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Income inequality begins at birth and these are the stats that prove it.

May 6, 2015 Leave a comment

from John Komlos

Even conservative Republican Alan Greenspan, an ardent advocate of free markets, is beginning to see inequality as a fundamental threat to the system and admits that,

“You cannot have the benefits of capitalist market growth without the support of a significant proportion, and indeed, virtually all of the people; and if you have an increasing sense that the rewards of capitalism are being distributed unjustly the system will not stand.”

Well, the system was not standing very sturdily during the days of rage in Baltimore or in Ferguson. So we need to look beyond the ugly surface manifestations of young black men being shot in the back or suffocated and consider the deeper socioeconomic plight of this demographic in this country in 2015. The truth of the matter is that people of color are disadvantaged by the current socio-economic system from the very beginning of their lives.

Problem no. 1: babies born in low-income neighborhoods will go to bad schools.  Read more…

Categories: The Economy

The limits of statistical inference

May 6, 2015 Leave a comment

from Lars Syll

causationCausality in social sciences — and economics — can never solely be a question of statistical inference. Causality entails more than predictability, and to really in depth explain social phenomena require theory. Analysis of variation — the foundation of all econometrics — can never in itself reveal how these variations are brought about. First when we are able to tie actions, processes or structures to the statistical relations detected, can we say that we are getting at relevant explanations of causation.

For more on these issues — see the chapter “Capturing causality in economics and the limits of statistical inference” in my On the use and misuse of theories and models in economics.

Rational expectations — totally incredible bogus

May 4, 2015 7 comments

from Lars Syll

Roman Frydman is Professor of Economics at New York University and a long time critic of the rational expectations hypothesis. In his seminal 1982 American Economic Review article Towards an Understanding of Market Processes: Individual Expectations, Learning, and Convergence to Rational Expectations Equilibrium — an absolute must-read for anyone with a serious interest in understanding what are the issues in the present discussion on rational expectations as a modeling assumption — he showed that models founded on the rational expectations hypothesis are inadequate as representation of economic agents’ decision making.

Those who want to build macroeconomics on microfoundations usually maintain that the only robust policies and institutions are those based on rational expectations and representative actors. As yours truly has tried to show in On the use and misuse of theories and models in economics there is really no support for this conviction at all. On the contrary. If we want to have anything of interest to say on real economies, financial crisis and the decisions and choices real people make, it is high time to place macroeconomic models building on representative actors and rational expectations-microfoundations where they belong – in the dustbin of history.  Read more…

War and peace and the steady-state economy

May 2, 2015 4 comments

from Herman Daly

My parents were children during WW I, the so-called “war to end all wars.” I was a child in WW II, an adolescent in the Korean War, and except for a physical disability would likely have been drafted to fight in the Vietnam War. Then came Afghanistan, Iraq, the continuous Arab-Israeli conflict, ISIS, Ukraine, Syria, etc. Now as a senior citizen, I see that war has metastasized into terrorism. It is hard to conceive of a country at war, or threatened by terrorism, moving to a steady state economy.

Peace is necessary for real progress, including progress toward a steady state economy. While peace should be our priority, might it nevertheless be the case that working toward a steady state economy would further the goal of peace? Might growth be a major cause of war, and the steady state a necessity for eliminating that cause? I think this is so. Read more…

C. T. Kurien’s book Wealth and Illfare is now available in EPUB (for iPad) and MOBI (for Kindle) formats as well as PDF. ($10)

May 1, 2015 Leave a comment

Cover of Wealth and Illfare: An Expedition through Real Life Economics

Wealth and Illfare: An Expedition through Real Life Economics
C. T. Kurien

WEALTH and ILLFARE is intended for readers who do not have much knowledge in economics, but are eager to know how economic systems function.

In particular, it deals with the phenomenon that many find disturbing, the soaring affluence of the few and the continuing misery of the many that is increasingly becoming evident globally and in our country.

Ownership and control over resources, different forms of mediation and asymmetry of information are identified as clues for any interested reader to develop skills to study real life economic problems.

It is a unique and timely contribution by a reputed practitioner who, over the past half a century, has influenced generations of students and through his earlier writings the general public as well.

Categories: WEA Books

Validating assumptions

April 30, 2015 1 comment

from Lars Syll

Piketty uses the terms “capital” and “wealth” interchangeably to denote the total monetary value of shares, housing and other assets. “Income” is measured in money terms. We shall reserve the term “capital” for the totality of productive assets evaluated at constant prices. The term “output” is used to denote the totality of net output (value-added) measured at constant prices. Piketty uses the symbol β to denote the ratio of “wealth” to “income” and he denotes the share of wealth-owners in total income by α. In his theoretical analysis this share is equated to the share of profits in total output. Piketty documents how α and β have both risen by a considerable amount in recent decades. He argues that this is not mere correlation, but reflects a causal link. It is the rise in β which is responsible for the rise in α. To reach this conclusion, he first assumes that β is equal to the capital-output ratio K/Y, as conventionally understood. From his empirical finding that β has risen, he concludes that K/Y has also risen by a similar amount. According to the neoclassical theory of factor shares, an increase in K/Y will only lead to an increase in α when the elasticity of substitution between capital and labour σ is greater than unity. Piketty asserts that this is the case. Indeed, based on movements α and β, he estimates that σ is between 1.3 and 1.6 (page 221).  Read more…

Categories: methodology

Are economists superior to other social scientists?

April 29, 2015 4 comments

from Grazia Ietto-Gillies

En route from London to Rome I read The Superiority of Economists by Marion Fourcade, Etienne Ollion and Yann Algan (Journal of Economic Perspectives, 29, 1: 89-114). https://www.aeaweb.org/articles.php?doi=10.1257/jep.29.1.89

Some travels within Italy – to Pisa and Siena – gave me time for musings and reflections about the content of this paper. Move forward a few weeks and back in London I have decided to turn those reflections into clicks and share them . . .  read more

Seeking short reviews of the following books

April 29, 2015 Comments off

The Real-World Economics Review and the RWER Blog are interested in publishing short reviews (1,000 words) of the following books.  Send submissions to pae_news@btinternet.com

Categories: WEA Books

Macroeconomic ad hocery

April 28, 2015 4 comments

from Lars Syll

Robert Lucas is well-known for condemning everything that isn’t microfounded rational expectations macroeconomics as “ad hoc” theorizing.adhoc

But instead of rather unsubstantiated recapitulations, it would be refreshing and helpful  if the Chicago übereconomist — for a change — endeavoured to clarify just what he means by “ad hoc.”

The standard meaning — OED — of the term is “for this particular purpose.” But in the hands of New Classical–RBC–New Keynesians it seems to be used more to convey the view that modeling with realist and relevant assumptions is somehow equivalent to basing models on “specifics” rather than the “fundamentals” of individual intertemporal optimization and rational expectations.

This is of course pure nonsense, simply because there is no — as yours truly has argued at length e. g. here — macro behaviour that consistently follows from the RBC–New Keynesian microfoundations. The only ones that succumb to ad hoc assumptions here are macroeconomists like Lucas et consortes, who believe that macroeconomic behaviour can be adequately analyzed with a fictitious rational-expectations-optimizing-robot-imitation-representative-agent.

Categories: methodology

A detailed proposal for a complementary currency for Greece

April 28, 2015 4 comments

from Alan Harvey 

Introduction

Austerity has delivered obvious suffering to the Greek people and serious burdens to the Greek state, trials that do not need to be enumerated here. The mechanics of austerity drain money and the goods and services it will buy from the economy. Austerity follows from the rule of the primacy of debt, enforced by misguided, coercive and often bizarre policy programs.

The  government in Greece is pursuing anti-austerity, pro-recovery policies to the extent it can. There are three primary strictures it faces. The Hellenic Republic cannot (1) use exchange rates to multiply the domestic currency relative to the international currency; (2) employ the fiscal policy demanded by its situation for want of spending power; and (3) use monetary policy, as that is in the hands of the European Central Bank.  Read more…

Categories: Greece

Bayesianism — a dangerous scientific cul-de-sac

April 27, 2015 4 comments

from Lars Syll

The bias toward the superficial and the response to extraneous influences on research are both examples of real harm done in contemporary social science by a roughly Bayesian paradigm of statistical inference as the epitome of empirical argument. For instance the dominant attitude toward the sources of black-white differential in United States unemployment rates (routinely the rates are in a two to one ratio) is “phenomenological.” The employment differences are traced to correlates in education, locale, occupational structure, and family background. The attitude toward further, underlying causes of those correlations is agnostic … Yet on reflection, common sense dictates that racist attitudes and institutional racism must play an important causal role. People do have beliefs that blacks are inferior in intelligence and morality, and they are surely influenced by these beliefs in hiring decisions … Thus, an overemphasis on Bayesian success in statistical inference discourages the elaboration of a type of account of racial disadavantages that almost certainly provides a large part of their explanation.

Read more…

Categories: methodology

The message: from austerity to prosperity

April 25, 2015 8 comments

from Asad Zaman

Modern history is largely driven by the battle of the rich (top 0.01%) against the masses (bottom 90%). Over the past few decades, the rich have been tremendously successful in having it all their way. A previous blog post on “Deception and Democracy” illustrates by examples their successful conversion of democracy into plutocracy in the USA. As pointed out by Polanyi, unregulated markets create disastrous outcomes for the majority. Therefore, in a democratic environment, theories which misrepresent facts and justify massive inequalities are essential pillars of support for the plutocrats. Spreading these theories via media and educational channels helps create an environment where people support policies which go against their common interests. Read more…

Categories: rethinking economics

Rethinking the international financial architecture. The next WEA Conference

April 24, 2015 1 comment

from Maria Alejandra Madi 

The existing international financial architecture, left over institutions from the Bretton Woods period, proved useless to prevent or warn against the 2007-2008 crisis, or even less, solve it. Only when a new presidential grouping (G20) meeting was called for in London in March 2009, the issues of how to coordinate countercyclical policies and inject resources into the economies were discussed. At that time, a UN high level Commission was created to propose reforms to the international financial architecture. The results of what became known as the Stiglitz Commission came to light in April 2010; the Commission’s recommendations were, however, shunned by some large UN member countries due to their rejection of the principle of global solutions for global problems. Indeed, some European countries and the US still insist on national solutions, that is on the use of local regulatory agencies in the international financial field. Read more…

Money is NOT neutral in the long run

April 23, 2015 3 comments

from Lars Syll 

Paul Krugman has often tried to explain why we should continue to use neoclassical hobby horses like IS-LM and Aggregate Supply-Aggregate Demand models. Here’s one example:

So why do AS-AD? … We do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility. Or to put it differently, you do want somehow to make clear the notion (which even fairly Keynesian guys like me share) that money is neutral in the long run.

Well, this “fairly Keynesian” guy is not impressed. And I doubt that Keynes himself would have been impressed by having his theory being characterized with catchwords like “tendency to return to full employment” and “money is neutral in the long run.” Read more…

Categories: New vs. Old Paradigm

Gödel’s theorems & the limits of reason

April 23, 2015 19 comments

from Asad Zaman

My article on the limits of reason was published in Express Tribune recently (Monday April 13, 2015). This essay shows that logic is limited in its ability to arrive at a definite conclusion even in the heartland of mathematics. Pluralism is required to cater for the possibility that both Euclidean and non-Euclidean geometries represent valid ways of looking at the world. The world of human affairs is far more complex. In order to study and understand societies, one must learn to deal with a multiplicity of truths. This argument, which is related to the first, has been made in my article “Tolerance and Multiple Narratives” which was published in Express Tribune earlier (March 29, 2015). These ideas form part of the background for supporting the drive for pluralism in our approaches to economic problems.

Categories: methodology

New and forthcoming eBooks from WEA Books

April 20, 2015 3 comments
Categories: WEA Books

Model validation and significance testing

April 19, 2015 Leave a comment

from Lars Syll

In its standard form, a significance test is not the kind of “severe test” that we are looking for in our search for being able to confirm or disconfirm empirical scientific hypothesis. This is problematic for many reasons, one being that there is a strong tendency to accept the null hypothesis since they can’t be rejected at the standard 5% significance level. In their standard form, significance tests bias against new hypotheses by making it hard to disconfirm the null hypothesis.  Read more…

Categories: methodology

Workers wages in the United States are lower today than they were back in 1972. (3 charts)

April 17, 2015 2 comments

from David Ruccio

BN-HY153_realwa_G_20150417085212 BN-HY156_bytheh_G_20150417085434

The Wall Street Journal notes that workers wages in the United States are lower today than they were back in 1972.

In particular, both average real weekly earnings and real hourly earnings of production and nonsupervisory workers peaked in October 1972 (“when Richard Nixon won re-election, Eugene Cernan became the last man to walk on the moon and the Dow Jones Industrial Average closed above 1,000 for the first time”) and they still haven’t reached that level more than four decades later. Read more…

On dogmatism in economics

April 17, 2015 10 comments

from Lars Syll

GW239H358Abstraction is the most valuable ladder of any science. In the social sciences, as Marx forcefully argued, it is all the more indispensable since there ‘the force of abstraction’ must compensate for the impossibility of using microscopes or chemical reactions. However, the task of science is not to climb up the easiest ladder and remain there forever distilling and redistilling the same pure stuff. Standard economics, by opposing any suggestions that the economic process may consist of something more than a jigsaw puzzle with all its elements given, has identified itself with dogmatism. And this is a privilegium odiosum that has dwarfed the understanding of the economic  process wherever it has been exercised.

Categories: methodology

from today’s Financial Times: Moribund orthodoxy grips economics departments

April 16, 2015 1 comment

Bringing economics back into liberal academic life.April 16, 2015.http://www.ft.com/cms/s/0/99799262-e293-11e4-ba33-00144feab7de.html#ixzz3XTazf200

Sir, The moribund orthodoxy that currently exercises such an inflexible grip on university economics departments will, as Wolfgang Münchau comments, inevitably face a challenge, and this “will come from outside the discipline and will be brutal” (“Macroeconomists need new tools to challenge consensus”, April 13). The orthodoxy has brought this dismal prospect on itself through the brutality with which it has purged those departments of any other school of thought than its own.

Indeed, in its extreme version, the orthodoxy’s doctrine holds quite simply that there are “no schools of thought in economics”, a totalitarian assertion all too true in most economics departments today, so ruthless has been the purge of alternatives. As a result, the different approaches to economic issues of Adam Smith, Bentham, Ricardo, Marshall, Keynes, Friedman and so on are all relegated to the fringe subject of the “history of economic thought”.

Read more…

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