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Understanding Macro II: Post-war prosperity

from Asad Zaman

In part 1 of this article (Understanding Macro: The Great Depression (1/3), we saw that Keynes challenged classical economics on many fronts. Against the classical idea that free markets will automatically eliminate unemployment, he argued that governments needed to adopt appropriate fiscal and monetary policy in order to create full employment, as a necessary condition for high economic growth. He also argued that money is not neutral, and that there is fundamental uncertainty about the future.  Widespread acceptance of Keynesian economics was one of the two major ingredients that led to prosperity in Europe and USA after World War II. We start with a discussion of the second ingredient, which was strict regulation of financial institutions.

It was obvious to all that irresponsible lending had caused the Great Depression. The creation of the Federal Reserve Bank in 1914 allowed banks to create credit freely. Banks could provide loans to anyone who asked for it, without minimal backing in cash reserves, since the Fed would provide them with cash in case of any shortfall in reserves. This was a windfall for the private banking sector, since they could provide credit for loans at zero cost to themselves, simply by making an entry on their books. Banks capitalized on this opportunity by creating a debt-based boom in the economy. Consumers were encouraged to buy everything, especially real estate, housing, and stocks on credit. Easy availability of loans created a boom in economy, referred to as the roaring twenties. As prices of land and stocks increased, people rushed out to get loans to buy more, in order to get a share of the easy profits due to soaring values. Eventually, a stock market crash in 1929 punctured this bubble, leading to the Great Depression of 1929. About 11,000 of 25,000 banks collapsed, wiping out the life-savings of millions, since there was no deposit insurance at the time.  read more

On the vital importance of understanding international financial architecture

May 12, 2018 1 comment

from Asad Zaman

Part 1: Power/Knowledge – How Macro Theory is shaped by the Powerful

Why Understand Macro? If we understood macroeconomics, we would be able to understand the reasons for the major economic events currently going on all around us. For instance, increasing inequality, effects of austerity, Brexit, inequities of post-Bretton Woods dollar based financial system, impacts of emerging economy of China on global finance, and many other questions of vital importance for conduct of economic policy. Unfortunately, standard courses in Advanced Macroeconomics currently being taught at leading universities throughout the world are worse than useless for this purpose. Many leading economists have admitted that we need to replace the “entire edifice” of contemporary macro, that our leading models are strongly in conflict with everything we know about reality. For one sharp critique, see David Romer “The Trouble with Macroeconomics”, where he says that theorists completely ignore the strong disagreement between their theories and reality, and are content to build mathematical models which have no relation to the real world. Leading macro textbooks teach student how to do advanced mathematical manipulation, but teach nothing about the events going on around us, which is why economists were taken by complete surprise when the Global Financial Crisis occurred. According to all the macro models in use then (and which continue to be used today) such an event was impossible.

Textbooks teach Myths About Macro: It is not just that what is taught in the textbooks is irrelevant. It is actually misleading, and we can argue that it is deliberately so. Learning the truth about how the economy works would be harmful to the rich and powerful who benefit enormously from the myths that are taught in modern macroeconomics textbooks, and widely believed throughout the world. Many, many myths taught as realities could be listed, but perhaps the central one among them is the “Neutrality of Money”. According to this widely believed myth, money plays no important role in the economy, except to affect the price level. If we double the quantity of money, the prices will be double and there will be no other effects on the real economy. In other words, “money is a veil” and we have to see through this veil in order to understand the workings of the real economy.

Suppression of Keynesian Knowledge: read more 

A realist approach to econometrics

May 7, 2018 2 comments

from Asad Zaman

The talk linked below explains why the positivist/nominalist methodology used in Econometrics leads to mostly nonesense regressions. It also explains how a realist alternative can be developed.

“The Philosophy and Techniques for Quantitative Research” – Keynote Address by Dr. Asad Zaman, VC PIDE at Workshop on 19-20 April, 2018 Dept of Economics, Fatima Jinnah Women’s University, Rawalpindi, Pakistan.

My message will come as a surprise to students gathered here to learn advanced econometric techniques. Let me begin by stating it baldly: “Econometrics is nothing more than Fraud by Numbers”.

As Joan Robinson famously said, “The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.” A similar statement holds for econometrics. We should learn it not in order to acquire techniques which will teach us how to use data sets to make inferences about reality. Rather, we should learn it to avoid being deceived by econometricians. The techniques described by Perkins in “Confessions of an Economic Hit-Man” are in common use around the world. Fancy econometrics is used to persuade people to adopt policies which harm the public, while fattening corporate coffers.  read more

The Pareto Efficiency Swindle

May 4, 2018 2 comments

from Asad Zaman

This continues a sequence of posts explaining how conventional economics is actually the economic theory of the top 1%: ET1%: Blindfolds created by Economic Theories. Eight central concepts of economic theory are shown to be deceptive – they have an appearance of objectivity, fairness, and equity, but actually conceal a strong bias in the favor of the wealthy. The previous post was the “Illusion of Scarcity.

We call the concept of “Pareto Efficiency” a swindle because it encapsulates a normative principle that property rights of the wealthy take precedence over the right to basic needs of the poor. However, it is disguised to have an appearance of scientific objectivity, while the opposite normative preference, which most people have, is said to depend on subjective and unreliable value judgments.

The principle of Pareto efficiency has a harmless and innocuous appearance. Who could object to the idea that if we give more material goods to everyone, then the society as a whole would be better off? However, we will show that Pareto Efficiency is deceptive and fully qualifies for the label ET1%. It appeals to everyone when we say that increasing social welfare requires giving more goods to all. But the hidden consequence of accepting this principle is that you cannot take wealth away from the super-rich to give to the hungry, because that would decrease the wealth of the super-rich. It also provides moral cover for increasing inequality, as we shall see. It also protects property rights against the taxation required to fulfill social needs of the poor.  read more

The illusion of scarcity

April 28, 2018 Leave a comment

from Asad Zaman

(continuation of previous post on ET1%: Blindfolds Created by Economic Theory)

Economists have performed an amazing piece of magic, successfully creating a mass deception which has taken in the vast majority of the population of the world. Seeing through this complex and sophisticated trick requires separating, studying and understanding many different elements which all combine to create this illusion. One of the elements is a binary theory of knowledge, according to which theories are either true or false, and this is the only characteristic of theories that we should study. This prevents us from looking at the historical context in which the theories originate, and the functions that these theories serve, in terms of advancing the interests of powerful groups in the social struggles then going on. Social theories cannot be understood without this context, and hiding this context, and the relationships between knowledge and power, is an essential component of the WMD — weapon of mass deception — deployed by the economists to create a mass hallucination. In this post we analyze briefly the concept of Scarcity, which is at the heart of modern Economic Theory.

According to this concept, which was made central to Economics by Lionel Robbins in 1929, there are not enough resources to satisfy the unlimited needs and wants of all people. Accordingly, solutions require increasing resources, or economic growth.  On the surface, this seems like a straightforward statement of the factual position: we need more resources in order to take care of the needs of the poor. Hidden beneath this simplicity is a strategy which is massively favorable to the interests of the top 1%. We bring out some of these hidden implications below.

1.     Failure to Distinguish Needs and Wants  –  read more

ET1%: blindfolds created by economics

April 12, 2018 3 comments

from Asad Zaman

In my paper on “The Empirical Evidence Against Neoclassical Utility Theory: A Survey of the Literature”, I have argued that economic theories act as a blindfold, preventing economists from seeing basic facts about human behavior, obvious to all others. For instance, economists consider cooperation, generosity, integrity (commitments), and socially responsible behavior, as anomalies requiring explanation, while all others consider these as natural aspects of human behavior.

Far deeper insight into the blindfolds created by economic theory is obtained when we realize that these are not random mistakes, made due to defective reasoning or neglect of empirical evidence. If the shopkeeper systematically makes mistakes which always increase the total bill, we can conclude that the mistakes are purposeful. Similarly, strong and repeated commitment of exactly the same mistakes, flying in face of all empirical evidence, reveals the deep ideological commitments which create these systematic errors.  In particular, the goal of this note is to show that modern economics is not what it claims and pretends to be: an objective, factual and scientific description of the laws governing capitalist economies. Instead, it is actually a branch of moral philosophy, and provides a justification for the inequality and injustice built into the system, by “showing” that these are necessary for the functioning of the system, and the system itself is fair for all participants, and leads to the best possible outcomes.  read more

The Coca-Cola theory of happiness

March 29, 2018 4 comments

from Asad Zaman

The root cause of our hopelessly defective economic theories is a fundamentally misguided model of human behavior. Modern economic theory assesses the impact of policies by replacing all human beings with homo economicus, which is a brain connected to a mouth and stomach. Because the heart and soul of human beings is removed from the picture before the economist begins his calculations, economists are routinely baffled by behavioral economics, based on actual behavior instead of hypothesis. Topping this deep ignorance is an amazing arrogance about “microeconomic foundations” — that even if macro is wrong, at least our micro theories rest on solid foundations! Such assertions leave me speechless; what can you say to someone who confidently claims to be Napoleon Bonaparte ?

Because of complete failure to understand human beings, economists subscribe to a ridiculous theory of human welfare — it is monotonic in consumption. All of us act as if our sole purpose in life is to maximize the utility obtained from consumption. Economists have never heard of the Buddha who taught that the root of suffering is attachment to material pleasures obtained from consumption. Yet the illusion that increasing consumption leads to increasing welfare has been clearly exposed by Easterlin. Economists continue to struggle to counter and explain away the Easterlin Paradox, since it contradicts their firm belief in the “Coca-Cola theory of happiness”. This is briefly described below, in an excerpt from my previous post on “The Search for Knowledge” :  read more

Method or Madness?

March 23, 2018 1 comment

from Asad Zaman

Because of the universal spread and impact of Western educational systems, necessary for survival in the modern world, we have all learned to view the world through glasses manufactured in Europe. Just as a fish is unaware of the waters in which it swims, so we are unaware of the currents of history which have shaped European thought. Yet to understand the world we live in, and how our perceptions have been shaped by the dominance of West, it is essential to acquire an understanding of how the Western worldview has been radically transformed over the past few centuries. In this brief essay, we will discuss the “Methodenstreit”, the battle of methodologies, which took place in the late nineteenth century. While this is only one piece of the complex and multi-dimensional historical experiences of Europeans, the methodenstreit had a decisive impact on modern social science, which shapes our current understanding of human beings and their social, political and economic lives. The title of the book “How Economics Forgot History” about the methodenstreit by Geoffrey Hodgson accurately describes the impact of this battle on the discipline of Economics. In this battle, the German Historical School, championed by Schmoller and his colleagues, lost to the Austrian School of Menger, who favored a scientific and quantitative approach to economics.

But what is wrong with taking a scientific approach to the formulation and solution of economic problems, the reader might ask.  read more

Friedman’s methodology: a stake through the heart of reason

March 15, 2018 5 comments

from Asad Zaman

Romer writes that macro-economists casually dismiss facts, and the profession as a whole has gone backwards over the past few decades, losing precious and hard-won knowledge. He does not consider WHY this happened. What are the methodological flaws that create the possibility of moving backwards, losing knowledge, affirming theories known to be in conflict with facts. How is it that leading economists can confidently assert theories which border on lunacy, and receive Nobel Prizes instead of psychiatric treatment?

This is due to the famous AS-IF methodology of Friedman, which gave economists a license for lunacy.  Friedman came up with this defense of orthodoxy when numerous emprical investigation revealed clearly that firms did not maximize profits, did not know their marginal costs, typically used mark-up pricing, and did other things which did not square with neo-classical theories. Friedman’s argument has been universally condemned by logicians and philosophers as an instance of the logical fallacy of “Affirming the consequent” – the use of modus ponens in reverse. That is, Friedman says, in effect, that theory T implies observable consequence C. We observe C, and therefore we can affirm that T holds. This is obviously fallacious since many different theories, inconsistent with T, may also imply consequence C.  read more 

Understanding Macro: The Great Depression (1/3)

February 26, 2018 6 comments

from  Asad Zaman

Preliminary Remarks: “The trouble is not so much that macroeconomists say things that are inconsistent with the facts. The real trouble is that other economists do not care that the macroeconomists do not care about the facts. An indifferent tolerance of obvious error is even more corrosive to science than committed advocacy of error.” From The Trouble with Macroeconomics (Paul Romer)

Personally, I do not understand why indifference to error is worse than committed advocacy. For an illustration of committed advocacy of error, see postscript below on 70 years of economists’ commitment to a fallacious theory of supply and demand in the labor market. Furthermore, the problem is not confined to macro. Microeconomists are also dogmatically committed to utility maximization, when in fact this hypothesis about consumer behavior is solidly rejected by empirical evidence; see: The Empirical Evidence Against Neoclassical Utility Maximization: A Survey of the Literature

Understanding Macro: The Great Depression

Due to frequent headlines, there is a substantial public awareness of core macroeconomic issues like unemployment, trade agreements, exchange rates, deficit, taxes, interest rates, etc. However, even professionals are often ignorant of the intellectual battles which have shaped modern macroeconomics, since this is not taught in typical PhD programmes in economics. This article attempts to provide the history of ideas which led to the emergence of macroeconomics, since this is an essential background required for informed analysis of these issues.

Lord John Maynard Keynes invented the entire field of macroeconomics in response to the Great Depression in 1929, which could not be understood according to economic theories dominant until then. According to the classical economic theory, forces of supply and demand in the labour market would ensure full employment. Keynes starts his magnum opus, The General Theory of Employment, Interest, and Money, with the observation that the economic theory cannot explain the long, persistent and deep unemployment that was observed following the Great Depression. Keynes set himself the goal of creating a theory which could explain wide fluctuations in levels of employment that he observed. He discovered that creating such a theory involved rejecting deeply held convictions, central to economic theory.  read more

Choosing our own pathways to progress

January 20, 2018 2 comments

from Asad Zaman

Pride resulting from global dominance and spectacular scientific and technological developments led Europeans to believe that the West was the most advanced and developed of all societies. Other societies were primitive and under-developed. As these other societies matured and grew, they would follow the same stages that were followed by the West, and eventually become like modern Western societies. Early thinkers like Comte described the stages in growth from primitive society to modern ones in a ‘logical’ sequence. The enterprise of colonizing the non-European world was painted in bright terms as being part of the “White Man’s burden” of bringing enlightenment, good government, science, technology and other benefits of Western civilization to the rest of the world. Until the 60’s modernization theorists, like Parsons and Rostow echoed these sentiments, regarding Westernization as a desirable and inevitable process for the rest of the world. The goal of this article is to discuss some of the difficulties which led to substantial reconsideration of these naïve views. Current views (for example, Development as Freedom by Amartya Sen) are much more complex and diverse, and generally more respectful of other ancient civilizations in the world.  read more

Prosperity as human development, not wealth

January 15, 2018 12 comments

from Asad Zaman

The main thesis of our lecture is that our quest for prosperity has failed to deliver the sought-after goals because we have misunderstood the meaning of prosperity , and looked for it where it cannot be found. We base our economic policies on modern economic theory, which is based on the amazing assumption that human beings act to maximize lifetime consumption, since this is the sole source of human welfare. Human beings are far more generous and cooperative than the assumptions of economic theory allow for. Even more important is Richard Easterlin’s discovery that enormously increased levels of consumption do not bring about corresponding increases in happiness. Consumption only brings short-run happiness; long-run happiness has no correlation with consumption, and is far better correlated with character traits like generosity and gratitude. Mindless pursuit of wealth, implemented by policies to maximize growth, has led to increasing misery, instead of prosperity . Growth-oriented policies have destroyed family lives, engaging all members in production of wealth, and they have damaged our environment, destroying the future of our species for short run gains.his damage be reversed? Can we improve human lives and welfare, and also stave off the impending environmental crisis? At the core of the crisis we face is the prioritization of wealth over human beings. A market economy cheapens human beings because it is based on the idea that human lives are commodities for sale in the labor market. Reversing these priorities requires the recognition that all human lives are infinitely precious, with amazing potentials and capabilities for growth in dimensions unknown. Taking this principle seriously would require re-writing all economics textbooks, and radically re-organizing our economic, political and social institutions. Taking collective responsibility to ensure that all members of a society get the chance to develop their capabilities would be a new definition of prosperity , very different from GNP per capita, which is the current focus of policy makers across the globe.  read more

Resources for study of Polanyi’s Great Transformation

December 30, 2017 11 comments

from Asad Zaman

Summary: My 1000+ word summary of Polanyi’s classic: “The Great Transformation: The Political and Economic Origins of Our Times” has been wildly popular, remaining constantly among the top ten on the RWER Blog since it was was published nearly five years ago.  I have recently (25/12/26) revised and updated the post to clean up extraneous elements and clarify the substance in light of readers comments as well as my own improved understanding. Perhaps the most important element of this post is that it explains how living in a market society shapes our thoughts to conform with the commercialization it creates. Creating radical changes requires the first step of liberating our selves from these blinders, to be able to imagine radical alternatives.  I have also recorded a 28m video-talk on this topic, which has been added to the original post. This post provides links to additional material that I have written about Polanyi over the past five years.

Methodology: Moving forward from critique, Polanyi’s analysis is based on methodological principles radically different from those currently in use. Understanding and implementing these principles woujld allow us to create a new approach to economics and social sciences. My 20 page paper explaining the three fundamental principles used by Polanyi was published in the WEA Journal: Asad Zaman (2016) ‘The Methodology of Polanyi’s Great Transformation.’ Economic Thought, 5.1, pp. 44-63. A brief 1000 word explanation of this methodology is available in a WEA Pedagogy Blog post:    The Methodology of Polanyi’s Great Transformation. The post also provides a link to a 45m video lecture on this topic. (This lecture has been by far my most popular video-lecture, with more than 2000 views.) Polanyi’s analysis provides the basis for a radically different approach to economics, which considers politics, society, environment, and economics as inter-related subjects which cannot be understood in isolation. One of the deep insights of Polanyi is that economic theory itself is a product of a power struggle between different social classes and cannot be understood outside its historical context.

Ecological Collapse read more

Subjective probability does not exist

December 6, 2017 3 comments

from Asad Zaman

The title is an inversion of De-Finetti’s famous statement that “Probability does not exist” with which he opens his famous treatise on Probability. My paper, discussed below, shows that the arguments used to establish the existence of subjective probabilities, offered as a substitute for frequentist probabilities, are flawed.

The existence of subjective probability is established via arguments based on coherent choice over lotteries. Such arguments were made by Ramsey, De-Finetti, Savage and others, and rely on variants of the Dutch-Book, which show that incoherent choices are irrational – they lead to certain loss of money. So every rational person must make coherent choices over a certain set of especially constructed lotteries. Then the subjectivist argument shows that every coherent set of choices corresponds to a subjective probability on part of the decision maker. Thus we conclude that rational decision makers must have subjective probabilities. This paper shows that coherent choice over lotteries leads to weaker conclusion than the one desired by subjectivists. If a person is forced to make coherent choices for the sake of consistency in certain specially designed environment, that does not “reveal” his beliefs. The decision may arbitrarily chose a “belief”, which he may later renounce. To put this in very simple terms, suppose you are offered a choice between exotic fruits Ackee and Rambutan, neither of which you have tasted. Then the choice you make will not “reveal” your preference. But preferences are needed to ensure stability of this choice, which allows us to carry it over into other decision making environments.  read more

Consumer Theory

November 26, 2017 Leave a comment

from Asad Zaman

Lecture 5 of Advanced Microeconomics at PIDE. The base for this lecture Hill & Myatt Anti-Textbook Chapter 4 on Consumer Theory.

Hill and Myatt cover three criticisms of conventional microeconomic consumer theory.

  1. Economic theory considers preference formation as exogenous. If the production process also creates preferences via advertising, this is not legitimate.
  2. Consumers are supposed to make informed choices leading to increase welfare. However, deceptive advertising often leads consumers to make choices harmful to themselves. The full information condition assumed by Economics is not valid.
  3. Economic theory is based on methodological individualism, and treats all individual separately. However, many of our preferences are defined within a social context, which cannot be neglected.

Before discussing modern consumer theory, it is useful to provide some context and

1      Historical Background:

In a deeply insightful remark, Karl Marx said that Capitalism works not just by enslaving laborers to produce wealth for capitalists, but by making them believe in the necessity and justness of their own enslavement. The physical and observable chains tying the exploited are supplemented by the invisible chains of theories which are designed to sustain and justify existing relationships of power. Modern economic consumer theory is an excellent illustration of these remarks.  read more

The Shifting Battleground

November 22, 2017 2 comments

from Asad Zaman

The bull charges the red flag being waved by the matador, and is killed because he makes a mistake in recognizing the enemy.  A standard strategy of the ultra-rich throughout the ages has been to convince the masses that their real enemy lies elsewhere. Most recently, Samuel Huntington created a red flag when he painted the civilization of Islam as the new enemy, as no nation was formidable enough to be useful as an imaginary foe to scare the public with. Trillions of dollars have since been spent in fighting this enemy, created to distract attention from the real enemy.

The financial deregulation initiated in the Reagan-Thatcher era in the 1980s was supposed to create prosperity. In fact, it has resulted in a sky-rocketing rise in inequality. The gap between the richest and the poorest has become larger than ever witnessed in history. Countless academic articles and books have been written to document, explain and attempt to provide solutions to the dramatic increase in inequality. The American public does not need these sophisticated data and theories; it experiences the fact, documented in The Wall Street Journal, that the quality of jobs and wage earnings are lower today than they were in the 1970s. Growing public awareness is reflected in several movies about inequality. For instance, Elysium depicts a world where the super-rich have abandoned the ruined surface of the planet Earth to the proles, and live in luxury on a satellite.

The fundamental cause of growing inequality is financial liberalisation. Just before the Great Depression of 1929, private banks gambled wildly with depositors’ money, leading to inflated stocks and real estate prices. Following the collapse of 1929, the government put stringent regulations on banking. In particular, the Glass-Steagall Act prohibited banks from speculating in stocks. As a result, there were few bank failures, and widespread prosperity in Europe and the US in the next 50 years. Statistics show that the wealth shares of the bottom 90 per cent increased, while that of the top 0.1 per cent decreased until 1980. To counteract this decline, the wealthy elite staged a counter-revolution in the 1980s, to remove restrictive banking regulations.  read more

Completing the Circle: From GD ’29 to GFC ’07

November 16, 2017 1 comment

from Asad Zaman

Karl Marx said that “The advance of capitalist production develops a working class which by education, tradition and habit looks upon the requirements of that mode of production as self-evident natural laws.” Modern economic theory is a tool of central importance in making the laborers and the poor accept their own exploitation as natural and necessary. As explained in greater detail in the next lecture (AM09), Economic Theory argues that distribution of income is

  • FAIR – everyone gets what they deserve, in proportion to what they contribute (the marginal product)
  • NECESSARY – the laws of economics ensure that this is the only distribution which will prevail in equilibrium
  • EFFICIENT – this distribution creates efficient outcomes, and maximal productivity in the economic system.

In fact, as I have argued elsewhere, neoclassical Economic Theory should be labeled as ET1% (Economic Theory of the Top 1%), because it only represents their interests, and glosses over issues of central importance and concern to bottom 90%. Nonetheless, widespread propagation of this theory through university courses, and popular expositions for the general public, are very important in convincing the bottom 90% that the capitalist economic system is the best possible, and their own misfortunes are due to their own bad luck or other defects.

1      Classical Economic Theory

According to classical economic theory, free markets automatically eliminate unemployment, guaranteeing jobs for everyone at a fair wage, consonant with the productivity of labor. In particular, payoff to labor and to capital is perfectly symmetric – both factors get what they deserve. If government tries to regulate the labor market to create better outcomes – minimum wages, better working conditions, labor unions, etc. — it will actually end up hurting laborers. Economists argue that unemployment is due to minimum wage laws, labor unions, and search costs, and not due to free markets themselves.

2      Credit Creation By Banks

read more

Duopolie

November 2, 2017 1 comment

from Asad Zaman

Varian start his intermediate micro text by stating the maximization and equilbrium are the core principles of micro. Krugman recently stated that I am a “maximization and equilibrium” kind of guy. The goal of this lecture is to show that these two principles fail completely to help us understand behavior is a very simple model of a duopoly.

In last lecture (AM03), we introduced a simple duopoly model. Two ice-cream vendors buy ice-cream wholesale and can sell at any chosen price in the park. If they have matching prices, they split customers. Under Perfect Competition assumptions, with Full Information and Zero Transaction Costs, if they have different prices, then all customers go to the lower price vendor. Straightforward analysis of this duopoly model leads to the following conclusions:

  1. There is a huge amount of genuine uncertainty – probability calculations required for expected utility cannot be made. We cannot know how many people will come to the park on any given day. We cannot forecast the weather conditions, which influence the demand for ice-cream, with any degree of reliability. This means that vendors will adopt rules-of-thumb to make decisions, rather than maximize anything. This leads to the use of evolutionary Agent Based Models as the preferred modeling technique.  read more

Monopolies

October 24, 2017 2 comments

from Asad Zaman

Building on the analysis of Supply and Demand in Chapter 3 of Hill and Myatt’s Anti-Textbook, this lecture constructs a very simple model of monopoly and duopoly, to show that policy implications in these cases differ dramatically from what conventional textbooks teach. The higher level goal is to teach students Meta-Theoretical thinking. This goes beyond the binary logic which lies behind conventional textbooks, which teach student to think in terms of whether theories are true or false, or even instrumental – enabling you to formulate policy and welfare questions. In Meta-Theory, we try to step back and ask questions about who created this theory, in what historical context, which groups did it help, and which did it hurt, and what will the effects be upon us and upon the world, if we decide to affirm these theories for use in our personal lives, and to shape our societies?

The Hill and Myatt Anti-Text is ideally suited to this goal, since it is directly a meta-analysis of the message contained in conventional textbooks, and brings out the implications hidden beneath the surface of the analysis. In particular, the Anti-Text helps us to understand the rhetorical strategy used by conventional textbooks to convince students of theories which are overwhelmingly contradicted by empirical evidence.

BTW, it is worth pausing here to admire the efficiency with which economists succeed in creating such deep brainwashing that mountains of empirical evidence fail to move the faith of the true believers. For Real-World economists, it is very important to study these rhetorical strategies, as exposing this framework is an important component of the De-Programming techniques which are required to reverse the effects of this brainwashing.  read more

AM02: Supply & Demand

October 16, 2017 Leave a comment

from Asad Zaman

2nd Lecture (90min) on Advanced Microeconomics at PIDE, (14 Sep 2017). While planning to teach a heterodox micro course, I was faced with the dilemma of choosing a suitable textbook. Interestingly, there are many options available, but I was not happy with most of them. Some were too mathematical for my taste, some made too many concessions to conventional micro while being critical of it, and some were simply not suitable for use as texts. Eventually, I decided to use Rod Hill and Tony Myatt’s: The economics anti-textbook: a critical thinker’s guide to microeconomics. Zed Books Ltd., 2010. I am very pleased with this choice. It provides contact with conventional micro that we need, together with a critique that is easy to understand, and can be used as a basis for construction of good alternative approaches.

I started the course (first lecture was preliminary introduction to methodology and approach) by covering Chapter 3: How Markets Work (In an imaginary world) of the H&M anti-textbook. This chapter attacks the central Supply and Demand model which is at the heart of mainstream micro in a beautiful and elegant way. I am impressed! I have myself written what I thought (and still think) is a very good critique (see The Conflict between General Equilibrium and the Marshallian Cross). I have also seen other critiques (like Sraffa). But H&M pointed out an angle that I had not considered before. They survey conventional textbooks to pick out the main message being conveyed in the S&D model and its policy implications. Then they show that the S&D model is heavily dependent upon the assumptions of perfect competition, which require small price-taking firms, full information and zero transaction costs. All conclusions of S&D and policy implications fail when firms have market power, and the reverse policy ocnclusions can be easily derived.   read more