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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

Microeconomics: an Islamic approach

October 11, 2017 8 comments

from Asad Zaman

At the heart of modern economic theory is the micro-economic model of homo economicus, who is cold, calculating and callous. This picture of humans as heartless rational robots is what leads to “Poisoning the Well: How Economic Theory damages our moral imagination” (Julie Nelson). I have provided a thorough critique of neoclassical utility theory in my paper:  The Empirical Evidence Against Neoclassical Utility Theory: A Review of the Literature,” International Journal of Pluralism and Economics Education, Vol. 3, No. 4, 2012, pp. 366-414. However, as Thomas Kuhn noted, paradigms cannot be changed by critiques; they can only be changed by providing an alternative paradigm. Thus to oppose neoclassical utility theory, we need an alternative model for human behavior. For western theorists, a natural alternative is the secular humanist model, which allows for a wide range of cognitive and emotive functions not captured in economics. For my purposes, Islam provide a more relevant model of human beings as having spiritual, emotional and rational dimensions. This model speaks directly to my audience.

It is also true that, regardless of how we try, it is impossible to do economics without notions of morality, justice, equity and fair-play. Currently economics pretends to be positive, which means that it sneaks in very questionable (indeed, poisonous) value judgments (like that of Gauthier) into the framework, without explicit discussion. I have explained how the apparently objective concept of scarcity is actually built upon hidden foundations of three major value judgments about exogeneity of tastes, sacredness of property rights, and the idea that (unobservable) human welfare directly corresponds to  (observable) human choice behavior:; see  the normative foundations of scarcity.real-world economics review, issue no. 61. 22. Again to oppose neoclassical micro, we must introduce an alternative ethical and moral framework. Here again it suits my purpose and my audience to use an Islamic framework for this purpose.

Below, I provide a link to a summary of the first lecture I gave, in a unique course on Microeconomics.  read more

Hunter-Gatherer Societies

July 30, 2017 Leave a comment

from Asad Zaman

huntergatherer

As a preliminary demonstration, and an explanation of the “Three Methodologies“, we assess how they work in primitive hunter-gatherer societies.

hunter-gatherer is a human living in a society in which most or all food is obtained by foraging (collecting wild plants and pursuing wild animals), in contrast to agricultural societies, which rely mainly on domesticated species.

There are many characteristics of such societies forced by the material conditions of production. Since existing food supplies in any one location are soon exhausted, such societies are generally nomadic. Here are some philosophies, and political and social structures that would naturally arise in hunter-gatherer nomadic societies.

Philosophy: Since human beings are directly dependent on the environment, the idea of “Mother Earth” and a close relationship with nature can be expected to develop. This stands in contrast with urban lifestyles which are remote from nature; it is this detachment from nature which has permitted the widespread environmental destruction which is currently taking place.

Politics: Typical Hunter-Gatherer societies are egalitarian. This is because everyone derives a living directly from nature, and is mobile. If one subgroup is oppressed, they can simply leave, so there is not much room for powerful groups to exercise large amounts of power and control over other groups. Furthermore, in subsistence economies, one cannot afford slaves because there is generally not enough surplus food to feed them. So economic conditions favor egalitarian political structures; nonetheless, human ingenuity can sometimes overcome such obstacles.

Property: Since property of nomads is confined to what they can carry with them, it is necessarily limited. Illustrative of hunter-gatherer attitudes towards property is the Cherokee Constitution of 1839, which states: “The lands of the Cherokee Nation shall remain common property”.

We now consider insights yielded into the study of such societies by the three methodologies discussed in the previous post.  read more

Three Methodologies

July 26, 2017 21 comments

from Asad Zaman

This is a summary of the introduction/motivation part of Lecture 15 on Advanced Microeconomics II, delivered at PIDE in Spring Semester 2017.  The lecture is about 19th Century European History, and how it is deeply entangled with Modern Economic Theory. We cannot understand one without the other.

19th Century European Economic Ideas In Historical Context.

“… the race is not always to the swift, nor the battle to the strong …” Ecclesiastes 9:11

In the late 19th century, a battle of methodologies (“Methodenstreit”) took place, which shaped the future of economics. The German Historical School lost out to the newly emergent, quantitative, mathematical and scientific approach. This led to a re-conceptualization of economics as a science similar to physics, which studies the economic laws of motion of societies. For a detailed account of this battle, and its effects, see “How Economics Forgot History,” by Geoffrey Hodgson.

1. Contemporary Methodology:[humans are predictable robots] The idea that economic theory is a science like physics has extremely unpleasant and counterintuitive consequences. We look for universal laws of economics, which apply equally well to Pakistan, France, Brazil, Russia and Nigeria. Furthermore, they apply equally well in the seventeenth, nineteenth, and twenty-first century. The trade theory of economists must apply equally to trade between Ghana and England, India and Pakistan, and the Huron and Iroquois tribes. Since the ability of human beings to shape their destiny in accordance with visions cannot be fit into a scientific framework, human behavior is reduced to that of a robotic pleasure machine, which follows precise mathematical laws.  read more

Adam Smith & the Invisible Hand

July 21, 2017 2 comments

from Asad Zaman

In response to a comment by David Chester regarding Adam Smith and the Invisible Hand, I am reproducing the section in the paper which deals with this issue. This answers his question about how what is attributed to Adam Smith differs from what he actually said.
[Excerpt from the paper: Failures of the Invisible Hand]

Section 6: Recent Vintage of the Invisible Hand

The main goal of this section is to show that the modern interpretation of the IH is relatively recent. The idea that Mankiw (together with other modern economists) attributes to Smith is not actually present in Smith’s writings. In fact, modern writers borrow the authority of Adam Smith to provide weight to a very dubious idea of recent coinage.

We first note that modern interpretation of the “IH” is radically different from any interpretation of this concept that existed before the second half of the twentieth century. There is a growing body of literature (e.g., Grampp, 2000; Minowitz, 2004) which insists that the metaphor used by Smith was never meant to be anything more than a metaphor, and that the meanings inferred from Smith’s idea of IH by the modern economists support only their own interpretation of economic policies. Kennedy (2009) shows that three leading modern economists laud the IH as the “profoundest” and “most influential” contribution of Adam Smith. Nonetheless, their interpretation of the term and its significance is not supported either by Adam Smith or by readers of Adam Smith until the late nineteenth century.

In a corpus of over a million words, the terms IH appears only twice in the economic writings of Adam Smith. It is used only once in the Wealth of Nations in very limited and narrow context. Rothschild (1994) analyses the controversy surrounding the meaning of IH and concludes that what Smith meant by this metaphor was only a “mildly ironic joke.” Blaug (2007) also shows that Adam Smith cannot be blamed for these ideas. He cites other references which state that:  read more

The human development revolution

May 21, 2017 4 comments

from Asad Zaman

HDI

Goethe starts his famous East-West Divan with a poem about the journey (Hegire), both physical and spiritual, from the West to the East. In this essay, we consider the analogous journey from Western to Eastern conceptions of development. This involves switching from viewing humans as producers of wealth, to viewing wealth as a producer of human development. To start with the Western conceptions, both Adam Smith and Karl Marx defined economic growth as the process of accumulation of wealth. The range of diversity of Western thought is bounded by the Left-Right spectrum. Ideas on which both extremes agree command widespread consensus in the West. Consequently, a core concept of modern economic theory is that wealth is the means and ends of the process of economic development. Unfortunately, due to the dominance and influence of Western paradigms, this concept has been widely accepted and adopted in the East today.

Mahbubul Haq was indoctrinated into the Western development paradigm which gives primacy to wealth at leading universities, Yale and Harvard. He got the chance to apply these economic models as the chief economist in Pakistan during the ’60s. However, because of his Eastern upbringing and heritage, he was able to see the murderous message at the heart the cold mathematics of the Solow-Swan growth models. These models focus on savings, created by reducing present levels of consumption, as the only route to the accumulation of greater future wealth.  read more

Meta-theory and pluralism in the methodology of Polanyi

May 6, 2017 9 comments

from Asad Zaman

Currently, I am teaching a course in Advanced Microeconomics where I have started with the premise that conventional economic theory, both Micro and Macro are fundamentally wrong. The number of ways in which they are wrong cannot even be counted. Instead of enumerating errors, the course is devoted to providing a constructive alternative. A lot of the early lectures deal with the basic concepts of optimization and equilibrium, the fundamental building blocks of conventional courses, and explain how these are wrong. I also explain how economists are using a wrong methodology, and how they misunderstand the concept of a theoretical model, and the relations between models and reality. The video-taped lectures, PPT slides, and some supporting materials, are available from my website: https://sites.google.com/site/az4math/

Originally, I had not planned to teach Karl Polanyi because his theories are significantly more complex than those of Karl Marx and Adam Smith. However, because the class has been very receptive, and has understood the what I have been teaching, I have decided to explain his ideas. We have already started discussing his ideas starting from Lecture 13, and have finished Part I of the Great Transformation in Lecture 16. In order to prepare for the complexities of Part II, I have distributed the following handout to the class, to explain the complex general methodological framework which underlies Polanyi’s analysis.  Read More

Economics is a form of brain damage

April 30, 2017 20 comments

from Asad Zaman

Environmentalist David Suzuki hits the nail on the head. The number of ways that economic theory systematically blinds you to the realities of the world we live in is almost uncountable. When Henry George’s land tax became widely popular, economists “disappeared” land as a factor of production from economic theories, merging it illegitimately with capital. Money is made to “disappear” by using the quantity theory of money to claim that money is veil. This makes it impossible to understand how the mechanisms of creation of money ensure that the wealthy can get rich at the expense of the rest of us. The parasitical nature of the finance industry has been covered up by the idea of “wealth creation” — when wild speculation doubles the price of stocks, financiers have created wealth, which is a socially valuable activity, instead of a fraud and deception. The ideas of cut-throat competition, survival of fittest, and social darwinism have been used to justify a large number of free market activities which harm the masses to make profits for the wealthy. There is no doubt that believing all of the textbook economic theories leads to serious brain damage, as I myself have experienced — the process of unlearning has been slow and painful. Here is the 2 minute video by David Suzuki:

We cannot understand social theories (like economics) outside the historical context.

April 25, 2017 6 comments

from Assad Zaman

Based on ideas derived from my study of the methodology of Polanyi’s Great Transformation, I have come to the conclusion that history and social theories are entangled — they co-evolve in time. We cannot understand social theories (like economics) outside the historical context, just as we cannot understand history without understanding the social theories in use by different groups to try to interpret events in ways that would lead to policy actions in their favor. It is only in context of the struggle of groups with competing interests to impose favorable interpretations upon historical events that we can understand the emergence of theories like comparative advantage. We cannot understand them from the standard “scientific” point-of-view based on the binary of True/False. This dominant mode of understanding will leave us forever confused as to why theories so dramatically at variance with facts can come to dominate, and be widely taught and believed by people who are, by all appearances, perfectly intelligent.

Supply and Demand: fundamentally flawed model of labor market

April 5, 2017 2 comments

from Asad Zaman

I am currently engaged in teaching the final semester of Advanced Micro in our Ph.D. program. I have freedom to do here at PIDE, Pakistan, what may be extremely difficult in US/Europe — My course is built around demonstrating how conventional micro theory is strongly contradicted by empirical evidence. I also go on to build a convincing alternative. The first lecture on micro topics, starts by dismantling the fundamental Supply and Demand model in the context of the Labor Market. This is exactly where Keynes starts his book the General Theory. What amazes me is that conventional Labor Econ texts use exactly the same theory that Keynes demolished, and never mention Keynes — his objections are swept under the carpet, instead of being adressed or answered. I have posted an outline of the first lecture on WEA Pedagogy Blog:

This is an outline of the lecture 3 in Advanced Microeconomics — expands somewhat on the slides available from the link. This should be useful to heterodox economists looking for ways to teach an alternative course, radically different from conventional approaches. First two lectures consisted of some preliminary math, and can be skipped without lack of continuity.  Video of the lecture (90m) is available at the bottom of the post.

Supply & Demand is Central to Economics: This is the modern Theory of Value. The market price determines the value – this is in conflict with classical conceptions of value.

BUT, this theory is WRONG!  The central question in theory of Value is: HOW are prices determined? Why are water and tomatoes cheap, and why are diamonds expensive?   read more

 

Behavioral vs Neoclassical Economics

March 14, 2017 Leave a comment

from Asad Zaman

In my paper entitled “Empirical Evidence Against Neoclassical Utility Theory: A Survey of the Literature,” I have argued that neoclassical utility theory acts as a blindfold, which prevents economists from understanding simple realities of human behavior. The paper provides many examples of this phenomenon, which I will illustrate briefly with one simple example in this post.

Consider the two player Ultimatum Game. The Proposer (P) has ten dollars in single dollar bills. He makes an offer of $m to the Responder (R), which allows him to keep $(10-m). The responder can either Accept or Reject. If Responder Accepts than P get $10-m, and R get $m as proposed; it is convenient to denote this outcome as (P:10-m,R:m). If Responder Rejects, then both get $0: (P:0,R:0)

Here are four predictions made by Game Theory, based on utility maximization behavior.

  1. Responder will be indifferent between the two choices Accept and Reject if he is offered $0.
  2. Responder will Accept an offer of $1, resulting in outcome (P:9, R:1). R prefers 1 to 0.
  3. Proposer believes that Responder is a Utility Maximizer; that is, he will behave in accordance with propositions 1 & 2 above.
  4. Proposer will therefore offer $1, as it maximizes his share at $9. If he offers $0, the outcome is uncertain because both responses A and R are possible maximizing responses, which is why an offer of $1 is the unique utility maximizing offer.

All four of these propositions are false. Furthermore, every layman will . . .  read more

Spirituality & Development – part 2

February 9, 2017 Leave a comment

from Asad Zaman

Part 2 of Lecture on Spirituality and Development: Friday, 27th Jan 2017 by Dr. Asad Zaman, VC PIDE — for Students of Religion & Development Paper, Center of Development Studies, University of Cambridge. Click here to read outline of lecture and click here to watch the lecture.

Spirituality & Development – part 1

February 6, 2017 Leave a comment

from Asad Zaman

Friday, 26th Jan 2017: Lecture by Dr. Asad Zaman, VC PIDE to students at University of Cambridge, Center of Development Studies for Religion & Development paper. 40 minute video recording of lecture on you-tube.

Part 1: “What Is Spirituality?”:  Modern Secular thought takes spirituality and religion to be diseases which affect weak minds not properly trained in the scientific method. Part I of this lecture explains why this view, which is based on positivist ideas, is seriously mistaken.  Click here to read outline of lecture and click here to watch the lecture.

Theory of Employment

January 19, 2017 Leave a comment

from Asad Zaman

jobsThis is the 9th Post in a sequence about Re-Reading Keynes. In chapter 2 of General Theory, Keynes wishes to develop a theory of employment. He claims that classical economics does not have a theory of employment, because it assumes that all resources will be fully employed. But the theory that unemployment will always be 0% – except for frictional – is not a theory which can explain observations of high and persistent unemployment. Taking this post-Depression observation for granted, the question arises how we can create a theory in which the labor resources can be utilized at different levels. In order show that classical theory cannot explain the observed fluctuations in the level of employment, Keynes lists the four possibilities under classical theory which could create a change in the quantity of labor being employed:

  1. A more efficiently organized labor market, which find faster matches between the unemployed and job opportunities, would lower frictional unemployment and increase employment.
  2. A decrease in the disutility of labor would mean that laborers would be willing to accept lower wage offers, which would lead to expansion of the employment.
  3. An increase in the productivity of labor would bring greater rewards to the employers and induce them to hire more labor at a given wage.
  4. An exogenous decline in price of consumer goods purchased by laborers would increase the real wage and thereby employment. Exogenous means that demand for these goods by non-laborers decreases, causing the price decline.  read more

Ideological Macroeconomics & Increasing Inequality

January 15, 2017 Leave a comment

from Asad Zaman

ideologyinequalityEven though very few people have more than a vague idea about them, macroeconomic theories deeply affect the lives of everybody on the planet. Writings of Piketty, Stiglitz and many others, as well as personal experience of the 1% — 99% divide, have created increasing awareness of the deep and increasing inequalities which characterize modern capitalist economies. However, the link between inequality and macroeconomic theory has not been pointed out clearly. The fact that since the 1970’s top corporate salaries have increased by 1000% while the average worker only earns 11% more is closely linked to the revolution in economic theory that occurred over the 70’s and 80’s. We will try to sketch some parts of the complex and coordinated efforts which led to the emergence of theories which provide the invisible foundations and the enabling environment for this inequality.

The oil crisis of the early 70’s destroyed the consensus on Keynesian macroeconomics, and created the opportunities for ideologies disguised as economic theories to emerge. Chicago school economist Robert Lucas attacked the dominant Keynesian theories which argued that governments must play an important role in eliminating unemployment. Guided by free market ideology, Lucas created macroeconomic theories which suggested that government interventions are always harmful. Some elements of the Lucasian methodology provided genuinely superior alternatives to defects in existing Keynesian models. However, other elements were bizarre. Even though unemployment is a painful reality to vast numbers of people, defender-of-free-markets Lucas argued that this was a free choice. According to Lucas, the Great Depression was really the Great Vacation, where vast numbers of people suddenly decided to stop working in order to enjoy leisure. This, and many other strange assumptions of the Lucasian alternative led famous economists like Robert Solow to say that to engage in a serious discussion with the Chicago school would be analogous to discussing technicalities of the Battle of Austerlitz with a madman who claimed to be Napoleon Bonaparte. For example, Solow wrote that “Bob Lucas and Tom Sargent like nothing better than to get drawn into technical discussions, because then attention is attracted away from the basic weakness of the whole story. Since I find that fundamental framework ludicrous, I respond by treating it as ludicrous – that is, by laughing at it – so as not to fall into the trap of taking it seriously and passing on to matters of technique.”  read more

Keynesian Complexity

January 7, 2017 5 comments

from Asad Zaman

complexThis continues the sequence of posts on re-reading Keynes. The fundamental point about the labor market which is made in Chapter 2 is that the micro level negotiations on wages between firms and laborers do not determine the real wage in the macro-economy. Before explaining this point in detail, we want to show how it is just a special case of the general idea that the economy is a complex system which cannot be understood by looking at simple sub-systems.

The idea of complex systems is beautifully illustrated by the parable of the blind men and the elephant. Each one understood correctly and accurately one small part of the big picture. When we don’t understand the system as a whole, the descriptions of subsystems appear conflicting and contradictory. Once we have an understanding of the complex system, we can assemble the partial insights into a coherent whole. The main contribution of Keynes can be understood as an attempt to describe the economy as a complex system. Unfortunately, most of his followers were blind to the main insights of Keynes. Accordingly, there have been many different interpretations of Keynes; some followers saw the trunk, others the legs, and yet others the tail of the system that Keynes was describing. But no one appears to have understood the fundamental insights of Keynesian complexity: the system as whole does not act as a simple aggregate of the actions of the individual agents within the system. Pre-Keynesian macroeconomics was based centrally on the misunderstanding that the macroeconomy can be understood by scaling up the microeconomic behaviors of individual agents. While Keynes forcefully rejected this thesis, and created a complex system view of the macroeconomy, simple-minded followers failed to understand complexity, and went back to the pre-Keynesian views.  Read more…

P7: GT02 Keynesian Unemployment

December 24, 2016 11 comments

from Asad Zaman

unemploymentThis 7th post in a series about re-reading Keynes, starts the discussion of Chapter 2 of General Theory, which deals with the Classical (and neoclassical) Postulates characterizing the Labor market. The astonishing fact is that Keynes central arguments regarding how the labor market can fail to be at equilibrium, despite flexible wages, were never understood. As a consequence, the theory of the labor market is taught today exactly as it was prior to Keynes, and completely disregards Keynesian objections, and the Keynesian alternative. This post makes a start on Chapter 2, and the analysis will be continued in later posts.

In this chapter, Keynes formulates and rebuts the (neo)-classical theory of the labor market and presents an alternative theory of employment. This chapter was apparently never understood by economists, who mis-interpreted it as stating that unemployment arises due to price rigidities. In fact, Keynes held this position earlier, but renounces it explicitly in this chapter. His theory of employment states that the real wage is an “emergent” phenomenon. That is micro level decisions and actions of laborers and firms are based on nominal wages, but the complex economic system itself determines the general level of prices which is not in control of individual agents. So the real wage is out of reach of individual actors, and even though all parties may try to reduce real wages, they may fail to do so, because prices may respond in un-anticipated ways.

Keynes starts out be stating the classical postulates for the labor market, which continue to be the basis of modern labor economics.  read more

P6: Historical context for Keynes

December 12, 2016 Leave a comment

from Asad Zaman

This post, 6th in a sequence about Re-Reading Keynes, continues to borrow heavily from Brian S. Ferguson, “Lectures on John Maynard Keynes’ General Theory of Employment, Interest and Money (1): Chapter One, Background and Historical Setting” University of Guelph Department of Economics and Finance Discussion Paper No. 2013-06. However the first three paragraphs are mine.

Distinguishing between ideologies and science:

Deduction: According to Lionel Robbins, economic theory uses an axiomatic deductive methodology, based on logical deduction from postulates which are “simple and indisputable facts of experience.” This means that there is no possibility of mistakes, and hence no possibility of learning from empirical evidence. If someone claims to have drawn a triangle where three angles do not sum to 180, we would not examine this triangle carefully to see if our law is empirically refuted. This is exactly the defining feature of an ideology – it does not waver in face of empirical evidence to the contrary.  For more details, see Economic Theory as Ideology. This is important because today we are still fighting the same battles, discussing the same questions, which were being discussed at the time of Keynes. Macroecconomics has been going backwards for decades, and there has been failure to learn from experience, due to the adoption of axiomatic-deductive methodology by economists.

Induction: As opposed to this, scientific laws derived from induction are always falsifiable – the next experience may refute them. As a result, revisions are frequently necessary, as more and more experience comes in. The central insight of Kuhn is that scientific progress occurs via revolutions, which destroy one established way of looking at the world, and replace it with another. One of the key assertions of Polanyi is that when social change occurs, people devise theories to try to understand the new phenomena. These theories are often wrong, because lack of experience leads to misunderstandings. The ability to arrive at good theories depends crucially on the ability to revise theories in light of experience.  read more

A crisis-prone & fragile financial system

December 7, 2016 9 comments

from Asad Zaman

Prior to the Global Financial Crisis (GFC 2007), many senior economists and policy makers expressed confidence that they had finally solved the problem of business cycles, booms and busts, that plagues capitalism. Because of this over-confidence, early warnings of a looming crisis by Nouriel Roubini, Ann Pettifor, Peter Schiff, Steven Keen, Dean Baker, and Raghuram Rajan, were ridiculed and dismissed. Even after the crisis, many economists thought this was a minor glitch, which would soon be remedied. Now however, while conventional economists continue to search for reasons for the mysterious stagnation besetting capitalistic economies, the weak and jobless recovery from the GFC has been labeled as an illusion and a false dawn by Schiff. Like him, deeper analysts are converging on the idea that the problems run deep, and that radical changes in the global financial architecture are required to solve current problems and prevent future crises.

For instance, consider Lord Mervyn King, the Governor of the Bank of England from 2003 to 2013. His experience at the heart of the global financial system led him to the conclusion that   “Of all the many ways of organising banking, the worst is the one we have today. … (can we) think our way through to a better outcome before the next generation is damaged by a future and bigger crisis?” Similarly, Minneapolis Federal Reserve President, Narayana Kocherlakota , after viewing the stark conflicts between the empirical evidence and the macroeconomic theories over the past ten years, writes the economists use “Toy Models” which do not work in face of the complexities of real life

There are two central elements which lie at the core of the fragility of the financial system.  read more

P5:Intellectual & Theoretical Context

December 5, 2016 1 comment

from Asad Zaman

Fifth Post in a sequence on Re-Reading Keynes.

Chapter 1 of General Theory is just one paragraph, displayed in full HERE

Briefly: Keynes writes that Classical Economics is a special case of his General Theory. Furthermore, the assumptions required for the special case do not hold for contemporary economic societies,”with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience”

The discussion below borrows extensively, without explicit point-by-point acknowledgement, from Brian S. Ferguson, “Lectures on John Maynard Keynes’ General Theory of Employment, Interest and Money (1): Chapter One, Background and Historical Setting” University of Guelph Department of Economics and Finance Discussion Paper No. 2013-06:

1.       RHETORIC: Keynes wishes to persuade fellow economists. Instead of saying that they are all wrong, blinkered idiots, he says that they are studying a special case, which he wishes to generalize. He also acknowledges that he was misled by the same errors, and creates common ground to enable dialog. He is also making a subliminal appeal to the hugely influential General Theory of Relativity published earlier by Einstein.

2.       INVENTION OF MACRO: The revolutionary contribution of Keynes is to study aggregates, instead of micro-level behavior. He is correctly labelled the inventor of macro-economics; prior to him, economists thought that the aggregate behavior would be obtained simply as a sum of the individual behaviors; there is no need to study macroeconomics separately. Parenthetically, it is this same position to which macro-economists retreated in the 70’s and 80’s with the development of DSGE model. Ferguson writes that:  read more