Archive for July, 2013

“it really isn’t education at all, but proselytization”

July 31, 2013 Comments off

This is a new post from Jack Reardon on the WEA Pedagogy Blog

It is a great privilege and a pleasure to be one of three editors of this pedagogy blog. Reforming economics education is my life’s work and I am honoured to work with committed individuals like Edward, Maria and Asad.

As an undergraduate I started as physics major and then switched to economics. I knew something was wrong with economics, but couldn’t put my finger on it at first. Physics, like most disciplines  has its controversies and even ideologues, but I was not ready for the onslaught of fundamentalism mixed in with proselytization. Read more…

Should China Deregulate?

Kevin P. Gallagher

BOSTON – Rumor has it that China is set to accelerate the deregulation of its financial system.

For years, China has restricted the ability of its residents and foreign investors to pull and push their money in and out of the country. While that may be illiberal, there was a sound reason for this restriction: Every emerging market that has scrapped these regulations has had a major financial crisis and subsequent trouble with growth.

The world can’t afford for that to happen in China. China is too big to fail.

This issue came to the fore last year when the People’s Bank of China (PBOC) announced that it might “liberalize” its financial system in five to 10 years. Read more…

Cruel arithmetic and President Obama’s big speech

July 29, 2013 4 comments

from Dean Baker

Last week President Obama gave a speech at Knox College in Illinois in which he announced plans to return his focus to the economy. The agenda he outlined centered on policies to rebuild the middle class leading to growth from the middle out as he put it.

The basic idea sounds good. There are few who would take issue with the focus of his policies: improving the nation’s infrastructure, better school-to-work transitions, high quality pre-school for everyone. These ideas all score very high in opinion polls and focus groups, although there might be serious differences on what they mean concretely.

But even if we can agree on the best way to rebuild our infrastructure, better our schools, and guarantee high quality pre-school education, we will still face serious economic problems well into the future for the simple reason that the economy lacks demand. Generating demand has to be issue one, two, and three on the economic agenda right now, and unfortunately President Obama’s speech came up seriously short on it. Read more…

What’s the use of economics?

July 28, 2013 15 comments

from Lars Syll

The simple question that was raised during a recent conference … was to what extent has – or should – the teaching of economics be modified in the light of the current economic crisis? The simple answer is that the economics profession is unlikely to change. Why would economists be willing to give up much of their human capital, painstakingly nurtured for over two centuries? For macroeconomists in particular, the reaction has been to suggest that modifications of existing models to take account of ‘frictions’ or ‘imperfections’ will be enough to account for the current evolution of the world economy. The idea is that once students have understood the basics, they can be introduced to these modifications. Read more…

Simple model mania

July 26, 2013 24 comments

from Peter Radford

Economics, as we all know, is a bit of a shambles. There’s plenty of good stuff sitting about, and there’s plenty of bad stuff. On any given day we can witness two Nobel prize winners disagree and put forward totally contradictory theories to support radically different sets of policy advice. One example at the moment is the continual warnings we gat about the imminence of high inflation. One side says we are doomed because all the money the Fed has been tolerating in the economy will cause prices to rise – this is a variant of the old “too much money chasing too few goods” argument. The other side says this won’t happen because the money is all idle in bank reserves and will stay there as long as the economy sputters and interest rates stay stuck at or near zero – no one wants to do anything with all that money, so it is irrelevant and certainly won’t end up chasing too few goods. So far the evidence supports the latter, but the former don’t stop, and they don’t revise their ideas either. The two sides just shout at each other. The public has a right to be bewildered.  Read more…

Bart van Ark, chief economist of the ‘Conference Board’, debunks Macro Real Unit Labour Costs

July 26, 2013 1 comment

In 2005, Bart van Ark, at present chief economist of the Conference Board but at that time employed at the Rijksuniversteit Groningen, published together with Edwin Stuivenwold and Gerard Ypma a study called ‘Unit labour costs, productivity and international competitiveness‘ (a joint publication with the Conference Board). Though Unit Labour Costs are useful as a micro metric to compare for instance cheese factories they are unfit as a macro indicator of competitiveness of countries because of all kinds of conceptual problems, aggregation problems, composition problems and, indeed, ‘macro’-problems ,macro in the sense that in a situation with low but positive inflation and a growing economy a stable RULC requires (not : causes!) a continuously increasing surplus (decreasing deficit) of the current account as there will be increasing macro domestic underconsumption problems. Van Ark et all try hard to be positive about the RULC but of course ran into these same problems (though they do not identify the macro problems, consult Felipe and Kumar about these): Read more…

What has Keynes got to do with New Keynesian Macroeconomics? Nothing!

July 25, 2013 30 comments

from Lars Syll

Paul Krugman has a post on his blog discussing “New Keynesian” macroeconomics and the definition of neoclassical economics:

So, what is neoclassical economics? … I think we mean in practice economics based on maximization-with-equilibrium. We imagine an economy consisting of rational, self-interested players, and suppose that economic outcomes reflect a situation in which each player is doing the best he, she, or it can given the actions of all the other players …

Some economists really really believe that life is like this — and they have a significant impact on our discourse. But the rest of us are well aware that this is nothing but a metaphor; nonetheless, most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point or baseline, which is then modified — but not too much — in the direction of realism.

This is, not to put too fine a point on it, very much true of Keynesian economics as practiced … New Keynesian models are intertemporal maximization modified with sticky prices and a few other deviations …

Why do things this way? Simplicity and clarity. In the real world, people are fairly rational and more or less self-interested; the qualifiers are complicated to model, so it makes sense to see what you can learn by dropping them. And dynamics are hard, whereas looking at the presumed end state of a dynamic process — an equilibrium — may tell you much of what you want to know.

Being myself sorta-kinda Keynesian I  find this analysis utterly unconvincing. Why? Let me try to explain. Read more…

Teflon-coated econometrics

July 24, 2013 12 comments

from Lars Syll

At least since the time of Keynes’s famous critique of Tinbergen’s econometric methods, those of us in the social science community who have been unpolite enough to dare questioning the preferred methods and models applied in quantitive research in general and econometrics more specifically, are as a rule met with disapproval. Although people seem to get very agitated and upset by the critique – just read the commentaries on this blog if you don’t believe me – defenders of “received theory” always say that the critique is “nothing new”, that they have always been “well aware” of the problems, and so on, and so on.

So, Read more…

Edward Snowden and Financial Speculation Taxes

July 23, 2013 6 comments

from Dean Baker

In the last few weeks Edward Snowden has been holed in Moscow’s airport trying to negotiate terms of asylum with various countries around the world. Thus far it doesn’t seem that Snowden has been able to find any acceptable offers.

Part of the reason is that the United States government has been openly threatening governments that are considering offering asylum, warning of dire consequences. Governments throughout the world take these threats seriously.

In fact, governments take threats from the United States very seriously. France and Portugal both broke with international conventions a few weeks back and refused to allow Bolivia President Evo Morales to use their airspace because the Obama administration had heard rumors that Snowden was on board his plane.

Clearly when something matters to the United States government, it is willing to go to extraordinary lengths to get what it wants. And even relatively powerful countries like France quickly bow to its wishes, even when it means breaking with well-established international protocols.

This is important background for understanding the effort in Washington to block financial speculation taxes. Read more…

More Proof: Employment Protection Does Not Affect Employment

July 22, 2013 1 comment

The OECD has just released its 2013 Employment Outlook.  In addition to its usual overview of labour market developments, Chapter 2 of this year’s report reports on a thorough revision and updating of the OECD’s quantitative index of employment protection legislation (EPL). The chapter contains a useful summary of the mainstream literature regarding EPL costs and benefits – although this would have benefited from inclusion of the important heterodox voices who have written about on the employment effects of labour market institutions (such as Baker, Glyn, Howell, and Schmitt).  Chapter 2 also contains a detailed review of the revised methodology behind the OECD index.

The actual country scores for the index do not seem to be reported in the chapter, but they are available through the OECD’s online employment database.

The key findings of Chapter 2 include: Read more…

Keynes on speculators taking advantage of mob psychology

July 22, 2013 3 comments

from Lars Syll

How far the motives which I have been attributing to the market are strictly rational, I leave it to others to judge. They are best regarded, I think, as an example of how sensitive – over-sensitive if you like – to the near future, about which we may think that we know a little, even the best-informed must be, because, in truth, we know almost nothing about the more remote future …

The ignorance of even the best-informed investor about the more remote future is much greater then his knowledge … But if this is true of the best-informed, the vast majority of those who are concerned with the buying and selling of securities know almost nothing whatever about what they are doing … This is one of the odd characteristics of the Capitalist System under which we live …  Read more…

Seven technical reasons why ‘(Real) Unit Labour Costs’ are not a valid macro-indicator of competitiveness

July 21, 2013 6 comments

Update: a revised, empirically extended  and improved version of this blogpost can be found here.

Unit Labour Costs (ULC) are one of the most used metrics during this crisis. Generally, it is stated that countries with a high increase of ULC have to get these down, at least compared with other countries, to become more ‘competitive’. The way to do this is to slash wages, as this will lead to a lower ULC and therewith to an increase of competitivety. The European Central Bank even considers ULC to be so important that they are included in the list of eleven core economic metrics, together with inflation, GDP growth, the current account, unemployment and some others (graph 1).

Graph 1. Development of the Eurozone ULC, Year on Year increase. Source: ECB.


For an economist this is quite embarrassing, Read more…

The China syndrome and Paul Krugman’s latest

July 21, 2013 4 comments

from David Ruccio

Readers will remember the China syndrome: the fear of a nuclear meltdown in the West, in which reactor components melt through their containment structures and into the underlying earth, “all the way to China.” Now, to judge by Paul Krugman’s latest, the fear seems to be running in the opposite direction: the fear is that an economic meltdown in China will make its way “all the way to the West.”

The fact is, mainstream economists in the West have a particularly difficult time making sense of the Chinese economy, based on the fear that the West has failed in its mission to show China and the rest of the world its future. Last year, it was Daron Acemoglu who worried that the development of capitalism in China was based not on a “happy connection between prosperity and democracy” but, instead, on a system in which “rulers have been able to deliver strong economic growth without surrendering political and social control.” Krugman’s fear is a bit different: that the period of massive investment based on low wages is coming to an end and what China needs, but is failing to engineer, is an increase in private consumption. Read more…

Mistaking luck for skill

July 21, 2013 2 comments

from Lars Syll

It’s often said that people misperceive skill and luck, for example by saying that a team is on form when it has merely had a run of good fortune. A new experimentat the Autonomous University of Barcelona shows that this error is even worse than we thought.

Jordi Brandts and colleagues got a group of students to predict a sequence of five coin tosses, and then selected the best and the worst predictor. They then asked other subjects to bet on whether the best and worst predictor could predict another five coin tosses. The subjects were told that they would bet on the worst predictor from the first round, unless they paid to switch to the best predictor. Read more…

The broken link (2 graphs)

July 19, 2013 3 comments

Josh Bivens today has an excellent post The Compensation/Productivity Link Is Indeed Broken for the Vast Majority of American Workers at the Economic Policy Institute Blog.  The post includes these to graphs pertaining to the US economy.

Read more…

“New York Times” mocks Bernanke and lauds Keen

Yesterday in the New York Times‘ “Business Day” section there appeared a long article titled “The Time Bernanke Got It Wrong“.   It compares Ben Bernanke’s level of professional competence at understanding financialized economies to Steve Keen’s.  Here is an excerpt.

One economist who would have expected that development was Hyman Minsky. In 1995, the year before Minsky died, Steve Keen, an Australian economist, used his ideas to set forth a possibility that now seems prescient. It was published in The Journal of Post Keynesian Economics.

He suggested that lending standards would be gradually reduced, and asset prices would rise, as confidence grew that “the future is assured, and therefore that most investments will succeed.” Eventually, the income-earning ability of an asset would seem less important than the expected capital gains. Buyers would pay high prices and finance their purchases with ever-rising amounts of debt.

When something went wrong, an immediate need for liquidity would cause financiers to try to sell assets immediately. “The asset market becomes flooded,” Mr. Keen wrote, “and the euphoria becomes a panic, the boom becomes a slump.” Minsky argued that could end without disaster, if inflation bailed everyone out. But if it happened in a period of low inflation, it could feed upon itself and lead to depression.

“The chaotic dynamics explored in this paper,” Mr. Keen concluded, “should warn us against accepting a period of relative tranquillity in a capitalist economy as anything other than a lull before the storm.”

When I talked to Mr. Keen this week, Read more…

Three Goals for Pedagogical Change

July 19, 2013 12 comments

A provacative and substantial post  by Asad Zaman went up today on the WEA Pedagogical BlogBelow is the first third of the post and a link to the whole post.

Three Goals for Pedagogical Change

by Asad Zaman

While there exist many books, journals and forums discussing improved teaching of neoclassical theories, our goal at RWER Pedagogy blog is radically different. Our goal is to change the teaching of economics in ways that will help all human beings on this planet lead richer and fuller lives, and enable them to realize the potential for excellence possessed by all humans. We would like to eliminate hunger, poverty, economic oppression and injustice, and move towards greater equality in standards of living. We would like all children to have equal opportunities for education, and access to health care. Is it possible to do this by changing the way we teach economics? Many people, including myself, believe that it is. Indeed, among of the major props which support the current extremely oppressive global economic system are the wrong economic theories currently being taught at universities throughout the world. Below I discuss three major obstacles to creating positive changes posed by conventional economics theories. Each of these obstacles provides us with a pedagogical goal: we should change our teaching of economics so as to remove these obstacle.

FIRST Obstacle to Formulating a GOAL for improvement: Normative Positive Distinction

In my paper entitled “The normative foundations of scarcity,” published in issue 61 of Real World Economics Review (download pdf) I have shown that even what is currently taken to be the fundamental defining concept of economics is deeply normative. This is an application of an argument of Hilary Putnam, who showed that facts and values can be entangled in such a way that it is impossible to separate the two. Only after we come to the understanding that economics is not an objective and value-free scientific endeavor, does it become possible to formulate a goal for teaching and studying economics.

ACTION PLAN 1: Read more…

Generous and not so generous countries

July 18, 2013 1 comment

Official Development Assistance by country as a percentage of Gross National Income in 2012 The list includes international giving through official channels that qualify as Official Development Assistance, and national charitable giving. This list is as follows:

  1.             Luxembourg      – 1.00%
  2.             Sweden – 0.99%
  3.             Norway – 0.93%
  4.             Denmark –      0.84%
  5.             Netherlands      – 0.71%
  6.             United Kingdom – 0.56%
  7.             Finland –      0.53%
  8.             Ireland – 0.48%
  9.             Belgium –      0.47%
  10.             France– 0.45%
  11.             Switzerland      – 0.45%
  12.             Germany –      0.38%
  13.             Australia      – 0.36%
  14.             Canada – 0.32%
  15.             Austria –      0.28%
  16.             New Zealand – 0.28%
  17.             Portugal –      0.27%
  18.             Iceland –      0.22%
  19.             United States – 0.19%
  20.             Japan – 0.17%
  21.             Spain – 0.15%
  22.             South Korea – 0.14%
  23.             Italy – 0.13%
  24.             Greece – 0.13%


Why expected utility theory is an ex-parrot (wonkish)

July 18, 2013 11 comments

from Lars Syll

Although the expected utility theory is obviously both theoretically and descriptively inadequate, colleagues and microeconomics textbook writers all over the world gladly continue to use it, as though its deficiencies were unknown or unheard of.

That cannot be the right attitude when facing scientific anomalies. When models are plainly wrong, you’d better replace them! As Matthew Rabin and Richard Thaler have it in Risk Aversion:


It is time for economists to recognize that expected utility is an ex-hypothesis, so that we can concentrate our energies on the important task of developing better descriptive models of choice under uncertainty.       Read more…

Wall Street Journal turns news section over to the financial industry

July 18, 2013 Leave a comment

from Dean Baker

Everyone knows that the Wall Street Journal has a strong pro-rich perspective in its opinion pages. Its guiding philosophy is a dollar in a pocket of a poor or a middle class person is a dollar that could be in the pockets of the rich. But its news section is mostly reasonably fair.

That may no longer be the case. The financial industry is on the warpath against a financial transaction tax in Europe. The proposed tax would be 0.1 percent on stock trades (one fifth the size of the tax that has been in place for centuries in the United Kingdom) and 0.01 percent on transfers on most of options, futures, and most other derivatives.

Since the price of trading has plummeted over the last four decades due to developments in computer technology, this tax would just raise trading costs back to where they were ten or twenty years ago. That would not seem to be too horrible on its face, since Europe certainly had a well-developed and active capital market in 2000 or even 1990.

But the financial industry needs to scare people in order to discourage Europe from going the route of the tax. So Read more…