On models and simplicity

November 23, 2022 1 comment

from Lars Syll

Quotes about Simplicity (804 quotes)When it comes to modelling yours truly does see the point emphatically made time after time by e. g. Paul Krugman about simplicity — at least as long as it doesn’t impinge on our truth-seeking. ‘Simple’ macroeconomic models may of course be an informative heuristic tool for research. But if practitioners of modern macroeconomics do not investigate and make an effort of providing a justification for the credibility of the simplicity assumptions on which they erect their building, it will not fulfil its tasks. Maintaining that economics is a science in the ‘true knowledge’ business, yours truly remains a sceptic of the pretences and aspirations of  ‘simple’ macroeconomic models and theories. So far, I can’t really see that e. g. ‘simple’ microfounded models have yielded very much in terms of realistic and relevant economic knowledge.

All empirical sciences use simplifying or unrealistic assumptions in their modelling activities. That is not the issue – as long as the assumptions made are not unrealistic in the wrong way or for the wrong reasons.

Being able to model a ‘credible world,’ a world that somehow could be considered real or similar to the real world, is not the same as investigating the real world. Even though all theories are false since they simplify, they may still possibly serve our pursuit of truth. But then they cannot be unrealistic or false in any way. The falsehood or unrealisticness has to be qualified. Read more…

The pandemic treaty, crypto, and inequality

November 22, 2022 1 comment

from Dean Baker

The World Health Organization is in the early phases of putting together an international agreement for dealing with pandemics. The goal is to ensure both that the world is prepared to fend off future pandemics by developing effective vaccines, tests, and treatments; and that these products are widely accessible, including in low-income countries that don’t have large amounts of money available for public health expenditures.

While the drafting of the agreement is still in its early phases, the shape of the main conflicts is already clear. The public health advocates, who want to ensure widespread access to these products, are trying to limit the extent to which patent monopolies and other protections price them out of the reach of developing countries. On the other side, the pharmaceutical industry wants these protections to be as long and as strong as possible, in order to maximize their profits. As Pfizer and Moderna know well, pandemics can be great for business.

The shape of this battle is hardly new. We saw the same story not just in the Covid pandemic, but also in the AIDS pandemic in the 1990s, when millions of people needlessly died in Sub-Saharan Africa because the U.S. and European pharmaceutical industries tried to block the widespread distribution of AIDS drugs.

Although the battle lines are familiar, one disturbing feature is the continuing failure of those concerned about inequality to take part in this debate. In the United States, we have plenty of groups and individuals who will spend endless hours fighting over clauses in the tax code that may give a few hundred million dollars to the rich. This is generally a good fight, but it is hard to understand the lack of interest in the structuring of a pandemic treaty that could mean hundreds of billions of dollars going to the rich. Read more…

Macroeconomics and the Friedman-Savage ‘as if’ logic

November 17, 2022 3 comments

from Lars Syll

0An objection to the hypothesis just presented that is likely to be raised by many … is that it conflicts with the way human beings actually behave and choose. … Is it not patently unrealistic to suppose that individuals … base their decision on the size of the
expected utility?

While entirely natural and under-
standable, this objection is not strictly relevant … The hypothesis asserts rather that, in making a particular class of decisions, individuals behave as if they calculated and compared expected utility and as if they knew the odds. The validity of this assertion … depend  solely on whether it yields sufficiently accurate predictions about the class of decisions
with which the hypothesis deals.

M Friedman & L J Savage

‘Modern’ macroeconomics — Dynamic Stochastic General Equilibrium, New Synthesis, New Classical and New ‘Keynesian’ — still follows the Friedman-Savage ‘as if’ logic of denying the existence of genuine uncertainty and treat variables as if drawn from a known ‘data-generating process’ with a known probability distribution that unfolds over time and on which we, therefore, have access to heaps of historical time-series. If we do not assume that we know the ‘data-generating process’ – if we do not have the ‘true’ model – the whole edifice collapses. And of course, it has to. Who really honestly believes that we have access to this mythical Holy Grail, the data-generating process? Read more…

The monetary policy fallout for developing countries

November 16, 2022 Leave a comment

from C.P. Chandrasekhar and Jayati Ghosh

The monetary policies of the major advanced economies have been obsessively nationalist for more than two decades now, with hardly any genuine international cooperation beyond some coordination among G7 economies. These policies in turn have had all sorts of impacts—often very negative—in the rest of the world, and particularly in the low and middle income countries referred to collectively as emerging and developing economies (EMDEs).

After the Global Financial Crisis, the advanced economies unleashed historically loose monetary policies, with major liquidity expansion and very low or even negative interest rates of their central banks. This enabled and encouraged massive increases in debt both within their own economies and in the rest of the world, as banks and other financial companies sought to use cheap money to maximise returns in sectors and locations that would otherwise not record much capital inflow. Since these cross-border capital flows were inherently speculative, much of this debt was short-term in nature or in bond markets that facilitated easy withdrawal.

This rush of finance of emerging and “frontier” markets did not necessarily result in productive investment. Instead, they typically pushed up domestic assets prices and caused exchange rate appreciation in the recipient countries, which actually worked against encouraging more investment in tradeable sectors even as they made the balance of payments more fragile and vulnerable to sudden shocks. Read more…

CRYPTO MELTDOWN is a great time to eliminate waste in bloated financial sector

November 15, 2022 3 comments

from Dean Baker

I remember talking to a progressive group a bit more than a decade ago, arguing for the merits of a financial transactions tax (FTT). After I laid out the case, someone asked me if we had lost the opportunity to push for an FTT, now that the financial crisis was over. I assured the person that we could count on the financial sector to give us more scandals that would create opportunities for reform.

Shortly thereafter, we were rewarded with the trading scandal from the aptly named investment company, MF Global. It seems that FTX has given us yet another great case study in greed and corruption in the financial sector.

The financial sector was and is a happy home for those seeking big bucks, and who don’t mind bending or breaking the rules to fill their pockets. Corporate America is not in general known as a center of virtue, but in most other sectors there is at least a product by which a company can be evaluated. Does the auto industry produce cars that are safe and drive well, does the airline industry get people to their destinations on time?

These are metrics that can be applied in a reasonably straightforward way. But what does the financial sector do? In fact, there are metrics, but they are not as straightforward, and we literally never see the business press applying them to the sector. Read more…

The dangers of using unproved assumptions

November 14, 2022 1 comment

from Lars Syll

2014+22keynes%20illo2The unpopularity of the principle of organic unities shows very clearly how great is the danger of the assumption of unproved additive formulas. The fallacy, of which ignorance of organic unity is a particular instance, may perhaps be mathematically represented thus: suppose f(x) is the goodness of x and f(y) is the goodness of y. It is then assumed that the goodness of x and y together is f(x) + f(y) when it is clearly f(x + y) and only in special cases will it be true that f(x + y) = f(x) + f(y). It is plain that it is never legitimate to assume this property in the case of any given function without proof.

J. M. Keynes “Ethics in Relation to Conduct” (1903)

Since econometrics doesn’t content itself with only making optimal predictions, but also aspires to explain things in terms of causes and effects, econometricians need loads of assumptions — the most important of these are additivity and linearity. Important, simply because if they are not true, your model is invalid and descriptively incorrect. It’s like calling your house a bicycle. No matter how you try, it won’t move you an inch. When the model is wrong — well, then it’s wrong.


November 12, 2022 21 comments

What’s money? Wrong question. The right question: ‘which kinds of monies do we use for which purposes?’ as there are different kinds of money which are used for different purposes. Here, I want to stress that ‘receivables’ are: money. And are, at the moment, mainly used for inter-company purchases. The quarterly balance sheets (below) of Alphabet (formerly Google) show that, as of September 2020, Accounts Receivable had a value of almost 35 billion dollar. Accounts receivable are privately issued money. They are backed by the law but not created by banks or governments. They are created when a buyer promises to pay and a seller accepts this promise, a promise which can be legally enforced. But it’s not the payment by the debtor which defines the moment of the sale. The actual sale is legally finalized when the seller accepts the promise of the buyer. That’s the moment when ownership changes hands. Receivables are stated in a unit of account, they are a legal means of exchange and they surely are a store of value (that’s why they are included on the balance sheet).

Read more…

new from WEA Books – “Heterodox Economics: Legacy & Prospects”

November 8, 2022 Leave a comment

Look inside this book.

Heterodox Economics: Legacy and Prospects by [Lynne Chester, Tae-Hee Jo]

Kindle edition $5.99   US UK DE FR ES IT NL JP BR CA MX AU IN

paperback $14.99    US UK DE FR ES IT NL PL SE JP CA AU

“The pressing need for alternative approaches in economics that is evident in the wake of the global pandemic, has also signalled an opening of space for the ideas and prescriptions of heterodox economics. This timely volume interrogates the rich diversity of the legacy of the heterodox economics, the institutional context and constraints that determine its influence, while addressing important questions about appropriate and desirable strategies and practices for fostering a vibrant constructive heterodox tradition . . .”

Edited by Lynne Chester & Tae-Hee Jo

Graph of the day. Youth unemployment in the EU

November 7, 2022 Leave a comment

Unemployment in the EU is still going down a little. But youth unemployment, a slightly more sensitive cyclical indicator, is rising. The most distinct geographical pattern behind the average: the combination of high levels of youth unemployment (>20%) with clear increases in Greece, Italy and Spain, even when total unemployment in these countries is still going down or stable. France shows a remarkable decline in youth unemployment but is still in double digit territory. Average youth unemployment is lower than in 2008 but the >20% rates in several countries are unacceptable. The EU labour market is not tight, at this moment.

What’s Left?

November 6, 2022 3 comments

One of the successes of the right is their identification of the left with a sorry pastiche of ‘woke’. But the left is more than outspoken, individual awareness of the role of identities, however constructed and defined, whoever constructs and defines them and whatever role they plays in group dynamics of power and in- and exclusion. Which leads us to the question: What’s Left? I’ll state some points. Some points (many of which are related to social , economic and political in- and exclusion):

  • One person, one vote and universal unrestricted suffrage (incarcerated people should have the right to vote too, for instance). Voting rights should not be tied to income, wealth, property, race, gender or education (all of these variables have been used to restrict voting rights). Universal voting rights have been a huge success of ‘la gauche’.
  • The eight hour working day. There’s a nice wikipedia entry about this
  • Free, accessible and high quality education for everyone until at least 16 years of age
  • Cheap, accessible and high quality health care for everyone
  • Affordable, high quality, energy producing but not necessarily detached housing with access to running clean water, sewage systems, clean air and green surroundings and within walking or at least cycling distance from schools and sports facilities and designed to foster interactions with neighbors and to enable community care
  • Healthy, non-polluted environments outside, at work and in these houses
  • Full employment
  • Care free retirement (the age at which this starts might be over 65…)
  • Policies aimed at enabling people raising children to manage the financial and practical burden of the combination of paid labour and family responsibilities
  • government ownership of natural resources like oil, natural gas, aquifers and the like – let’s say anything more than 40 meters beneath the surface
  • Taxes on unearned wealth, like the value of unimproved land and inheritances
  • A long term environmental strategy (climate, biodiversity, nature). This is about survival.
  • free speech, fee unions and other non-profit organizations
  • thriving businesses which, however, have to be bridled in the political arena and which have to follow the rules (labour, environment, food safety, quality, liability – the list is long). Sensible patent policies.
  • A state which does not care about gender or race and which can be sued if it does
  • Which brings us to mechanisms of in- and exclusion. Many of these mechanisms will be countered by the combinations of full employment and access to education, health care and housing. But we will have to fight for this. Hard and long and mean fights.

Let’s be woke about that.

Inflation and wages in Greece

November 5, 2022 Leave a comment

Consumer price inflation in Greece is, at the moment, 12% (graph 1). This is high and surely bankrupting quite some families. The high level of inflation is surprising, as Greek inflation was quite low and often even negative in the 2012-2022 period. The questions are: (A) what caused this sudden increase? An overheated labour market and runaway wages increases? And: (B) how can we get inflation down again? Does the ECB have to tank the economy to crush wages? Below we will investigate these questions.

Graph 1. Consumer price inflation in Greece. Source: Elstat.

Read more…

Weekend read – How to be an Academic Hyper-Producer

November 4, 2022 2 comments

from Blair Fix 

Are you an aspiring academic? If so, this manual will reveal the secret to maximizing your scholarly output. Follow my advice, and you too can become an academic hyper-producer.

The golden rule: Don’t do research

Newcomers to the academy typically think that the recipe for success is to ‘do high-quality research’. Nothing could be more false. ‘Doing research’ (and writing papers about your ‘results’) is a tedious waste of time. It is no way to be hyper-productive. Savvy academics know that their true goal is to have their name stamped (as author) on stacks of published papers.

Here is a jingle to help you remember the golden rule:

Productive academics neither research nor write,
That is their subordinates’ plight.
To inflate their way up the productivity ramp,
academic hyper-producers perfect their namestamp.

The billboard

When you begin your scholarly enterprise, the first step is to frame academic papers in the correct light. Their purpose is not to ‘convey knowledge’. Scholarly papers are devices for delivering authorship. They are billboards for your name.

Like an eye-catching advertisement, a good scholarly paper is soundly constructed yet easy to mass produce. To achieve the requisite economics of scale, the successful hyper-producer must subcontract the job of billboard construction.

If you’ve entered academia because you ‘enjoy’ doing your own research, now is the time to change your attitude (or exit the field). To become an academic hyper-producer, your goal is to secure billboards on which to stamp your name.

In what follows, I will detail the two most popular strategies for billboard acquisition.

Strategy 1: Graffiti tagging

For the cunning entrepreneur, learning the art of graffiti tagging is a good way to become an academic hyper-producer. The goal is to surreptitiously add your namestamp to material published by someone else.

Graffiti tagging can be done either in wholesale or in piecemeal.

Read more…

The world according to Bloomberg

November 3, 2022 1 comment

from David Ruccio

The story currently being peddle by the folks at Bloomberg [ht: ja] is that the American middle-class is currently suffering, as the enormous wealth they managed to accumulate during the past few years is now dwindling. And that crisis—the end of their “once-in-a-generation wealth boom”—is what they will take into the midterm elections.

There is a kernel of truth in that story but it is overshadowed by all that it leaves out.

The small sliver of truth?

Yes, as we can see in this chart, the average real wealth (in July 2022 dollars) of the middle 40 percent of Americans did in fact increase from January 2017 (when Donald Trump first took office) until March of 2022; now it has begun to fall and is projected to continue declining (according to data provided by Realtime Inequality).*

That should come as no surprise. It is the result of years of cheap money, which has fueled increases in the value of the two major components of middle-class wealth: house prices and the stock market. Read more…

Leontief and the sorry state of economics

November 2, 2022 18 comments

from Lars Syll

The core assumption of 'modern' macro — totally FUBAR | LARS P. SYLLPage after page of professional economic journals are filled with mathematical formulas leading the reader from sets of more or less plausible but entirely arbitrary assumptions to precisely stated but irrelevant theoretical conclusions …

Year after year economic theorists continue to produce scores of mathematical models and to explore in great detail their formal properties; and the econometricians fit algebraic functions of all possible shapes to essentially the same sets of data without being able to advance, in any perceptible way, a systematic understanding of the structure and the operations of a real economic system.

Wassily Leontief

Mainstream economics is, as noted by Leontief, hopelessly irrelevant to the understanding of the real world, and the main reason for this irrelevance is the failure of economists to match their methods with their subject of study. The fixation on constructing models showing the certainty of logical entailment has been detrimental to the development of relevant and realist economics. Insisting on formalistic-mathematical modeling forces the economist to give up on realism and real-world relevance.

It is — sad to say — a fact that within mainstream economics internal validity is everything and external validity next to nothing. Why anyone should be interested in that kinds of theories and models — as long as one does not come up with export licenses for the theories and models to the real world in which we live — is beyond comprehension.

Herman Daly has passed away

October 31, 2022 2 comments

Herman Daly (1938-2022) was an early supporter of and a frequent contributor to the Real-World Economics Review, and the week before last, eleven days before he died age 84, he submitted an essay to RWER with this email.

Dear Edward,

I hope that you are well and surviving still in our disintegrating world.  RWER continues as a voice of sanity.  I am still kicking, but slowly, which has its benefits.

Attached is an article that I am submitting to RWER. Suggestions welcome.

All good wishes,

Herman’s essay “Ecological economics in four parables” will appear in RWER‘s next issue, early December.



Weekend read – The Pope justifies the means: The first two years of the Council for Inclusive Capitalism with the Vatican

October 28, 2022 1 comment

from Norbert Häring

The Council for Inclusive Capitalism with the Vatican turns two. After his famous verdict “This economy kills,” Pope Francis seems to now be offering big capitalists a spiritual platform for polishing their public image. Unless, the commitments that corporate CEOs post on this platform are seriously intended to make the world a better place? Let’s take a look.

It’s a contrast that could hardly be greater: In late 2013, Pope Francis condemned predatory capitalism and its leaders in his doctrinal letter “Evangelii Gaudium,” something like his government declaration: “Such an economy kills,” it read, and:

“The worship of the ancient golden calf has found a new and merciless form in the fetish of money and in the dictatorship of an economy without a face and without a truly human goal. (…) A new, invisible, sometimes virtual tyranny is emerging, which unilaterally and inexorably imposes its laws and its rules. (…) In this system, which tends to absorb everything in order to increase its benefits, everything weak (…) is defenseless against the interests of the deified market, which become the absolute rule.”

Quite in line with the interpretation of church representatives, Frank A. Meyer wrote on this in Cicero that the Pope was not anti-capitalist, but a reformer of capitalism. He differed fundamentally from his predecessors, however, according to Meyer, in that for him appeals to the improvement of the actors do not suffice. Exploitation and poverty, alienation and misery could not be eliminated by an exorcism of “greed for power and property,” but only by changing the economic substructure, by law. This interpretation is supported by Francis’ writing on trickle-down theory, the theory that something always drips down from the rich man’s table to the blessing of those at the bottom:

“This view, never confirmed by the facts, expresses an undifferentiated, naive confidence in the goodness of those who hold economic power in their hands, as well as in the deified mechanisms of the dominant economic system.”

A change of mind of the infallible

The Pope Francis of the 2020s does not seem to have much in common with the one of 2013. It is a pope who Read more…

What’s wealth got to do with it?

October 27, 2022 1 comment

from David Ruccio

In a recent article in The Intercept, Jon Schwarz [ht: db] arrives at a perfectly reasonable conclusion—but, unfortunately, he makes a real hash of the data concerning changes in wealth ownership in the United States.

Schwarz starts with the fact that the total amount of wealth owned by the bottom 50 percent of the U.S. population has doubled since the first quarter of 2020 (in other words, during the pandemic). He then takes issue with the idea that economic growth needs to be slowed (for example, by the Fed’s raising of interest-rates) in order to help the poorest who presumably have been most hurt by inflation. And his conclusion?

According to the actual numbers, these are good times for many, many Americans in the poorer 50 percent. That doesn’t mean that millions aren’t struggling, but the financial prospects for most were even worse in the past in a lower-inflation world, a situation that did not excite the warm concern of the corporate media. What we should concentrate on now is keeping the streak going, not bludgeoning the workforce into submission.

I agree, at least in part: what policymakers are attempting to do (in a move supported by mainstream economists, large corporations, and the top 1 percent) is to bludgeon workers into submission. And there’s no reason to do so, especially when other policies—such as regulating prices, raising taxes on the rich, and imposing windfall profits taxes on large corporations—exist.

As for the rest of Schwarz’s argument, there are serious problems.

Let’s start with the idea that, in his view, these are good times for many Americans in the poorest 50 percent. This is based entirely on recent data concerning the net worth of those at the bottom has risen. Read more…

Macroeconomic aspirations

October 26, 2022 2 comments

from Lars Syll

Some economists seem to be überjoyed by the fact that they are using the same ‘language’ as real business cycles macroeconomists and that they therefore somehow can learn something from them.

James Tobin obviously did not find any need to speak the RBC ‘language’:

They try to explain business cycles solely as problems of information, such as asymmetries and imperfections in the information agents have. Those assumptions are just as arbitrary as the institutional rigidities and inertia they find objectionable in other theories of business fluctuations … I try to point out how incapable the new equilibrium business cycles models are of explaining the most obvious observed facts of cyclical fluctuations … I don’t think that models so far from realistic description should be taken seriously as a guide to policy … I don’t think that there is a way to write down any model which at one hand respects the possible diversity of agents in taste, circumstances, and so on, and at the other hand also grounds behavior rigorously in utility maximization and which has any substantive content to it.

Arjo Klamer, The New Classical Mcroeconomics: Conversations with the New Classical Economists and their  Opponents,Wheatsheaf Books, 1984

Using the same microfoundational ‘language’ as mainstream macroeconomists don’t take us very far. Far better than having a common ‘language’ is to have a well-founded, realist, and relevant theory: Read more…

Neoclassical induced financial fragility. Central bank pension fund regulation edition.

October 23, 2022 3 comments

Financial wizardry recently caused massive problems for UK pension funds and the Bank of England. The Bank of England forces pension funds to take part in ‘LDI’ contracts which aim to insure possible future liquidity problems. These contracts however lead to real liquidity problems, which forced the Bank of England to intervene to prevent a market melt down. The solution became the problem.

Deputy Governor John Cunliff of the Bank of England stated:

“The Bank was informed by a number of LDI fund managers that, at the prevailing yields, multiple LDI funds were likely to fall into negative net asset value. As a result, it was likely that these funds would have to begin the process of winding up the following morning… In that eventuality, a large quantity of gilts, held as collateral by banks that had lent to these LDI funds, was likely to be sold on the market, driving a potentially self-reinforcing spiral and threatening severe disruption of core funding markets and consequent widespread financial instability.”

Notice the ultra short periods whichm presumably, are specified in the LDI contracts: ‘Cash, Now!’. I haven’t read any of these contracts, if somebody can provide me with one: please! I do not see any reason for such ultra short periods.

This did not just happen in the UK. Related problems in the Netherlands in 2020 forced the ECB to intervene, to prevent a market melt down. This led Anil Kashyap, in a November 2020 speech at the Bank of England about the March 2020 crisis, to issue the next warning (emphasis added): Read more…

Weekend read – Can university education in economics contribute to strengthened democracy and peace?

October 21, 2022 4 comments

from Peter Söderbaum and WEA Commentaries current issue


In all societies there is a tension between democracy and dictatorship. In some countries democracy is well institutionalized and the threat of dictatorship is successfully kept at a distance. In other societies, a system close to dictatorship is quite established and democracy is regarded as a threat. Today, we witness a confrontation between Russia, a nation close to dictatorship and Ukraine which appears to move toward strengthened democracy.

In this essay it is assumed that a strengthened democracy is preferable to dictatorship if one aims at a sustainable and peaceful relationship between single nations and regional assemblies of nations. Does the economics taught in universities play a positive role in strengthening democracy or is the idea rather for economists to be neutral and leave democracy to other disciplines, such as political science?

Two observations concerning the state of economic science

Until about 1870 economics was understood and referred to as, “political economics”. From that time onwards, a group of economists preferred to see themselves as objective and neutral comparable to how they understood the role of scholars in disciplines such as physics and chemistry. So called “neoclassical economics” was born as a theoretical perspective that claims to be more objective and neutral in terms of values than its forerunners. And neoclassical economics developed into a mainstream. “Political economics” became just “economics”. Read more…

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