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What works? Policy design without theory is useless

September 23, 2019 4 comments

from Maria Alejandra Madi

Against a rationalist top down approach to policy making, the evidence-informed policy and practice has rapidly evolved in the last two decades.

In this line of research, a new book What Works Now? Evidence-informed Policy and Practice has been edited by Annette Boaz, Huw Davies, Alec Fraser and Sandra Nutley.  It offers not only a synthesis of the role of evidence in policy making but also an analysis of its use in recent economic models and practices in the UK, Australia, New Zealand, Scandinavia, Canada and the United States. In addition to the diversity of policy and practice settings where evidence is sought and gets applied, the book considers policy examples related to healthcare, social care, criminal justice, education, environment and international development.. At the core of the argument regarding the actual relevance of ‘know-about’, ‘know-what works’, ‘know-how’, ‘know-who’ and ‘know-why’ is the belief that evidence matters.

Considering this policy scenario, the relevant question at stake is  what are the implications of the new policy design practices that mainly rely on the belief that evidence matters?  read more . . .

GOING DIGITAL. The next WEA Conference

from Maria Alejandra Madi                  

GOING DIGITAL conference site

The advent of digital economy creates new challenges for businesses, workers, and policymakers. Moreover, business prospects for artificial intelligence and machine learning are evolving quickly. These technologies have transforming implications for all industries, businesses of all sizes, and societies. The digitalization of economic activities calls for a deep reflection on the forces that will shape the future of the global economy.

The objective of this conference, led by Prof. Maria Alejandra Madi and Dr. Malgorzata Dereniowska, is to discuss recent contributions to the understanding of digital economy and its consequences for business trends and labour challenges. The conference also focuses on bridging the gap between different economic theoretical approaches and the practical applications of artificial intelligence and machine learning.

The Conference calls for a focused reflection on the benefits and risks of the high-tech revolution is an important element of shaping sustainable business and just labor. Related topics include law, ethics, safety, and governance.

Topics include (but are not limited to): read more

On NAIRU and NAIBER

from Maria Alejandra Madi

Throughout the last decades, the nominal interest rate became the dominant monetary policy instrument. Looking backward, the early 1980s proved to be a transition period in terms of monetary policy. After the monetarist experiences of Thatcher and Reagan, there was a pragmatic shift from the supply of the monetary base to the interest rate as monetary policy instrument. The recognition that the control of the monetary base could not only impose extreme volatility to the interest rate but also deeply affect the whole economy challenged, in fact, the previously stable empirical relationship between money supply, demand for money, prices, and income supported by Milton Friedman.

At the theoretical level, the so-called “New Consensus in Macroeconomics” favoured the short-term interest rate as the policy instrument in conjunction with inflation targeting. The new-Keynesian so-called “Taylor rule” has increasingly turned out to be adopted by central banks to manage the interest rate as the policy instrument. In this policy approach, the central bank, mainly through open market operations, sets the short-term interest rate in order to adjust its level in response to changes in inflation and output. In a framework of capital account openness, however, the autonomy of monetary policy, aimed to stabilize prices, subordinates the fiscal budget.

After the global financial crisis, academic economists and policy makers have actively participated in the debate on monetary policy.  read more . . .

The neoliberal governance of the self: a clarification

from Maria Alejandra Madi

My last post on Behavioural Economics arose some interesting questions about the rationality of the neoliberal governance of the self and its relation to the current research about psychology and cognitive theories. (https://rwer.wordpress.com/2019/03/20/beyond-behavioral-economics-the-self-governance-of-nudging/#comment-150149)

The neoliberal governance of self-care (or neoliberal governance of the self) relies on Dual Process Cognitive Theories (DPTs), especially the one elaborated by Daniel Kahneman. According to him, the distinction between Econs and Humans rejects the concept of homo oeconomicus of the neoclassical theory.  The human brain functions in ways that refer to a distinction between two kinds of thinking: automatic  and reflective (rational), and Kahneman called these ways of thinking System 1 and System 2, respectively. His Dual Process Cognitive Theory tries to explain why human beings actually systematically deviate from rational decisions.   read more

Beyond behavioral economics: the self-governance of nudging

from Maria Alejandra Madi

Looking back, after the Second World War, new theoretical and applied work in economics fostered empirical techniques that included structural estimation, the development of input-output methods and linear programming. Among the theoretical advances, the Keynesian revolution, the mathematical modeling of the business cycle, game theory, dynamic modeling, new models of consumer behavior and general equilibrium analysis can be highlighted.

What is significant about these changes is that, as theoretical and empirical work became more formal and mathematical, the conceptions of economic theory and of its relationship to various types of applied work changed. “Measurement without theory”, as Rutledge Vining explained, means that empirical work was needed in order to discover the appropriate theory. The ensuing debates were dominated by this view, that also included Milton Friedman’s contribution that turned out to be one of the most widely read methodological essays in economics.

By the 1970s, mainstream economics was centered on mathematical modeling of maximizing agents and econometric models were widely spread in applied work. Consequenlty, economics was becoming more methodologically homogeneous despite the protests from heterodox economists. In this setting, new theories for specific fields in economics were developed. As Backhouse and Cherrier claimed, there has been a process of unification and fragmentation in economics.  read more

Karl Polanyi and social justice

February 22, 2019 35 comments

from Maria Alejandra Madi

In the introductory note to the book Trade and Market, Polanyi invites the readers to re-examine the notion of the “economy” since many people think that the only way of organizing the livelihoods of men is the market economy. In his own words:

‘What is to be done, though, when it appears that some economies have operated on altogether different principles, showing a widespread use of money, and far-flung trading activities, yet no evidence of markets or gain made on buying or selling? It is then that we must re-examine our notions of the economy.’ (Polanyi et al, 1957: xvii).

In order to develop an alternative notion of the “economy”, Polanyi proposed a new theoretical approach to explain the place and role of human beings in social and economic systems. He addressed that men value those material goods that serve the end to promote protection and social standing. As a result, in his approach, social matters  turn out to be anthropological ones and the role of history is highly relevant. As  Polanyi wrote:

“But a purposeful use of the past may help us to meet our present over concern with economic matters and to achieve a level of human integration, that comprises the economy, without being absorbed in it” (Polanyi et al., 1957: xviii). 

Indeed, while considering different historical references, Polanyi provided a guide to examine the non-market economies and claimed that empirical observations reveal economic life in archaic and primitive economies to be entirely different from that assumed by formal economic analysis (Polanyi et al, 1975: 243-44). Against the methodological approach to economics based on assumptions, premisses and deductive reasoning, Polanyi proposed the method of economic anthropology that depends upon principles of economic behavior that are induced from empirical observation.  read more

Pension funds and the search for alternative assets

January 11, 2019 6 comments

from Maria Alejandra Madi

A decade after the 2008 global crisis, some key trends can be highlighted: a) There has been a shift to defined contribution (DC) pension plans, b) The increasing role of alternative assets, such as private equity, among pension assets.

Many governments in OCDE countries have been committed to structural reforms in labour markets and pension plans. As a result, the current era of austerity has deep impacts on the diversification of types of pension plans. According to a 2018 OCDE  report, in a mandatory pension plan, a) employers setup a plan for their employees, b) employees contribute to a state funded pension scheme or c) employees contribute a private pension fund of their choice.  In a quasi-mandatory, employers need to setup a pension plan as a result of labour agreements. In some OCDE countries, there are automatic enrolment programs at the national level where employees have the option to opt out of the plan under certain conditions.

In this setting, a recent PwC report warned that government-incentivized or government-mandated retirement plans turns out to privilege the use of defined contribution (DC) pension plans -such as the United States.  read more

Climate change: threats and challenges

from Maria Alejandra Madi

Global warming and global CO2 emissions are interconnected. In 2018, heatwaves were observed in Europe, Asia, North America and northern Africa, while the extent of Arctic sea ice has been continuously dropping. According to the World Meteorological Organization (WMO), the last four years (2015-2018) have been the warmest years on record. In particular, between January and October 2018, global average temperature increased 0.98 degrees Celsius above the levels of 1850-1900. If this trend continues, temperatures may rise by 3-5 degrees Celsius by 2100.

Global CO2 emissions have also been increasing in the last years. China and the US together account for more than 40% of the global total CO2 emissions, according to 2017 data from the European Commission’s Joint Research Centre and the PBL Netherlands Environmental Assessment Agency. After the withdrawal from the Paris climate change agreement, the US’s environmental policy shifted to a pro-fossil fuels agenda on behalf of the need to overcome the disadvantage of American businesses and workers. Trump called climate change a “very, very expensive form of tax”. Fossil fuel lobbies in Saudi Arabia, Russia and Canada are powerful forces against government climate policies.  read more

The neoliberal policies of resilience

from  Maria Alejandra Madi

Economic conditions are constantly changing. Today, our generation is confronted with the outcomes of contemporary globalization that is a broader, complex, and multifaceted process characterized by new markets, new actors and new rules. Indeed, globalization has produced many changes in our economy, society, culture, and politics. As a result, deep pressures to conform to new standards of behavior, such as efficiency and competitive performance, have forced individuals and communities not only to rethink values and practices but also to rebalance tradition and change.

In the scenario of globalized markets, individuals and communities face many challenges to be resilient because of the changes in markets, wealth and power. Throughout the last forty years, most governments around the world supported the long-run process of neo-liberal reforms that turned out to be characterized by the financialisation of the capitalist economy. By negatively influencing labor and working conditions, it rendered increasingly difficult to reach (or even approach) the level of full employment. In this setting, changes in corporate ownership, through waves of mergers and acquisitions, created new business models where companies, while highly powerful and concentrated, turned out to be simply bundles of financial assets and liabilities to be traded (Madi, 2017).   Read more…

Complexity in economics

September 6, 2018 20 comments

from Maria Alejandra Madi

Traditional epistemological theories have fostered an endless debate on dichotomies characterized by forms of objectivism, on the one hand, and forms of relativism/skepticism on the other. Currently, among the deep global social and cultural challenges, the crisis in epistemology is characterized by a radical questioning of the whole matrix within which such dichotomies have been drawn.

Taking into account the evolution of Economics as a science, the need for a deep epistemological has already been pointed out by outstanding economists.  Joseph Schumpeter, for example,  rejected the kind of economic thought that mainly favours deductive methods of inquiry – based on mathematical reasoning- because this  habit  generates analytical unrealistic results that are irrelevant to solve the real-world economic problems. Also John Maynard Keynes warned that the understanding of the economic phenomena demands not only purely deductive reasoning, but also other methods of inquiry along with the  study of other fields of knowledge- such as History and Philosophy. Today, Schumpeter’s and Keynes’s criticism could be certainly addressed to those economists whose beliefs ultimately privilege the adoption of a nominalist bias because the dialogue between the economic theories and the economic reality turns out to be abandoned not only in academic research but also in the policy making process.  read more

On global capitalism and the survival of democracy

from Maria Alejandra Madi

In the new millennium, the proliferation of financial assets, with  unstable economic growth, has given way to widespread precarious jobs, income gaps and weaker welfare programs. The same policies that have obliterated social services and kept labour cheap have supported the expansion of short-termism and new global business models in the context of deregulated capitalism.

Besides, the onset of the 21st century represents a new political age  overwhelmed by the violation of democratic ideals of political equality and social peace. Indeed,  democracy has been allowing for election to office but not to power (Madi, 2015). And, as a consequence, policy makers might give priority to their sponsors instead of the needs of citizens – decent work and income equality.

In truth, the current trends in  global capital accumulation and production have shaped a scenario where unemployment, job instability and fragile conditions of social protection increased (Stiglitz, 2011). First, labour-saving technologies have reduced the demand for many middle-class, blue-collar jobs. Second, globalization has created a global marketplace, confronting expensive unskilled workers with cheap unskilled workers overseas and favouring outsourcing practices. Third, social changes have also played a role in the labor market changes, such as the decline of unions. Four, political decisions are influenced by the top 1% who favor policies that increase income inequality.

All these trends do reveal issues of current power, politics and economics in a social context where democratic institutions are being threatened.    read more

Dialogos: economics education and pedagogy. An interview with Peter Söderbaum

from Maria Alejandra Madi

Malgorzata Dereniowska: Welcome to “Dialogos: Economics Education and Pedagogy,” Peter! In this interview we will focus on the questions of institutional change in economics education system, economic pedagogy and social responsibility of universities.

Could you tell me something about your background and your professional experience as a teacher of economics?

Peter Söderbaum: As a student at Uppsala University I became interested in political science, economics and business management (or business economics). My first teaching experiences were at Uppsala University and the department of economics (course in international economics) but I later moved to the department of business management where I was teaching marketing courses and also took my PhD on Positional Analysis. Later I moved back to economics now at the Swedish University of Agricultural Sciences, Uppsala, to become associate professor and lecturer in environmental and natural resource economics. 1995-2005 I was responsible for ecological economics Bachelor and Master programs at Mälardalen University in Västerås.

At an early stage Uppsala University organized an interdisciplinary course in environmental science and I became the person responsible for the environmental economics part of the course. I am referring to the 1970s and this was a time when the borders between disciplines became less respected and interdisciplinary work and courses increasingly encouraged. If I as a lecturer in marketing can learn something about consumer behavior from social psychology – why should I refrain from such learning opportunities? read more

Introducing a New Economics

from Maria Alejandra Madi

Alfred Marshall wrote in his Principles of Economics that “economic conditions are constantly changing, and each generation looks at its own problems in its own way” (1920, p. v.). Our generation is confronted with many problems including climate change, environmental damage, disruptive innovations, inequality, indebtedness, youth unemployment, besides a health care crisis. At the center of these problems, however, is the discipline of economics itself and economics education.

The mathematization of economics was done in the name of science, but in doing so, the mainstream of the academic community has renounced its claim to studying the actual economy. In this respect, it is worth remembering  Keynes’ critique of  the behaviour of pofessional economists at his time since his words are more valuable  than ever,

For professional economists…were apparently unmoved by the lack of correspondence between the results of their theory and the facts of observation;– a discrepancy which the ordinary man has not failed to observe, with the result of his growing unwillingness to accord to economists that measure of respect which he gives to other…scientists whose theoretical results are confirmed by observation when they are applied to the facts (Keynes, 1936, The General Theory of Employment)

read more

10th anniversary of the Bearn Stearns collapse

from Maria Alejandra Madi

Ten years ago, the collapse of the investment bank Bear Stearns marked a prelude of the 2008 global financial crisis. Founded in 1923, it became one of the world’s largest investment banks and its stock market capitalization was $20 billion in 2007. Extremely active in the hedge fund business, the funds High-Grade Structured-Credit Strategies Fund and Enhanced Leverage Fund owned $20 billion in collateralized debt obligations as of 2006. These derivatives, based on mortgage-backed securities, started losing value in September 2006 since housing prices began to fall.

In January 2008, Moody’s downgraded Bear Stearns’ mortgage-backed securities and this event put pressure on the bank’s  liquidity management. In March 2008, the Federal Reserve held its first emergency weekend meeting in 30 years and finally lent up to $30 billion to Chase to purchase Bear Stearns in order to avoid that the bankruptcy of other over-leveraged investment banks, such as Merrill Lynch and Lehman Brothers (Amadeo, 2018).

After Septmeber 2008, the financial crisis acquired a manifold character involving the socio-economic structures at worldwide level. Although the crisis was triggered in the financial sector, it marked the culmination of a long-term trend of financialisation of the economic system (Herman and Madi, 2018).  read more 

WEA online conference: Monetary Policy after the Global Crisis is now open

February 26, 2018 2 comments

from Maria Alejandra Madi

The current WEA Conference: Monetary Policy after the Global Crisis marks the tenth anniversary of the greatest recession after 1929-33. The aims of this conference include discussing key theoretical insights in order:

  • To provide a framework for improving monetary policy practices.
  • To review and advance knowledge on the recent financial crisis regarding the main challenges and prospects of central banking.
  • To particularly survey and discuss the use of Divisia monetary aggregates and their potential role to address central bank challenges economic vulnerabilities.

Therefore, our main goal is to establish a global forum for confronting of the opposite views about

  • the causes and consequences of the Great Crisis.
  • the current challenges to central banking.
  • the role of proper money aggregation in preventing of the future economic slowdowns.

In sum, the conference aims to survey and discuss the recent theoretical advances in monetary tools, goals and policies, along with the latest empirical research findings.  Indeed, this Conference will be one of the first which, in an extensive manner, tackles the problem of monetary aggregation after the Great crisis.  Read more…

Keynes and econometrics

from Maria Alejandra Madi

After the 1920s, the theoretical and methodological approach to economics deeply changed. Based on a criticism of Marshall’s work and legacy, a new generation of American and European economists developed Walras’ and Pareto’s mathematical economics. As a result of this trend, the Econometric Society was founded in 1930.

The constitutional assembly was held in  Cleveland, Ohio, during the annual joint meeting of the American Economic Association and the American Statistical Association. The Norwegian economist Ragnar Frisch played an important role in the Econometric Society that was founded to enhance studies based on the theoretical-quantitative and the empirical-quantitative approach to economic problems. In this way, the  founding fathers believed that  economic thinking could be as rigorous as the one that dominates the natural sciences.

At the 5th European Meeting of the Econometric Society, in 1935, Jan Tinbergen presented a paper on ‘A mathematical theory of business cycle policy’ that followed the Econometric Society’s guidelines. His causal explanation of the business cycle began with a priori economic-theoretical considerations about explanatory variables and then he proceeded to test a model.  read more

Disruptive technologies and sustaintech investments

January 11, 2018 2 comments

from Mari Alejandra Madi

On a global level, to achieve the 2˚C agreed upon during the Paris Agreement, a decrease in emissions of 40-70 percent (relative to 2010) should be obtained by 2050. According to Bloomberg New Energy Finance, 2017 global green investments exceeded 2016´s total of $287.5 billion. With strong government policy support, China has experienced a rapid increase in sustainable investments over the past several years and nowadays this country is the leader of global renewable investments. Besides, as of 2017, giant wind projects spread between the U.S., Mexico, U.K., Germany and Australia.

Considering the global market at the beginning of the 21st century, sustainable or green investments have gone through three stages—Envirotech, Cleantech and Sustaintech (2017 White Paper, Tsing Capital Strategy & Research Center).

First, the envirotech stage has been driven by environmental technology in addition to government policy and regulations. Envirotech investments have aimed to address traditional environmental issues, such as solid waste treatment, water treatmen and renewable energy.  Considering the related business models, the envirotech business has been characterized by capital intensive investments reliant on scaling up for competitive advantage.  read more 

WTO, price crops and global hunger

December 20, 2017 6 comments

from Maria Alejandra Madi

Current food challenges involve issues ranging from land and food access to commodity price volatility, besides national and international regulation. Although the scope and intensity of these challenges vary according to the different economic and social situations of countries, the debate has been global.

Today, once again, these issues arise deep concerns on behalf of the 2017 WTO ministerial conference  that has just been closed, in Buenos Aires, Argentina. Indeed, the WTO has not seemed to enhance effective actions on long-standing proposals. Agriculture negotiations remain among the most important and challenging issues. These negotiations began in 2000 as part of the mandated “built-in agenda” agreed at the end of the 1986-1994 Uruguay Round and, then, they were incorporated into the Doha Round launched at the end of 2001.

The process of globalization of capital in agriculture and food production has shaped a global network of institutions that supplies the worldwide food markets. Contract farming and integrated supply chains are deeply transforming the structure of the agriculture and food industries and, as a result, they have put the local farm sector under high pressure. Further, the expansion of big investment projects, led by transnational companies and institutional investors, has expose small farmers to a situation of hunger and food insecurity by expelling them from the land where they live. In addition to these challenges, the biotech revolution and the introduction of genetically improved varieties of seeds have fostered structural changes.  read more

Blanchard and Summers: Back to the future

from Maria Alejandra Madi 

Olivier Blanchard and Lawrence Summers have recently called for a reflection about the macroeconomic tools required to manage the outcomes of the 2008 global crisis  in their paper Rethinking Stabilization Policy. Back to the Future. The relevant question they address is: Should the crisis lead to a rethinking of both macroeconomics and macroeconomic policy similar to what we saw in the 1930s or in the 1970s? In other words, should the crisis lead to a Keynesian approach to macroeconomic policy or will it reinforce the agenda suggested by mainstream macroeconomics since the 1990s?

Since the 1990s, mainstream macroeconomics has largely converged on a view of economic fluctuations that has become the basic paradigm of research and macroeconomic policy. According to this view of unexplained random underlying shocks, the fluctuations result from small shocks to components of demand and supply with linear propagation mechanisms which do not prevent the economy to return back to the potential output trend.  Considering a world of regular fluctuations:  (1) dynamic stochastic general equilibrium (DSGE) models are used to develop structural interpretations to the observed dynamics, (2) optimal policy is mainly based on monetary feedback rules- such as the interest rate rule- while fiscal policy is avoided as a stabilization tool, (3) the role of the finance is often centered on the yield curve, and (4) macro prudential policies are not considered.  read more

Nudges, individual behavior and neoliberalism

from Maria Alejandra Madi

The concept of nudge became popular after the publication of the 2008 book Nudge: Improving decisions about health, wealth, and happiness, written by Cass Sunstein and the most recent Nobel Laureate, Richard Thaler.  According to the authors, nudge refers to “any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting fruit at eye level counts as a nudge. Banning junk food does not” (Thaler and Sunstein, 2008).

In a previous paper, Thaler and Sunstien (2003) highlighted the paternalistic intention and the libertarian tone that overwhelm the concept. As a result, while policymakers shape contexts of individual choice towards optimal policy goals, individuals are free to choose.

Currently, nudges are used to foster social policy goals, such as the so called consumer protection. The aim of the nudge approach is both to test non-coercive alternatives to traditional regulation and to enhance cooperation between the public and the private sector.  Indeed, after 2008, a Behavioural Insights Team (BIT) was created in the UK and in many others countries – like Australia, Canada, the Netherlands, Germany, U.S. and Qatar. Since 2010, the Behavioural Insights Team (BIT) in the UK has been exploring and testing policy options by means of randomised controlled trials (RCTs). Taking into account the American experience, the Obama’s administration stimulated the introduction of nudges in new regulations to generate welfare with cost effectiveness.

Considering this background, the relevant question is: which are the reasons that explain the increasing acceptance of the nudge approach to public policy?      read more