Friedman’s Feedback Loop

from Duncan Austin and RWER

The “free market” advocate is in the dissonant position of wishing market actors to be the sole conferees of new property rights while also depending on the government to uphold a general rule of law which is the necessary condition for property to being meaningful at all. Indeed, because of the indispensability of the rule of law, we should be more accurate with our terminology. We never have “free markets”. We only ever have “enabled markets” – markets enabled by an authority capable of upholding the rule of law that gives property meaning. Language matters. “Free markets” is a highly misleading term – routinely deployed as an unassailable universal principle to cloak a more parochial agenda. Too often, what “free market” proponents are really advocating is a system of “enabled markets where we want them and not where we don’t.” Or, put another way, the working slogan of neoliberalism has come to be: “some markets are the solution; government is the problem”.

Government is in the loop!  

Krugman and Eggertsson’s model of the Global Financial Crisis of 2007-8

from Geoff Davies and RWER

Yet consider a model of the Global Financial Crisis of 2007-8 by Eggertsson and Krugman (2012), the latter a pseudo-Nobel prize winner. They made two models, one for before and one for after a crash, with the difference between the models being effectively that the amount of available credit was presumed to be less in the second. Nothing in the model determined the amount of credit, it was imposed from the outside. Their equations of optimisation did require sophisticated, though old-fashioned, analytical methods to solve, but that says nothing about the usefulness of the models.

 

Both models are equilibrium models. But if the “before” state of the market, with high prices, was an equilibrium state there would be no crash. Therefore the model must be missing the imbalance that drove the crash. It is therefore incapable of telling us why such a crash occurred. It cannot tell us anything about the dynamic process of boom and crash, the inflation and bursting of a debt bubble. It is not a useful model, it is a useless model, a dead end as far as understanding an observable economy is concerned.

read more: http://www.paecon.net/PAEReview/issue95/Davies95.pdf

Maybe inflation should be welcomed

from Philip George

Until 1982 it was believed that stomach ulcers were caused by stress and lifestyle. That year,
two Australian scientists, Robin Warren and Barry Marshall, demonstrated that most gastric
and duodenal ulcers were caused by a bacterium, Heliobacter pylori. They cultivated the
bacteria which they discovered in biopsies of patients suffering from ulcers, after which
Marshall ingested the bacteria to prove that they caused gastric ulcers.

As this example shows, it is not uncommon even in science to try and explain real-world
phenomena using variables that cannot be measured, like stress. Such attempts inevitably turn
out to be incorrect.

In economics the most common of such fairy variables is “inflation expectations”; the other
popular one is of course “rational expectations”. Thus, when inflation falls short of the
targeted rate for a long time it is ascribed to the central bank’s failure to calibrate inflation
expectations high enough. That the cause could lie elsewhere is never considered.
An analogy would not be out of place. If someone fails to hit the top of a tree with his gun
you get him to aim higher, at the top of a skyscraper. If he still cannot hit the top of the tree
you get him to aim at the moon. When he still cannot hit his target you are forced to veer
around to the conclusion that his failure is because his gun is not powerful enough. With
inflation during the past few decades in the US, this has indeed been the case. But
economists are reluctant to accept this explanation.

A classical utilitarian position implicates that individuals have no moral rights

from Tanja von Egan-Krieger and RWER

. . . the World Bank builds on a utilitarian definition of efficiency, which is of course a normative criterion. It is a criterion of judgement. The implicit aim is increasing the net value or total wealth. The World Bank refers to this idea in terms of a “social benefit”: “Even investments that are highly profitable for an investor will generate sustainable social benefits only if they are not associated with environmental externalities”.

An ethical reflection immediately raises the question for whom the net value is produced. Who does benefit from the increasing total wealth? From a utilitarian point of view this question doesn’t matter. The ethical maxim of classical utilitarianism is to maximise the sum of pleasure and pain and thereby the overall utility. The economy, and ultimately society at large which encompasses the economy, is thus regarded as a collective subject. An action is ethically right if the overall utility, in case of the economy the total wealth, is increased. Thereby individuals become mere “represents” of utility quanta. They are off-settable assets.

It was Gunnar Myrdal who named this construction of social harmony sarcastically a “communistic fiction”. 

. . . broken into multiple disconnected compartments of western understanding

from Richard Norgaard

. . . until early in the 19^th century, merely two hundred years ago, an effort to intertwine reality and morality still existed in natural theology, the project to understand the character, will, and operating manual of God through the study of nature. Isaac Newton was both an accomplished moral philosopher and a path-breaking natural philosopher (Iliffe, 2017). The Physiocrats made moral arguments about who should be taxed based directly on what they understood to be physical realities (Schabas, 2007). Adam Smith wrote a treatise on astronomy to document his knowledge of natural systems before writing moral philosophy (Ross, 2010, chapter 7). Well into the 19^th century, both natural and moral philosophy students as well as students of theology, medicine, and law studied William Paley’s “Natural Philosophy, or Evidences of the Existence and Attributes of the Deity collected from the Appearances of Nature” (Paley, 1835 and earlier editions). In 1874, social philosopher and economist John Stuart Mill intertwined the science of natural laws and natural religion (Mill, 1874). Morality and reality intertwined in the minds of European intellectual elites during the rise of disciplines in the latter 19^th century. Then, not only reality and morality became separated but they too were broken into multiple disconnected compartments of western understanding. The creation of disciplines, specialized realms of knowledge, implicitly entailed the assumption that the linkages between disciplines were sufficiently weak that, for “practical” purposes, they could be ignored. Pure reason combined with empirical evidence in the style of Newton’s physics was only practical by assuming reality could be divided into parts. It was in this historical context that the 20^th century idea arose that economics could be a separate field of human understanding.

 ( read more: Post-economics: Reconnecting reality and morality to escape the Econocene)

Rising Inequalities in OECD Countries – Gini coefficients 1985 vs 2013

Source: Sighing for paradise to come | The Economist

Weekend read – Kant: misogynist & racist

from Asad Zaman and WEA Pedagogy Blog

Reducing politics to rational calculation allows the destruction of entire countries, and killings of
millions, for the sake of political power or corporate profits. Today this “rationality” dominates
the world where corporations are busy destroying the planet for the sake profits.

Introduction: The dark underside of leading lights of the European Enlightenment has been skillfully concealed. Nearly all major enlightenment thinkers held abhorrent views about slavery, race, democracy, women, and equality. Even though their views are public, easily available in major works, there is a conspiracy of silence, and suppression of dissent. Even though there is an abundance of nauseating quotes from major Enlightenment thinkers, these remain hard to find . One of the most striking instances Is Immanuel Kant, one of founding fathers of European Enlightenment and modern Western Philosophy. To a far greater extent than we realize, philosophy provides a foundation for our way of life. Philosophy provides answers to the central questions we all face: Who are we? What is the meaning of life? How can we lead good lives, and build a good society? These answers direct our personal and collective efforts, and have enormous, generally unrecognized influence on our lives. An amusing illustration of the foundational importance of philosophy is furnished by the Wikipedia article “Getting to Philosophy”. This article shows that clicking of the first internal link within any Wikipedia entry eventually ends up with an entry classified as philosophy. All human knowledge is built on philosophical foundations.

Even though philosophy plays a central role in shaping our lives, we are largely unaware of this. Keynes expressed this insight colorfully:  “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”. But there is a deeper and darker reason for our ignorance of the profound influence of Western philosophy on the way we lead our lives.

Jeffrey Sachs’ (2021) speech at the UN

How dynamic is global capitalism?

from C. P Chandrasekhar and Jayati Ghosh

Capitalism is supposed to be all about economic growth, through the dynamism that is created by competition. This growth is meant to be driven by investment (or accumulation) which in turn is used to justify the shares of national income that are delivered to private profits, to the owners of capital. “Accumulate, accumulate! That is Moses and the prophets” famously said a certain Karl Marx in the first volume of Capital more than 150 years ago. It is undeniable that investment is the fundamental driving force of capitalism.

Of course, there have been and continue to be many naysayers, who object to this obsession with economic growth at all costs. There are obvious problems with using GDP as the basic indicator for even material well-being, and for all the important processes and outcomes that are important for human life. GDP does not capture human well-being, and can even disguise adverse outcomes. Per capita income is a poor estimate of general welfare when there are pervasive and growing economic inequalities. Many dimensions of human life that economies are supposed to provide a frame for, are ignored in this perspective.

But within the terms set by market-driven profit orientation, GDP is what matters, since capitalism is really concerned only with whatever is commercialised. Investment, the associated technological progress and the resulting expansion of economic activity are the most important metrics by which capitalist systems are judged. Never mind that this has been compared to the “grow-at-all-costs-and-in-all-circumstances” proclivity of cancer cells. To judge capitalism on its own terms, look at investment and monetary incomes. 

Based on these (admittedly limited) indicators alone, how has capitalism been doing in its triumphal “globalised” phase?

Weekend read – With great power comes great fear

from Blair Fix

Over the last year, I’ve watched with horror and amusement as health agencies around the world flip-flopped their advice on how to deal with COVID.

My horror comes from knowing this flip-flopping breeds mistrust in science. But I am (morbidly) amused because I know that uncertainty is a basic part of real research. For the public, ‘science’ tends to mean authoritative knowledge. But for researchers, ‘science’ is an iterative process, filled with wrong turns, new evidence, and revised ideas.

With COVID flip-flops in mind, I thought I’d tell you a story about science in progress. It’s a story about how we should understand the stock market.

Three stories about the stock market

Here are three stories about how the stock market works.

The first story says that the stock market reflects the productivity of the underlying economy. When stocks go up, the thinking goes, everyone should celebrate because the tide of productivity is rising. This is the story that neoclassical economists believe.

How the past allows us to imagine – and see the future

from Richard Parker and current issue of RWER

Let me now try to connect this little synoptic “longue duree” to the present and to the matter before us: neoliberalism and what might succeed it. We live in the early 21^st century and the conventional economics we’ve inherited has now arrived at a moment when once-novel Victorian-era ideas seem not just inadequate but irrelevant.

A similar moment seemed, to many, to have arrived before, back in the 1930s. But apostles of marginalism such as Lionel Robbins or Mies or Hayek – faced with what they saw as the socialist implications of Rooseveltian politics and Keynesian ideas about states and economies – insisted on the singular “efficiency” purpose of “economics” as theory, and theory’s realization in the modern market world around them.  For these men, the matter was supremely “intellectual” and “scientific”, not a story of competing classes in capitalist societies.  Robbins’ magisterial dictum that economics was “the science which studies human behavior as a relationship between ends and scarce means which have alternative uses” was in fact by the 1930s already, well, Victorian.

The power of dominant capital continues to rise

from Jonathan Nitzan and Shimshon Bichler

Here we show the after-tax profit and market capitalization of the top 0.01% of U.S.-based corporations, expressed as a % of U.S. GDP.

Updated from ‘The Asymtptoes of Power‘.

Weekend read – The evolution of ‘big’: How sociality made life larger

from Blair Fix

The game I play is a very interesting one.
It’s imagination in a tight straitjacket.

— Richard Feynman

Like Richard Feynman’s game of science, evolution is stuck in a straitjacket. It is driven by chance. But evolution is not free to explore every path.

Take, as an example, the evolution of organism size. While it seems like there are many routes to bigness, I propose that there is fundamentally only one: sociality. In the march towards ever-larger organisms, there have been three major revolutions. All of them involved the merger of previously autonomous organisms into a new communal creature. I call this route to bigness ‘size through sociality’. It is a tale 4 billion years in the making.

The drive towards sociality, I argue, is a response to a basic feature of geometry. As objects get larger, their volume grows faster than their surface area. This fact of space causes problems for harvesting energy. It requires that big organisms harness and distribute energy on a limited surface-area budget. The easiest way to solve this problem, it seems, is to merge existing structures. Hence the evolution of bigger life is deeply connected to the evolution of sociality.

The evolution of ‘big’ is also connected to human culture.

Modern human institutions may represent a new transition in the evolution of life — a transition from massive organisms to supermassive superorganisms. But as with the rest of life, this evolution occurs in a straitjacket. The size distribution of human institutions seems to follow the same pattern as the size distribution of other organisms. In fact, it is an extension of this pattern, upping the size of life to new proportions.

In this light, human cultural evolution may be a variation on an old theme: size through sociality.

The tyranny of geometry

As I child, I loved playing with toy cars. I made the little vehicles jump over great distances, usually with the gleeful hope that they might explode. But the toys always took the beating with ease. When I imagined doing the same stunt with life-sized cars, however, I knew that they couldn’t withstand the punishment. But I didn’t know why.

Today I do. It’s because the size of an object changes how it behaves. The reason owes to a simple feature of geometry. As objects get larger, their volume grows faster than their area. This fact affects the objects’ properties.

Food poverty map

Learning to re-envisage the economy (Part 2)

from David Taylor and WEA Pedagogy Blog

Looking now at anticipations of Shannon’s information systems in recent economic research, Maria Madi found American pragmatist C. S. Peirce studying scientific logic cycles and semiotics (signalling) in 1873.  In the latest Real Word Economic Review, Katherine Farrell found Marshall starting economics from everyday life (small is beautiful) instead of the funding of government. Andri Stahel started from Aristotle and found Dilthey studying hermeneutics (Shannon’s decoding).  However, the story told about computing is that Babbage showed it to be a mechanism, which Turing turned into a tape recorder using von Neumann’s architecture and linear programming.  Unsurprisingly, Shannon does not surface in Jamie Galbraith’s brilliant survey of current economics, nor in Edward Fullbrook’s textbook proposal: both still seeing the economy as it still is, so how it is usually seen.  Like a centralised power distribution system, primarily supplying governments and big business.

“Power and Influence of Economists”

from Mitja Stefancic and current issue of WEA Commentaries

“Power and Influence of Economists: Contributions to the Social Studies of Economics”, edited by J. Maesse et al reflects upon the multifaceted relationships that exist between science and society – a domain in which economic experts play a very influential role and often have a direct impact on society by and large. It offers complex insights into the forms of power in economics and provides a broad overview of recent developments in the evolving field of social studies of economics. The book comprises 14 chapters, which are grouped into four main parts: a) Economic knowledge and discursive power; b) Economic governmentalities; c) Economists in networks; d) Economics as a scientific field. Each chapter takes a detailed view on the multiple dimensions of power, action and impact with reference to economics.

Among several notable accomplishments, the volume brings forward two themes that have been singled out in this review, as they are of particular interest to social scientists and, thus, worth commenting on. On the one hand, it provides evidence on how some countries have become laboratories for economic experiments, for instance in the application of the politics of austerity orchestrated by influential economists and policy makers. On the other hand, the book shows that economics is a field of power in which powerful networks play a role in determining who may be publicly recognized as a successful economist, i.e. an expert worth reading and listening to, and, by contrast, identifying those who shall not enjoy such attention among colleagues or such visibility in mainstream media.  

. . . . . . 

Selected quotes from the volume  

Evolutionary and biophysical economics

from James Galbraith

The evolutionary and biophysical approach to economic phenomena is not a new thing, and actually long predates the neoclassical orthodoxy from which some believe it now springs. It began with the intellectual interplay of Malthus and Darwin, developed through Marx and Henry Carey and (to a degree) in the work of the German Historical School, brewed and fermented in the pragmatic and pluralist effervescence of late 19^th century American philosophy, and achieved a first full articulation in the hands of Thorstein Veblen (1898). It thereafter developed in the Institutionalist tradition of John R. Commons (1934) and Clarence E. Ayres (1944), among many others, and emerged as the dominant intellectual force in American economics under the New Deal. 

Learning to re-envisage the economy (Part 1)

from David Taylor and WEA Pedagogy Blog

After the invention of printing, pedagogy began with Machiavelli’s The Prince teaching politicians to lie, and Francis Bacon’s The Advancement of Learning advising a new king to develop an encyclopedia of science “for the glory of God and the relief of Man’s estate” by “taking things to bits to see how they worked”.  Bacon’s doctor Harvey took men’s bodies to bits and discovered the circulation of the blood.  In France, Descartes took brains to bits, envisaging a “spiritual” mind (what we would now call information) controlling the brain’s matter. 

Economics began to go wrong when Locke denied Descartes’ “spirit”, mistaking Newton’s proving his gravitational hypothesis by observation for his starting with a “blank slate”; perhaps seeing that people having learned to see money as gold enabled would-be princes and mass producers to win wars using Bank of England credit.  Hume then denied Bacon’s unobservable God and his friend Adam Smith that Men who had fallen on hard times should be relieved; the new “princes” replaced invisible rights with written laws, certificates of authority and deeds of ownership.  The subsequent scientific discoveries of invisible flows in electric circuits, electro-magnetism, radio communication, electric circuit logic and the creation of information and environmental sciences passed them by except insofar as they could make money from them. So did mass production far exceeding the world’s capacity for self-renewal.

Behavioral economics and complexity economics

from James Galbraith

What is to take the place of neoclassical economics and its neoliberal policy offshoot? There is no shortage of candidates, grouped under the broad banner of economic heterodoxy. Some of these successor doctrines – behavioral economics and complexity economics are examples of note – take the neoclassical orthodoxies as a point of departure. They therefore continue to define themselves in relation to those orthodoxies. Others avoided the gravitational pull altogether – or, as in the exceptional case of Keynes, made a “long struggle to escape”.

The behaviorists depart from neoclassicism by giving up strict assumptions of rational and maximizing behavior. Complexity theorists explore the dynamics of interacting agents and recursive functions. Both achieve a measure of academic reputability by remaining in close dialog with the orthodox mainstream. Neither pays more than a glancing tribute to earlier generations or other canons (Reinert, Ghosh and Kattel, 2016) of economic thought. The model is that of neoclassical offshoots – New Institutionalism, New Classical Economics, New Keynesianism – that make a vampire practice of colonizing older words and draining them of their previous meaning.

Changing the conceptions of morality and reality associated with economics

from Richard Norgaard

Economism has been modern capitalism’s myth system, or in computer parlance, capitalism’s operating system. It has stressed utilitarian moral beliefs compatible with economic assumptions that are critical to neoclassical economic theories. These beliefs include the idea that society is simply the sum of its individuals and their desires, that people can be perfectly, or at least sufficiently, informed to act rationally in markets, that markets balance individual greed for the common good, and that nature can be divided up into parts and owned and managed as property without systemic social and environmental consequences (Norgaard, 2019). Especially after World War II when the industrialized nations globally organized around economic beliefs and set out to spread their economic systems among less industrialized nations, these simple beliefs steadily displaced more complex moral discourses of traditional religions (Cobb, Jr, 2001). Economism has facilitated climate change and other anthropogenic drivers of rapid environmental change. Natural scientists are labeling current times the Anthropocene. I advocate using the term Econocene since our economic beliefs, both moral and those with respect to reality, and the econogenic drivers they facilitated have been critical to the rise of rapid environmental change. Furthermore, the term Econocene alludes to the current social and technological structures and human capital that are sustained by economism.[1] Escaping the Econocene will require dynamically, polycentrically, reconnecting reality and morality writ large.