from Lars Syll
In opening the conference, Frank Morris mentioned his disappointment or disillusionment – which many others share – that the analytical success of the 1960s didn’t survive that decade. I think we all knew, even back in the 1960s, that as Geof put it, “inflation doesn’t wait for full employment.” These days inflation doesn’t even seem to care if full employment is going along on the trip … The question is: what are the possible responses that economists and economics can make to those events?
One possible response is that of Professors Lucas and Sargent. They describe what happened in the 1970s in a very strong way with a polemical vocabulary reminiscent of Spiro Agnew. Let me quote some phrases that I culled from thepaper: “wildly incorrect,” “fundamentally flawed,” “wreckage,” “failure,” “fatal,” “of no value,” “dire implications,” “failure on a grand scale,” “spectacular recent failure,” “no hope” … I think that Professors Lucas and Sargent really seem to be serious in what they say, and in turn they have a proposal for constructive research that I find hard to talk about sympathetically. They call it equilibrium business cycle theory, and they say very firmly that it is based on two terribly important postulates — optimizing behavior and perpetual market clearing. When you read closely, they seem to regard the postulate of optimizing behavior as self-evident and the postulate of market-clearing behavior as essentially meaningless. I think they are too optimistic, since the one that they think is self-evident I regard as meaningless and the one that they think is meaningless, I regard as false. The assumption that everyone optimizes implies only weak and uninteresting consistency conditions on their behavior. Anything useful has to come from knowing what they optimize, and what constraints they perceive. Lucas and Sargent’s casual assumptions have no special claim to attention …
from Lars Syll
A couple of years ago yours truly had a discussion with the chairman of the Swedish Royal Academy of Sciences (yes, the one that yearly presents the winners of The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel). What started the discussion was the allegation that the level of employment in the long run is a result of people’s own rational intertemporal choices and that how much people work basically is a question of incentives.
Somehow the argument sounded familiar.
When being awarded the ‘Nobel prize’ for 2011, Thomas Sargent declared that workers ought to be prepared for having low unemployment compensations in order to get the right incentives to search for jobs. The Swedish right-wing finance minister at the time appreciated Sargent’s statement and declared it to be a “healthy warning” for those who wanted to increase compensation levels.
The view is symptomatic. As in the 1930s, more and more right-wing politicians – and some economists – now suggest that lowering wages is the right medicine to strengthen the competitiveness of their faltering economies, get the economy going, increase employment and create growth that will get rid of towering debts and create balance in the state budgets. Read more…
from Norbert Häring
Microsoft’s Bill Gates is one of the richest and most influential people on earth. He announced in 2015 that his Bill & Melinda Gates Foundation was aiming at achieving full digitalization of the payment systems of India and other populous developing countries by 2018. This “financial inclusion” program for India dates back to well before Narendra Modi came to power. It was elevated to official US policy by Executive Order in 2012, because the President saw vital US security interests are at stake.
Speaking for the Bill & Melinda Gates Foundation at the “Financial Inclusion Forum” in Washington, organized by the Treasury Department and USAID on December 1, 2015, Bill Gates said (min 17):
“Full digitalization of the economy may happen in developing countries faster than anywhere else. It is certainly our goal to make it happen in the next three years in the large developing countries. We have very significant efforts in Nigeria, Pakistan and India, (and) a dozen other countries, where we work with the central banks to make sure that the right kind of transaction switch is available…(min 20)…We worked directly with the central bank there (India) over the last three years and they created a new type of authorization called the payments bank, and those customers will be able to use their mobile phones to perform basic financial transactions. And 11 entities applied, including all the mobile phone providers, and were granted that payment bank status.”
“Financial Inclusion” was defined by PayPal-CEO Dan Schulman in an interview during the forum as:
“Financial Inclusion is a buzz word for bringing people into the system.”
The cooperation of the Gates foundation and the Reserve Bank of India (RBI) is and has been a very tight one. Nachiket Mor, a “Yale World Fellow”, is head of the Gates Foundation India. He is also a board member of the RBI, with responsibility for financial supervision. He chaired the RBI Committee on the Licensing of Payment Banks and a financial inclusion committee that the RBI convened in 2013.
+++Note: Since this text puts forward a conspiracy theory, I want to let the actors and their documents speak for themselves as much as possible. Where my own judgement and additional information figure in significantly, as in the following lines, it will be in italics and clearly marked. If you are skeptical, you may want to jump over those sections in italics in a first round, to not be unduly influenced in your interpretation of the quotes from the main actors and their documents. Read more…
from Maria Alejandra Madi
By 2020, the largest pools of pension fund assets are projected to remain concentrated in the US and Europe. In North America, pension fund assets reached $19.3 trillion in 2012 and PwC estimates that by 2020, pension fund assets will rise by 5.7 percent a year to achieve over $30 trillion of the $56.5 trillion in total global assets, more than 50 percent of the global total.
Indeed, according to the PwC report, Asset Management 2020: A Brave New World, demographic changes, accelerating urbanization, technological innovations and shifts in economic power are reshaping the asset management environment where pension funds have been playing and will play an outstanding role in the global saving and investment process. Three key factors seems to stimulate the global growth in assets: i) changes in government-incentivized or government-mandated retirement plans that will turn out to increase the use of defined contribution (DC) individual plans; ii) faster growth of high-net-worth-individuals in South America, Asia, Africa and Middle East regions up to 2020; iii) the expansion of new sovereign wealth funds.
However, in spite of the pension funds’ power to centralize huge amount of “savings from workers”, in this scenario of financial globalization, workers do not seem to have strong defense against the impacts of the current global scenario on the savings of workers and the flows of workers’ income. read more
Ideas Towards a New International Financial Architecture (Wea-Books) Paperback – February 2017
In the short span of a few essays, this book takes the reader on a trip from the historical roots of the current financial architecture to the imaginable futures one can envision for it, only if there is the political will to change it. If we accept that, as put by the editors, financial markets’ marginal imperfections are rather endemic pathologies, the consequences for the financial architecture have Copernican proportions. Every scholar and practitioner interested in the problems posed by the global economy at a critical moment when it has reached what looks like a dead end, will appreciate the refreshing inspiration offered by the authors that a star editing team has put together.
from Lars Syll
If all agents are supposed to have rational expectations, it becomes convenient to assume also that they all have the same expectation and thence tempting to jump to the conclusion that the collective of agents behaves as one. The usual objection to representative agent models has been that it fails to take into account well-documented systematic differences in behaviour between age groups, income classes, etc. In the financial crisis context, however, the objection is rather that these models are blind to the consequences of too many people doing the same thing at the same time, for example, trying to liquidate very similar positions at the same time. Representative agent models are peculiarly subject to fallacies of composition. The representative lemming is not a rational expectations intertemporal optimising creature. But he is responsible for the fat tail problem that macroeconomists have the most reason to care about …
For many years now, the main alternative to Real Business Cycle Theory has been a somewhat loose cluster of models given the label of New Keynesian theory. New Keynesians adhere on the whole to the same DSGE modeling technology as RBC macroeconomists but differ in the extent to which they emphasise inflexibilities of prices or other contract terms as sources of shortterm adjustment problems in the economy. The “New Keynesian” label refers back to the “rigid wages” brand of Keynesian theory of 40 or 50 years ago. Except for this stress on inflexibilities this brand of contemporary macroeconomic theory has basically nothing Keynesian about it.
The obvious objection to this kind of return to an earlier way of thinking about macroeconomic problems is that the major problems that have had to be confronted in the last twenty or so years have originated in the financial markets – and prices in those markets are anything but “inflexible”.
And still mainstream economists seem to be impressed by the ‘rigour’ brought to macroeconomics by New-Classical-New-Keynesian DSGE models and its rational expectations and micrcofoundations! Read more…
from Lars Syll
Scientific progress … is frequently the result of observation that something does work, which runs far ahead of any understanding of why it works.
Not within the economics profession. There, deductive reasoning based on logical inference from a specific set of a priori deductions is “exactly the right way to do things”. What is absurd is not the use of the deductive method but the claim to exclusivity made for it. This debate is not simply about mathematics versus poetry. Deductive reasoning necessarily draws on mathematics and formal logic: inductive reasoning, based on experience and above all careful observation, will often make use of statistics and mathematics …
The belief that models are not just useful tools but are capable of yielding comprehensive and universal descriptions of the world blinded proponents to realities that had been staring them in the face. That blindness made a big contribution to our present crisis, and conditions our confused responses to it.
The ‘deductivist blindness’ of mainstream economics explains to a larger extent why it contributes to causing economic crises rather than to solving them. But where does this ‘deductivist blindness’ of mainstream economics come from? To answer that question we have to examine the methodology of mainstream economics. Read more…
from Jayati Ghosh
There is a lot of buzz globally around the idea of a Universal Basic Income (or UBI). It is perceived as one way of coping with technology-induced unemployment that is projected to grow significantly in the near future, as well as reducing inequalities and increasing consumption demand in stagnant economies. Certainly there is much to be said for the idea, especially if it is to be achieved by taxing the rich and particularly those activities that are either socially less desirable or are generating larger surpluses because of technological changes.
Indeed, that is precisely the proposal of the French Socialist candidate Benoit Hamon, who just sprang a surprise by topping the first round of the primary race of his party for the Presidential election. Obviously, this idea (which has proved to be more popular even among the young than his other proposal of legalising marijuana) is picking up more supporters across Europe. Elsewhere in the developed world, there have already been pilot projects experimenting with the idea, for example in Finland (but only to around 2000 persons there). The idea has also found expression in several developing countries. In China, there is already a dibao, or minimum livelihood guarantee (set at different levels in urban and rural areas) that adds to the incomes of those categorised as poor, to reach a certain minimum.
Proponents of the UBI see it as a broader, non-targeted provision: a “periodic cash payment unconditionally delivered to all on an individual basis, without means-test or work requirement.” The idea is to ensure that every person in the society has the means to live with a modicum of freedom and dignity, independent of capacity to earn or availability of employment. It is certainly attractive in that, if implemented according to this norm, it would reduce both poverty and inequality. Read more…
from Lars Syll
There was an unusual degree of consensus among economists about what would happen if Britain voted for Brexit in the referendum on June 23 last year. The language used by the International Monetary Fund was typical: It expressed fears of an “abrupt reaction,” adding that this “may have already begun” …
What happened instead was that Britain enjoyed the best growth of any major advanced economy in 2016 … Andy Haldane compared the pitfalls of economic prediction to the single most famously wrong weather forecast in British history, made on the BBC on Oct. 15, 1987. A woman had called the BBC to say she was worried there was a hurricane on the way. “Don’t worry, there isn’t,” the weatherman responded. That night, 22 people died amid hurricane-force winds …
The reason this poses a deep intellectual crisis for macro-economics is that the entire point of the field, as it has developed since the work of John Maynard Keynes in the 1930s, is to prevent just this sort of severe downturn. Keynes once spoke of a future in which economists would be “humble, competent people on a level with dentists” … It seems to me, though, that what macroeconomists do is really most like bomb disposal. Uniquely in the social sciences and humanities, macroeconomics was developed with a specific, real-world purpose, and a negative purpose to boot: to stop anything like the Great Depression from ever happening again. Given this goal — to avert systemic crises and downturns — the credit crunch and the Great Recession were, for macroeconomics, an intellectual disaster. Read more…
from Lars Syll
The 2017 OECD Economic Survey of Sweden — presented today in Stockholm by OECD Secretary-General Angel Gurría and Sweden’s Minister of Finance Magdalena Andersson — points out that income inequality in Sweden has been rising since the 1990s.
from today’s Guardian
In the autumn of 2011, as the world’s financial system lurched from crash to crisis, the authors of this book began, as undergraduates, to study economics. While their lectures took place at the University of Manchester the eurozone was in flames. The students’ first term would last longer than the Greek government. Banks across the west were still on life support. And David Cameron was imposing on Britons year on year of swingeing spending cuts.
from Lars Syll
The trouble is, too many theorists — especially in the mainstream of the discipline — have drifted far from the real world. Their ambition has been to build mathematically elegant and internally consistent models of the economy, even if that requires wholly unrealistic assumptions. Granted, just as maps have to simplify complex terrain, theoretical models must ignore aspects of reality to be any use. But there’s a line between simplification and gross distortion, and modern macroeconomics has crossed it.
Before the 2008 financial crisis, for example, the standard models more or less ignored finance. No banks, no indebtedness, no leverage. As a result, they couldn’t make sense of the worst global recession since the 1930s …
Given such spectacular failures, you’d think the profession would have gone back to the drawing board. It hasn’t …
Whenever an economist says “in our model,” beware. Demand to know what assumptions the model makes, and question those assumptions as severely as the theorists test for valid inference — because valid inference from bogus assumptions is useless. Where possible, and in the same spirit, pay closest attention to empirical and historical research.
In just about every branch of science, theoretical research has been crucial to achieving breakthroughs. In macroeconomics, it has held progress back. To stop the discipline fading into irrelevance, this will have to change.
The editors of Bloomberg View are, of course, absolutely right.
Unfortunately, there are many kinds of useless ‘post-real’ economics held in high regard within the mainstream economics establishment today. Few — if any — are less deserved than the macroeconomic theory/method called calibration. Read more…
from Asad Zaman
Part 2 of Lecture on Spirituality and Development: Friday, 27th Jan 2017 by Dr. Asad Zaman, VC PIDE — for Students of Religion & Development Paper, Center of Development Studies, University of Cambridge. Click here to read outline of lecture and click here to watch the lecture.
from Stuart Birks and the WEA Newsletter
Aldous Huxley’s Brave New World (1932) and George Orwell’s Animal Farm (1945) and Nineteen Eighty-Four (1949) are noted examples of dystopian literature. In contrast to idyllic utopian literature, they describe what might be considered to be seriously flawed societies. The authors wished to warn of potential dangers that might arise in the future. Huxley later published a follow-up collection of essays, Brave New World Revisited (1958) (BNWR). In it he warned that, his prophecies in the earlier book were coming true much sooner than he had anticipated. He wrote this in the 1950s, but his points seem particularly pertinent today as I will illustrate below. However, first I will give some context.
While not an economist, in BNWR Huxley made some points of particular relevance to economics:
“Omission and simplification help us to understand – but help us, in many cases, to understand the wrong thing; for our comprehension may be only of the abbreviator’s neatly formulated notions, not of the vast, ramifying reality from which these notions have been so arbitrarily abstracted.” (P. xxi)
And (bearing in mind, rationality, atomism, the efficiency of markets):
“Under the influence of badly chosen words, applied, without any understanding of their merely symbolic character, to experiences that have been selected and abstracted in the light of a system of erroneous ideas, we are apt to behave with a fiendishness and an organized stupidity.” (p.136)
Of course, the 20th Century was not the first time that utopian views have been challenged. A disastrous earthquake struck Lisbon in 1755 accompanied by massive tsunamis and widespread fires. This greatly affected Voltaire, among others, and a few years later he published Candide (1759). This satirical fiction challenged the view of nature and society being orderly and resulting in “the best of all possible worlds”. See here also. Anyone supporting neoliberal views or basing their opinions on the desirability of perfect competition would do well to consider Voltaire’s characterisation of Dr Pangloss.
So what was worrying Huxley in 1958? He argued that: read more
from Lars Syll
Limiting model assumptions in economic science always have to be closely examined since if we are going to be able to show that the mechanisms or causes that we isolate and handle in our models are stable in the sense that they do not change when we “export” them to our “target systems”, we have to be able to show that they do not only hold under ceteris paribus conditions and a fortiori only are of limited value to our understanding, explanations or predictions of real economic systems. Read more…
from Asad Zaman
Friday, 26th Jan 2017: Lecture by Dr. Asad Zaman, VC PIDE to students at University of Cambridge, Center of Development Studies for Religion & Development paper. 40 minute video recording of lecture on you-tube.
Part 1: “What Is Spirituality?”: Modern Secular thought takes spirituality and religion to be diseases which affect weak minds not properly trained in the scientific method. Part I of this lecture explains why this view, which is based on positivist ideas, is seriously mistaken. Click here to read outline of lecture and click here to watch the lecture.
from Lars Syll
Eminent statistician David Salsburg is rightfully very critical of the way social scientists — including economists and econometricians — uncritically and without arguments have come to simply assume that one can apply probability distributions from statistical theory on their own area of research:
We assume there is an abstract space of elementary things called ‘events’ … If a measure on the abstract space of events fulfills certain axioms, then it is a probability. To use probability in real life, we have to identify this space of events and do so with sufficient specificity to allow us to actually calculate probability measurements on that space … Unless we can identify [this] abstract space, the probability statements that emerge from statistical analyses will have many different and sometimes contrary meanings …
Kolmogorov established the mathematical meaning of probability: Probability is a measure of sets in an abstract space of events. All the mathematical properties of probability can be derived from this definition. When we wish to apply probability to real life, we need to identify that abstract space of events for the particular problem at hand … It is not well established when statistical methods are used for observational studies … If we cannot identify the space of events that generate the probabilities being calculated, then one model is no more valid than another … As statistical models are used more and more for observational studies to assist in social decisions by government and advocacy groups, this fundamental failure to be able to derive probabilities without ambiguity will cast doubt on the usefulness of these methods.
Wise words well worth pondering on.
As long as economists and statisticians cannot really identify their statistical theories with real-world phenomena there is no real warrant for taking their statistical inferences seriously. Read more…
from Maria Alejandra Madi
Throughout 2016, many countries around the world keep on competing for market share in high-wage, innovation-based industries. Indeed, these countries have turned to “innovation mercantilism” by imposing protectionist policies to expand domestic production and exports of high-tech goods and services.
In this setting, innovation mercantilist policies are being oriented to high-value tech sectors such as life sciences, renewable energy, computers and electronics, and Internet services. There are new “beggar-thy-neighbor” strategies adopted by nation-states, such as forcing companies to transfer the rights to their technology or forcing them to relocate their production, research and development (R&D), or data-storage activities. These strategies aim at both replacing imports with domestic production or promoting exports.
At this respect, the 2016 Information Technology and Innovation Foundation annual report shows that:
- China introduced a new cybersecurity law so as to impose local data-storage requirements, and forced intellectual property and source code disclosures. This country also introduced new cloud-computing restrictions so as to exclude and prevent foreign firms from operating in the Chinese market.
- Germany introduced forced local data-storage requirements as part of a new telecommunications data law.
- Indonesia introduced forced local data-storage requirements for Internet-based content providers. The country also introduced a patent law amendment in order to force local production and technology transfers.
- Russia introduced forced local data-storage requirements and encryption-key disclosure as part of a new telecommunications data law. The country also introduced new government procurement rules in order to ban the purchase of foreign software.
- Turkey introduced a new data-protection law that, as a matter of fact, forced local data storage.
- Vietnam introduced forced local data-storage requirements for Internet-based content providers. The country also introduced a new network-security law that forces disclose encryption keys and source codes a condition of market access. read more
from Lars Syll
Many mainstream economists seem to think the idea behind Modern Monetary Theory is new and originates from economic cranks.
New? Cranks? How about reading one of the great founders of neoclassical economics – Knut Wicksell. This is what Wicksell wrote in 1898 on ‘pure credit systems’ in Interest and Prices (Geldzins und Güterpreise), 1936 (1898), p. 68f:
It is possible to go even further. There is no real need for any money at all if a payment between two customers can be accomplished by simply transferring the appropriate sum of money in the books of the bank …
A pure credit system has not yet … been completely developed in this form. But here and there it is to be found in the somewhat different guise of the banknote system …
We intend therefor, as a basis for the following discussion, to imagine a state of affairs in which money does not actually circulate at all, neither in the form of coin … nor in the form of notes, but where all domestic payments are effected by means of the Giro system and bookkeeping transfers. A thorough analysis of this purely imaginary case seems to me to be worth while, for it provides a precise antithesis to the equally imaginay case of a pure cash system, in which credit plays no part whatever [the exact equivalent of the often used neoclassical model assumption of “cash in advance” – LPS] …
For the sake of simplicity, let us then assume that the whole monetary system of a country is in the hands of a single credit institution, provided with an adequate number of branches, at which each independent economic individual keeps an account on which he can draw cheques.
What Modern Monetary Theory (MMT) basically does is exactly what Wicksell tried to do more than a hundred years ago. The difference is that today the ‘pure credit economy’ is a reality and not just a theoretical curiosity – MMT describes a fiat currency system that almost every country in the world is operating under.
And here’s another well-known economist with early ideas of the MMT variety: Read more…
from Lars Syll
In an often cynical world, standard ﬁnancial and macroeconomic quantitative models give people the beneﬁ t of the doubt. Fundamental economic theory assumes the best of us, supposing that human beings are perfectly rational, know all the facts of a given situation, understand the risks, and optimize our behavior and portfolios accordingly. Reality, of course, is quite different. While a signiﬁcant portion of individual and market behavior can be modeled reasonably well, the human emotions that drive cycles of fear and greed are not predictable and can often defy historical precedent. As a result, quantitative models sometimes fail to anticipate major macroeconomic turning points. The ongoing debt crisis in Europe is the most recent example of an extreme event shattering historical norms.
Once an extreme event occurs, standard models offer limited insight as to how the ensuing crisis could play out and how it should be managed, which is why policy responses can seem disjointed. The latest policy responses to the European crisis have been no exception. To understand and respond to a crisis like the one in Europe, perhaps we need to consider some new models that include the “human factor.” Economic historian Charles Kindleberger can offer some insight. In his book Manias, Panics, and Crashes, Kindleberger explores the anatomy of a typical ﬁnancial crisis and provides a framework that considers the impact of the powerful human dynamics of fear and greed. Kindleberger’s descriptive process of the boom and bust liquidity cycle can help shed light on the current European sovereign debt saga, and perhaps illuminate whether we have in fact turned the corner on this ﬁnancial crisis.