from Peter Radford
I don’t want to spend much time on Trump and his version of economics primarily because I am not sure what it is. Nor, I think, does he.
One thing worth mentioning is that there is an unprecedented disconnect between the economics profession and the incoming President. Just about every economist I know says that Trump will be bad for the economy, and that the best we can hope for is that his notoriously poor attention span will prevent him from doing much.
For a much more detailed discussion of this disconnect go and read Justin Wolfers article in the New York Times.
What intrigues me is that this near complete separation between the economics profession, of all political persuasions, and the incoming administration is in stark contrast to that between Trump and both Wall Street and small business owners.
Is this because Wall Street and small business has a better handle on the economy? Or is it because they are deluded and are thus in for an ugly surprise?
There’s a part of me that would argue that Wall Street and small business are better informed than economists are about the economy. This opinion is based on my continued amazement at the extraordinarily strange convolutions that economics puts itself through in order to “prove” its various propositions. They are, frankly, absurd. So much so that any conclusions economists draw from their mathematics ought be taken with bucket loads of salt. Economists are steadfastly incapable and unwilling to amend their ideas and are still stuck in major reconsideration mode after the real world repudiation of their confidence and theories that the Great Recession represented. Suffice to say that were I a politician trying to steer the ship of state through these turbulent times, the last place I would look for economic advice is to a profession that still — despite the evidence — builds its theories on the quicksands of rationality, perfect information and so on. Read more…
from Lars Syll
Maintaining that economics is a science in the ‘true knowledge’ business, I remain a skeptic of the pretences and aspirations of ‘New Keynesian’ macroeconomics. So far, I cannot really see that it has yielded very much in terms of realist and relevant economic knowledge. And there’s nothing new or Keynesian about it.
‘New Keynesianism’ doesn’t have its roots in Keynes. It has its intellectual roots in Paul Samuelson’s ill-founded ‘neoclassical synthesis’ project, whereby he thought he could save the ‘classical’ view of the market economy as a (long run) self-regulating market clearing equilibrium mechanism, by adding some (short run) frictions and rigidities in the form of sticky wages and prices.
But — putting a sticky-price lipstick on the ‘classical’ pig sure won’t do. The ‘New Keynesian’ pig is still neither Keynesian nor new.
The rather one-sided emphasis of usefulness and its concomitant instrumentalist justification cannot hide that ‘New Keynesians’ cannot give supportive evidence for their considering it fruitful to analyze macroeconomic structures and events as the aggregated result of optimizing representative actors. After having analyzed some of its ontological and epistemological foundations, yours truly cannot but conclude that ‘New Keynesian’ macroeconomics on the whole has not delivered anything else than ‘as if’ unreal and irrelevant models. Read more…
from Asad Zaman
Even though very few people have more than a vague idea about them, macroeconomic theories deeply affect the lives of everybody on the planet. Writings of Piketty, Stiglitz and many others, as well as personal experience of the 1% — 99% divide, have created increasing awareness of the deep and increasing inequalities which characterize modern capitalist economies. However, the link between inequality and macroeconomic theory has not been pointed out clearly. The fact that since the 1970’s top corporate salaries have increased by 1000% while the average worker only earns 11% more is closely linked to the revolution in economic theory that occurred over the 70’s and 80’s. We will try to sketch some parts of the complex and coordinated efforts which led to the emergence of theories which provide the invisible foundations and the enabling environment for this inequality.
The oil crisis of the early 70’s destroyed the consensus on Keynesian macroeconomics, and created the opportunities for ideologies disguised as economic theories to emerge. Chicago school economist Robert Lucas attacked the dominant Keynesian theories which argued that governments must play an important role in eliminating unemployment. Guided by free market ideology, Lucas created macroeconomic theories which suggested that government interventions are always harmful. Some elements of the Lucasian methodology provided genuinely superior alternatives to defects in existing Keynesian models. However, other elements were bizarre. Even though unemployment is a painful reality to vast numbers of people, defender-of-free-markets Lucas argued that this was a free choice. According to Lucas, the Great Depression was really the Great Vacation, where vast numbers of people suddenly decided to stop working in order to enjoy leisure. This, and many other strange assumptions of the Lucasian alternative led famous economists like Robert Solow to say that to engage in a serious discussion with the Chicago school would be analogous to discussing technicalities of the Battle of Austerlitz with a madman who claimed to be Napoleon Bonaparte. For example, Solow wrote that “Bob Lucas and Tom Sargent like nothing better than to get drawn into technical discussions, because then attention is attracted away from the basic weakness of the whole story. Since I find that fundamental framework ludicrous, I respond by treating it as ludicrous – that is, by laughing at it – so as not to fall into the trap of taking it seriously and passing on to matters of technique.” read more
from David Ruccio
Like many liberal economic nationalists, who are concerned about both inequality and economic growth, Michael Lind attempts to make a distinction between “takers” and “makers.”
As against conservative economic nationalists, who blame immigrants and the welfare-dependent poor, Lind focuses his attention on the “rent-extracting, unproductive rich” for undermining the dynamism and fairness of contemporary capitalism.
The term “rent” in this context refers to more than payments to your landlords. . . “Profits” from the sale of goods or services in a free market are different from “rents” extracted from the public by monopolists in various kinds. Unlike profits, rents tend to be based on recurrent fees rather than sales to ever-changing consumers. While productive capitalists — “industrialists,” to use the old-fashioned term — need to be active and entrepreneurial in order to keep ahead of the competition, “rentiers” (the term for people whose income comes from rents, rather than profits) can enjoy a perpetual stream of income even if they are completely passive.
This is a familiar trope within economic discourse. As I’ve explained before (e.g., here and here), it relies on a distinction between productive and unproductive economic activities, which is then overlain with other dichotomies: active vs. passive, doing vs. owning, and so on. The idea is that one group—the passive, owning, recipients of rent—increasingly serve as a drag on the other group—the active, doing, recipients of profits. Read more…
from Dean Baker
It really is shameful how so many people, who certainly should know better, argue that automation is the factor depressing the wages of large segments of the workforce and that education (i.e. blame the ignorant workers) is the solution. President Obama takes center stage in this picture since he said almost exactly this in his farewell address earlier in the week. This misconception is repeated in a Claire Cain Miller’s NYT column today. Just about every part of the story is wrong.
Starting with the basic story of automation replacing workers, we have a simple way of measuring this process, it’s called “productivity growth.” And contrary to what the automation folks tell you, productivity growth has actually been very slow lately.
Source: Bureau of Labor Statistics.
The figure above shows average annual rates of productivity growth for five year periods, going back to 1952. As can be seen, the pace of automation (productivity growth) has actually been quite slow in recent years. It is also projected by the Congressional Budget Office and most other forecasters to remain slow for the foreseeable future, so the prospect of mass displacement of jobs by automation runs completely counter to what we have been seeing in the labor market.
from Peter Radford
Here’s a well known quote:
“For really I think that the poorest he that is in England hath a life to live, as the greatest he; and therefore truly, sir, I think it’s clear, that every man that is to live under a government ought first by his own consent to put himself under that government … and I do think that the poorest man in England is not bound in a strict sense to that government that he hath not had a voice to put himself under.”
Thus spoke Colonel Rainsborough at Putney in 1647.
This is an early instance of the rise of the modern liberal view of government. Rainsborough lost the argument with Cromwell and Ireton because the issue of property ownership intruded into the debate. That issue revolved around the question of the likelihood that those who owned no property would infringe on the rights of those who did, were the former allowed to participate in their own governance. So even at this formative moment in modern constitutional development the possibility that a liberal stance could evolve down two parallel tracks was clear.
Liberalism was subject to division at its inception.
One track, the one that dominated early on and which echoes strongly to this day, argues that for a person to have a voice in their own government they ought to have an overt stake in society. And the most obvious and material such stake is the ownership of property. Read more…
from Lars Syll
There is something about the way macroeconomists construct their models nowadays that obviously doesn’t sit right.
Empirical evidence still only plays a minor role in mainstream economic theory, where models largely function as a substitute for empirical evidence.
One might have hoped that humbled by the manifest failure of its theoretical pretences during the latest economic-financial crisis, the one-sided, almost religious, insistence on axiomatic-deductivist modeling as the only scientific activity worthy of pursuing in economics would give way to methodological pluralism based on ontological considerations rather than formalistic tractability. That has, so far, not happened.
If macroeconomic models – no matter of what ilk – build on microfoundational assumptions of representative actors, rational expectations, market clearing and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypotheses of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. Incompatibility between actual behaviour and the behaviour in macroeconomic models building on representative actors and rational expectations microfoundations is not a symptom of ‘irrationality.’ It rather shows the futility of trying to represent real-world target systems with models flagrantly at odds with reality. Read more…
from David Ruccio
Mainstream economists and economic commentators continue to invoke the so-called “dignity of work” to criticize the idea of a universal basic income. Read more…
As a means of fending off criticism of its autism, of further concealing its ideological role (see below), of diverting calls for pluralism and, perhaps most of all, just as a pastime, economics’ Neoclassical mainstream plays a game of relaxing the assumptions. It loosens one or two assumptions around the edges of the theory and then does a bit of analysis. This is no better than when viewing David to lean to the left or to the right or kneel or stand tiptoed as a means of seeing another side of Michelangelo’s masterpiece. Yet the whole mainstream project is now so infected with this methodological dilettantism that it seems necessary to spell out the difference between fake and real pluralism. Read more…
from Peter Radford
My wife is reading Kahneman’s “Thinking Fast and Slow”, somewhere in which he relates his reaction when he first came across the bedrock of mainstream economics: rational microeconomic behavior. I must admit I had a very similar reaction. The description of human behavior that underpins modern economics is so bizarre that my first thought was that it must be some form of Monty Pythonesque satire. Surely, I thought, this is a joke and in a few pages all will be revealed. But no. Economics really is built on a foundation that to outside eyes is not just odd, but what appears to be a deliberate spoof.
What is even more strange, and those of you who listen to economists and take them seriously please suspend your sense of humor at this point, is that this total perversion of humanity is then taken as the essential starting point for all subsequent theorizing. Economists are all brought up nowadays to repeat the mantra that all “good” theorizing about the economy at higher levels — what economists call macroeconomic theory — has to be based on a foundation of theorizing at a lower level — what economists call microeconomics. So in the literature and in conversation it is common to come across the phrase that some higher level idea is based upon “micro foundations”.
Except that foundation is exactly what Kahneman and others laugh at.
You would too if you spent any time at all thinking about it.
Which brings me to another point: economics is full of these oddities that anyone outside the profession would dismiss a priori as some form of ludicrous joke. Read more…
from Jim Stanford
For years, we’ve been told the dictates of globalization, and the intrusive and prescriptive terms of free trade agreements in particular, are immutable, natural, and unquestionable. When workers were displaced by the migration of multinational capital toward more profitable jurisdictions, we were told there’s nothing we can do about it except join the race to the bottom in a desperate attempt to hang onto our jobs. When investment and employment were undermined by lopsided trade and capital flows, and employers and financiers utilized the leverage afforded them by unrestrained international mobility to ratchet the distributional structure of the economy ever-more-blatantly in their own favour, we were informed this was just the logic of markets. And anyone who questioned that logic, or pointed out that it didn’t work in the real world like it is described in the economic textbooks, was labelled either economically illiterate or protectors of vested interests.
Now, suddenly, on the strength of a few tweets from a President who hasn’t even taken office yet, it seems that those rules are not so immutable, permanent, or natural after all. Now, global corporations will move billions of dollars of investment, and thousands of good jobs, just because a President-elect wants them to. If there is one crucial lesson from the extraordinary developments this month in the North American auto industry (including Trump’s threats against Ford, GM, and Toyota, and Ford’s stunning decision to completely cancel its new assembly plant in Mexico), it’s that politics matter. Nothing about the economy is ever natural or permanent — and the immense resources invested in convincing us they are, are actually trying to disempower and silence the potential power of those being hurt by the current system of globalization. We’ve now seen that when it suits powerful forces, global rules can be rewritten in an instant; decisions of global megacorps overturned swiftly and effectively; provisions of trade deals simply ignored. Read more…
from Lars Syll
If contributions made by statisticians to the understanding of causation are to be taken over with advantage in any specific field of inquiry, then what is crucial is that the right relationship should exist between statistical and subject-matter concerns …
Where the ultimate aim of research is not prediction per se but rather causal explanation, an idea of causation that is expressed in terms of predictive power — as, for example, ‘Granger’ causation — is likely to be found wanting. Causal explanations cannot be arrived at through statistical methodology alone: a subject-matter input is also required in the form of background knowledge and, crucially, theory …
Likewise, the idea of causation as consequential manipulation is apt to research that can be undertaken primarily through experimental methods and, especially to ‘practical science’ where the central concern is indeed with ‘the consequences of performing particular acts’. The development of this idea in the context of medical and agricultural research is as understandable as the development of that of causation as robust dependence within applied econometrics. However, the extension of the manipulative approach into sociology would not appear promising, other than in rather special circumstances … The more fundamental difficulty is that, under the — highly anthropocentric — principle of ‘no causation without manipulation’, the recognition that can be given to the action of individuals as having causal force is in fact peculiarly limited.
Causality in social sciences — and economics — can never solely be a question of statistical inference. Causality entails more than predictability, and to really in depth explain social phenomena require theory. Analysis of variation — the foundation of all econometrics — can never in itself reveal how these variations are brought about. First when we are able to tie actions, processes or structures to the statistical relations detected, can we say that we are getting at relevant explanations of causation. Read more…
from Norbert Haering
When Prime minister Narendra Modi took the bulk of Indian cash out of circulation, he caused great hardship for many Indians, while a disruption-loving tech elite and political establishment asked for optimism and patience. In an earlier piece I have provided some indications for US involvement in that scheme. In this piece, I am adding some more, including earlier, evidence, summarize the evidence and ask if this evidence is reasonably compatible with the interpretation that the initiative was really Modi’s.
There is no firm proof or admission, as yet, that the decision has been taken at the behest of foreign institutions. In a report of news agency Reuters from December named “Who knew?”, unnamed Indian official sources want to make us believe that only the prime minister himself and a handful of people, knew of the plans. The Reuters-report names only one of the supposedly five who knew, a high-ranking official of the finance ministry. Tellingly, there is not a single mention of any foreign involvement, despite a formal co-operation of the finance ministry with USAID, aimed at pushing back cash in favor of digital payments.
There is plenty of evidence that US government entities, foundations and other institutions were intensely involved. We briefly summarize the evidence presented already in an earlier piece, bring it together with some more evidence, and then ask, if this evidence is reasonably compatible with the interpretation that the Indian government made its own demonetization plan, and either did it alone or – somewhat more plausibly – enlisted all the help and advice it could get, including from abroad. This is an interpretation that some readers of my earlier piece have brought forward. In the following concise list of evidence, items 3,6 and 7 have been discussed more extensively in my earlier piece, 1,2,4 and 5 are new.
Predictably (as energy prices can’t fall forever) consumer price inflation in the EU recently increased. The present level is 1,1% which is, in a historical perspective, outright low. Also, ‘core’ inflation (which, unlike consumer price inflation, has never been negative) remained subdued and even below 1%. Predictably, however, people already start to scream that inflation is soaring and we should be afraid about worthless money.
They are wrong. Four reasons:
- Inflation does not measure the purchasing power of money. It measures the purchasing power of nominal income. A nice example of this: Read more…
- Very cool webpage which maps CO2 content of electricity in different European countries in real time (i.e.: German content drops when sun start to shine in Germany), as well as international flows. Blackest country: Poland. Greenest: Norway (hydro), France (nuclear).
- I’ve been tweeting a bit with global warming deniers. They are soooooo conservative, at least when it comes to their (lack of) believe in the power of technology. The transition is taking place already. Here, a real life zero emission truck (hydrogen + electricity) which is cheaper, faster and stronger than a diesel truck. Costs of solar and wind continue to plunge. Wind power was so abundant in Germany with Christmas that electricity was free. Decentralised storage has great potential. They don’t want to know.
- Is reality starting to look more like neoclassical models? On websites like ‘mechanical Turk’ a total flexible load of work, subdivided in mini tasks, is performed by a total flexible, anonymous labour force. One of these ‘Turkers’ posted the next question on reddit (in Canada, Turkers are paid in amazon gift cards: “Hey guys, Canadian turker here and I just got my first 10 days and now able to take out my earnings ($20). What gift card would be the best to sell in /r/giftcardexchange to get the lowest loss? Also do you guys have any better idea to cash it out with minimal loss aside from gift cards? Thanks! Side question: Does netflix gift card bought in US can be used in canada?”
- Demonitisation in India is a disaster, according to this article (based upon careful investigation). Another view however states, invoking Minsky, that credit can cushion the epic liquidity crunch. Recent economic historical findings however indicate that an economy should be seen as a whole bunch of markets and other transactions systems which are interconnected but which also often use their own specialized kind of money and payment system which can’t easily be replaced by other systems. When one carefully reads the positive article this seems to be the case in India, too.
from Asad Zaman
This continues the sequence of posts on re-reading Keynes. The fundamental point about the labor market which is made in Chapter 2 is that the micro level negotiations on wages between firms and laborers do not determine the real wage in the macro-economy. Before explaining this point in detail, we want to show how it is just a special case of the general idea that the economy is a complex system which cannot be understood by looking at simple sub-systems.
The idea of complex systems is beautifully illustrated by the parable of the blind men and the elephant. Each one understood correctly and accurately one small part of the big picture. When we don’t understand the system as a whole, the descriptions of subsystems appear conflicting and contradictory. Once we have an understanding of the complex system, we can assemble the partial insights into a coherent whole. The main contribution of Keynes can be understood as an attempt to describe the economy as a complex system. Unfortunately, most of his followers were blind to the main insights of Keynes. Accordingly, there have been many different interpretations of Keynes; some followers saw the trunk, others the legs, and yet others the tail of the system that Keynes was describing. But no one appears to have understood the fundamental insights of Keynesian complexity: the system as whole does not act as a simple aggregate of the actions of the individual agents within the system. Pre-Keynesian macroeconomics was based centrally on the misunderstanding that the macroeconomy can be understood by scaling up the microeconomic behaviors of individual agents. While Keynes forcefully rejected this thesis, and created a complex system view of the macroeconomy, simple-minded followers failed to understand complexity, and went back to the pre-Keynesian views. Read more…
from David Ruccio
As regular readers of this blog know, I try to make available and critically interpret charts of data—both to challenge others’ arguments and to provide a foundation for my own.
Last year, I spent much more time using publicly available data to make my own charts, which readers are free to use for their own purposes.
Here are some of those charts (just click on each chart to go to the post in which it originally appeared).
from Lars Syll
Getting it right about the causal structure of a real system in front of us is often a matter of great importance. It is not appropriate to offer the authority of formalism over serious consideration of what are the best assumptions to make about the structure at hand …
Where we don’t know, we don’t know. When we have to proceed with little information we should make the best evaluation we can for the case at hand — and hedge our bets heavily; we should not proceed with false confidence having plumped either for or against some specific hypothesis … for how the given system works when we really have no idea.
Trying to get around this lack of knowledge, mainstream economists in their quest for deductive certainty in their models, standardly assume things like ‘independence,’ ‘linearity,’ ‘additivity,’ ‘stability,’ ‘manipulability,’ ‘variation free variables,’ ‘faithfulness,’ ‘invariance,’ ‘implementation neutrality,’ ‘superexogeneity,’ etc., etc. Read more…
from Dean Baker
Shortly after Donald Trump enters the White House, we should get an answer to a key question from his campaign: What does he actually intend to do about trade? Trade was one of his main issues when he campaigned in the key industrial states that he won in November.
Trump argued that past presidents of both parties had failed the country’s workers by signing bad trade deals. He said that the negotiators were “stupid” and that he would instead appoint “smart” negotiators who wouldn’t let Mexico, China and other trading partners beat us at the negotiating table.
Trump is correct in identifying trade as a force that has caused enormous economic damage to millions of people in these states, but he is wrong that the problem was “stupid” negotiators. The vast majority of people who have been given the responsibility for negotiating trade deals are smart, ambitious and hard-working.
The large trade deficits we have been running in the last two decades are not due to negotiators. We run large trade deficits because securing manufacturing jobs in the United States has not been a priority for our negotiators. Read more…
from Peter Radford
I am going to be writing an extensive review of Avner Offer and Gabriel Söderberg’s excellent book: “The Nobel Factor” in the near future. Meanwhile allow me to share a a couple of early comments because they bear heavily on how we all approach the Trump administration.
Offer and Söderberg clarify the circumstances behind the shift in economics that occurred in the late 1970’s and came into full effect in the subsequent decades. Their focus is heavily on how the Nobel Prize in economics has reinforced that shift and how the very origins of the prize were steeped in political bias on the part of the Swedish Central Bank, which was involved at the time in a guerrilla war against the then prevailing (in Sweden) economics of social democracy.
This history is, perhaps, the clearest indication of the inherent anti-democractic intentions of modern economics.
Democratically aware economics and the more commonly quoted mainstream or neoclassical economics have very different attitudes towards the mitigation of lifetime risks that we all experience.
In a socially democratic world such risks are borne by the community via the redistribution of wealth, taxation, and the establishment of government provided safety-net programs of various sorts. In the world of modern economics the libertarian approach dominates: people provide their own risk mitigation through the purchase of private insurance. In this latter world the government plays no role. Indeed, any attempt on the part of government to play a positive role is regarded as, by definition, an attack on the ability of so-called free markets to produce maximal social welfare. Read more…