Hyman Minsky and the IS-LM obfuscation

January 28, 2023 1 comment

from Lars Syll

As a young research stipendiate in the U.S. yours truly had the pleasure and privilege of having Hyman Minsky as a teacher. He was a great inspiration at the time. He still is.

The concepts which it is usual to ignore or deemphasize in interpreting Keynes — the cyclical perspective, the relations between investment and finance, and uncertainty, are the keys to an understanding of the full significance of his contribution …

miThe glib assumption made by Professor Hicks in his exposition of Keynes’s contribution that there is a simple, negatively sloped function, reflecting the productivity of increments to the stock of capital, that relates investment to the interest rate is a caricature of Keynes’s theory of investment … which relates the pace of investment not only to prospective yields but also to ongoing financial behavior …

The conclusion to our argument is that the missing step in the standard Keynesian theory was the explicit consideration of capitalist finance within a cyclical and speculative context. Once capitalist​ finance is introduced and the development of cash flows … during the various states of the economy is explicitly examined, then the full power of the revolutionary insights and the alternative frame of analysis that Keynes developed becomes evident …

The greatness of The General Theory was that Keynes visualized [the imperfections of the monetary-financial system] as systematic rather than accidental or perhaps incidental attributes of capitalism … Only a theory that was explicitly cyclical and overtly financial was capable of being useful …

If we are to believe Minsky — and I certainly think we should — then when people like Paul Krugman and other ‘New Keynesian’ critics of MMT and Post-Keynesian economics think of themselves as defending “the whole enterprise of Keynes/Hicks macroeconomic theory,” they are simply wrong since there is no such thing as a Keynes-Hicks macroeconomic theory!

There is nothing in the post-General Theory writings of Keynes that suggests that he considered Hicks’s IS-LM anywhere near a faithful rendering of his thoughts. Read more…

Increase in billionaire wealth 1987 to 2022

January 27, 2023 3 comments

Debt, deficits, secular stagnation and the which way is up problem in economics

January 24, 2023 Leave a comment

from Dean Baker

The economy can have a problem of too much demand, leading to serious inflationary pressures. It can also have a problem of too little demand, leading to slow growth and unemployment. But can it have both at the same time?

Apparently, the leading lights in economic policy circles seem to think so. As I noted a few days ago, back in the 1990s and 00s economists were almost universally warning of the bad effects of an aging population. The issue was that we would have too many retirees and too few workers to support them.

This meant a problem of excess demand. Since much of the money to support retirees comes from government programs for the elderly, like Social Security and Medicare, this meant we would see this show up as large government budget deficits, unless we had big tax increases to reduce demand.

In recent years, this view had largely been replaced with concerns over secular stagnation. This is a story where an aging population implies a slow-growing or shrinking labor force. This reduces the need for investment spending. The reduction in investment spending, coupled with other factors increasing saving, gives what Larry Summers referred to as a “savings glut.” This is a story of too little demand.

Okay, so it’s January of 2023, the Republicans are threatening to blow up the economy by not raising the debt ceiling, do we have a problem of too much demand or too little demand? Which way is up? Read more…

How not to deal with a debt crisis

January 23, 2023 4 comments

from Jayati Ghosh

In the 1920s and early 30s, John Maynard Keynes was embroiled in a controversy with the ‘austerians’ of his time, who believed that balancing the government budget, even in a time of economic volatility and decline and financial fragility, was necessary to restore ‘investor confidence’ and therefore provide stability. Keynes was horrified by the idea.

Zachary Carter’s brilliant biography notes that Keynes felt a package of government spending cuts and tax increases would be ‘both futile and disastrous’. It would be an affront to social justice to ask teachers and the unemployed to carry the burden of deflating a doomed currency, in the name of balanced budgets. Even worse would be imposing austerity on debtor countries, as American banks were then demanding of several European nations.

Keynes was concerned with more than just the lack of efficacy and adverse distributional effects of austerity. He worried that such measures would alienate working people, cause them to lose faith in their leaders and make them prey to right-wing demagogy and incitation to violence. His arguments were not heeded and fascism in Europe followed. Deflation in Germany under Heinrich Brüning as chancellor left six million unemployed when Adolf Hitler assumed power in early 1933.

Nearly a century on and after more than a hundred sovereign-debt crises those in charge of global economic governance appear however to have learnt nothing. Those who do not learn from history are condemned to repeat it and, sadly, the worst effects of their decisions are likely to be felt by others, not themselves.

Read more…

Econometric testing

January 19, 2023 19 comments

from Lars Syll

Debating econometrics and its shortcomings yours truly often gets the response from econometricians that “ok, maybe econometrics isn’t perfect, but you have to admit that it is a great technique for empirical testing of economic hypotheses.”

But is econometrics — really — such a great testing instrument?

ecokEconometrics is supposed to be able to test economic theories. But to serve as a testing device you have to make many assumptions, many of which themselves cannot be tested or verified. To make things worse, there are also only rarely strong and reliable ways of telling us which set of assumptions is to be preferred. Trying to test and infer causality from (non-experimental) data you have to rely on assumptions such as disturbance terms being ‘independent and identically distributed’; functions being additive, linear, and with constant coefficients; parameters being’ ‘invariant under intervention; variables being ‘exogenous’, ‘identifiable’, ‘structural and so on. Unfortunately, we are seldom or never informed of where that kind of ‘knowledge’ comes from, beyond referring to the economic theory that one is supposed to test. Performing technical tests is of course needed, but perhaps even more important is to know — as David Colander put it — “how to deal with situations where the assumptions of the tests do not fit the data.”

That leaves us in the awkward position of having to admit that if the assumptions made do not hold, the inferences, conclusions, and testing outcomes econometricians come up with simply do not follow from the data and statistics they use.

The central question is “how do we learn from empirical data?” Read more…

Why debate markets vs. government when we let the right rig the market?

January 18, 2023 3 comments

from Dean Baker

I was happy to see this segment of Ezra Klein’s show (hosted by Rogé Karma) which featured an interview with Columbia University Law Professor Katharina Pistor. Pistor is the author of The Code of Capital: How the Law Creates Wealth and Inequality.

I’ve not yet read the book, but got the gist from the interview. Pistor is arguing that we have structured the market in ways that generate enormous inequality. In the interview, she presents several ways in which the law has been written that facilitate the accumulation of wealth by a small group of people. These include rules on property in land, intellectual property, and the creation of corporations as distinct entities with an existence independent of their owners.

Pistor’s point is that the way these rules are structured is not set in stone. They can be written differently so that they don’t lead to so much inequality.[1] Having written several books and endless blogposts in this vein, Pistor’s interview almost made my day. (There is also the video version.)  Read more…

Victoria Chick (1936-2023) – RWER 2018 paper “Industrial policy, then and now”

January 17, 2023 1 comment


After 40 years of neoliberalism, even governments believe that they are inefficient when compared to the private sector. And economics, in its swing to the right, reinforces this view. The philosophy behind public expenditure for social purposes and the criteria for judging such projects has not been a subject for public debate until recently. In particular, industrial policy was very simple: leave it to the private sector to allocate resources as the market prompts. In Keynes’s time this was not the case. This article reviews some of the issues concerning industrial policy that were aired in the interwar period. The debate needs to be revived, revisited and, where appropriate, revised to suit the present day, but on basic principles there is much to learn from the interwar discussions. The contrast between the recent (2018) UK government’s White Paper on Industrial Strategy and the Liberal Industrial Inquiry’s Britain’s Industrial Future (1928) is quite instructive.

read more

Share of new wealth gained by richest 1% between 2020-21

January 16, 2023 1 comment

Source: Oxfam calculation based on Credit Suisse Global Wealth Report.

Inflation in an unequal world economy: How the Fed’s policies are doubly perverse for the Global South

January 16, 2023 1 comment

from C. P. Chandrasekhar and Jayati Ghosh 

Tight monetary policies in rich countries obviously affect people in the countries where they are applied, but they also cause ripple effects across the world. We were already in a very unequal world before the most recent global price increases. Most developing countries were not able neutralize the damage inflicted by the pandemic, largely because they had much weaker fiscal stimuli. Of nearly $14 trillion in additional fiscal spending by the end of 2021, more than 80 percent was from just ten advanced economies, and more than half was from the U.S.

This fiscal inequality worsened after the start of the Ukraine War. Governments of low- and middle-income countries were constrained by declining revenues and externally or self-imposed austerity, because of concerns about high levels of sovereign debt, or IMF conditions imposed on borrowing, or simply the fear of potential credit rating downgrades and capital flight.

So advanced economies experienced faster and stronger recovery from the pandemic. And the highly mobile capital that moved into “emerging” markets in search of higher yields during the years after the global financial crisis, when the global financial system was awash with cheap liquidity, began flowing back to the advanced economies.

All this has been devastating for many economies, especially those with high levels of import dependence. Read more…

Economic modeling — a constructive critique

January 12, 2023 15 comments

from Lars Syll

Behind the Model: A Constructive Critique of Economic Modeling (Strategies  for Social Inquiry): Amazon.co.uk: Spiegler, Peter: 9781107069664: BooksIf we have independent reasons to believe that the phenomena under investigation are mechanical in Mill’s sense, well and good: mathematical modeling will prove an apt mode of representation … But if we have independent reasons to believe that there is more going on in the phenomena under investigation than a mathematical model can suggest – that is, that the phenomena in question are not in fact mechanical in the required sense – then mathematical modeling will prove misleading … Moreover, as will be discussed, the empirical assessment of such models using econometric methods will not be sufficient to reveal that mismatch.

These problems cannot themselves be addressed through reforms to mathematical methods. That would simply be to produce a more refined version of the wrong tool for the job, like sharpening one’s knife when what is needed is a spoon. Rather than striving to improve the quality of mathematical models given the assumption that the subject matter under investigation is mechanical in Mill’s sense and therefore susceptible of mathematical analysis, we need to ask a prior question, which is whether there is sufficient reason to feel confident that the subject matter under investigation is mechanical in the first place. That means scrutinizing the subject matter in the first instance in non-mathematical ways … We as scientists must remain sensitive to information about the phenomena in which we are interested that lies outside our models’ conceptual maps. In the case of economics, what this requires is a new field dedicated to qualitative empirical methods that would play a similar role to that played by econometrics in the matter of quantitative empirical methods.

Highly recommended reading!

Using formal mathematical modeling, mainstream economists sure can guarantee that the conclusions hold given the assumptions. However, the validity we get in abstract model worlds does not warrantly transfer to real-world economies. Read more…

Social protection for the self-employed

January 10, 2023 2 comments

from C. P. Chandrasekhar and Jayati Ghosh

The Covid-19 pandemic highlighted the urgent need for a universal social protection floor—something that has been talked about and even internationally accepted for more than a decade now, but has still received relatively little serious attention from policy makers in most countries. The challenge is to ensure basic levels of food, health, income and livelihood security, not only in periods of crisis like the pandemic or economic shocks but also in the “normal” course of economies and societies.

This has become a major concern because of the dramatically increased economic inequality and greater vulnerability of people to adverse events and processes, as well as the heightened fragility of material life. It has been compounded by the large (and growing) share of informal workers in almost all economies, which means that, even among those in some form of paid employment, there are few forms of legal protection or social security that they can automatically access in periods of difficulty.

While the problems of providing social protection for informal workers are obviously significant and varied, they are even more acute in the case of workers who are described as “self-employed”.  For such workers, there are no declared employers who could be seen as even partly responsible for providing either legal or social protection

It is true that there is widespread prevalence of outsourcing of both goods and services, and an increasing tendency to label small producers of goods and services as “independent contractors”, even when they are effectively dependent on a particular company. This means that though  there is some sort of employment relationship, this is effectively concealed, certainly for legal and policy purposes. Therefore even those who are tied to particular companies as suppliers do not have legal recourse and end up being responsible for their own remuneration, safety and other conditions at work, and social security.

This is a much more extensive concern than is often realised. Figure 1 shows the proportion of self-employed workers to total (recognised) employment, disaggregated by per capita income group of countries.

Read more…

Contrary to what the NYT tells you, the problem in an aging society is distribution

January 9, 2023 4 comments

from Dean Baker

The New York Times had a major article reporting on how many people in South Korea, Hong Kong, and Japan are being forced to work well into their seventies because they lack sufficient income to retire. The piece presents this as a problem of aging societies, which will soon hit the United States and other rich countries with declining birth rates and limited immigration.

While the plight of the older workers discussed in the article is a real problem, the cause is not the aging of the population. The reason these people don’t have adequate income to retire is a political decision about the distribution of income.

If the issue was simply that too few people were working in these aging societies, we should expect to see slower per capita growth than in countries where aging is less of a problem. That is not the case. The figure below shows real per capita income in these three countries from 2014, along with projections to 2027, as well as France, which has maintained a relatively high birth rate. Read more…

My philosophy of economics

January 5, 2023 12 comments

from Lars Syll

A critique yours truly sometimes encounters is that as long as I cannot come up with some own alternative to the failing mainstream theory, I shouldn’t expect people to pay attention.

This is however to misunderstand the role of philosophy and methodology of economics!

As John Locke wrote in An Essay Concerning Human Understanding:

19557-004-21162361The Commonwealth of Learning is not at this time without Master-Builders, whose mighty Designs, in advancing the Sciences, will leave lasting Monuments to the Admiration of Posterity; But every one must not hope to be a Boyle, or a Sydenham; and in an Age that produces such Masters, as the Great-Huygenius, and the incomparable Mr. Newton, with some other of that Strain; ’tis Ambition enough to be employed as an Under-Labourer in clearing Ground a little, and removing some of the Rubbish, that lies in the way to Knowledge.

That’s what philosophy and methodology can contribute to economics — clear obstacles to science. Read more…

Fed will cause unnecessary harm to the US and world economy this year

January 4, 2023 3 comments

from Mark Weisbrot

Here are eight predictions for the coming year, in accordance with a hallowed tradition that I have previously not honored. If some of the supporting facts below seem unfamiliar, it could be because they have not received the attention they deserve. But they are real, and links to sources are provided. First, some good news about the US economy:

  1. Inflation will likely continue to fall until it becomes obvious that it is no longer a serious concern. Inflation (as measured by the Consumer Price Index) has already fallen precipitously over the past five months: annualized inflation has been 2.5 percent (July through November), as compared with 11.8 percent for the preceding five months (February through June). If this looks surprising, it’s because the number most reported in the media is for November 2021-November 2022, which is 7.1 percent. This is true, but not as informative about what’s been happening more recently.
  2. The Fed will continue to harm the economy by raising interest rates unnecessarily: That’s the bad news. The economy will slow, and unemployment will rise; the latest survey of economists finds a 70 percent probability of a recession. But, whether it’s technically a recession or “just” a slowdown, the pain will be real for many employees and job-seekers. Sadly, the Fed has actually caused most of the US recessions since World War II by raising interest rates.
    Read more…

How to ensure that models serve society

January 2, 2023 26 comments

from Lars Syll

• Mind the assumptions — assess uncertainty and sensitivity.

• Mind the hubris — complexity can be the enemy of relevance.

• Mind the framing — match purpose and context.

• Mind the consequences — quantification may backfire.

• Mind the unknowns — acknowledge ignorance.

Andrea Saltelli, John Kay, Deborah Mayo, Philip B. Stark, et al.

Five principles I think modern times “the model is the message” economists would benefit much from pondering. And especially when it comes to the last principles, they would benefit enormously from reading.

More than a hundred years after John Maynard Keynes wrote his seminal A Treatise on Probability (1921), it is still very difficult to find economics and statistics textbooks that seriously try to incorporate his far-reaching and incisive analysis of induction and evidential weight.  Read more…

State of play at year end

December 30, 2022 3 comments

from Peter Radford

Is it just me?

Or is the realm of punditry in a state of confusion?

There seems to be an emerging consensus that something big is happening.  It’s just that we don’t quite know what.  The problem is that the template we are all applying is frayed if not shattered.  Consequently we are searching for the safety of explanations but finding that our questions do not elicit comfortable answers.  This is not a place we like to inhabit.  What are we to do?

Let’s speculate.

Stagflation?  Growth seems to have slowed dramatically over the last decade if not longer.  There’s talk of malaise.  There’s talk of a post-growth economy.  Some folks even applaud the idea that the days of vertiginous growth are behind us.  Now, we are told, we can focus on the environment and pivot to a less material way of life.  We can manage with less stuff after all.  How many homes, cars, and trinkets do we really need?

Lots.  Lots say the pro-growth crowd.  Just look at the cornucopia we call contemporary America.  It is stashed full of goodies.  Our poor ancestors would be green with envy at all the gadgets, the health care, the cozy homes, and the relative lack of physical exertion needed to provide it all.  Why would we not want more?

Ah.  Some others say.  We might be knee deep in goodies overall, but there appears to a problem with the distribution of those goodies.  Too many end up in too few hands.  That’s not good.  It eats away at social cohesion.  It isn’t, as the elitists inevitably say, that the poor are envious.  Not at all.  It’s that the concentration of goodies leaks into a concentration of power.  And the elitists use that power to preserve what they have.  They reject the very nostrums of the liberalism they espouse.  They abhor competition.  And they absolutely don’t want to partake of anything social.  Except for the exotic parties and trips they enjoy.  They prefer their society over our society.

Inflation?  Read more…

The debt-trap and self-reliance

December 28, 2022 1 comment

from Asad Zaman and the WEA Pedagogy Blog

Why does “Sovereign Default” become a hot topic with annoying regularity in Pakistan? The fundamental problem is the huge imbalance between our exports and imports. In 2021, our exports were USD 30 Billion, while our imports were around USD 62 Billion. In general, since 1960 onwards, our imports have averaged about 18%, while exports have been around 12% of the GNP. After reaching a high of 16.9% in 1996, the export ratio has been declining steadily, varying between 8% to 10% over the past five years. The dollar difference between the imports and exports is the ever-increasing amounts that we must borrow. This trade-gap serves as a brake on any growth spurt. As soon as the economy grows, the trade gap grows even faster, and we are forced to borrow money to finance this gap. IMF terms on loans are designed to slow down growth and create unemployment, breaking the back of the economy, so that the demand for imports is reduced to manageable levels.

So, what is the solution to the debt trap? Faithfully following the prescriptions of the same economic theories which plunged the world into global recession in 2007-8, economists and policy makers alike have been focusing on how to increase exports. The data shows the complete failure of this strategy – despite our best efforts, exports have been shrinking, instead of increasing. Despite this failure, you will not hear any mention, either from the policy makers or from the economists, of the obvious alternative: reduce imports. Why not?  To understand the answer, we must take a deeper look into the nature of economic theory itself. Read more…

Economics beyond Krugman, Mankiw, and Rodrik

December 26, 2022 16 comments

from Lars Syll

1390045613Economics students today are complaining more and more about the way economics is taught. The lack of fundamental diversity — not just path-dependent elaborations of the mainstream canon — and narrowing of the curriculum, dissatisfy econ students all over the world. The frustrating lack of real-world relevance has led many of them to demand the discipline to start developing a more open and pluralistic theoretical and methodological attitude.

Dani Rodrik — among economics journalists and commentators often described as a heterodox economist — has little understanding of these views, finding it hard to ‘understand these complaints in the light of the patent multiplicity of models within economics.’  Rodrik shares the view of his colleagues Paul Krugman and Greg Mankiw — both of whom he approvingly cites in his book Economics Rules — that there is nothing basically wrong with ‘standard theory’ and ‘economics textbooks.’ As long as policymakers and economists stick to ‘standard economic analysis’ everything is fine. Economics is just a method that makes us ‘think straight’ and ‘reach correct answers.’

Writes Rodrik in Economics Rules:

Pluralism with respect to conclusions is one thing; pluralism with respect to methods is something else … An aspiring economist has to formulate clear models … These models can incorporate a wide range of assumptions … but not all assumptions are equally acceptable. In economics, this means that the greater the departure from benchmark assumptions, the greater the burden of justifying and motivating why those departures are needed …

Some methods are better than others … For some these constraints represent a kind of methodological straitjacket that crowds out new thinking. But it is easy to exaggerate the rigidity of the rules within which the profession operates.

Young economics students that want to see a real change in economics and the way it’s taught, have to look beyond Rodrik, Mankiw, Krugman & Co. Read more…

Merry Christmas and a happy Colchis challenge!

December 25, 2022 3 comments

Holiday read – Industrial policy is not a remedy for income inequality

December 24, 2022 Leave a comment

from Dean Baker

The idea of industrial policy has taken on almost a mystical quality for many progressives. The idea is that it is somehow new and different from what we had been doing, and if we had been doing industrial policy for the last half-century, everything would be better.

This has led to widespread applause on the left for aspects of President Biden’s agenda that can be considered industrial policy, like the CHIPS Act, the Inflation Reduction Act (IRA), and the infrastructure package approved last year. While these bills have considerable merit, they miss the boat in reducing income inequality in important ways.

First, the idea that we had not been doing industrial policy before Biden, in the sense of favoring specific sectors, is wrong. We have been dishing out more than $50 billion a year to support biomedical research through the National Institutes of Health and other government agencies. If that isn’t supporting our pharmaceutical industry, what would be?

We also have a whole set of structures in place — most obviously Fannie Mae and Freddie Mac, but also many other financial institutions — as well as tax policies to support home ownership. We also support the (bloated) financial sector through tax policy, deposit insurance, and all but explicit too-big-to-fail guarantees. Read more…

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