from Lars Syll
We are storytellers, operating much of the time in worlds of make believe. We do not find that the realm of imagination and ideas is an alternative to, or retreat from, practical reality. On the contrary, it is the only way we have found to think seriously about reality. In a way, there is nothing more to this method than maintaining the conviction … that imagination and ideas matter … there is no practical alternative”
Robert Lucas (1988) What Economists Do
Sounds great, doesn’t it? And here’s an example of the outcome of that serious think about reality … Read more…
In the sense that there now exists in the economics profession an implicit and perverse intellectual hierarchy which is premised on the understanding that the less of what you do is related to the real world, the cleverer you are. So, if you are really clever, you would do mathematical modelling of a kind that has nothing to do with the real world. You would do something on the Turing machine [a theoretical computing device] or on information cascade or some such thing. If you are a little less clever, you would do econometrics, and if you are not even that clever, you would work on monetary policy or development economics. And, if you are not even that good, you would do economic history. But if you are the worst, you would go around factories interviewing managers. So, the leadership of the profession is moving towards abstraction for the sake of abstraction.
This has resulted in the shutting down of courses such as the history of economics, history of economic thought, philosophy of economics and other such fields. Basically, teaching economics has become like one of the other trades, like becoming a plumber or a bricklayer, as if it is about providing students with a set of skills which they can apply. There is no encouragement of critical thinking or teaching of real-world issues.
from Lars Syll
By the early 1980s it was already common knowledge among people I hung out with that the only way to get non-crazy macroeconomics published was to wrap sensible assumptions about output and employment in something else, something that involved rational expectations and intertemporal stuff and made the paper respectable. And yes, that was conscious knowledge, which shaped the kinds of papers we wrote.
More or less says it all, doesn’t it?
And for those of us who do not want to play according these sickening hypocritical rules — well, here’s one good alternative.
from Lars Syll
In econometrics one often gets the feeling that many of its practitioners think of it as a kind of automatic inferential machine: input data and out comes casual knowledge. This is like pulling a rabbit from a hat. Great — but first you have to put the rabbit in the hat. And this is where assumptions come in to the picture.
As social scientists — and economists — we have to confront the all-important question of how to handle uncertainty and randomness. Should we define randomness with probability? If we do, we have to accept that to speak of randomness we also have to presuppose the existence of nomological probability machines, since probabilities cannot be spoken of – and actually, to be strict, do not at all exist – without specifying such system-contexts.
Accepting a domain of probability theory and a sample space of “infinite populations” — which is legion in modern econometrics — also implies that judgments are made on the basis of observations that are actually never made! Infinitely repeated trials or samplings never take place in the real world. So that cannot be a sound inductive basis for a science with aspirations of explaining real-world socio-economic processes, structures or events. It’s not tenable. Read more…
from Lars Syll
Deflationary policies are deflationary. To a large extent the deflation is caused by tight monetary and fiscal policies pursued by ECB. With a very defensive fiscal policy and a targeted inflation rate set at a very low level, real inflation has during the last couple of years been negative. Another consequence of the austere fiscal and monetary policies is that overall unemployment is stuck at an enormously high level.
This is deeply worrying.
So here’s a suggestion for reading …
Zoltan Pozsnar and Paul McCulley have written an absolutely splendid essay on what a liquidity trap means and why mainstream neoclassical economics has nothing to offer in way of solving the problems that it brings along – and why it is so important to get hold of the insights that Fisher, Keynes, and Minsky have given us on debt-deflation processes and liquidity traps: Read more…
Well, heterodox is relative, isn’t it? The Pope is a heterodox if you are a Greek or a Russia. I don’t particularly like it but wouldn’t mind if people use it as an easy way of saying that I am not a neoclassical economist. But, as I have explained in my latest book (Economics: The User’s Guide), I don’t entirely subscribe to one school or another. I have been influenced by many different schools. I believe—not only for political reasons but for intellectual reasons too—we need pluralism in economics. Different schools have different methodological approaches, have different interests (some more interested in production, while others are more interested in exchange, for instance) or make different political and ethical assumptions. We need all of them to understand fully the complexity of the world.
from Lars Syll
I came to think about this dictum when today reading yet another piece on Piketty — this time on his refusal to use the term “human capital” in his inequality analysis.
I think there are many good reasons not to include human capital in economic analyses. Let me just give one — perhaps analytically the most important one — reason and elaborate a little on that. Read more…
from Asad Zaman
from Dean Baker
In the late 1990s, and again in the business cycle in the last decade, the United States to a large extent was the main engine of world growth. In both cases, growth in the United States, coupled with a rising dollar, led to a growing trade deficit, which provided a boost to demand elsewhere in the world.
There are many who see this pattern repeating based on a pickup of GDP growth in 2014, coupled with considerably faster job growth. This has coincided with a sharp rise in the dollar against other major currencies. However, beyond these outward similarities, there is little basis for the view that the U.S. economy will again be the engine for world growth.
The first and most important reason why this is unlikely is the pickup in growth in the United States is largely an illusion. The economy did grow at a fairly rapid 4.1 percent annual rate in the last three quarters of 2014, but this has to be understood in the context of a first quarter when it shrank at a 2.1 percent annual rate. Read more…
from David Ruccio
Like the capital controversy of the 1960s, the current controversy over human capital pits neoclassical economics against its critics.
The capital controversy (also known as the Cambridge controversy, because it was staged between neoclassical economists at MIT, and thus of Cambridge, Massachusetts, and non-neoclassical economists at Cambridge University, and thus of Cambridge, England), which actually took place between the mid-1950s and mid-1970s, was narrowly about the internal consistency of neoclassical economics and more generally about the role of capital in economic theory. The basic idea is that, in a world of heterogeneous capital goods (e.g., a shovel and an automobile assembly-line), you need to know the price of capital (the interest rate or rate of return on capital) in order to determine the quantity of capital (i.e., in order to add up all those different kinds of physical capital). But, in neoclassical economics, you need to use the quantity of capital in order to determine the price of capital (via supply and demand in the “capital market”), which creates a fundamental problem for the neoclassical theory of capital. Read more…
from Lars Syll
ATHENS — I am writing this piece on the margins of a crucial negotiation with my country’s creditors — a negotiation the result of which may mark a generation, and even prove a turning point for Europe’s unfolding experiment with monetary union.
Game theorists analyze negotiations as if they were split-a-pie games involving selfish players. Because I spent many years during my previous life as an academic researching game theory, some commentators rushed to presume that as Greece’s new finance minister I was busily devising bluffs, stratagems and outside options, struggling to improve upon a weak hand.
Nothing could be further from the truth.
If anything, my game-theory background convinced me that it would be pure folly to think of the current deliberations between Greece and our partners as a bargaining game to be won or lost via bluffs and tactical subterfuge.
from Stuart Birks
Well done, your concerns about the economics curriculum are getting attention. There are also many practicing economists who have concerns about the current emphasis and direction of economics as a discipline.
As in any such situation, the process of change can be crucial in determining the outcome. Often many different initiatives are called for. There is one initiative which may be effective in the short term and also instrumental in shaping developments in the long term. I am referring to the World Economics Association’s Textbook Commentaries Project.
The project involves the development of an online platform containing brief commentaries which can be used right now in existing and new economics courses. This growing collection is designed to increase critical understanding of economics approaches and awareness of alternative perspectives. The commentaries are each short and stand-alone, so can be easily be incorporated into existing courses without greatly increasing the workload. They do generate an awareness of the concerns about various approaches and the diversity of thought that exists, even if no longer included in the standard curriculum. Many commentaries draw directly on alternative literature by recognised experts in the field. It is important that students be made aware of these sources, if only to put their own knowledge in a wider context. Additional pages also highlight other accessible material (books and online teaching resources).
How can you participate?
from Lars Syll
The Greeks tried to talk with the other finance ministers of EU. The negotiations broke down.
As soon as it was admitted that it was in fact impossible to make Germany pay the expenses of both sides, and that the unloading of their liabilities upon the enemy was not practicable, the position of the Ministers of Finance of France and Italy became untenable. Thus a scientific consideration of Germany’s capacity to pay was from the outset out of court. The expectations which the exigencies of politics had made it necessary to raise were so very remote from the truth that a slight distortion of figures was no use, and it was necessary to ignore the facts entirely. The resulting unveracity was fundamental. On a basis of so much falsehood it became impossible to erect any constructive financial policy which was workable. For this reason amongst others, a magnanimous financial policy was essential.
from John Schmitt
In a new CEPR report out today, I argue that the US labor market is failing on two fronts. The first failure is the decades-long stagnation of real wages at the middle and the bottom of the wage scale –even as earnings at the top have grown rapidly. The second failure, only apparent since the early 2000s, is the sharp deterioration in job creation. Read more…
from Lars Syll
In a previous article posted here — What are the key assumptions of linear regression models? — yours truly tried to argue that since econometrics doesn’t content itself with only making optimal predictions, but also aspires to explain things in terms of causes and effects, econometricians need loads of assumptions — and that most important of these are additivity and linearity.
Let me take the opportunity to cite one of my favourite introductory statistics textbooks on one further reason these assumptions are made — and why they ought to be much more argued for on both epistemological and ontological grounds when used (emphasis added): Read more…
from Lars Syll
Finding Equilibrium explores the post–World War II transformation of economics by constructing a history of the proof of its central dogma—that a competitive market economy may possess a set of equilibrium prices. The model economy for which the theorem could be proved was mapped out in 1954 by Kenneth Arrow and Gerard Debreu collaboratively, and by Lionel McKenzie separately, and would become widely known as the “Arrow-Debreu Model.” While Arrow and Debreu would later go on to win separate Nobel prizes in economics, McKenzie would never receive it. Till Düppe and E. Roy Weintraub explore the lives and work of these economists and the issues of scientific credit against the extraordinary backdrop of overlapping research communities and an economics discipline that was shifting dramatically to mathematical modes of expression.
Based on recently opened archives, Finding Equilibrium shows the complex interplay between each man’s personal life and work, and examines compelling ideas about scientific credit, publication, regard for different research institutions, and the awarding of Nobel prizes. Instead of asking whether recognition was rightly or wrongly given, and who were the heroes or villains, the book considers attitudes toward intellectual credit and strategies to gain it vis-à-vis the communities that grant it.
Telling the story behind the proof of the central theorem in economics, Finding Equilibrium sheds light on the changing nature of the scientific community and the critical connections between the personal and public rewards of scientific work.
Although I find Düppe’s and Weintraub’s book a well-researched and interesting reading , I still can’t get rid of the feeling that all these efforts at modeling a world full of agents behaving as economists — “often wrong, but never uncertain” — and still not being able to show that the system under reasonable assumptions converges to equilibrium (or simply assume the problem away), is a gross misallocation of intellectual resources and time. Read more…
from Lars Syll
The loanable funds theory is in many regards nothing but an approach where the ruling rate of interest in society is — pure and simple — conceived as nothing else than the price of loans or credit, determined by supply and demand — as Bertil Ohlin put it — “in the same way as the price of eggs and strawberries on a village market.”
In the traditional loanable funds theory — as presented in mainstream macroeconomics textbooks like Greg Mankiw’s — the amount of loans and credit available for financing investment is constrained by how much saving is available. Saving is the supply of loanable funds, investment is the demand for loanable funds and assumed to be negatively related to the interest rate. Lowering households’ consumption means increasing savings that via a lower interest.
From a more Post-Keynesian-Minskyite point of view the problems with the standard presentation and formalization of the loanable funds theory by Greg Mankiw and other “New Keynesian” macroeconomists are quite obvious:
1 As already noticed by James Meade decades ago, the causal story told to explicate the accounting identities used gives the picture of “a dog called saving wagged its tail labelled investment.” In Keynes’s view — and later over and over again confirmed by empirical research — it’s not so much the interest rate at which firms can borrow that causally determines the amount of investment undertaken, but rather their internal funds, profit expectations and capacity utilization. Read more…
from Claude Hillinger
The Syriza party under Alexis Tsipras won the Greek election on a promise to end austerity. Negotiations between the new Greek government and the European Union have at this writing not yet begun. It is clear that whatever the outcome of the negotiations, the EU will at most finance a tiny fraction of all the expenditure programs that Syriza has planned and is already implementing: Re-hiring government employees, raising the minimum wage, stopping many privatization projects, and other measures. Equally evident is the fact that under present conditions, the Greek government does not have sufficient own resources to finance what it has planned. To think that the programs can be paid for by taxing the Greek Oligarchs is fantasy. So what can be done?
I have a proposal: Read more…