Archive for March, 2012

Forbes’ update on the state of plutonomy or “democracy for the few”

March 30, 2012 15 comments

from Edward Fullbrook

The current Forbes, the bi-weekly of The One Percent, features an update on the current state of what it, like Citigroup, calls plutonomy.  Also called by its insiders “democracy for the few”, this is the basic economic-political reality of our time, which one-percenters chat about daily and which the rest of us generally pretend doesn’t exist.  Skeptics of the analysis of plutonomy offered in “The Political Economy of Bubbles” in the current issue of RWER are encouraged to read Forbes’ plutonomy update.   Below is a taster. 

The new “us versus them” is not like the racism of colonial times. This is starkly different. It’s the 99% versus the 1%, . . . Read more…

Money Circulation in the Eurozone- “Banks’ Deposits” under the lens!

March 30, 2012 2 comments

Today a guest post by Erwan Mahé, from OTCex group. Unlike standard ECB analysis the article focuses on monetary differences between Euro countries and dynamic as well as changing relations between monetary and other variables. The ECB was very helpful in explaining and providing data.

from Erwan Mahé

Regular Thaler’s Corner readers are well aware of the importance I assign to money circulation, as per the famous MV of MV=PQ equation, which has enabled to avoid a good number of pitfalls in recent years.

But it is crucial to view this equation in the context of today’s real world, and not as some of our Stone Age monetarists would have us believe, with a more or less stable V, and a confusion between money supply and monetary base!  Read more…

Keen, Krugman and National Accounting

March 29, 2012 26 comments

from Merijn Knibbe

A little bit about the Keen-Krugman debate. According to Steve Keen,

“The Walras-Schumpeter-Minsky proposition [is] that aggregate demand is income plus the change in debt, and that this is expended on both goods and services and purchases of financial claims on existing assets.”

Steve should have called this the Walras-Schumpeter-Minsky-National Accounting proposition. As can be seen from the next graph, these accounts use the same idea (the accounts use gross income and not net income, but this doesn’t matter for the argument, at the moment):

Source: Centraal Bureau voor de Statistiek, National Accounts, tables S14B and S14M. 

So, Steve is right, at least in a technical sense. His concept is Read more…

The ergodic axiom: Davidson versus Stiglitz and Lucas

March 28, 2012 35 comments

Contemporary neoclassical economists proceed under the assumption that as concerns the economy there exists a predetermined reality that can be fully described by “unchanging objective conditional probability functions”.  This is called the ”ergodic axiom”, and its current supporters include Joseph . Stiglitz and Robert Lucas.  In the anti-scientism spirit of Keynes, Paul Davidson has long campaigned against the use of the ergodic axiom, but never so tellingly as in his most recent paper, Is economics a science? Should economics be rigorous? It appears in the current issue of the Real-World Economics.  Here is one section from this paper.

The ergodic axiom 

First, let us take up the ergodic – nonergodic stochastic process distinction.  Paul Samuelson [1969] has written that if economists hope to move economics from “the realm of history” into “the realm of science” they must impose the “ergodic hypothesis” on their theory[1].  In other words Nobel Prize Winner Paul Samuelson has made the ergodic axiom the sine qua non for the scientific method in economics. Lucas and Sargent [1981] have also claimed the principle behind the ergodic axiom is the only scientific method of doing economics. 

Following Samuelson’s lead, most economists (e.g., Cochrane, Stiglitz, Mankiw, M. Friedman, Scholes, etc) and economic textbook writers either implicitly or explicitly have assumed that observable economic events are generated by an ergodic stochastic process.   Read more…

Krugman versus Keen

March 28, 2012 13 comments

from Edward Fullbrook

A few days ago Steve Keen’s paper “Instability in Financial Markets: Sources and Remedies” was posted on the Web, and, deservedly, it is attracting a great deal of attention.  Yesterday Paul Krugman entered the fray, with his New York Times column devoted to Keen’s latest. Followers of this blog are encouraged to enter the debate here.  Does the role of banks need to be included in the basic story that economists tell about how modern economies work?  Krugman says no.  Keen says yes.

Below is Keen’s long synopsis of his paper. Read more…

Top .01%, Top 1%, Bottom 99%

March 27, 2012 15 comments

from David Ruccio (and the New York Times

Read more…

Should everything be up for sale?

March 25, 2012 10 comments

from David Ruccio

In discussing markets with my students, I often invite them to engage in the following thought experiment: “Suppose that body parts—livers, hearts, legs, arms, etc.—are bought and sold on markets.” Their usual response is that body parts shouldn’t be available on markets. “But why draw the line there? Why prohibit the buying and selling of body parts but allow markets for food—when people are dying of hunger and malnutrition—and shelter—when so many are homeless—and healthcare—when so many suffer from poor health or disease?” And then, of course, I remind that body parts are for sale, both legally and illegally, from surrogate mothers and human guinea pigs in drug-safety trials to blood, kidneys, and plastinates. Read more…

Why Ocampo–Not Kim–Should be Next World Bank President

Kevin P. Gallagher

Emerging countries have gone on the offensive to put an end to the “wink-wink” succession rule whereby Europeans get to choose who heads the International Monetary Fund and the US picks the president of the World Bank.

On Friday, developing countries are expected to nominate at least two candidates – Ngozi Okonjo-Iweala, the Nigerian finance minister, and José Antonio Ocampo, former finance minister of Colombia. If the decision is finally based on merit, as it should be, Ocampo will win: he is far and away better than any on the list of credible names, including President Barack Obama’s nominee, Jim Yong Kim.  Read more…

Plutonomy Bubble Number Three

March 24, 2012 15 comments

Industrial production in Europe, 1992-2011 (5 graphs)

March 22, 2012 5 comments

from Merijn Knibbe
It’s often stated that Germany outcompeted quite some other European countries, especially in the realm of industrial production, which is one reason why Germany is doing really well while these others aren’t. Is there some truth to this story? Did German industrial production outcompete the others? That’s, when you think about it, quite a difficult question. But we can look if German industrial production did better than production in other EU countries. To do this, the first graph shows German industrial production after 1992 (manufacturing, mining, energy). The other graphs show industrial production in the other countries of the EU (with more than 1 million inhabitants) relative to Germany, if possible since 1992. All data: Eurostat. If these indices increase, industrial production rises faster than in Germany and vice versa. Mind that production can rise faster or slower due to increased or decreased competitiveness but also because of changes in demand or a fortuitous discovery of, for instance, oil.

The main findings:

1. Up to about 2003, all other countries did at least as well or (in most cases) better than Germany. After 2003, quite some countries did worse. After 2009, almost all countries did worse or, in the case of some low wage countries like Poland and Turkey, about as well as Germany. This really was a German heyday – but production is not yet as high as in 2008 and starts to falter.
2. The UK and France did, in the long run, not do better than for instance Greece or Italy and show a very profound relative decline. As the UK and France do not have the same troubles as Spain and Greece and Ireland this shows that competitiveness is only on side of the story.
3. Housing bubbles and busts seem to have crowded out industrial production in quite some countries (Denmark, the Netherlands, the Baltic States, Ireland, Spain), first by diverting money and resources to construction and afterwards when debt deflation dampened demand.

Read more…

The herd instinct and the common theory

March 20, 2012 4 comments

Below are two thought-provoking, stand-on-their-own sections from Patrick Spread‘s paper “Science and Support: The Struggle for Mastery in Economics” in the new issue of RWER. 

The herd instinct

Fullbrook (2010a, p. 102), in the quotation above on page 3, refers to the AEA and neoclassical economists as ‘the old herd.’ References to ‘the herd instinct’ are fairly common in academic literature but its nature is never specified. The phenomenon is easily understood in terms of support-bargaining. An individual advances an idea that looks likely to advance the interests of himself, or herself, and his or her associates. Read more…

“Given the extraordinary level of incompetence shown by these economists, one may ask. . . .”

March 19, 2012 22 comments

from Edward Fullbrook

This post has now started a discussion  Punish Economists For Bad Advice?  at the WEA Ethics Conference.  If you go there, you can take part in the debate.

An article “Stop letting economists off the hook”  by Philip Soos in the Business Spectator should be required reading for economists.  It raises the question: “If other professions can be held accountable for poor job performance, why not economists?”   Here is one section of Soos’s  article.

According to conventional economic theory that the majority of economists advocate Read more…

The new political economy of the Eurozone

March 17, 2012 25 comments

I might be boring the pants off you with my European Central Bank Posts – but what’s happening in Europe is going very fast and it’s important. Power (lots of it) is shifting towards Frankfurt and Brussels. How will this power be used?

First, the shift. A quote from a recent speech from José Manuel González-Páramo, member of the board of the European Central Bank: Read more…

Remembering Alice Amsden

from Kevin P. Gallagher

World renowned development economist Alice Amsden passed away this week.

Alice Amsden seared through conventional economics and political science with her analyses of East Asian development in the later part of the 20th Century. She will long be remembered as one of the best development economists, and political economists, of her time.

Her book “The Rise of the Rest: Challenges to the West from Late-Industrializing Economies” crystallized a lifetime of work that blended theory, quantitative analysis, and careful field work on “late development.” Other landmark books were “Asia’s Next Giant: South Korea and Late Industrialization” and “Beyond Late Development: Taiwan’s Industrial Upgrading.”

In each of these books Amsden empirically showed how many East Asian nations diversified themselves away from peasant agriculture to become some of the most vibrant industrialized economies the world has ever seen. Her findings flew in the face of neo-classical trade theories that were fashionable at the time. Read more…

The 13,6% decrease in hourly wage costs in Greece after the third quarter of 2009

March 15, 2012 4 comments

from Merijn Knibbe
According to the IMF, Greece has to cut wages. See here and here.

Hmmm. Let’s improve upon the IMF and look at the facts – Greece already did. No country in Europe comes even close (graph), according to recent data from Eurostat. To no avail, alas, as employment is down 8,5%, compared with a year ago (and again, no country in Europe comes close). Considering a 7% rate of inflation between the third quarter of 2009 and the third quarter of 2011 as well as taking the decline of employment between 2009 and 2010 into account this means that purchasing power of total wages must have declined with about 30% in two years (which is consistent with the comparable decline of retail sales).

Read more…

The prescription drugs bubble

March 15, 2012 Leave a comment

Below, from the new issue of RWER, is an especially interesting section from the lead paper, “Public debt tipping point studies ignore how exchange rate changes may create a financial meltdown”, by Robin Pope and Reinhard Selten.   Read more…

“toxic and destructive” Goldman Sachs and the Obama administration

March 15, 2012 13 comments

from Edward Fullbrook

As you may have heard in the news, yesterday one of the key directors of Goldman Sachs, Greg Smith, published in the New York Times his long letter of resignation.  It begins:

TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

Given the degree of attention that the international media is today giving this mini event, it seems appropriate to republish here a table from my RWER paper, published on Monday, “The Political Economy of Bubbles”.  The table below, which is largely based on an article by fflambeau, details 32 relationships, financial and otherwise, between Goldman Sachs people (“morally bankrupt” says Smith) and the Obama Administration. Read more…

Mario Draghi, president of the ECB: “cut bonuses!”

March 14, 2012 1 comment

from Merijn Knibbe

On this blog, I’ve on occasion been scornful about the European Central Bank (ECB). Being scornful is of course easy – but I had little other choice, considering the content of the speeches of people like Stark and Trichet. And I was surely not the only highly critical voice. In a recent publication of the Dutch Central Bank (!) the authors write (emphasis added and remember: Trichet continued to focus exclusively on a narrow indicator of price stability until the very end!):

With hindsight, it seems that the most recent housing boom could have been identified as a bubble, given the similarities of this crisis to earlier ones. For instance, the sharp increases in credit and household leverage are usually early warning indicators of financial vulnerabilities building up. Nonetheless, policymakers did not react to these signals. Read more…

The Plutonomy Reports

March 14, 2012 1 comment

from Edward Fullbrook

On this blog, posts dealing with plutonomy have consistently been the most heavily viewed. Given this interest, here is one of several sections on plutonomy from my paper “The Political Economy of Bubbles” in the new issue of Real-World Economics Review. It is centered on the three Citigroup Plutonomy Reports. Read more…

RWER issue 59

March 12, 2012 27 comments

real-world economics review

Subscribers: 17,500+                                                             ISSN 1755-9472
– a journal of the World Economics Association (9 months old; 8,024 members) 
back issues at    recent issues: 58 57 56 55 54 53 52 51 50

Issue no. 59, 12 March 2012                    

You can download the whole issue as a pdf document by clicking here  

In this issue:   Read more…