from Dean Baker
Andrew Ross Sorkin seems prepared to pronounce Ken Rogoff to be prescient once again with his prediction that China would run into a debt crisis. Rogoff’s past claims to prescience might be viewed as somewhat questionable. He, along with co-author Carmen Reinhardt, famously argued that countries face a severe slowdown in growth when their debt to GDP ratios exceed 90 percent. It turned out that this claim was driven by an error in an Excel spreadsheet, nonetheless it was used to justify austerity in the euro zone, the United States and elsewhere. This austerity did help to worsen the downturns caused by the collapse of asset bubbles, in effect contributing to the crisis that Sorkin credits Rogoff with predicting. Read more…
Econ 101 textbooks are misleading more than a million students a year in the U.S. alone because they leave the lasting impression that markets could solve all our economic problems if only they were left to themselves. Not even the horrendous sub-prime mortgage-crisis bailout in 2008 and 2009, amounting to trillions of dollars, shook the professions’ faith that the markets know best. They continue to invoke the “invisible hand” metaphor coined by Adam Smith in 1776, without conceding that the global economy has undergone several revolutions and changed profoundly during the intervening centuries. Outdated metaphors will not help but only hinder any effort to understand where we have gone wrong, and why, and what to do about it.
Happily, some students are beginning to see the disconnect between the idealized, theoretical version of economics thought on blackboards and its real-world variant. That is exactly why students walked out of Gregory Mankiw’s Principles of Economics (Econ 10) class at Harvard in 2011,1 and provided him a written explanation for this symbolic gesture: Read more…
from Mark Weisbrot
As the ever-lengthening U.S. election season begins to heat up, it is interesting to compare the U.S. and Europe regarding the evolution of their politics since the world financial crisis and recession (2008-09). In Europe, there has been quite a bit of political upheaval, with center-left parties often losing a large part of their voters. In Greece, to take the most dramatic example, the Panhellenic Socialist Movement (PASOK) is now polling just 3 percent of the electorate, after decades of wining around 40 percent or more of the vote. There have been significant losses of popularity for similar center-left parties in Spain, Italy, France and other countries — although some have yet to materialize in elections. In Greece, the leftist Syriza party has gotten most of the disaffected voters and took power this year; in Spain, the newly created leftist Podemos party shot up to the top quickly, although it has fallen some in polls recently. In France it has been the extreme right National Front that gained most, and in Italy, the new populist Five Star Movement. Read more…
from Lars Syll
The U.S. economy has, on the whole, done pretty well these past 180 years, suggesting that having the government owe the private sector money might not be all that bad a thing. The British government, by the way, has been in debt for more than three centuries, an era spanning the Industrial Revolution, victory over Napoleon, and more.
But is the point simply that public debt isn’t as bad as legend has it? Or can government debt actually be a good thing?
Believe it or not, many economists argue that the economy needs a sufficient amount of public debt out there to function well. And how much is sufficient? Maybe more than we currently have. That is, there’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt.
Krugman is absolutely right.
Why? Read more…
From the comfortable obscurity of academia to become one of the most recognised politicians on the planet
from The Observer
The island of Aegina is just 17 miles from Athens, a mere 40 minutes’ dash on a hydrofoil. Owing to its proximity to the Greek capital, it’s less a tourist island than a second-home sanctuary for wealthy Athenians, but it boasts several impressive classical sites and a distinguished history. Not only was it briefly the capital of a newly liberated Greece in the 19th century but back in the 7th century BC it was the first Greek state to mint its own coins.
Given Greece’s current predicament, trapped in the euro and an ever-expanding debt crisis, that last fact is a monetary irony not lost on one particular wealthy Athenian on Aegina. Sitting on top of a hill a few minutes’ drive from the port is the holiday home of Yanis Varoufakis. He is the former finance minister of Greece, although that’s hardly a description that befits the man’s legend. Gikas Hardouvelis is also a former finance minister of Greece, but no one has heard of him.
It would be more accurate to say that Varoufakis is the former finance minister of Greece who took on the global banking system, the European political elite and, in the minds of many, the great god of capitalism itself. His is a story so full of drama and symbolism that it contains more than a hint of Greek myth.
An economics professor by occupation, he went in a few months from the comfortable obscurity of academia to become one of the most recognised politicians on the planet. read much more
from Maria Alejandra Madi and the WEA Pedagogical Blog
The expansion of neoliberalism in the last four decades has increasingly expressed the tensions between the expansion of the market economy and the consolidation of a new way of life. Indeed, the neoliberal way of life can be apprehended if considering Karl Polanyi´s concern about the way in which the economy relates to social organization and culture and the impacts of social and political institutions in relation to human livelihood. In his opinion, since the proper self-regulation of the market entails that nothing must be allowed to inhibit the formation of markets, the institutional patterns and principles of behavior turn out to adjust perfectly.
Taking into account the current effects of the neoliberal modernization process on the way of life, Karl Polanyi´s critique of the liberal myth and of the disruptive forces inherent to the self-regulated markets it is inspiring to think about the deep impacts of neoliberal policies and institutions on livelihoods. In accordance to Polanyi, the centrality of the market entails that “Nothing must be allowed to inhibit the formation of markets, nor must incomes be permitted to be formed otherwise than through sales” (Polanyi 1944: 69). In other words, labor, land and money turn out to be seen as commodities and are produced for sale. As the commodity fiction proves to be the vital organizing process, the self-regulated markets demand the institutional separation of society into an economic and a political sphere. In other words, the commodity fiction implies that the market economy demands the institutional separation of society into an economic and political sphere, that is, in the market society the social relations are embedded in the economy rather than the economy embedded in social relations. read more
from Lars Syll
“New Keynesian” macroeconomist Simon Wren-Lewis has a post up on his blog, discussing how evidence is treated in modern macroeconomics (emphasis added):
It is hard to get academic macroeconomists trained since the 1980s to address this question, because they have been taught that these models and techniques are fatally flawed because of the Lucas critique and identification problems. But DSGE models as a guide for policy are also fatally flawed because they are too simple. The unique property that DSGE models have is internal consistency. Take a DSGE model, and alter a few equations so that they fit the data much better, and you have what could be called a structural econometric model. It is internally inconsistent, but because it fits the data better it may be a better guide for policy.
Being able to model a credible world, a world that somehow could be considered real or similar to the real world, is not the same as investigating the real world. Read more…
from Jamie Morgan’s “Piketty’s Calibration Economics: Inequality and the Dissolution of Solutions?” – an open access paper in current issue of Globalizations
In the neoliberal age, we have naturalised the rich. However, the success of Thomas Piketty’s Capital in the Twenty-First Century has done a great deal to legitimate a rather differently inflected concern. It is now permissible to ask: can we, should we, afford the rich? Growing income and wealth inequality have gradually become areas of public concern, but this concern has become more acute, and more politically febrile, in the wake of the global financial crisis. The election victory by Syriza in Greece, and the Occupy Movement speak directly to this. Austerity responses to the crisis have distributed the fallout costs to the many from the few who benefitted most from the preceding decades. Meanwhile, central bank policy responses have created new opportunities for the global rich to become even richer.1 To a large degree, the idea that the rest of us are dragged along in the wake of the wealthy has been exposed as a myth. Read more…
from Lars Syll
General equilibrium is fundamental to economics on a more normative level as well. A story about Adam Smith, the invisible hand, and the merits of markets pervades introductory textbooks, classroom teaching, and contemporary political discourse. The intellectual foundation of this story rests on general equilibrium, not on the latest mathematical excursions. If the foundation of everyone’s favourite economics story is now known to be unsound — and according to some, uninteresting as well — then the profession owes the world a bit of an explanation.
Almost a century and a half after Léon Walras founded general equilibrium theory, economists still have not been able to show that markets lead economies to equilibria.
We do know that — under very restrictive assumptions — equilibria do exist, are unique and are Pareto-efficient.
But after reading Frank Ackerman’s article — or Franklin M. Fisher’s The stability of general equilibrium – what do we know and why is it important? — one has to ask oneself — what good does that do? Read more…
from Asad Zaman and the WEA Pedagogical Blog
A recent and amazing article by John H Richardson, titled “When the end of human civilisation is your day-job”, describes how many climate scientists suffer from psychological trauma because their studies lead to the inescapable conclusion that human beings are destroying the planet, and climate change will create conditions making it impossible for the human civilisation to survive. There are two strategies currently being pursued with regard to climate change. One is the ostrich strategy of denial, which claims that there is no such thing, or if there is, it is part of natural geological processes rather than being created by human beings. The second is the band-aid strategy which seeks to make small efforts at relief of major visible problems being caused by climate change. Neither strategy has any hope of success at saving the human civilisation in its current form.
The roots of the problem run deep, and the changes we need to make are very radical. One of the most fundamental teachings of all traditional societies is the subordination of personal interests to the social or collective good. During the “Great Transformation” that led to the creation of modern society, this teaching was turned on its head. Individuals were encouraged to pursue personal interests even at the expense of society. As this philosophy gradually gained strength, many institutions which depended on social commitments were destroyed. Key examples are families and communities, previously built on lifetime commitments, which have been replaced by temporary social relationships based on expediency in advanced societies. The idea that excessive and wasteful consumption was immoral, especially when others were in need has been replaced by the idea of sacredness of property. That is those who have are perfectly justified in flaunting their luxurious lifestyles, while the rest of us struggle to imitate them. The breakdown of barriers to greed led to a mad race to consume more and more without any concern as to the effects on others or on the planet. As a result, income inequalities have become greater than ever seen in human history, and the lifestyles of the super-rich are unimaginably wasteful of planetary resources. read more
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from Lars Syll
Noah Smith has a post up trying to defend p-values and traditional statistical significance testing against the increasing attacks launched against it:
Suddenly, everyone is getting really upset about p-values and statistical significance testing. The backlash has reached such a frenzy that some psych journals are starting to ban significance testing. Though there are some well-known problems with p-values and significance testing, this backlash doesn’t pass the smell test. When a technique has been in wide use for decades, it’s certain that LOTS of smart scientists have had a chance to think carefully about it. The fact that we’re only now getting the backlash means that the cause is something other than the inherent uselessness of the methodology.
That doesn’t sound very convincing.
Maybe we should apply yet another smell test … Read more…
from Lars Syll
The concept of “critical mass” was originally created by Thomas Schelling to explain a variety of different “tipping point” actions and behaviours in society.
The concept was elaborated on in Schelling’s masterful Micromotives and Macrobehavior (1978).
Here’s what it’s (almost) all about …
from Lars Syll
If I ask myself what I could legitimately assume a person to have rational expectations about, the technical answer would be, I think, about the realization of a stationary stochastic process, such as the outcome of the toss of a coin or anything that can be modeled as the outcome of a random process that is stationary. I don’t think that the economic implications of the outbreak of World war II were regarded by most people as the realization of a stationary stochastic process. In that case, the concept of rational expectations does not make any sense. Similarly, the major innovations cannot be thought of as the outcome of a random process. In that case the probability calculus does not apply.
‘Modern’ macroeconomic theories are as a rule founded on the assumption of rational expectations — where the world evolves in accordance with fully predetermined models where uncertainty has been reduced to stochastic risk describable by some probabilistic distribution. Read more…
from Asad Zaman and the WEA Pedagogical Blog
The mounting evidence that we are moving along the fast track to ecological suicide can no longer be denied. A new word ‘endling’ has been coined to describe an individual which is the last of its species. There are too many recorded tragedies of endlings who issued mating calls, but there was no one left to answer them. In Cut From History, author Eric Freedman writes that “It is deep-to-the-bone chilling to know the exact date a species disappeared from Earth. It is even more ghastly to … know that nobody knew or cared.” Elizabeth Kolbert details the depressing facts in her book entitled The Sixth Extinction: An Unnatural History. She estimates that about half of the species of plants and animals currently in existence will die out by 2050. This is not due to any natural catastrophe, but rather due to destructive effects of human activities. read more
1. Summary of the Great Transformation by Polanyi, Asad Zaman
2. Piketty’s response to Mankiw et al.: “and some consume academics.”, David Ruccio
3. Germany is bluffing on Greece, Mark Weisbrot
4. Reflections on the “Inside Job”, Peter Radford
from Norbert Häring
Anasthase Contagyris is a French and Greek economist living in Athens. He is Co-Founder of Attac-Greece, CEO of Dialogos Ltd, an Athens Startup coaching and export facilitation consultancy he founded in 1987. He is a member of the Truth Committee on Public Debt of the Greek Parliament, which recently issued a preliminary report. We met in Frankfurt. He is well conneted, though not a member, to Syriza.
Häring: Mr. Contagyris, in Germany many people do not understand the behavior of the Greek government in the negotiations with creditors. It seems to have made quite a few unexpected turns.
Contagyris: This negotiations were a lot like a poker game all along. Players adapted to the hands they had and to what they found out about the cards of their opponents.
What did Syriza hope to achieve in these negotiations? Read more…
from Lars Syll
Modern economics has become increasingly irrelevant to the understanding of the real world. In his seminal book Economics and Reality (1997) Tony Lawson traced this irrelevance to the failure of economists to match their deductive-axiomatic methods with their subject.
It is — sad to say — as relevant today as it was eighteen years ago.
It is still a fact that within mainstream economics internal validity is everything and external validity nothing. Why anyone should be interested in that kind of theories and models is beyond my imagination. As long as mainstream economists do not come up with any export-licenses for their theories and models to the real world in which we live, they really should not be surprised if people say that this is not science, but autism!
Studying mathematics and logics is interesting and fun. It sharpens the mind. In pure mathematics and logics we do not have to worry about external validity. But economics is not pure mathematics or logics. It’s about society. The real world. Forgetting that, economics is really in dire straits. Read more…
from Trond Andresen
As a point of departure I refer to this paper, on page 2 in the Real-World Economics Review, issue 71, 28 May 2015. The paper argues for and describes how to possibly implement an electronic parallel currency in Greece.
But the proposal for a parallel currency should now be even more specific, tailored to the current drama and urgency. And the pressure to do something along the lines suggested below is increasing all the time (because the so-called “bailouts” only imply further exponential debt growth in a pyramid game – something that is mostly not recognised in the media and by commentators).
Here are my suggestions: PHASE A Read more…
from Maria Alejandra Madi and the WEA Pedagogy Blog
The conceptualization of the informal economy focuses on some features of the business dynamics and employment conditions. That is why the definition includes not only enterprises that are not legally regulated, but also employment relations that are unregulated and unprotected, that is to say, employment without any kind of social protection.
In most of the developing countries, the small businesses’ challenges have contributed to the expansion of the informal economy. Small and micro-entrepreneurs are usually subject to complex regulatory barriers. Besides, the access to credit is restricted. As a result, micro and small enterprises reveal poor performance in competitive environments, a lower capacity for innovation and a weak international orientation. Among other obstacles to survival and expansion in the formal economy, the costs of starting up a formal enterprise are outstanding in developing countries. Among these transaction costs, we can highlight: i) the number of procedures that includes all necessary licenses and permits and completion of any notifications, verifications or registrations required by the relevant authorities; and ii) business legislation, specific regulations and fee schedules that are used as sources for start-up cost calculation. read more
from Lars Syll
Re-reading the Lucas & Sargent New Classical manifesto ‘After Keynesian Economics’ (1979) some macroeconomists seem to be überimpressed by its “quality” and “persuasiveness.”
Quality and persuasiveness?
Let’s listen to what James Tobin had to say on the Lucas & Sargent kind of macroeconomic analysis:
They try to explain business cycles solely as problems of information, such as asymmetries and imperfections in the information agents have. Those assumptions are just as arbitrary as the institutional rigidities and inertia they fins objectionable in other theories of business fluctuations … I try to point out how incapable the new equilibrium business cycles models are of explaining the most obvious observed facts of cyclical fluctuations … I don’t think that models so far from realistic description should be taken seriously as a guide to policy … I don’t think that there is a way to write down any model which at one hand respects the possible diversity of agents in taste, circumstances, and so on, and at the other hand also grounds behavior rigorously in utility maximization and which has any substantive content to it.