Home > Uncategorized > RWER issue no. 98

RWER issue no. 98

real-world economics review

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issue no. 98
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101 Textbooks

The riddle of the use of impossible examples in microeconomics textbooks
Emmanuelle Bénicourt, Sophie Jallais and Camille Noûs

2

101 Textbooks

The 1-2-3 toolbox of mainstream economics:
promising everything, delivering nothing

Shimshon Bichler and Jonathan Nitzan

23

Capitalists are dispensable, laborers are not
M. Shahid Alam

49

Redistributing income through hierarchy
Blair Fix

58

The Becker model of discrimination is anachronistic and should no longer be taught
John Komlos

87

“Susan Strange saw the financial crisis coming, Your Majesty”
Nat Dyer

92

Measuring economic transformation:
what to make of constant price sectoral GDP

Adam Fforde

112

Booming wealth alongside fiscal concerns about ageing populations
David R Richardson

135

Price indices suitable for the monetary policy
Carlos Guerrero de Lizardi

149

Interview
From the political economy of financial regulation and economic governance to climate change
Jamie Morgan with Andrew P. Baker

169

Board of Editors, past contributors, submissions, etc

203

 

  1. Meta Capitalism
    December 17, 2021 at 12:59 am

    Really enjoying. Started at Nat Dyer’s essay. Very enlightening.

  2. Meta Capitalism
    December 17, 2021 at 2:20 pm

    Reference List
    Did Strange really see the global financial crisis coming?

    The 2008 crisis crashed not only stock prices, banking institutions, and the prospects of millions, but also economic theories – especially, the neoclassical macroeconomic theories which dominated policy-making and leading universities in the US and UK. They were bankrupted by awkward and undeniable facts. Global financial markets revealed themselves to be far more anarchic, less rational, and difficult to manage than believed. Sophisticated financial products such as derivatives made the financial system more not less risky, especially over-the-counter (OTC) trades. Senior bank managers and regulators did not understand the complex transactions. Banks ± which had fought for decades for a hands-off approach from governments ± had to be bailed out. The chief financial danger came from America. (Dyer 2021, 94)

    What is remarkable about these unwelcomed truths – ignored or denied for decades before the crash – is that Susan Strange saw them all, and repeatedly, clearly and loudly warned of the risks they posed to the global system. Strange also foresaw aspects of the aftermath: that the US Federal Reserve would be the only organisation able to provide enough dollars to keep the global economy from freezing solid. And that the rise and fall of global finance would alienate ordinary people and help fuel a right-wing political backlash. (Dyer 2021, 94)

    (….) Precise predictions in human global affairs are not possible, she argued, in what is an irrational, emotional and organic world, not a mechanical one. (Dyer 2021, 94)

    In 1986, Strange, then the Montague Burton Professor of International Relations at the LSE, published a book called Casino Capitalism. It was the year of the ‘Big Bang’ deregulation of London financial markets. The book argued that the past fifteen years had seen a global revolution in credit creation which impacted almost every corner of world affairs. Strange picked out the dangers of derivatives and other innovative financial products which could lead to a contagious, global financial panic: “far from stablizing the system by damping its ups and downs, the devices such as futures markets – developed to deal with uncertainty – have actually served to exaggerate and perpetuate it.”10 She warned about increased market volatility as “new credit instruments are thought up every month, and new assets ‘securitized’ – which means that the banks find new ways of passing on to a speculative market the loans they have made to houseownes.”11 Although she wrote little about the US real estate market, she had her finger on the right spot. (Dyer 2021, 94)

    Contemporary reviewers understood her message well enough but not all believed it. The Economist – where Strange started her career in the 1940s after a First in Economics at the LSE – summarised Casino Capitalism’s message neatly: “financial innovation, she argues, has put the world economy at the mercy of Wall Street gamblers who are ‘playing Snakes and Ladders with people’s lives.'” The book was “well written” “enjoyable” and “original”, The Economist said, but it critcised Strange’s “misjudgements” chiefly the idea that “financial innovation is itself destablising” and that the Federal Reserve may have to play a greater role in calming global marketrs.12 In hindsight, it’s an embarrassing mistake for the magazine. (Dyer 2021, 94-95)

    Strange warned of the risk of sophisticated financial products in other venues too. …. She also told delegates, according to the published version of her speech: “The financial market dealers insist futures, options, and other derivatives are efficient devices to protect their clients from risk and uncertainty. But it is not so certain that the system as a whole is protected – as taxpayers in Orange County are now aware.”15 Although forgotten today, the reference is to Orange County, California which went bankrupt in 1994 after losing $2 billion on a bad bet on interest-rate derivatives.16 Her insight into systemic risk was far ahead of her time. (Dyer 2021, 95)

    (Dyer, Nat. “Susan Strange saw the financial crisis coming, Your Majesty”. Real-World Economics Review. 2021; (88).)

    What “methodologies” allowed Susan Strange to entertain such prescient views the nature of financial derivatives and their destabising effect upon the global economy? History is one for sure, for she was an astute student of past financial crises. Are there other methods she used? I would be interested in knowing exactly what they were, for I think we need modern economists to be more like her.

    • December 17, 2021 at 9:35 pm

      Thanks for the kind words. The best place to get a flavour of Strange’s methodology is her book ‘States and Markets’. Essentially, she advoacted paying attention to what is actually happening in the world and trusting your own judgement. She would jest that professors like teaching abstract theory because they don’t need to revise their lectures every year, whereas if you’re looking at the world you have to. Personally, I think economics needs to be more ‘inductive’ and less ‘deductive’, attention to history is a big part. At the end of her only piece of autobiographical writing Strange said that she tried to teach her children (6 of them!) and students: “not to expect justice in life – but to try hard to get it; to work hard – but to question authority, whether political or academic; to distrust ideologies – but to respect the evidence; to avoid following the crowd – but to trust your own judgement and to stand up for your own ideas.” https://www.earthriseblog.org/stand-up-for-your-own-ideas-susan-stranges-remarkable-life/

      • Meta Capitalism
        December 20, 2021 at 6:25 am

        Thank you Nat, for the paper and wonderful comment. Much appreciated.

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