the laborers and the poor accept their own exploitation as natural and necessary. As explained in greater detail in the next lecture (AM09), Economic Theory argues that distribution of income is

  • FAIR – everyone gets what they deserve, in proportion to what they contribute (the marginal product)
  • NECESSARY – the laws of economics ensure that this is the only distribution which will prevail in equilibrium
  • EFFICIENT – this distribution creates efficient outcomes, and maximal productivity in the economic system.

In fact, as I have argued elsewhere, neoclassical Economic Theory should be labeled as ET1% (Economic Theory of the Top 1%), because it only represents their interests, and glosses over issues of central importance and concern to bottom 90%. Nonetheless, widespread propagation of this theory through university courses, and popular expositions for the general public, are very important in convincing the bottom 90% that the capitalist economic system is the best possible, and their own misfortunes are due to their own bad luck or other defects.

1      Classical Economic Theory

According to classical economic theory, free markets automatically eliminate unemployment, guaranteeing jobs for everyone at a fair wage, consonant with the productivity of labor. In particular, payoff to labor and to capital is perfectly symmetric – both factors get what they deserve. If government tries to regulate the labor market to create better outcomes – minimum wages, better working conditions, labor unions, etc. — it will actually end up hurting laborers. Economists argue that unemployment is due to minimum wage laws, labor unions, and search costs, and not due to free markets themselves.

2      Credit Creation By Banks

read more

Taxes: 1970’s Redux?

November 16, 2017 1 comment

from Peter Radford

Taxes. What a problem.

I was going to start by saying something about our current national debate about taxes, but that would have been an untruth. We are not having a debate. Instead we are all sitting on the sidelines whilst the Republican Party desperately tries to cobble together a tax plan in order to fulfill one of the promises it made during last year’s election. That this would be the only major promise thus fulfilled we can ignore for now.

Instead, I think I will start with an observation I have made many times before: the American tax code is ridiculously complex and inefficient. It is also rigged, although the real extent of the rigging only comes into focus when we take a look at the budget that the tax code nestles within.

One of the sneaky ways that politicians of both parties communicate about government spending is to talk only in terms of programs funded out of revenues. That’s obviously a sensible thing to do. So we hear all about such-and-such a program costing $xx billion or trillion dollars which is invariably then presented as YY% of the total budget.

This is sneaky because it immediately creates a framework for conversation about programs and policies. In particular it opens up programs to easy public scrutiny and criticism of their expense. The most oft attacked programs — things like welfare and poverty amelioration activities — are easy targets when their cost is presented in clear dollar amounts or as shares of total revenues.

Indeed anything that is a line item in the budget becomes an easily understood and vulnerable target.

But here’s the really sneaky part:  Read more…

Where has all the surplus gone?

November 15, 2017 4 comments

from David Ruccio

profits abroad

Thanks to the release of the so-called Paradise Papers, and the additional research conducted by Gabriel Zucman, Thomas Tørsløv, and Ludvig Wier, we know that a large share of the surplus captured by corporations is artificially shifted to tax havens all over the world. This, of course, is on top of the conspicuous tax evasion practiced by the individual holders of a large portion of the world’s wealth.   Read more…

The atomic hypothesis and the limits of econometrics

November 15, 2017 3 comments

from Lars Syll

4388529Our admiration for technical virtuosity should never blind us to the fact that we have to have a cautious attitude towards probabilistic inferences in economic contexts. Science should help us disclose causal forces behind apparent ‘facts.’ We should look out for causal relations, but econometrics can never be more than a starting point in that endeavour since econometric (statistical) explanations are not explanations in terms of mechanisms, powers, capacities or causes. Firmly stuck in an empiricist tradition, econometrics is only concerned with the measurable aspects of reality, But there is always the possibility that there are other variables – of vital importance and although perhaps unobservable and non-additive, not necessarily epistemologically inaccessible – that were not considered for the model. Those who were can hence never be guaranteed to be more than potential causes, and not real causes. A rigorous application of econometric methods in economics really presupposes that the phenomena of our real world economies are ruled by stable causal relations between variables. A perusal of the leading econom(etr)ic journals shows that most econometricians still concentrate on fixed parameter models and that parameter-values estimated in specific spatio-temporal contexts are presupposed to be exportable to totally different contexts. To warrant this assumption one, however, has to convincingly establish that the targeted acting causes are stable and invariant so that they maintain their parametric status after the bridging. The endemic lack of predictive success of the econometric project indicates that this hope of finding fixed parameters is a hope for which there really is no other ground than hope itself.  Read more…

Neoclassical economics usually reads its models backwards.

November 14, 2017 2 comments

from Edward Fullbrook

In public, including in the training of economists, Neoclassical economics usually reads its models backwards. This gives the illusion that they show the behaviour of individual economic units determining sets of equilibrium values for markets and for whole economies. It hides the fact that these models have been constructed not by investigating the behaviour of individual agents, but rather by analysing the requirements of achieving a certain macro state, that is, a market or general equilibrium. It is the behaviour found to be logically consistent with these hypothetical macro states that is prescribed for the individual agents, rather than the other way around.[1] This macro-led analysis, this derivation of the micro from a macro assumption, is and always has been the standard analytical procedure of theory construction for the Neoclassical narrative. Sometimes, for pedagogical reasons, authors call attention to how the “individualist” rabbit really gets into the Neoclassical hat. For example, consider the following passage from a once widely used introduction to economics.

 “For the purpose of our theory, we want the preference ranking to have certain properties, which give it a particular, useful structure. We build these properties up by making a number of assumptions, first about the preference-indifference relation itself, and then about some aspects of the preference ranking to which it gives rise” (emphasis added) (Gravell and Rees 1981, p. 56).

Read more…

Keynes was right about Quantitative Easing (QE)

November 13, 2017 6 comments


Did the growth of money caused by QE in the Eurozone (graph) stimulate economic activity? Not enough. According to John Maynard Keynes, in The general theory(1936),

The relation of changes in M (money) to Y (income) and r (the interest rate) depends, in the first instance, on the way in which changes in M come about.”

Put differently: credit and not money makes the world go round. Money creating lending to enable household purchases of existing homes has a quite different effect on the economy than money creating lending to exiting new companies which hire lots of labor to produce live saving medical equipment (or the latest craze, L.O.L. balls, works too). Quantitative easing by central banks is a nice albeit dismal empirical example which shows that the amount of money did grow thanks to QE – but that the wrong sectors obtained the money. Read more…

Conspicuous tax evasion

November 12, 2017 4 comments

from David Ruccio

The release of the so-called Paradise Papers confirms, with additional names and more salacious details, what we already knew from the Panama Papers and other sources: the world’s wealthy increasingly use offshore tax havens to engage in conspicuous tax evasion.

That’s on top of their participation in conspicuous consumptionconspicuous philanthropy, and conspicuous productivity.

According to Annette Alstadsæter, Niels Johannesen, and Gabriel Zucman, in a study published before the release of the Paradise Papers, the equivalent of 10 percent of world GDP is held in tax havens globally—and that’s only counting bank deposits, not the portfolios of equities, bonds, and mutual fund shares that wealthy individuals entrust to offshore banks.

And, as it turns out, offshore wealth is extremely concentrated: the top 0.1 percent of richest households own about 80 percent of it, while the top 0.01 percent own about 50 percent of offshore wealth.

So, how does it work? There is a great deal of evidence that the vast majority of offshore wealth, both legal and illegal, is not reported on tax returns. That’s because offshore wealth is done “by combining trusts, foundations, and holding companies, so as to disconnect assets from their beneficial owners.” Thus, tax authorities won’t be able to observe or collect taxes on either the wealth or investment income earned or reported offshore, except in rare circumstances (e.g., a taxable and properly declared inter-generational transfer of assets).   Read more…

The ‘tiny little problem’ with Chicago economics

November 11, 2017 19 comments

from Lars Syll

14-john-cochrane.w710.h473.2xEvery dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This form of “crowding out” is just accounting, and doesn’t rest on any perceptions or behavioral assumptions.

John Cochrane

And the tiny little problem? It’s utterly and completely wrong!

What Cochrane is reiterating here is nothing but Say’s law, basically saying that savings are equal to investments and that if the state increases investments, then private investments have to come down (‘crowding out’). As an accounting identity, there is, of course, nothing to say about the law, but as such, it is also totally uninteresting from an economic point of view. As some of my Swedish forerunners — Gunnar Myrdal and Erik Lindahl — stressed more than 80 years ago, it’s really a question of ex-ante and ex-post adjustments. And as further stressed by a famous English economist about the same time, what happens when ex-ante savings and investments differ, is that we basically get output adjustments. GDP changes and so makes saving and investments equal ex-post. And this, nota bene, says nothing at all about the success or failure of fiscal policies!  Read more…

Productivity growth is up, are the robots finally coming?

November 9, 2017 8 comments

from Dean Baker

The Bureau of Labor Statistics (BLS) reported that productivity grew at a 3.0 percent annual rate in the third quarter of 2017. While this report got little attention, it is potentially very good news.

Before going into the good news part, it is worth briefly saying a bit about what productivity is. Productivity measures the value of the goods and services produced in an hour of work. It is the main determinant of living standards. If we want more or better housing or health care, we either have to work more hours to produce it, or we need higher productivity.

Alternatively, we may decide we are content with our material living standards but would like more leisure time. This could take the form of shorter workweeks, parental and family leave, or vacations. However, this would also require more productivity.

We could improve the living standards of much of the population with policies that reverse the upward redistribution of the last four decades. But if we don’t get productivity growth going forward, there is a limit to how far we can go with such policies. Unless people are content with stagnant living standards, we need productivity growth. Read more…

Waiting for Godot

November 9, 2017 7 comments

from David Ruccio

The official unemployment rate continues to fall in the United States. And everyone, at least among top policymakers and the business press, has been promising that workers’ wages will finally break out.

As it turns out, the unemployment rate (the red line in the chart above) in September was 4.1 percent, far below the high of 10 percent in October of 2009 and a new low for the so-called recovery from the Second Great Depression. However, hourly wages (for production and nonsupervisory workers, the blue line) rose only 2.5 percent on an annual basis, even less than the 2.7 percent workers were gaining at the height of the depression.

The only possible conclusion is that, in the United States, expecting workers’ wages to finally begin to catch up is like Vladimir and Estragon waiting below a leafless tree for the arrival of someone named Godot.

When economists become as modest as the physicists

November 8, 2017 8 comments

from Lars Syll

In advanced economics the question would be: ‘What besides mathematics should be in an economics lecture?’ In physics the familiar spirit is Archimedes the experimenter. aaaaafeynBut in economics, as in mathematics itself, it is theorem-proving Euclid who paces the halls …

Economics … has become a mathematical game. The science has been drained out of economics, replaced by a Nintendo game of assumption-making …

Most thoughtful economists think that the games on the blackboard and the computer have gone too far, absurdly too far. It is time to bring economic observation, economic history, economic literature, back into the teaching of economics.

Economists would be less arrogant, and less dangerous as experts, if they had to face up to the facts of the world. Perhaps they would even become as modest as the physicists.

D. McCloskey

Demonetisation in India: the marketing view

November 7, 2017 Leave a comment

One of the advantages of marketeers, compared with neoclassical economists, is that they do not assume things about consumers but observe them or ask them questions. So did Nielsen India, a large marketing company, less then a month after the infamous Indian demonetisation. The report is ungated and, for one thing, contains valuable information about the female experience. An excerpt

PART B: DECODING CONSUMER SENTIMENT (Source: Nielsen India)To pick up the consumer sentiment at this point in time, where they would have startedadjusting to this new reality, we ran a consumer measurement of sentiment and reaction. We reached out to nearly 800 people* in an online survey carried out between 25th November and 1st December 2016. Findings were quite revealing (Cities covered: Mumbai, Delhi, Kolkata, Bangalore, Chennai, Ludhiana, Ahmedabad, Vijayawada; Male – 52%, Female – 48%; Age 18 – 45 years; Occupation working professional, housewife, students)

Decline in overall spending: About half the consumers have cut down their household spends significantly.

One out of five housewives has reduced spending by 50% or more. : Read more…

Global rentier capitalism

November 7, 2017 8 comments

from David Ruccio

Mainstream economics lies in tatters. Certainly, the crash of 2007-08 and the Second Great Depression called into question mainstream macroeconomics, which has failed to provide a convincing explanation of either the causes or consequences of the most severe crisis of capitalism since the Great Depression of the 1930s.

But mainstream microeconomics, too, increasingly appears to be a fantasy—especially when it comes to issues of corporate power.


Neoclassical microeconomics is based on a set of models that assume perfect competition. Read more…

This intellectual cult threatening us all

November 6, 2017 21 comments

from Edward Fullbrook

Determinism, the idea that everything that happens must happen as it does and could not have happened any other way, and atomism, the idea that the world is made up of entities whose qualities are independent of their relations with other entities, are fundament components of classical mechanics. Atomism is also central to the concept of mind developed in John Locke’s An Essay Concerning Human Understanding, published (1690) three years after Newton’s Principia. Locke’s general conception of the human mind became commonplace among 18th-century philosophers, so when Adam Smith came to write the foundational text for economics, The Wealth of Nations (1776), he had the example not only of Newton’s material atomism, but also of Locke’s extension of it to an altogether different area of inquiry. If atomism could form the basis of a theory of ideas, then why not apply it as well to a theory of human beings?

Of course Smith did not limit his vision of economic reality to what could be seen through the metaphysical lens of classical mechanics. But a century later the founders of Neoclassical economics did exactly that and even boasted that they were doing so. Their justification of course – and it was a plausible one at the time – was the enormous success that exclusive devotion to this approach had yielded in physics. In time, especially from the 1960s onwards, undivided allegiance to this determinist-atomistic narrative became, with few exceptions, a basic requirement for making a career in economics.  Read more…

Haunted by surplus

November 4, 2017 8 comments

from David Ruccio

income  wealth

Inequality in the United States is now so obscene that it’s impossible, even for mainstream economists, to avoid the issue of surplus.   Read more…

Blaming inequality on technology: sloppy thinking for the educated

November 3, 2017 5 comments

from Dean Baker

The most popular explanation for the sharp rise in inequality over the last four decades is technology. The story goes that technology has increased the demand for sophisticated skills while undercutting the demand for routine manual labor.

This view has the advantage over competing explanations, like trade policy and labor market policy, that it can be seen as something that happened independent of policy. If trade policy or labor market policy explain the transfer of income from ordinary worker to shareholders and the most highly skilled, then it implies inequality was policy driven, it is the result of conscious decisions by those in power. By contrast, if technology was the culprit, we can still feel bad about inequality, but it was something that happened, not something we did.

That view may be comforting for the beneficiaries of rising inequality, but it doesn’t make much sense. While the development of technology may to some extent have its own logic, the distribution of the benefits from technology is determined by policy. Most importantly, who gets the benefits of technology depends in a very fundamental way on our policy on patents, copyrights, and other forms of intellectual property.  Read more…

The gilded age: a tale of today*

November 2, 2017 5 comments

from David Ruccio


The timing could not have been better, at least for me. It just so happens I’m teaching Thorsten Veblen’s Theory of the Leisure Class this week. It should become quickly obvious to students that, as I have argued before on this blog, we’re now in the midst of a Second Gilded Age.   Read more…


November 2, 2017 1 comment

from Asad Zaman

Varian start his intermediate micro text by stating the maximization and equilbrium are the core principles of micro. Krugman recently stated that I am a “maximization and equilibrium” kind of guy. The goal of this lecture is to show that these two principles fail completely to help us understand behavior is a very simple model of a duopoly.

In last lecture (AM03), we introduced a simple duopoly model. Two ice-cream vendors buy ice-cream wholesale and can sell at any chosen price in the park. If they have matching prices, they split customers. Under Perfect Competition assumptions, with Full Information and Zero Transaction Costs, if they have different prices, then all customers go to the lower price vendor. Straightforward analysis of this duopoly model leads to the following conclusions:

  1. There is a huge amount of genuine uncertainty – probability calculations required for expected utility cannot be made. We cannot know how many people will come to the park on any given day. We cannot forecast the weather conditions, which influence the demand for ice-cream, with any degree of reliability. This means that vendors will adopt rules-of-thumb to make decisions, rather than maximize anything. This leads to the use of evolutionary Agent Based Models as the preferred modeling technique.  read more