Four structural characteristics of the US economy

July 21, 2019 1 comment

from Dimitri Papadimitriou, Michalis Nikiforos, and Gennaro Zezza

In order to understand the US economy – or for that matter any economy – we need to identify its structural characteristics. These characteristics will allow us to link its precrisis trajectory to the present relatively slow recovery and, most importantly, its future prospects. Through this prism, it is also easier to understand major policy debates and concerns regarding foreign competition, such as the recent much-discussed “trade wars”.

In several previous reports we have identified four main structural problems afflicting the US economy: (1) the weak net export demand for US products; (2) the fiscal conservatism that has prevailed for most of the last three decades; (3) the increase in income inequality; and (4) the associated financial fragility.

These issues are not independent of each other. An economy that faces weak net export demand from abroad tends to have high trade deficits. From the financial balances perspective, a trade deficit implies a negative balance (deficit) for the private sector, the public sector, or both. If trade deficits are accompanied by austerity, the burden of the adjustment falls on the private sector. Such an economy faces the choice between growth accompanied by trade and private deficits – essentially growth fueled by private indebtedness – or a recession that will dampen output and reduce imports, thus reducing trade and private deficits. In the former case, private deficits accumulate into higher stocks of debt and make the financial position of the private sector more fragile. Read more…

The validity of statistical induction

July 19, 2019 1 comment

from Lars Syll

treatprob-2In my judgment, the practical usefulness of those modes of inference, here termed Universal and Statistical Induction, on the validity of which the boasted knowledge of modern science depends, can only exist—and I do not now pause to inquire again whether such an argument must be circular—if the universe of phenomena does in fact present those peculiar characteristics of atomism and limited variety which appear more and more clearly as the ultimate result to which material science is tending …

The physicists of the nineteenth century have reduced matter to the collisions and arrangements of particles, between which the ultimate qualitative differences are very few …

The validity of some current modes of inference may depend on the assumption that it is to material of this kind that we are applying them … Professors of probability have been often and justly derided for arguing as if nature were an urn containing black and white balls in fixed proportions. Quetelet once declared in so many words—“l’urne que nous interrogeons, c’est la nature.” But again in the history of science the methods of astrology may prove useful to the astronomer; and it may turn out to be true—reversing Quetelet’s expression—that “La nature que nous interrogeons, c’est une urne”.

Professors of probability and statistics, yes. And more or less every mainstream economist!

MMT Macro Final (2/3)

July 19, 2019 7 comments

from Asad Zaman

Last semester I taught an MMT-based Macro course which attempted to re-integrate history into economics. The course was based on the premise that economic theories cannot be understood outside the historical context in which they were born. Standard graduate macro courses attempt to teach a body of theory which has been empirically falsified. My course had the goal of giving the student the ability to understand major economic events of the past century.  A previous post on  MMT Macro Final (1/3)  provided the first 4 questions and answers for the Final Exam, as a sample of what was taught. This post provides questions 5 to 8, together with the answers.  read more

The necessity to change the rules of the current economic system is quite obvious.

July 18, 2019 4 comments

from Ikonoclast

Conventional economics is a prescriptive discipline pretending to be a descriptive discipline. I find it useful, at a first principles level of thinking, to distinguish between “rules” and “laws”.

(1) A “rule” is a prescribed guide for conduct or action by any agent (human or machine).

(2) A “law” is a fundamental law of (physical) nature described by the hard sciences after extensive observation, experiment, deduction and mathematical analysis.

A “rule” is made in a given way by culture, custom, convention, regulation or legal prescription and could be made in other ways. A fundamental law of nature is unchangeable by humans.

A “rule” may be possible or impossible to obey or execute depending on its relation to natural laws. Rules may also be executable for a period of time until natural limits are reached. Executable rules tend to work better if they are consistently obeyed by agents, although this tendency can reverse when consistent obedience leads to trends which run up against natural law limits. Read more…

Two must-read statistics books

July 18, 2019 5 comments

from Lars Syll

freedmanMathematical statistician David Freedman‘s Statistical Models and Causal Inference (Cambridge University Press, 2010)  and Statistical Models: Theory and Practice (Cambridge University Press, 2009) are marvellous books. They ought to be mandatory reading for every serious social scientist — including economists and econometricians — who doesn’t want to succumb to ad hocassumptions and unsupported statistical conclusions!

Read more…

Colonialism’s mindset planted the seeds of today’s climate crisis

July 17, 2019 Leave a comment

from Jamie Margolin and The Guardian

Many people trace the origins of today’s climate crisis to the Industrial Revolution, when humans first began to burn large amounts of coal, but the crisis’s true roots extend further back to the onset of colonialism. When European colonizers ventured to Africa, Asia, North and South America, they invariably plundered the local natural resources, damaged habitats, hunted species to extinction and often forced human inhabitants into slavery. Undergirding European colonialism was the assumption that everything on the earth was meant to be extracted, bought and sold – and to make an elite minority very rich. In the eyes of the colonizers, the “new” lands they encountered had no owners – no one had purchased them with a recognizable currency or could prove ownership with property records – so it was free pickings. Along with this attitude came the idea that nothing – not air, not water, not trees, not animals – was sacred or priceless.

Colonialism’s mindset of heedless extraction, greed and human exploitation not only planted the seeds of today’s climate crisis, it remains visible in the crisis’s central injustice: although the poor are responsible for only a tiny share of humanity’s greenhouse gas emissions, they generally suffer first and worst from the heatwaves, droughts, storms, rising seas and other effects of those emissions.   read more

Crude economism took over our society

July 17, 2019 5 comments

from Ikonoclast

Democracy is seen mainly as a hindrance to economics. Technology and science are funded (or not funded) mainly at the behest of economics. Production science which assists corporate capitalism gets massive subsidies. Impact science (ecology, climate science etc.) gets pitiful funding by comparison. It is not so much the unintended consequences of technology and science which are causing climate change (for example) but the ignored consequences of technology and science mustered at the behest of and in the manner specified by capital which are causing climate change. This is a crucial distinction.I think people are trying to correct a great distortion which has occurred. Speaking of babies and bathwater, what could we regard as the great advances of the modern era? I mean the era running from 1500 to the present day. I would take them to be the rise of technology, science, democracy and economics. What do we hear about most today? We hear about (conventional) economics ad nauseum. It’s almost as if technology, science and democracy have been treated as bathwater and thrown out.

We could have used technology, science and democracy in much better ways but crude economism took over our society and specified and controlled the ways we could and could not utilize technology, science and democracy. This is our central problem.

Elinor Ostrom and common pool resources

July 16, 2019 6 comments

from John Tomer  

Elinor Ostrom’s (1990; 2009) research focuses on common pool resources (CPR) and the dilemmas they have posed for their users and society. A CPR is a resource such as a fishing ground, an irrigation system, ground water, pasture land for grazing animals, etc. that jointly benefits a group of people (the users) but which provides diminished benefits to the users involved if each individual pursues his or her narrow self-interest without considering other users. The CPR has a definite capacity. The problem is that each individual user has an incentive to overuse the resource. As authors such as Garret Harden (1968) have pointed out, when each user single-mindedly and independently follows the incentives, that will cause depletion of the CPR’s capacity, possibly creating a tragic overuse of the resource.

In the view of conventional economic theory, there are only two ways to deal with this overuse problem. Read more…

What is ergodicity?

July 16, 2019 7 comments

from Lars Syll

Time to explain ergodicity …

The difference between 100 people going to a casino and one person going to a casino 100 times, i.e. between (path dependent) and conventionally understood probability. The mistake has persisted in economics and psychology since age immemorial.

Consider the following thought experiment.

skin_in_the_gameFirst case, one hundred persons go to a Casino, to gamble a certain set amount each and have complimentary gin and tonic … Some may lose, some may win, and we can infer at the end of the day what the “edge” is, that is, calculate the returns simply by counting the money left with the people who return. We can thus figure out if the casino is properly pricing the odds. Now assume that gambler number 28 goes bust. Will gambler number 29 be affected? No.

You can safely calculate, from your sample, that about 1% of the gamblers will go bust. And if you keep playing and playing, you will be expected have about the same ratio, 1% of gamblers over that time window.

Now compare to the second case in the thought experiment. One person, your cousin Theodorus Ibn Warqa, goes to the Casino a hundred days in a row, starting with a set amount. On day 28 cousin Theodorus Ibn Warqa is bust. Will there be day 29? No. He has hit an uncle point; there is no game no more.

No matter how good he is or how alert your cousin Theodorus Ibn Warqa can be, you can safely calculate that he has a 100% probability of eventually going bust.

The probabilities of success from the collection of people does not apply to cousin Theodorus Ibn Warqa. Let us call the first set ensemble probability, and the second one time probability (since one is concerned with a collection of people and the other with a single person through time). Now, when you read material by finance professors, finance gurus or your local bank making investment recommendations based on the long term returns of the market, beware. Even if their forecast were true (it isn’t), no person can get the returns of the market unless he has infinite pockets and no uncle points. The are conflating ensemble probability and time probability. If the investor has to eventually reduce his exposure because of losses, or because of retirement, or because he remarried his neighbor’s wife, or because he changed his mind about life, his returns will be divorced from those of the market, period.

Nassim Taleb

Taleb’s excellent example shows why the difference between ensemble and time averages is of such importance in economics. Read more…

Trump’s fixation on intellectual property rights serves the rich

July 15, 2019 4 comments

from Dean Baker

Between making threats of actual war with North Korea and Iran, Donald Trump has also gotten us into a trade war with China. Trump’s ostensible reason for this trade war — the large US trade deficit with China — actually did have some basis in reality, but in practice the trade war is straying into turf that is likely to offer few gains for US workers and could actually lead to sizable losses.

A major theme in Trump’s campaign was that China is a world-class currency manipulator that deliberately keeps down the value of its currency to give its products an advantage in international trade. The basic story is true; China did intervene heavily in currency markets to keep the value of its currency from rising against the dollar.

However, it would probably be more appropriate to say that China managed its currency rather than manipulated it. There was nothing hidden or sneaky about China’s intervention; it has an official exchange rate that it acts to maintain.

Read more…

Digital currency: cryptocoin or money-on-account?

July 15, 2019 1 comment

from Joseph Huber

People have become used to hearing about digital currencies (DC) such as Bitcoin. These currencies are based on new technology known as distributed ledger and blockchain technology and are also referred to as cryptocurrencies because of the data encryption involved. Cryptocurrencies represent a radical alternative to the current banking system, in that they bypass retail banks and defy central-bank control from the outset.

Against this background, central banks are now thinking about producing their own DC. Initially, such central-bank issued DC was imagined in the technical form of cryptocurrency. The new technology, however, is still in its infancy. In comparison, tried and tested ways of managing account balances and payments from and to accounts are well suited for implementing DC. In the foreseeable future, central-bank issued DC is thus likely to take the form of account balances (money-on-account). In this context, “digital money” and “electronic money” are interchangeable terms.

First design studies of DC were put forward by Barrdear and Kumhof of the Bank of England, the Swedish Riksbank and the Basel Bank for International Settlements, and were also presented at an early stage by monetary reformers and other economists. The number of central banks and international monetary institutions that have expressed an interest in DC has been steadily growing. Read more…

Why economic models do not give us explanations

July 14, 2019 18 comments

from Lars Syll

Unicorn-2Economic models frequently invoke … entities that do not exist, such as perfectly rational agents, perfectly inelastic demand functions, and so on. As economists often defensively point out, other sciences too invoke non-existent entities, such as the frictionless planes of high-school physics. But there is a crucial difference: the false-ontology models of physics and other sciences are empirically constrained. If a physics model leads to successful predictions and interventions, its false ontology can be forgiven, at least for instrumental purposes — but such successful prediction and intervention is necessary for that forgiveness … The idealizations of economic models, by contrast, have not earned their keep in this way. So the problem is not the idealizations in themselves so much as the lack of empirical success they buy us in exchange. As long as this problem remains, claims of explanatory credit will be unwarranted.

A. Alexandrova & R. Northcott

The data now used for “testing economic theories” provide no tests at all.

July 13, 2019 4 comments

from Salim Rashid

It is plausible that economics slipped into its current difficulty because all earlier theory was framed with agriculture in mind. But we are not in an agricultural world anymore. The number of available products must have expanded a 1000-fold since the 1700s. Unless one looks, it is difficult to grasp the sheer amounts of data that are generated and potentially available – but perhaps impossible to digest because of their magnitude and complexity. Below are two examples, from Trade statistics and from Price indices.

  • Customs forms provide us with Trade data, one for each export shipment. There were about 22 million export shipments originating in the U.S. in 2005. This suggests that we have information on some 22 million individual decisions. However, there are 229 countries and 8,867 product codes with active trade, so a shipment can have more than 2 million possible classifications.
  • Next, consider the Consumer and Producer Price Indexes, the CPI and PPI. The Producer Price Index program collects monthly price data on about 128,000 individual items from about 32,000 establishments.  The CPI collects data on about 80,000 individual items. The larger number for the PPI is presumably due to the addition of many intermediate goods in the PPI.

Unless one accepts the hara-kiri assumption of perpetual equilibrium, the question of data relevance now revolves around speeds of convergence in each market. Read more…

“data-free mathematical masturbation”

July 13, 2019 9 comments

from Imad Moosa

Econometrics is no longer about measurement in economics as it has become too abstract. The word “econometrics” is typically stretched to cover mathematical economics and the word “econometrician” refers to an economist, or otherwise, who is skilled and interested in the application of mathematics, be it mathematical statistics, game theory, topology or measure theory. Baltagi (2002) argues that research in economics and econometrics has been growing more and more abstract and highly mathematical without an application in sight or a motivation for practical use. In most cases, however, mathematization is unnecessary and a simple idea that can be represented by diagrams is made much more complex and beyond the comprehension of the average economist, let alone policy makers.

Heckman (2001) argues that econometrics is useful only if it helps economists conduct and interpret empirical research on economic data. Like Baltagi, Heckman warns that the gap between econometric theory and empirical practice has grown over the past two decades. Although he finds nothing wrong with, and much potential value in, using methods and ideas from other fields to improve empirical work in economics, he does warn of the risks involved in uncritically adopting the methods and mind set of the statisticians. Econometric methods adapted from statistics are not useful in many research activities pursued by economists. A theorem-proof format is poorly suited for analyzing economic data, which requires skills of synthesis, interpretation and empirical investigation. Command of statistical methods is only a part, and sometimes a very small part, of what is required to do useful empirical research. Read more…

Econometrics — a con art with no relevance whatsoever to real world economics

July 12, 2019 5 comments

from Lars Syll


Econometrics looks “sciency”. Once in a seminar presentation I displayed two equations, one taken from Econometrica and the other from the Journal of Theoretical and Experimental Physics and challenged the audience to tell me which is which. No one volunteered to tell me which is which, including at least one hard-core econometrician. Economics is a social science where the behaviour of decision makers is not governed purely by economic considerations but also by social and psychological factors, which are not amenable to econometric testing. This is why no economic theory holds everywhere all the time. And this is why the results of empirical testing of economic theories are typically a mixed bag. And this is why econometricians use time-varying parametric estimation to account for changes in the values of estimated parameters over time (which means that the underlying relationship does not have the universality of a law). And this is why there are so many estimation methods that can be used to produce the desired results. In physics, on the other hand, a body falling under the force of gravity travels with an acceleration of 32 feet per second per second – this is true anywhere any time. In physics also, the boiling point of water under any level of atmospheric pressure can be predicted with accuracy.

Unlike physicists, econometricians are in a position to obtain the desired results, armed with the arsenal of tools produced by econometric theory. Read more…

issue no. 88 of real-world economics review

July 11, 2019 Leave a comment

real-world economics review
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Issue no. 88 
​​​​​​​10 July 2019
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Make-believe empiricism

  • Is econometrics relevant to real world economics?
    Imad A. Moosa          download 
  • The fiction of verifiability in economic “science”
    Salim Rashid          download 
  • Nominal science without data – the artificial Cold War content of Game Theory and Operations Research
    Richard Vahrenkamp          download 
  • Real GDP: the flawed metric at the heart of macroeconomics
    Blair Fix, Jonathan Nitzan and Shimshon Bichler          download 
  • Realism and critique in economics: an interview with Lars P. Syll
    Lars P. Syll and Jamie Morgan          download

Digital currency. Design principles to support a shift from bankmoney to central bank digital currency
Joseph Huber           download

Economics and the shop floor: reflections of an octogenarian
Robert R. Locke          download

Can redistribution help build a more stable economy?
Dimitri B. Papadimitriou, Michalis Nikiforos, and Gennaro Zezza          download

What can economists and energy engineers learn from thermodynamics beyond the technical aspects?
Abderrazak Belabes          download

Metaphors for the evolution of the American economy: progressing from the invisible and visible hands to the humanistic hand
John F. Tomer            download

Permanent fiscal deficits are desirable for the high income countries: a note
Leon Podkaminer          download

There is no separation between culture and economy.

July 10, 2019 2 comments

from Ken Zimmerman

There is no separation between culture and economy. They are one another. Historian Richard Hofstadter notes, as have many others that American culture is “…diverse and contradictory” … “visionary and down-to-earth, deeply radical and solidly conservative, coldly prudent and· unexpectedly wild.” As American culture changes, so does American economy. America is Puritanism with its omnipotent God, souls predestined to heaven or hell before birth, and certainty that Christians could do nothing to change their fate. One of their primary duties as Christians, though, was to assess the state of their own souls through devoted self-examination and Bible study. America is also the “natural rights of man” philosophy. The common-law rights of freeborn Englishmen were, for example, closely identified with the natural rights of men. And these legal rights were sustained by two English authorities who were immensely influential in America: Sir William Blackstone, known through his Commentaries on the Laws of England (17 65-17 69), and Sir Edward Coke, an eminent seventeenth-century English lawyer. And one of the most widely read on “the rights of man” was John Locke. Locke’s ideas are in his “Two Treatises of Government,” Published in 1690, and taken as an ideological buttress for the Revolution of 1688 and for the supremacy of Parliament, Locke’s essays were used in the colonies after the 1760’s to support resistance to Parliament. More importantly Locke and the common-law rights of freeborn Englishmen are embedded in both the American Declaration of Independence and Constitution. Next, America, like Great Britain is an ethnocentric nation. Read more…

Paul Samuelson — a case of badly invested intelligence

July 10, 2019 13 comments

from Lars Syll

Paul Samuelson claimed that the ‘ergodic hypothesis’ is essential for advancing economics from the realm of history to the realm of science.

But is it really tenable to assume that ergodicity is essential to economics?

The answer can only be — as I have argued






here — NO WAY!

Obviously yours truly is far from the only researcher being critical of Paul Samuelson. This is what Ole Peters writes in a highly interesting article on Samuelson’s stance on the ‘ergodic hypothesis’: Read more…

Thought experiment: Radical abundance

July 9, 2019 16 comments

from Jason Hickel

Imagine if we were to even just partially decommoditize London’s housing stock; for example, imagine the government was to cap the price of housing at half its present level. Prices would still be outrageously high, but Londoners would suddenly be able to work and earn significantly less than they presently do without any loss to their quality of life. Indeed, they would gain in terms of time they could spend with their friends and family, doing things they love, improvements to their health and mental well-being, and so on. And by needing to work less they would contribute to less overproduction, and therefore ease concomitant pressures for unnecessary consumption.

The same thought experiment can be applied to all social goods that have either been made to be artificially scarce or that would otherwise be simple to manage as commons. And here I have in mind not only healthcare and education, which are already generally well-recognized as public goods by most social democracies, but also other key goods that are essential to people’s well-being, like internet, housing and public transportation, as in the vision of Universal Basic Services outlined by academics at University College London (IGP, 2017). On top of this, Read more…

Robert Reich suggests 5 ways to abolish billionaires

July 9, 2019 6 comments

from Ken Zimmerman

Robert Reich suggests that one thing we could do to deal with these problems is to abolish billionaires. Robert, lays out the ways billionaires are able to accumulate that much money. First, monopoly. We can address this by vigorously enforcing anti-trust laws already on the books. Second, copyrights and patents. Robert suggests shortening these by half or more. Third, insider information. Here we need to both enforce fines to take away all the money gotten in this way, and in egregious cases send those who seek out and use such information to prison. Fourth, pay off politicians. This screams for Congress to take private money out of elections completely. And long prison sentences for those convicted of giving and receiving private money wouldn’t be a bad idea. This was accomplished during the 1970s after the last major government scandals. But Americans seem to constantly forget history. Fifth, inheritance. Again, a problem addressed before. High inheritance taxes and a limit on the amount that can be inherited address this problem. These are not revolutionary changes. We’ve done them before in the US. But 50 years of propaganda by the American oligarchy have reversed most. We need to address them now before another 50 years of propaganda makes them impossible to even conceive.