Home > Uncategorized > Chicago economics — utterly and completely wrong

Chicago economics — utterly and completely wrong

from Lars Syll

Savings-and-InvestmentsEvery dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This form of “crowding out” is just accounting, and doesn’t rest on any perceptions or behavioral assumptions.

John Cochrane

The problem with this view is, of course, that it is utterly and completely wrong!

What Cochrane is reiterating here is nothing but Say’s law, basically saying that savings are equal to investments and that if the state increases investments, then private investments have to come down (‘crowding out’). As an accounting identity, there is, of course, nothing to say about the law, but as such, it is also totally uninteresting from an economic point of view. As some of my Swedish forerunners — Gunnar Myrdal and Erik Lindahl — stressed more than 80 years ago, it’s really a question of ex-ante and ex-post adjustments. And as further stressed by a famous English economist about the same time, what happens when ex-ante savings and investments differ, is that we basically get output adjustments. GDP changes and so makes saving and investments equal ex-post. And this, nota bene, says nothing at all about the success or failure of fiscal policies! 

william-vickrey-1914-1996As long as there are plenty of idle resources lying around, and monetary authorities behave sensibly … those with a prospect for profitable investment can be enabled to obtain financing. Under these circumstances, each additional dollar of deficit will in the medium long run induce two or more additional dollars of private investment. The capital created is an increment to someone’s wealth and ipso facto someone’s saving. “Supply creates its own demand” fails as soon as some of the income generated by the supply is saved, but investment does create its own saving, and more. Any crowding out that may occur is the result, not of underlying economic reality, but of inappropriate restrictive reactions on the part of a monetary authority in response to the deficit.

William Vickrey Fifteen Fatal Fallacies of Financial Fundamentalism

As could be expected there is no room in Chicago economics for any Keynesian type considerations on eventual shortages of aggregate demand discouraging the recovery of the economy. No, as usual in the new classical macroeconomic school’s explanations and prescriptions, the blame game points to the government and its lack of supply-side​ policies.

Robert Lucas and other Chicago economists have again and again dismissed even the possibility of a shortfall of demand. For someone who already 30 years ago proclaimed Keynesianism dead — “people don’t take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another” — this is of course only what could be expected. Demand considerations are simply ruled out on whimsical theoretical-ideological grounds, much like we have seen other neo-liberal economists do in their attempts to explain away the fact that the latest economic crises shows how the markets have failed to deliver. If there is a problem with the economy, the true cause has to be government.

Chicago economics is a dangerous pseudo-scientific zombie ideology that ultimately relies on the poor having to pay for the mistakes of the rich. Trying to explain business cycles in terms of ‘rational expectations’ has failed blatantly. Maybe it would be asking too much of freshwater economists like Lucas and Cochrane to concede that, but it is still a fact that ought to be embarrassing. My rational expectation is that 30 years from now, no one will know who Robert Lucas or John Cochrane was. John Maynard Keynes and William Vickrey, on the other hand, will still be known as two of the masters of economics.

  1. October 9, 2018 at 12:54 am

    Are you saying austerity could reduce demand sufficiently to create a piranha froth from the fight for survival among cannibal capitalists? and Since capitalism itself is a money loser dependent on an infinite planet, we had better watch out?

  2. Frank Salter
    October 9, 2018 at 8:01 am

    As long as economic analysis is conducted in terms of equilibria, arrant nonsense will be the result.

    Only through analysis, based on rigorous physical principles, dealing with time, i.e. the analysis of transient effects, will progress be achieved.

  3. October 10, 2018 at 9:41 am

    Agreed, “Chicago economics is utterly and completely wrong”, but equilibrium as an AIM is not arrant nonsense, and if we are using the world’s resources faster than they can be replaced, nor – terms of rigorous physical principles – is austerity nonsense. The problem lies in the use of the wrong physical principles. IF the economy could be reduced qua Samuelson to a circular flow of money, growth in the flow is non-equilibrium and adding resistance to the flow to reduce it again looks like an easier solution than addressing the cause of the growth. But the economy cannot be reduced to a CIRCULAR flow: it is a flow through a network reducible minimally to parallel circuits in the form of a WHEATSTONE’S BRIDGE, in which non-equilibrium is independent of the driving force but can be brought about by raising or lowering any of its resistances. This changes the DISTRIBUTION of the flow (which is predetermined in a simple circuit) and only trivially its magnitude.

    In this circuit, increasing the voltage only increases the voltage across each of the resistors (as in inflation), so to restore equilibrium one has to adjust the resistance which has (as Frank puts it) transiently changed its value. In economics, given it is not the power of money which is equilibrating the system but a need for food which motivates work yet reduces when satisfied, there is no reason not to supply money as credit and allow satisfied consumption to be the measure equilibrated by satisfying regeneration.

    But Frank, it is surely a physical principle that credit is not physical but an indicator of a current lack of physicality. Call it information. The Wheatstone Bridge with transient errors generating information in its resistances then turns into a PID control circuit with an aim, current value proportional to it, with a separate circuit setting the proportion setting the proportion long-term by the ratio of two more resistors. The dynamics of the two circuits are on different (short and long) timescales.

    • Frank Salter
      October 11, 2018 at 11:16 am

      Equilibrium as an aim is called stagnation. However I agree that the use of resources and their recycling is a vital consideration.
      Dave, please avoid using terms with multiple meanings. Forcing austerity on ordinary people while allowing the rich to reap inappropriate rewards is reprehensible but it is what is happening all over the world. Make the rewards to all appropriate and the world changes for ever and for the better. But this requires governments to take correct and decisive action — an unlikely development.
      I know that if the rewards were fair for all, economic reality would be changed for ever. Then it becomes unnecessary for many of the ideas espoused by you and Craig for example.

      Real technical progress is vital. Sufficient supplies of nuclear — fission and hopefully fusion — energy is necessary to prevent economic failure. Renewables can never produce sufficient energy to meet existing demands, never mind increasing requirements.

  4. October 15, 2018 at 11:39 am

    When George W. Bush wanted to invade Iraq, he had to explain his reasons for such a drastic and dangerous action. He fell back on the two political ideals neoliberal theorists have used always to justify neoliberal theory and actions, human dignity and individual freedom. All well and good. Such motivators are powerful and appealing. But of this Matthew Arnold asks a simple question, “freedom is a very good horse to ride, but to ride somewhere.” So, what was Bush’s destination, what is freedom. When will the Iraqi people be free? That was answered September 19, 2003 when Paul Bremer, head of the Coalition Provisional Authority propagated four orders that “made the Iraqi people free.” They included, full privatization of public enterprises, full ownership rights by foreign firms of Iraqi businesses, full reparations of foreign profits, opening of Iraqi banks to foreign control, national treatment for foreign companies, and elimination of nearly all trade barriers. These orders applied to every area of life in Iraq, including public services, the media, manufacturing, services, transportation, finance, and construction. Seems, at least in the view of the Bush I administration neoliberalism is just another word for piracy. And pirates always steal the money and other valuables while laying waste to the societies in which they are found. So, it is with Bush’s and other versions of neoliberalism. Those things that make human society and culture sustainable are all destroyed or stolen by neoliberal pirates. Neoliberals should be proud, however. They are part of a long history of piracy going back thousands of years. As for those these pirates attack, all fought back. The penalty for piracy today remains death without trial or delay. Neoliberals should have to cope with this aspect of piracy, along with the riches and good times murdering.

    How this sort of piracy is supposed to make the people of Iraq free is a bit more difficult to explain. It requires some nearly and clearly insane sorts of intellectual gymnastics. Per neoliberals the actions taken in Iraq were necessary for the creation of wealth (private, government wealth is merely stolen private wealth) and therefore for the improved well-being of the people everywhere (no mention of how the wealth is distributed). Per George Bush I individual freedoms are guaranteed by freedom of markets and of trade, a cardinal principle neoliberal theory and actions. Particularly dominant in the USA. I won’t go into detail but just say that I can find no neoliberal who cites any historical or experimental data to back this claim. But there are numerous instances, however, none hard to locate that counter these claims. One any American should know is the period from 1945 to 1980 in the USA when nothing functioned per neoliberal theory, but the nation experienced economic and even cultural well-being (despite the Cold War) never seen before in American history. I can only conclude these are rantings of sophisticated looters.

    • Craig
      October 15, 2018 at 8:08 pm

      The ethical economic and human perspective is expressed succinctly by the forerunner and policy progenitor of Wisdomics-Gracenomics thusly:

      “Systems were made for Man, and not Man for systems, and the interest of man which is self-development, is above all systems, whether theological, political or economic. C. H. Douglas

      • October 16, 2018 at 7:50 am

        Craig, systems are not only made for use by humans, they are made by humans. With all the peculiarities and limitations and failures that go with that.

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