Archive

Author Archive

Employment for all

May 17, 2019 4 comments

from Asad Zaman

Global experience shows that market economies create massive inequalities, enriching the top one per cent, while leaving the bottom of the population far behind. One key to prosperity is to provide productive jobs for all who would like to participate in the production process. Unfortu­nately, contemporary macroeconomics, which was blind to the possibility of the global financial crisis, is not equipped with the ideas and tools required to create full employment.

Conventional macro blames the poor for their poverty, and suggests education and training to fit them into existing jobs. However, the private sector does not naturally create enough jobs to employ everyone. Experience with Keynesian remedies shows that expansionary monetary policy starts to create inflation a long time before full employment is achieved. Modern Monetary Theory provides a genuine alternative, a job guarantee (JG) programme.

Instead of preparing people to fit them into existing or potential private sector jobs by providing them with education and training, we must create jobs tailored to the people. Jobs should be provided to take people as and where they are. Skills should be provided via on-the-job training. There are a huge number of jobs which require low levels of skill and education, and provide enormous benefits to society, but are not profit-making for the private sector.

Planting trees, building roads, cleaning dams, infrastructure projects, a range of social services, all provide benefits to society, and make a measurable impact on appropriate measures of GNP, but may not be privately profitable.   read more . . . 

Employment for all

April 30, 2019 4 comments

from Asad Zaman

Global experience shows that market economies create massive inequalities, enriching the top one per cent, while leaving the bottom of the population far behind. One key to prosperity is to provide productive jobs for all who would like to participate in the production process. Unfortu­nately, contemporary macroeconomics, which was blind to the possibility of the global financial crisis, is not equipped with the ideas and tools required to create full employment.

Conventional macro blames the poor for their poverty, and suggests education and training to fit them into existing jobs. However, the private sector does not naturally create enough jobs to employ everyone. Experience with Keynesian remedies shows that expansionary monetary policy starts to create inflation a long time before full employment is achieved. Modern Monetary Theory provides a genuine alternative, a job guarantee (JG) programme.

Instead of preparing people to fit them into existing or potential private sector jobs by providing them with education and training, we must create jobs tailored to the people. Jobs should be provided to take people as and where they are.  read more . . . . 

Fear of Floating

April 15, 2019 3 comments

from Asad Zaman

Published in Dawn, Mar 27, 2019, a leading Pakistani newspaper, in context of public debate about moving to a floating exchange rate regime —

In 1971, when Nixon shocked the world by abandoning the convertibility of dollars to gold, he dragged all of us, unwillingly, into the modern era of floating exchange rates. Since then, economic theories have changed. But old habits die hard; economists and policymakers today continue to think and operate as if they live in the old world. This article examines the question of fixed versus floating exchange rate regimes from the new perspective of Modern Monetary Theory (MMT).  read more

Origins of central banking

April 5, 2019 20 comments

from Asad Zaman

In this post, we provide some details regarding the origins of the Bank of England, the mother of all Central Banks and discuss some implications of this early history for our modern world. A link to a video-lecture on the topic is given at the bottom of the post.

We start with an excerpt from Ellen Brown in the Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free. Below, selected passages from Chapter 6: Pulling The Strings Of The King: The Moneylenders Take England: [passages in italics are my comments on the text, rest are quotes]

The first passage discusses how Queen Elizabeth asserted her sovereign right to issue money, and how the financiers worked to undermine thisread more

The fallacy of Ricardian equivalence

March 29, 2019 Leave a comment

from Asad Zaman

StiglitzRicardian equivalence is taught in every graduate school in the country. It is also sheer nonsense  [see “Quotes Critical of Economics” for more.] This post explains why.

In this post, we will create a simple model that demonstrates some fundamental truth of Modern Monetary Theory.  This is a variant of “.Simple Model Explains Complex Keynesian Conceptss“, We will show the following phenomena

  1. A Market Economy naturally creates an equilibrium with high unemployment and under-employment, showing existence of under-employment equilibria
  2. Government Deficit Spending increases aggregate demand, and moves the economy to full employment.
  3. Deficit Spending, also massively improves social welfare, by providing food even to the unemployed, using the additional output created by the increased aggregate demand
  4. Deficit Spending is not  “FINANCED” from any source. Government spending money which it does not have, creates welfare by injecting money into the economy. This money leads to increased output and is not inflationary. The government can continue this deficit spending forever, without worrying about sustainability or “paying back” the debt.
  5. Government Deficit injects money into the system which is exactly equal to the PROFITS of the firms, plus the SAVINGS of the laborers. Since firms work for profits while households wish to save, neither can succeed UNLESS the government runs deficits. Thus deficit spending is crucial to a capitalist economy — without it there would be no profits for business, and without profits and savings the economy would collapse.   Read more

Mainstream versus Minsky

March 26, 2019 4 comments

from Asad Zaman

Krugman fails to understand Minsky

On the one hand, Minsky has been transformed from an eclectic outcast to a darling of the mainstream after the crisis. On the other hand, Krugman and others have failed to appreciate the central insights of Minsky, just as they did with Keynes. While Keynes had completely rejected mainstream theories on solid grounds, Hicks and Samuelson constructed a neoclassical synthesis which conceded the short-run to Keynes on the basis of short run wage rigidities, but kept the fundamentals of mainstream theories intact. Similarly, today mainstream economists like Krugman admit to being at fault in not predicting the GFC, but blame it on external factors, rather than central weaknesses in mainstream theories. Three external factors which account for the failure of economists to “see it coming” are:

  1. The GFC was Black Swan Event. A period of stability led to under-estimation of risks and a discounting of the probabilities of crisis.
  2. The Fed kept interest rates low for too long. This allowed massive credit creation, which led to bubbles
  3. Rise of Shadow Banking Industry went un-noticed. The unregulated financial sector created a crisis by making high leverage gambles, using derivatives as insurance.  read more

 

Why Minsky matters

March 22, 2019 3 comments

from Asad Zaman

  1. Why did No One See It Coming?

We start by posing the question “Why did no one see it coming?” which the Queen of England asked at the London School of Economics. To answer, we must consider the evolution of macroeconomic thought. This involves the rejection of Keynes, the rise of monetarism of Friedman, the extremism of Lucas, New Monetary Consensus of Bernanke, Efficient Markets of Fama, Laissez-Faire approach to financial regulation. The book starts with a beautiful description of the problem, eminently worth adding to my collection of “Quotes Critical of Economics”:

What passed for macroeconomics on the verge of the global financial collapse had little to do with reality. The world modeled by mainstream economics bore no relation to our economy. It was based on rational expectations in which everyone bets right, at least within a random error, and maximizes anything and everything while living in a world without financial institutions. There are no bubbles, no speculation, no crashes, and no crises in these models. And everyone always pays all debts due on time.

In short, expecting the queen’s economists to foresee the crisis would be like putting flat-earthers in charge of navigation for NASA and expecting them to accurately predict points of reentry and landing of the space shuttle. The same can be said of the U.S. president’s Council of Economic Advisers (CEA)—who actually had served as little more than cheerleaders for the theory that so ill-served policy makers.

  1. Minsky: Stability is De-Stabilizing!   read more

Adam Smith’s bad history leads to bad economics

March 15, 2019 5 comments

from Asad Zaman

Guest Post by Donni Wang [author details at bottom of post]. Republished from The Economic Historian blog: “No Go from the Get Go: Adam Smith’s Bad History, Lessons from Ancient Greece, and the Need to Subsume Economics” – She is a historian, and argues here that a false history which portrays progression and progress actually seals off alternatives and choices which we could, and indeed need to, make today. Correcting Adam Smith’s views about history of mankind, using lessons from Ancient Greece, thus creates new possibilities for us today.

WORLDVIEWS THAT gain traction tend to be comprehensive in nature. They account for a wide range of phenomena that define the human condition, one of which being the changes that occur to society over time. This is true also for capitalism as an extensive body of thought. Although there is much emphasis placed on the modern epoch that features the rise of the industrial nation in the West, the weltanschauung of capitalism does supply a neat story of human development that extends back to earlier periods.

The obvious source for this narrative is to be found in the writing of Adam Smith.  Having been rightly credited as the father of capitalism, Smith has contributed much to the overall coherence of the market system by reinforcing it with a supportive philosophical foundation. In fact, his narrative of the past, which is still being circulated in contemporary textbooks and popular discourse, has not only rationalized the ascent of market forces in 18th century Europe, it also validated the major assumptions that undergird orthodox economic thinking today.

The historical account proffered by Smith, however, does not hold up even to the most basic test. read more

Islam’s gift: an economy of spiritual development

February 4, 2019 31 comments

from Asad Zaman

My article with the title above is due to be published in the next issue of the American Journal of Economics and Sociology (2019). This was written at the invitation of the editor Clifford Cobb, as an introduction to Islamic Economics for a secular audience. The Paper explains how modern economics is deeply flawed because it ignores the heart and soul of man, and assumes that the best behavior for humans is aligned with short-sighted greed. Islam provides a radically different view, showing how generosity, cooperation, and overcoming the pursuit of desires leads to spiritual progress. Islam seeks to create a society where individuals can make spiritual progress and develop the unique and extraordinary capabilities and potentials which every human being is born with. Pre-print – to appear in American Journal of Economics and Sociology, 2019 – is available for view/download at the bottom of this post.

As an excerpt, I am posting Section 2 of the paper, entitled

The Flawed Foundations of Modern Economics

The defeat of Christianity in a battle with science led to an extraordinary respect and reverence for scientific knowledge, sometimes called the “Deification of Science,” in Europe (Olson 1990; Zaman 2015a).   This had fatal consequences. Even though all scientific knowledge is inherently uncertain, a concerted effort was made to prove the opposite—that scientific knowledge is not only certain, but it is the only source of certain knowledge.  Because of distortions necessary to prove something which was not true, the methodology of science was dramatically misunderstood by the logical positivists. read more

Perils of exchange rate miss-alignment

January 26, 2019 5 comments

from Asad Zaman

As I have only recently come to realize, stabilizing the exchange rate at the wrong level can have massively harmful effects. One can trace major economic tragedies to such attempts. The British attempt to go back to the gold standard after post WW1 failed because they set the level too high (as Keynes pointed out). This attempt set of a sequence of events which had far reaching consequences. A similar story is told about Pakistan in “The Rupee is falling; let it crash”. Linked article shows that overvaluation of Pak Rupee de-linked the Pakistan and Indian Economies, which may the economic root of current political hostilities. Current problems of the European Union are a more advanced version of the same problem, where the rate of exchange between European countries cannot be re-aligned according to the gaps between their imports and exports. This is a subject worth exploring further, and if readers have more pointers/articles, I would appreciate learning more about it. The article below deals with the Dutch Disease in Pakistan.  read more

Fisher’s debt deflation theory of financial crises

January 18, 2019 Leave a comment

from Asad Zaman

This post is the third part of lecture 8 of Advanced Macro L08C: Fisher’s Debt-Deflation Theory of the Great Depression. In previous segments of this lecture L08A: Micro-Foundations for Keynesian Economics, and L08B: Keynesian Explanation for Great Depression: Seriously Incomplete, we examined the Keynesian explanation for the Great Depression, and found serious deficiencies in it. L08A explains that many different kinds of outcomes, with and without unemployment, are possible depending on how we specify details of the micro-structure that Keynes failed to specify. L08B explains that a simple deficiency in aggregate demand created by savings does not suffice to create unemployment because savings of current period is income/wealth of the next. It is necessary to look at abnormal savings, together with fixed prices, to create surplus production which signals shortfall in aggregate demand to the producers. Thus, many elements – micro-structure, role of debt, and different sectors of the economy – must be added to the Keynesian model to achieve the outcome of unemployment due to shortfall in aggregate demand that is at the center of Keynesian analysis.  read more

Romer’s trouble with macro

January 2, 2019 32 comments

from Asad Zaman

Let us start with Five Fundamental propositions, which would be startling to the general public, but familiar to my current audience of heterodox economists.

  1. Mainstream modern economic theory is complete garbage. This is true of Micro, Macro, Econometrics, Trade, Monetary, Industrial Organization — EVERYTHING.
  2. It is very EASY to prove this assertion. Fundamental principles on which the entire discipline is built are easily proven to be wrong. The axiomatic theory of human behavior encapsulated in homo economicus has no match to real human behavior. The theory of perfect competition devised to explain prices and markets has no relation to the realities of oligopolies, multinationals, excess production, and shaping of demand by advertisements and culture. The welfare theory implicit in maximization of lifetime utility is exceedingly harmful to our human welfare, which comes from social associations and character traits, rather than excess consumption. The optimization/equilibrium methodology is a complete failure. Humans do not and cannot optimize; they lack the information required to do so. Dynamic systems cannot be understood by looking at their equilibria. Standard econometrics techniques can be used to prove anything at all, given any data. In any place you look, the theory is flawed beyond belief. The young earth theory, as well as the flat earth theory are more defensible, in comparison.
  3. Many leading economists are aware of the astonishing conflicts between economics and simple facts of observation. See “Quotes Critical of Economics“ for a choice collection of quotes to prove this assertion.
  4. The Global Financial Crisis of 2007 created widespread public awareness of this catastrophic failure of Economics. The Queen of England went to London School of Economics to ask why no one saw this coming. The US Congress appointed a commission to study why economists not only did not foresee the crisis, they confidently predicted that such an event could not happen. read more

Class-conflict theory of inflation

December 27, 2018 4 comments

from Asad Zaman

Economists do not understand inflation. Daniel K. Tarullo. Former Governor, Federal Reserve Board should surely be in a position to know. I will list some key conclusions from his paper with the revealing title:  Monetary Policy Without a Working Theory of Inflation :

  1. We do not, at present, have a theory of inflation dynamics that works sufficiently well to be of use for the business of real-time monetary policy-making
  2. Many … good monetary policymakers … have an almost instinctual attachment to some of those problematic concepts and hard-to-estimate variables.
  3. (Nonetheless!) Going forward, monetary policy decisions will need to be made with as much, if not more, emphasis on the constellation of observable indicators with which the FOMC is confronted
  4. (Despite all this!) Macroeconomists (should) continue to play a decidedly leading role.

The italicized words are mine, not in Tarullo’s paper. If we pause to reflect, these are breathtaking conclusions. Tarullo says — quite clearly and explicitly — that current theories of inflation are NOT of use for real-time monetary policy. Furthermore, despite their evident failure, economists are blindly attached to these theories — they are “ unmoved by lack of correspondence between their theories and facts of observation “. But, regardless of these, for reasons that I could not fathom, Tarullo advocates going forward with using current constellation of observable indicators, and having the blind macro-economists continue to play a leading role in monetary policy decision making.

The real reason that economists do not understand inflation is because it is an outcome of the class struggle between laborers and capitalists. This topic is taboo in conventional economic theory — it has been ruled out of bounds of the subject, and to study it is to commit professional suicide.  read more

Demise of the Dollar?

December 11, 2018 Leave a comment

from Asad Zaman

SADLY, it is true that ‘money makes the world go round’. But, it is also true that very few people understand how. This article is an attempt at explaining the basics of our global trading system.

A good starting point is the Bretton-Woods conference which took place in 1944, while the Second World War was still raging. The two World Wars had drained the treasuries of the European states, making the gold standard impossible to maintain. An entirely new system had to be created to enable global trade for the post-War era. At the Bretton-Woods conference, the most sensible proposal for the global trading system was created and advocated by John Maynard Keynes. Unfortunately, the political power of the United States enabled it to quash this proposal. Instead, gold was replaced by the dollar standard, with the proviso that dollars could be exchanged for gold.

When the Vietnam War forced the US to print an excessive amount of dollars, president Richard Nixon declared in 1971 that dollars would no longer be backed by gold, creating a brave new world of currencies without any backing. Just like a fixed exchange rate is the natural consequence of pegging currencies to dollar or gold, so too a floating exchange rate system emerges naturally when there are no pegs for any currency

Today, the dollar is at the centre of the global trading system, and is as good as gold once was. Everyone needs dollars as reserves to back up their currencies. To acquire dollars, all countries other than the US, must strive to increase exports — this is how one earns dollars. The US can increase imports just by printing dollars, while the rest of world exports goods and services to earn dollars. Because dollars are the gold of the modern financial system, the US can print money without adverse consequences. For instance, the US printed trillions of dollars to finance the Iraq war, and other trillions to bail out the financial sector from the global financial crisis that was created by it. read more

We all use glasses to see the world.

November 27, 2018 2 comments

from Asad Zaman and the current issue of RWER

The outcome of all this discussion can be summarized metaphorically by saying that we all use glasses to see the world. The direct world out there is a jumble of sensations – a matrix of points – which makes no sense by itself, and must be interpreted using our own frameworks, represented by the glasses. This means that ALL observations are tinged with subjectivity, and interpreted within the frameworks created by our past experiences, successes and failures, in viewing the world.

A paradigm shift occurs if we remove the glasses we use to view the world, and instead put on a different pair of glasses. A famous experiment  conducted by Professor Theodor Erismann, of the University of Innsbruck put reversing glasses on his student and assistant Ivo Kohler. It caused extreme disorientation and discomfort at first, but after about a week of stumbling around, he adapted to this new way of seeing the world. His subjective interpretative equipment learned to interpret the reversed image by performing an additional reversal within the brain to arrive at a correct image of the world. Now, when the glasses were removed, the world appeared to be upside down to Ivo.  On a much larger scale, this is what happened in Europe due to the Great Transformation[1] which transformed traditional society to a market society, where everything is viewed a commodity for sale.  Later, these ways of thinking were spread throughout the world by colonization and Western education. We learned to value everything according to its market price, and forgot that the most precious things cannot be purchased. Then it became easy to kill a million children, and destroy entire nations, for corporate profits.  Read more…

Keynesian explanation of unemployment: seriously Incomplete

November 23, 2018 3 comments

from Asad Zaman

This post is Lecture 8B — from 17m to 37m of video lecture linked at bottom of post. It attempts to make sense of the Keynesian explanation of unemployment based on insufficient aggregate demand. It concludes that several elements missing from Keynes must be added to get to a satisfactory explanation.

 Friedman’s Methodology  leads to crazy models: In previous post (  Lecture 8A – Microfoundations for Keynesian Economics ), we showed that even small differences in the micro-foundations could lead to very large differences in the macro outcomes. Depending on how we choose micro-foundations, we can get almost any result we like at the macro level. So the question arises: HOW should we construct our micro-foundations? How can we choose among the wide variety of possible micro-structures. This leads to a very serious methodological issue of what models are and how they relate to reality. On this topic, see my detailed discussion in post on “Models and Reality“. Briefly, the standard POV adopted in neoclassical textbooks is that the only job of models is the provide a match to observations. The inner details of the models can be arbitrary.  However neoclassical economists insist that a good model must have optimizing behavior by all agents, and the equilibrium outcome of the model should match observations. There is no requirement for models to be realistic.   read more

Micro-foundations for Keynesian Economics

November 17, 2018 21 comments

from Asad Zaman

  Lecture 8A of Advanced Macroeconomics   — Outline below covers the first 17m of the lecture linked below at bottom of post.

1. EXCESS Savings reduce Effective Demand, Normal Savings Do Not

It seems clear that shortfalls in aggregate demand can lead to recessions, but only in presence of fixed prices. Furthermore, normal levels of savings cannot create such shortfalls – an abnormally high level of savings is required. This is because of factors discussed in “ The Subtleties of Effective Demand ”. Basically, if a normal level of savings is reduced from Aggregate Demand, this money is saved and goes on to period T+1. Similarly, the savings of last period T-1, is going to come into the present period T. This will exactly offset the shortfall in Aggregate Demand created by the savings. However, this will not happen if for some reason there is EXCESS savings, over and above normal levels. This excess S(T) > S*  will be not be compensated fully by S(T-1)=S*, where S* is the normal level of savings.

What could lead to abnormally high savings? It appears that debt can force people to earn money to pay off debt, reducing aggregate demand. Thus it appears that the Keynesian mechanism for creating unemployment as an equilibrium phenomenon relies on debt – without explicit mention. Once the role of debt is highlighted as the source of shortfall in aggregate demand, we examine in detail Fisher’s theory of Debt-Deflation, which never received the prominence that Keynes did. In the recent times, this theory has been resurrected, and is solidly backed by empirical evidence. See: Fisher-Minsky-Koo theory of debt-deflation.

2. Empirical Evidence favors Keynes Conjectures   read more

 

Modern Monetary Theory

November 4, 2018 5 comments

from Asad Zaman

In a rapidly changing world, ways of thinking which served us well in other eras, become obstacles to understanding, and reacting appropriately to change. Traditional economic theories, currently being taught all around the world,blinded economists to the possibility of the global financial crisis.The Queen of England went to London School of Economics to ask why “no one saw it coming?”.The US Congress appointed a committee to study why economic theories “dismissed the notion that a financial crisis was possible”. At the heart of this failure arewrong ideas about the role of money in the economy. All major schools of macroeconomics currently being taught around the globe teach that the quantity of money only affects the prices, and does not have any other effects on the real economy. Economists write that “money is a veil” – it hides the workings of the real economy, but does not play any role in it. Economists were blindsided by the crisis because models currently in use for policy making do not have a role for money, credit, banking, and debt, even though these were the factors responsible for the Global financial crisis.

The crisis made clear to all and sundry the vital role of money in the economy. Surprisingly, the mainstream economics profession has been extremely resistant to change. The same textbooks, theories and models which failed so drastically, continue to be used in teaching and policy making throughout the world. However, the space for unorthodoxy has expanded substantially, and a lot of new theories of money have emerged to challenge mainstream views.  read more

Models and Reality

September 30, 2018 1 comment

from Asad Zaman

The subtleties of effective demand

September 25, 2018 6 comments

from Asad Zaman

As I read more and more about effective demand, I got more and more confused — how can I explain this concept to my poor students, if I don’t understand it myself? There are a huge number of articles with different and conflicting views and interpretations of this concept, which Keynes describes as being central to his theory. Let me proceed to clarify the insights that have resulted from struggling with this material, and going through many iterations of revisions in terms of how to make sense of this theory.

Keynes and followers — both the Hicks-Hansen-Samuelson variety, as well as true blue post Keynesians — argue that it is deficiencies in the Aggregate Demand which lead to the unemployment equilibrium which is central to Keynesian economics. Stated in very simple terms, the argument can be phrased like this. The process of production generates factor incomes. These incomes are exactly the source of the demand for the product. If all the income generated is always spent on purchase of products, then the aggregate demand will exactly equal the aggregate supply — this is Say’s Law. In this case, there is no concept of shortfall in aggregate demand which could lead to unemployment.

However, Keynes and his followers deny the equality. They argue that some portion of the factor income could go into savings, thereby lowering the aggregate demand. Now the aggregate demand could be greater or lesser than the aggregate supply. An equilibrium would occur when the two are the same, but there is no guarantee that this equilibrium would occur at full employment. The standard diagram used to illustrate this idea is given below:  read more