from David Ruccio
An increasing number of student loan borrowers are struggling to repay their education debt as outstanding student loan balances nationwide increased by $13 billion in the third quarter of 2015, according to the New York Federal Reserve.
from Lars Syll
Lynn Parramore: It seems obvious that both fundamentals and psychology matter. Why haven’t economists developed an approach to modeling stock-price movements that incorporates both?
Roman Frydman: It took a while to realize that the reason is relatively straightforward. Economists have relied on models that assume away unforeseeable change. As different as they are, rational expectations and behavioral-finance models represent the market with what mathematicians call a probability distribution – a rule that specifies in advance the chances of absolutely everything that will ever happen.
In a world in which nothing unforeseen ever happened, rational individuals could compute precisely whatever they had to know about the future to make profit-maximizing decisions. Presuming that they do not fully rely on such computations and resort to psychology would mean that they forego profit opportunities.
Reading this post (below) from Erwan Mahé makes one ponder if the people at the head of the ECB have understood that we’re fighting for the future of Europe… and not just of the banks and the well to do.
From: Erwan Mahé (guest post)
“His references to core inflation and wage growth represent another semantic shift toward the dual mandate of the Fed, which also argues for a further monetary easing”.
The consensus of investors on what sort of moves the ECB may take following its next meeting on 3 December seems to dovetail with the opinion expressed in my last Thaler’s Corner
… “a 10-bps cut in the deposit rate, bringing it to -0.30%, and a 6-month extension of the QE to March 2017. And we cannot exclude additional measures like ending the 25% QE limit on triple-A issues and a corporate QE programme.”
from Dean Baker
As the world prepares for another round of climate negotiations, it is worth repeating a few simple points. First, it is becoming increasingly obvious that the world is already paying a substantial price for global warming.
Extreme weather events will never come with a stamp that says “caused by global warming.” We know that global warming will change weather patterns in ways that are not entirely predictable. That means that we will see unusual weather events where global warming was likely a factor, but we can never know for certain.
One of the leading candidates in this respect is the extreme drought that afflicted Syria in the last decade, destroying much of its agriculture and leading to a mass migration to its cities. This migration was likely a factor in the unrest that had led the country’s civil war. Syria’s civil war in turn has led to hundreds of thousands of deaths, the displacement of millions, and of course the rise of ISIS.
from Lars Syll
By the early 1980s it was already common knowledge among people I hung out with that the only way to get non-crazy macroeconomics published was to wrap sensible assumptions about output and employment in something else, something that involved rational expectations and intertemporal stuff and made the paper respectable. And yes, that was conscious knowledge, which shaped the kinds of papers we wrote.
More or less says it all, doesn’t it?
And for those of you who do not want to play according these sickening hypocritical rules — well, here’s one good alternative.
from David Ruccio
What are U.S. corporations doing with all the surplus they’re managing to rake in? Well, they’re not investing it. Instead, they’re paying it out to shareholders and upper-management, buying back their stock and expanding their portfolios of financial assets, and hoarding the rest in cash. The net effect is to dampen the rate of economic growth and the creation of new jobs. Read more…
This book describes the many wrong turns that the social sciences have taken to arrive at their current dismal state. Most of the space will be devoted to my own field of economics, however political science, particularly the theory of collective choice will also be treated at some length. Though I agree with much of the criticism of contemporary economics, particularly macroeconomics that comes from the Left of the political spectrum, this and the following two books differ from the conventional critique in fundamental ways.
The first is that I define each wrong turn by contrasting it with what my view would have been the correct turn in the sense that it would have advanced the field in a positive direction. Thus unlike much contemporary criticism, mine is not purely negative – the negative is always contrasted with a possible positive.
Secondly, I do not concentrate on the past several decades that saw the rise of neoclassical economics along with neoliberal economic policies. Instead, I begin with the rise of classical economics and the works of William Petty and Adam Smith. The rejection of all economic theory that is, or has been in some sense mainstream, is in my view an act of non-constructive nihilism.
The topic of this book is how economics came to its present state. What were the valid ideas discovered along the way and why were they lost? What motivated the wrong turns along the way? What role did ideologies of various kinds play in this process? The serious student will find many ideas to challenge him.
from Peter Radford
I remember sitting at business school what seems a lifetime ago and absorbing with enthusiasm the latest financial trickery. It seemed so much more rigorous than all the other stuff. I felt as if I was being taught something incisive, something with intellectual heft, something that was not subject to the whim of subjective belief, but was, rather, grounded in solid theory.
Boy, was I wrong.
Somewhere in the middle of all that mumbo jumbo was the notion of shareholder value. Here we were being taught that the only purpose of a corporation was to return the most it could to its shareholders. That most big businesses were called a ‘public’ corporation seems an irrelevancy because the word ‘public’ was simply a device to distinguish it from the alternative: a ‘private’ corporation, which was a different animal altogether.
But that word public actually has a deep meaning. Especially when we consider the near total lack of ownership that the presumed owners actually possess.
- Via Voxeu Jacques Melitz provides us with a more precise dating and geography of the origin of coins. My take away: production of coins started around 630 BC, coins spread much slower than I thought (partly because denominations were large) and especially hubs of trade were late to adopt coins as they had other means of payment. It was very much a state led innovation used, among other things, to organize armies.
- Jan Lucassen tells us, for a much later period (Netherlands, 1200-1940), how the state (again) solved the large denominations problem by producing ‘small change’. These small coins facilitated petty trade as well as the labour market. As producing small coins was not profitable, producing them could not be left to the market. This ‘coinisation’ of petty trade is nowadays called ‘deep monetization’ – mind that in the latter part of this period most trade was petty trade. Interesting fact: the Dutch VOC exported a billion of such coins to ‘The East’. Also interesting: different kinds of trade used different kinds of money – at the end of the eighteenth century there may have been as many as 14 of such ‘spheres’, all with their own markets and institutions and the like. Small change seems to have been much less of a problem in the Netherlands than in the UK.
- I’m working on the ‘loanable funds’ market in Friesland, 1537-1580. I’ve been reading a bit and, also using the data on Friesland which Paul Borghaerts unearthed and which Paul and I are starting to analyse, the next stylized patterns about pre-banking era rural lending and borrowing seem to emerge (at this moment: hypotheses!):
from David Ruccio
You can’t, of course, kill a unicorn. Because it isn’t real. It’s just a mythical creature.
Except, it seems, in the world of venture capital. There, as I’ve come to learn from Rupert Neate [ht: ja], unicorns abound. And they just may represent the beginning of the end of the current tech bubble.
On Voxeu an impressive number of economists are quite alarmed at the political and social fall out of the present situation and argue that the Financial Crisis and the Euro Crisis were not government debt crises: “Importantly, the EZ Crisis should not be thought of as a government debt crisis in its origin – even though it evolved into one. Apart from Greece, the nations that ended up with bailouts were not those with the highest debt-to-GDP ratios. Belgium and Italy sailed into the Crisis with public debts of about 100% of GDP and yet did not end up with Troika programmes; Ireland and Spain, with ratios under 40%, needed bailouts. The real culprits were the large intra-EZ capital flows that emerged in the decade before the Crisis. These imbalances baked problems into the EZ ‘cake’ that would explode in the 2010s. All the nations stricken by the Crisis were running current account deficits. None of those running current account surpluses were hit.
Mario Draghi states that QE is a success as borrowing rates for periphery non financial companies have come down quite a bit (which, though it will not by itself be a solution, is a very good thing). And I had to read this twice: “an increase in core services inflation – today close to an all-time minimum – will depend on rising nominal wage growth.” Read more…
from Lars Syll
Stylized facts are close kin of ceteris paribus laws. They are ‘broad generalizations true in essence, though perhaps not in detail’. They play a major role in economics, constituting explananda that economic models are required to explain. Models of economic growth, for example, are supposed to explain the (stylized) fact that the profit rate is constant. The unvarnished fact of course is that profit rates are not constant. All sorts of non-economic factors — e.g., war, pestilence, drought, political chicanery — interfere. Manifestly, stylized facts are not (what philosophers would call) facts, for the simple reason that they do not actually obtain. It might seem then that economics takes itself to be required to explain why known falsehoods are true. (Voodoo economics, indeed!) This can’t be correct. Rather, economics is committed to the view that the claims it recognizes as stylized facts are in the right neighborhood, and that their being in the right neighborhood is something economic models should account for. The models may show them to be good approximations in all cases, or where deviations from the economically ideal are small, or where economic factors dominate non-economic ones. Or they might afford some other account of their often being nearly right. The models may diverge as to what is actually true, or as to where, to what degree, and why the stylized facts are as good as they are. But to fail to acknowledge the stylized facts would be to lose valuable economic information (for example, the fact that if we control for the effects of such non-economic interference as war, disease, and the president for life absconding with the national treasury, the profit rate is constant.) Stylized facts figure in other social sciences as well. I suspect that under a less alarming description, they occur in the natural sciences too. The standard characterization of the pendulum, for example, strikes me as a stylized fact of physics. The motion of the pendulum which physics is supposed to explain is a motion that no actual pendulum exhibits. What such cases point to is this: The fact that a strictly false description is in the right neighborhood sometimes advances understanding of a domain.
Catherine Elgin thinks we should accept model claims when we consider them to be ‘true enough,’ and Uskali Mäki has argued in a similar vain, maintaining that it could be warranted — based on diverse pragmatic considerations — to accept model claims that are negligibly false.
from Shimshon Bichler and Jonathan Nitzan
from Peter Radford
Are we at a point of true reflection on the right in politics?
Here in the US we have the extraordinary spectacle of a bevy of outsiders of various political stripes leading in the polls not long before the election process gets into its more concrete moments. Decisions are looming very closely.
A few months back we were all amused at the sight of people like Donald Trump and Ben Carson ahead of the ‘establishment’ candidates. We all reassured each other that the closer we approached decision time the more likely its was that these oddballs would fall away and leave the field to the ‘sensible’ candidates – those with experience or gravitas in the political arena.
But that isn’t happening.
Not even after four televised debates. And those debates were very well watched. We cannot argue no one knows what’s going on any more – the viewership figures belie that idea. People know very well what’s going on.
from Lars Syll
In econometrics one often gets the feeling that many of its practitioners think of it as a kind of automatic inferential machine: input data and out comes casual knowledge. This is like pulling a rabbit from a hat. Great — but first you have to put the rabbit in the hat. And this is where assumptions come in to the picture.
As social scientists — and economists — we have to confront the all-important question of how to handle uncertainty and randomness. Should we equate randomness with probability? If we do, we have to accept that to speak of randomness we also have to presuppose the existence of nomological probability machines, since probabilities cannot be spoken of – and actually, to be strict, do not at all exist – without specifying such system-contexts.
Accepting a domain of probability theory and a sample space of “infinite populations” — which is legion in modern econometrics — also implies that judgments are made on the basis of observations that are actually never made! Infinitely repeated trials or samplings never take place in the real world. So that cannot be a sound inductive basis for a science with aspirations of explaining real-world socio-economic processes, structures or events. It’s not tenable.
from Peter Radford
Just to make the point, here is a chart I grabbed, back in 2012, from Atlantic magazine:
It shows the increase in the national debt as a percentage of GDP during various presidential regimes.
from Lars Syll
To achieve explanatory success, a theory should, minimally, satisfy two criteria: it should have determinate implications for behavior, and the implied behavior should be what we actually observe. These are necessary conditions, not sufficient ones. Rational-choice theory often fails on both counts. The theory may be indeterminate, and people may be irrational.
In what was perhaps the first sustained criticism of the theory, Keynes emphasized indeterminacy, notably because of the pervasive presence of uncertainty. His criticism applied especially to cases where agents have to form expectations about the behavior of other agents or about the development of the economy in the long run. In the wake of the current economic crisis, this objection has returned to the forefront. Before the crisis, going back to the 1970s, the main objections to the theory were based on pervasive irrational behavior. Experimental psychology and behavioral economics have uncovered many mechanisms that cause people to deviate from the behavior that rational-choice theory prescribes.
Disregarding some more technical sources of indeterminacy, the most basic one is embarrassingly simple: how can one impute to the social agents the capacity to make the calculations that occupy many pages of mathematical appendixes in the leading journals of economics and political science and that can be acquired only through years of professional training? …
I believe that much work in economics and political science that is inspired by rational-choice theory is devoid of any explanatory, aesthetic or mathematical interest, which means that it has no value at all. I cannot make a quantitative assessment of the proportion of work in leading journals that fall in this category, but I am confident that it represents waste on a staggering scale.
Elster’s article is essential reading for all those who want to understand why mainstream – neoclassical – economists actively have contributed to causing todays’s economic crisis rather than to solving it.
from David Ruccio
Robert Reich is right: the standard explanation of—along with the standard debate about—inequality misses the point.
The standard explanation for why average working people in advanced nations such as Britain and the United States have failed to gain much ground over the past several decades and are under increasing economic stress is that globalisation and technological change have made most people less competitive. The tasks we used to perform can now be done more cheaply by lower-paid workers abroad or by computer-driven machines.
The left’s standard solution has been an activist government that taxes the wealthy, invests the proceeds in excellent schools and in other means that people need to become more productive, and redistributes to those in need. These prescriptions have been opposed vigorously by those on the right, who believe the economy will function better for everyone if government is smaller, public debt is reduced and taxes and redistributions are curtailed.
- IS has an ideology which glorifies hatred, pillage, slavery, executions, subservient women and, as I see it, rape. Which is abhorrent and totally alien to everything I stand for. To hell with that. And not with this.
- The war in Syria of course leads to refugees: thousands in 2011, tens of thousands in 2012, hundreds of thousands in 2013 and millions in 2014. At this moment, this wave has of course finally reached the shores of Europe.
- ‘The west’ (which as I understand the world includes Russia, nowadays) is part of this war, for one thing as it is at war with IS for quite some time now, France for instance uses an aircraft carrier. Read more…