The real reasons wages are low

November 30, 2020 1 comment

from Dean Baker

It’s good to see the New York Times making the case for higher wages in an editorial. Unfortunately, they get much of the story confused.

First off, the essence of the case is that higher wages will lead to more consumption, which will spur growth. This is true, but higher pay is not the only way to generate more demand. We also get more demand with larger budget deficits, lower interest rates, and a smaller trade deficit.

But that is the less important problem with the piece. The bigger problem is the assertion that the failure of pay to keep pace with productivity growth over the last four decades is due to higher profits.

“Wages are influenced by a tug of war between employers and workers, and employers have been winning. One clear piece of evidence is the yawning divergence between productivity growth and wage growth since roughly 1970. Productivity has more than doubled; wages have lagged far behind.”

In fact, a rising profit share only explains about 10 percent of the gap between productivity growth and the median wage since 1979. The overwhelming majority of the gap is explained by rising high end wages — the money earned by CEOs and other top execs, high pay in the financial sector, the earnings of some workers in STEM areas, and high-end professionals, like doctors and dentists.

For some reason, the NYT never wants to talk about the laws and structures that allow for the explosion of pay at the top. Read more…

Immigration EU 2019 edition

November 28, 2020 Leave a comment

Immigration is a hotly debated issue in the EU. To be more precise: immigration from the ‘south’ is hotly debated. Immigration from the East is much more important and increasing. Some facts:

Read more…

Logic and truth in economics

November 28, 2020 8 comments

from Lars Syll

Logic yields validity, not truth. - Post by Ziya on BoldomaticTo be ‘analytical’ and ‘logical’ is something most people find recommendable. These words have a positive connotation. Scientists think deeper than most other people because they use ‘logical’ and ‘analytical’ methods. In dictionaries, logic is often defined as “reasoning conducted or assessed according to strict principles of validity” and ‘analysis’ as having to do with “breaking something down.”

But that’s not the whole picture. As used in science, analysis usually means something more specific. It means to separate a problem into its constituent elements so to reduce complex — and often complicated — wholes into smaller (simpler) and more manageable parts. You take the whole and break it down (decompose) into its separate parts. Looking at the parts separately one at a time you are supposed to gain a better understanding of how these parts operate and work. Built on that more or less ‘atomistic’ knowledge you are then supposed to be able to predict and explain the behaviour of the complex and complicated whole.

In economics, that means you take the economic system and divide it into its separate parts, analyse these parts one at a time, and then after analysing the parts separately, you put the pieces together.

The ‘analytical’ approach is typically used in economic modelling, where you start with a simple model with few isolated and idealized variables. By ‘successive approximations,’ you then add more and more variables and finally get a ‘true’ model of the whole.

This may sound like a convincing and good scientific approach.

But there is a snag! Read more…

Ecological Economics

November 28, 2020 2 comments

from Asad Zaman

Eurocentric history portrays the West as advanced, rational, scientific, and democratic, while the East is superstitious, unscientific, autocratic, and backwards. This poisonous philosophy enabled the incredibly brutal and ruthless violence required for the conquest of the globe, and continues to sustain extremely exploitative economic systems. A partial antidote is World Systems theory which portrays all human beings, nations, and cultures, as joint participants in weaving the rich fabric of human history. Ecological economics goes further to take the entire humanity as one element of the biosphere and geosphere of our planet. All of the biological species have their “economics” where they consume and produce, directly or indirectly affecting other species. All of these economies are closely interlinked. Viewed in this light, the environment crisis is easily seen as being due to human beings’ predatory consumption of vast proportions of the biosphere and the geosphere, without any compensatory productive replenishment.

Conventional economics assumes that . . . read more

Let the vaccinations begin…

November 27, 2020 3 comments

Let’s start to vaccinate as many people as possible as soon as possible. This will, together with other technological solutions like air purifiers, UV-C lamps as well as large scale fast testing, enable us to escape the cycle of alternating lock downs. It will also enable us to at least pursue a policy of total eradication of Covid-19. Lock downs work – for a while. They can buy us time. But the economic, social and psychological consequences are immense and we will have to rely as much as possible on other means. Vaccinations are one of our best weapons in this fight. Read more…

‘Mathiness’ in economics

November 27, 2020 9 comments

from Lars Syll

 blah_blahIn practice, what math does is let macro-economists locate the FWUTVs [facts with unknown truth values] farther away from the discussion of identification … Relying on a micro-foundation lets an author say, “Assume A, assume B, …  blah blah blah … And so we have proven that P is true. Then the model is identified.” …

Distributional assumptions about error terms are a good place to bury things because hardly anyone pays attention to them. Moreover, if a critic does see that this is the identifying assumption, how can she win an argument about the true expected value the level of aether? If the author can make up an imaginary variable, “because I say so” seems like a pretty convincing answer to any question about its properties.

Paul Romer

Yes, indeed, modern mainstream economics — and especially its mathematical-statistical operationalization in the form of econometrics — fails miserably over and over again. ‘Modern’ mainstream economics is based on the belief that deductive-axiomatic modelling is a sufficient guide to truth. That belief is, however, totally unfounded as long as no proofs are supplied for us to believe in the assumptions on which the model-based deductions and conclusions build. Read more…

A valid ontology for economics?

November 26, 2020 5 comments

from Ikonoclast (originally a comment)

The challenge is to develop a valid ontology for economics. In medicine, early theories of disease failed to yield efficacious treatments because their ontology (a theory of basic real existents and how they interact) was wrong. A few of the more common ideas founded on false ontologies were that diseases were caused by evil spirits, miasma and imbalances of the four humors. It was not until the advent of the germ theory of disease that real progress was made. More basic and real biological existents were found, microscopic “germs” or pathogens, and the pathogenic theory of disease was founded. With continued research, further causes of disease were found, namely deficiency disease, hereditary disease and physiological disease. Again, this progress was made possible by basic empirical research into real existents via the disciplines of physics, chemistry, biochemistry, genetics, physiology (a complex system discipline) and neurology (another complex system discipline).

Since conventional economics has made a total mess of things, and it is founded on a demonstrably false ontology, the discipline must be torn down and rebuilt from scratch. The conventional economists are the modern world’s equivalent of the medieval school-men. Read more…

Has mainstream economics — really — gone through a pluralist and empirical revolution?

November 25, 2020 53 comments

from Lars Syll

1390045613In an issue of the journal Fronesis yours truly and a couple of other academics (e.g. Julie Nelson, Tony Lawson, and Phil Mirowski) made an effort at introducing its readers to heterodox economics and its critique of mainstream economics. Rather unsurprisingly this hasn’t pleased the Swedish economics establishment.

On the mainstream economics blog Ekonomistas, professor Daniel Waldenström rode out to defend the mainstream with the nowadays standard defence — heterodox critics haven’t understood that mainstream economics today has gone through a pluralist and empirical revolution. Since heterodox critics haven’t noticed that, their views on the mainstream project is more or less irrelevant.

Well, the problem with that defence is that it has pretty little with reality to do.  Read more…

Discrimination and bias in economics, and emerging responses

November 24, 2020 1 comment

from Jayati Ghosh

Recently, mainstream economics has been forced to acknowledge some of the explicit and implicit forms of discrimination and bias that are rampant in the discipline, thanks in particular to some brave interventions by some women economists. The focus of these interventions has been on still-pervasive patriarchal and racist attitudes that are evident within the discipline in the Global North, particularly in the United States – such as the now-famous blog by Claudia Sahm: “Economics is a disgrace.” While these are critical concerns, there are other severe and persistent forms of discrimination and power imbalances in economic analyses that have not been the focus of attention, which have also operated to impoverish the discipline.

I would like to highlight two of these in particular: the hegemony of one particular approach to both theory and applied economics, falling broadly within what can be described as the neoclassical framework and the denigration of alternative approaches; and the neglect of and ignorance about economic research and analysis done by scholars who are not located in the Global North, especially those writing in languages other than English. I believe that there is no other discipline or branch of knowledge—whether in the natural or social sciences or in the humanities—that has been so driven by geographic location and ideological determinism. Read more…

How many lives would have been saved if we had collaborated on vaccines with China?

November 24, 2020 1 comment

from Dean Baker

We know that Republican office holders are not allowed to say that Joe Biden won the election. Apparently there is a similar ban in place for news outlets when it comes to the question of the United States collaborating with China, and other countries, in developing vaccines against the pandemic.

In recent days, there have been articles in several major news outlets about how China vaccinated close to 1 million people, under an Emergency Use Authorization, for vaccines that are currently in Phase 3 clinical testing (hereherehere, and here). While large-scale distribution of vaccines, that have not completed testing for safety and effectiveness, is probably not a good public health practice, none of these pieces raised any questions about whether the United States, and other countries, might have benefited from access to the Chinese vaccines.

It would not be reasonable to distribute Chinese vaccines here based on safety and effectiveness data that had not been thoroughly vetted by the Food and Drug Administration. But, if we had chosen to go a collaborative route in developing vaccines, we could have done our own tests, in addition to using data available from tests done by the Chinese manufacturers. Read more…

Paul Samuelson and the ergodic hypothesis

November 23, 2020 2 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 scientist 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…

The Krugman boom: Don’t bank on It

November 22, 2020 4 comments

from Dean Baker

I have largely been in agreement with Paul Krugman in his assessment of the economy over the last dozen years or so, but I think in his latest column he let the promise of a post-Trump era get the better of him. Krugman notes that the distribution of effective vaccines should allow people to return to their normal lives.

He argues that this will lead to a spending boom, as consumers have accumulated savings through the slump and will now be in a position to spend lots of money. As a model he points to the boom in 1983 and 1984 after the Fed lowered interest rates.

While I have not been one of the doomsayers predicting economic collapse, I can’t be as optimistic as Paul on this one. First, just to be clear, Krugman does not at all question the need for immediate and substantial stimulus. In the next few months, with the pandemic spreading largely unchecked until vaccines become widely available, millions of people will be thrown out of work as restaurants, bars and other businesses in the service sector are either forced to close or see demand collapse even if they remain open.

These people will need unemployment benefits, protection from eviction, and other support until the labor market improves. State and local governments will also need massive aid to avoid a further round of layoffs and to provide essential services, including setting guidelines and rules for safe re-openings.

But getting beyond this period, once the vaccines have allowed us to return to normal, will there be a spending spree? Read more…

“A primer for the perplexed”

November 20, 2020 10 comments

from Peter Radford

That’s the subtitle of Robert Skidelsky’s little book “What’s Wrong With Economics”?.  A primer for the perplexed.  With the U.S. election past us, I decided to start reading some of the books that had accumulated in my “to read” pile.  Skidelsky being one of my favorite authors I started with his.  The problem is that perplexity is insufficient to describe my usual emotion or state of mind whenever I engage with economics.  So, here I am, a mere fifty or so pages in, and already I am experiencing that same exhaustion I have felt these past few decades any time I wander into the morass that passes for economics.  Time and again I do this to myself.  It seems such an important topic.  It seems so relevant and useful to understand.  It seems so necessary for anyone who wants to think about the policy or policies we need to further the lot of our fellow citizens.  But.  Then economics slaps you on the side of the head.

Just what purpose does all this nonsense have?

It employs lots of economists.  So that’s useful.  It is the intellectual equivalent of digging holes and then filling them in.  No long term use comes from the endeavor, but paychecks are cut and unemployment is lower.

I know.  I know.  I am being a tad critical.

Which is why it’s useful to read someone like Skidelsky.

He is clearly exasperated too. Read more…

Using ‘small-world’ models in a large world

November 19, 2020 23 comments

from Lars Syll

Radical uncertainty arises when we know something, but not enough to enable us to act with confidence. And that is a situation we all too frequently encounter …

kayThe language and mathematics of probability is a compelling way of analysing games of chance. And similar models have proved useful in some branches of physics. Probabilities can also be used to describe overall mortality risk just as they also form the basis of short-term weather forecasting and expectations about the likely incidence of motor accidents. But these uses of probability are possible because they are in the domain of stationary processes. The determinants of the motion of particles in liquids, or overall (as distinct from pandemic-driven) human mortality, do not change over time, or do so only slowly.

But most of the problems we face in politics, business (including finance) and society are not like that. We do not have, and never will have, the kind of understanding of human behaviour which emulates the understanding of physical behaviour which yields equations of planetary motion. Worse, human behaviour changes over time in a way that the equations of planetary motion do not …

Discourse about uncertainty has fallen victim to a pseudo-science. When no meaningful quantification is possible, algebra can provide only spurious precision, while at the same time the language becomes casual and sloppy. The terms risk, uncertainty and volatility are treated as equivalent; the words likelihood, confidence and probability are also used as if they had the same meaning. But risk is not the same as uncertainty, although it arises from it, and the confidence with which a statement is made is at best weakly related to the probability that it is true.

The mistake that Viniar of Goldman Sachs exemplified as the credit crunch bit was to believe that a number derived from a “small world” model—a simplification based on a historic data set—is directly applicable to the “large world,” complex and constantly evolving, in which we live. We are both strongly committed to the construction and use of models—we have spent much of our careers in academia and in the financial and business world doing exactly those things. But that has left us aware of the limitations of models as well as their uses.

John Kay & Mervyn King

Since yours truly thinks this is a great article — as is the authors’ book Radical Uncertainty (The Bridge Street Press, 2020) — it merits a couple of comments. Read more…

“Protecting Intellectual Property” against China means redistributing income upward

November 19, 2020 2 comments

from Dean Baker

The New York Times had an article discussing the prospects for U.S. trade relations with China during Biden’s presidency. At one point it tells readers:

“Mr. Biden has given few details about his plans for U.S.-China relations, other than saying he wants to recruit American allies such as Europe and Japan to pressure China to make economic reforms, like protecting intellectual property.”

Stronger and longer patent and copyright protections have redistributed enormous amounts of income upward over the past four decades, likely more than $1 trillion annually (half of all corporate profits). If Biden plans to put stronger enforcement of U.S. intellectual property claims at the center of his trade relations with China, it means he wants to redistribute even more money away from the vast majority of people who voted for him to the richest 10 percent of the population.

That should be a big deal in a news story on Biden’s trade policy towards China.

Tech platforms feel the heat

November 18, 2020 2 comments

from C. P. Chandrasekhar

In a move that was expected, the US Justice Department has filed an anti-trust lawsuit against internet search giant Google, alleging that it resorts to anti-competitive practices to ensure its dominance in the search engine space and, through that, over the related online advertising revenues. As a leading example the case cites the successful effort to exclude the competition through a deal, in place since 2005, in which Google pays Apple around $8-12 billion a year in return for pole position as the default search engine in Apple’s devices and the Safari browser. Around half of Google’s search traffic is reportedly mediated by Apple devices. Such practices, Justice holds, help Google attract users and win a substantial share of the internet advertising revenue pie, a part of which is used to pay off Apple and other browser providers who direct users to Google search, completing the circle.

The Justice Department’s move is significant as it has been more than two decades since the institution last moved against a tech major for the misuse of monopoly through its case against Microsoft. Further, signs are that this may be the first in a series of cases against leading firms in the digital economy. In what appears to be a major pushback against the power of the platform companies in their home turf, Amazon, Apple, and Facebook (besides Google) have come under attack. Read more…

Graduate education in economics

November 17, 2020 17 comments

from Lars Syll

Modern economics has become increasingly irrelevant to the understanding of the real world. In his seminal book Economics and Reality (1997) Tony Lawson traced this irrelevance to the failure of economists to match their deductive-axiomatic methods with their subject.

It is — sad to say — as relevant today as it was twenty-three years ago.


It is still a fact that within mainstream economics internal validity is everything and external validity nothing. Why anyone should be interested in that kind of theories and models is beyond my imagination. As long as mainstream economists do not come up with any export-licenses for their theories and models to the real world in which we live, they really should not be surprised if people say that this is not science, but autism!

Studying mathematics and logics is interesting and fun. It sharpens the mind. In pure mathematics and logics we do not have to worry about external validity. But economics is not pure mathematics or logics. It’s about society. The real world. Read more…

Lowering the bar on success: Megan McArdle on drug development

November 16, 2020 6 comments

from Dean Baker

Washington Post columnist Megan McArdle was anxious to tell readers that drug development in the pandemic has been a great success story. After all, look at all the treatments we have, and now it appears that Pfizer/BioNtech have developed a highly effective vaccine. What could be better than that?

Well, first we need a bit of perspective. Yes, we place an enormous value on our health and our lives, so getting effective treatments and vaccines quickly are extremely important. But we do also care about what we pay to get there.

To take my favorite analogy, the firefighter who goes into a burning building to rescue a couple of children can be said to deserve many millions of dollars. After all, we put a huge value on human life. While firefighters are reasonably well-paid, most of their paychecks don’t cross $100,000. Should we pay all of our firefighters $1 million a year? Perhaps in some sense that would be fair, but the reality is that we can get people to do the work for far less.

And, if we want to talk about payments that are commensurate with the value they provide to society, how much did the anti-smoking activists of the 1970s, 1980s, and 1990s get paid? My guess is that most of the people (I’m sure mostly women) who crusaded to restrict smoking, originally in places like airplanes and restaurants and later public places more generally, got compensated little or nothing for their work. But how many hundreds of thousands (or millions) of lives were saved and heart attacks and strokes prevented as a result of their work. Surely that would be worth many trillions of dollars if we sought to put a price tag on it. Read more…

“necessities of thought”

November 13, 2020 13 comments

Concepts that have proven useful in ordering things easily achieve such an authority over us that we forget their earthly origins and accept them as unalterable givens.  Thus they come to be stamped as “necessities of thought,” “a priori givens,” etc.  The path of scientific advance is often made impassable for a long time through such errors.  For that reason, it is by no means an idle game if we become practiced in analyzing the long commonplace concepts and exhibiting those circumstances upon which their justification and usefulness depend, how they have grown up, individually, out of the givens of experience.  By this means, their all-too-great authority will be broken.  They will be removed if they cannot be properly legitimated, corrected if their correlation with given things be far too superfluous, replaced by others if a new system can be established that we prefer for whatever reason.

[Einstein 1916 in obituary notice for Ernst Mach]

Developing Asia: The growing divergence between China and the rest

November 12, 2020 3 comments

fromC. P Chandrasekhar and Jayati Ghosh

The past year has brought into sharp relief the significant differences between China and the rest of the world. The experience of the pandemic is probably the most extreme and definitive expression of that: the ability of China to contain the spread of the virus and prevent a renewed outbreak of any substantive nature is unmatched by almost all other countries, with the exception of a few outliers. The reasons for this certainly deserve separate study, but what is also worth noting is how this has also been associated with a relatively rapid recovery of the Chinese economy from the decline of the first quarter of 2020 to relatively rapid growth once again. This is contrary to almost every other major economy.

The differences are particularly marked with the rest of developing Asia, which until recently reflected similar tendencies as China, often precisely because the rest of the region was benefiting from the increasingly close and dense trade and investment links with that economy. But ever since the trade war with the US, which forced China to shift to greater reliance on domestic demand, and certainly since the Covid-19 pandemic struck, there has been growing divergence between China and the rest of developing Asia, particularly those economies (often clubbed as “Emerging Asia”) that are more integrated with global capital markets.

While there are significant differences amongst these countries, it may be that the differences between China and this group outweigh the differences within the group (with the exception of Vietnam, which appears to be following a trajectory closer to that of China). This divergence has actually been evident for some time now in terms of the global impact of the region. The latest World Economic Outlook of the IMF, released a few weeks ago, provides evidence of this.

Figure 1 presents the current account balances of China and the rest of the region, as shares of global GDP. Read more…