Author Archive

Are low interest rates ‘fair value’?

October 28, 2019 1 comment

The next post is by Pierre Fouchet from HPC is interesting on different levels. First, interest rates are low and it shows that medium run changes in these rates can to quite some extent be ‘explained’ by a cocktail of:  economic variables, price setting by central banks and expectation variables (mind that the model is straightforward but the variables aren’t!). This, however, does not explain why USA rates are quite a bit higher than (in this case) German rates, even when inflation, growth and unemployment in the USA and Germany is not too different. Second, it’s an example of investigating Keynes’ ‘beauty contest‘ (what do others expect expectations to be) and Soros’ ‘reflexivity‘ (expectations may be dead wrong but do influence markets so people follow them as they are paid to make short term gains) as well as possibly a weak version of the rational financial markets idea (whenever ideas like this become common knowledge  you can’t exploit them anymore). Third, rates like these are used to set interest rates used to discount future pension liabilities of pension funds. These liabilities stretch six to seven decades into the future. The model shows that todays’ low rates, which lead to a quite high calculated present value of future liabilities and hence to less favorable calculated funding of pensions, are partly driven by short term upswings and downswings of the business cycle. Millions of people risk having lower pensions now or in ten or twenty years time because we’re now in a downswing, or at least we expect to be in a downswing. That sure is an example of reflexivity – and of a kind we do not need. Read more…

Changing the money meme

October 19, 2019 29 comments

Scientific economics needs more memes: short statements which capture the imagination and stick to the mind of lay people as well as economists. One of the well known memes of classical and neoclassical economics is the definition of money:

Money is:

* A means of exchange
* A store of value
* A unit of account

As such, it’s not bad. But it’s incomplete. The unit of account and the means of exchange do not have to be the same thing. In the olden days, in the Dutch Republic (as well as elswhere), the universal unit of account was the Stuiver and multiples thereof, like the Carolus Guilder of twenty Stuiver. While the means of exchange existed of a bewildering array of Pieces of eight, Guilders, Nobels, Thalers and whatever and sometimes, especially before 1650, even of products like rye which were used to pay ‘monetary’ rents. It’s good to make a clear distinction between the unit of account and the means of exchange! However – this meme is (neo)classical as it implicitly understands transactions as isolated here and now events, without social or historical or political embedding or repercussions. We have to change it. One way to do this is, as sometimes already happens, to add a fourth dimension to the definition, stating that money also is:

* the standard of deferred payments

The debt contracts using the unit of account as the standard of deferred payments tie the individual actors of (neo)classical economics together and, as their balance sheets and projected liquidity statements change, also change the economic nature of these people and companies. This adds a time as well as a social as well as a political dimension to the definition. See, for a depressing example, this story about debt collecting in Coeffeyville, Kansas. Money makes the world go round. And in Coffeyville, debt makes it stop. Other examples are mortgages or commercial credit which open up possibilities but also come with risk. Any money meme should encompass this part of our monetary world.


Should Olivier Blanchard still get credit?

June 27, 2019 6 comments


On June 17 Olivier Blanchard, an influential economist, held a dinner speech at the ECB Sintra Forum. Weird. Nothing changed. No Hyman Minsky. No Claudio Borio. No Ulrich Bindseil and intertemporal instability of the asset side of bank balance sheets. No Flow of Funds. Nothing of the kind. His solution for the problems of the Eurozone: get relative prices right and, trust me, general neoclassical equilibrium will return. Just plain old 2007 macro-economics. The whole reason we’re stuck in the mud is according to him that the – unobservable – ‘natural rate of interest’ has declined and has to increase again. Just get prices right (read: lower wages and the interest rate), which is more difficult when the natural rate of interest and inflation is low, and wait. In the meantime, as interest rates are lower government expenditure might be a little higher to ease the transition period and to boost investments. What does this man still miss, after all these years, monetary and otherwise? Read more…

The age of Doris Day…

May 13, 2019 9 comments

Let’s not forget that she once played a union worker, in ‘The pajama game’. With the song ‘racing with the clock‘. Also, here a blogpost of mine about how in ‘The Age of Doris Day’ apt new institutions enabled everybody to work less and have better lives, in stead of a part of the population being entirely unemployed and miserable.

New distributional financial accounts from the Federal Reserve!

May 6, 2019 1 comment


The Federal Reserve (Fed) publishes the Flow of Funds. It has recently made an important addition to these invaluable financial data: quarterly distributional financial accounts. They are more frequent, more detailed and much faster than existing accounts. Why did they do this? For one thing: distributional accounts are not a new idea. As stated in their first footnote (but note the gap between the fifties and 2014): Read more…

Putting the baby in the tub: unemployment in a neoclassical (?) macro model

April 23, 2019 12 comments

Is it possible to model unemployment in neoclassical ‘DSGE’ macro-economic models ? I’m occupied with a project which compares neoclassical macro concepts with statistical macro concepts. One of the glaring differences between the statistics and the models: we measure unemployment as a matter of routine but DSGE-models do not conceptualize or define, let alone operationalize it. When you model our society as a one person ‘Robinson Crusoë’ ‘society’ you will have somebody who works a little less or more but who will never be entirely unemployed. Models with heterogeneous agents have problems with this, too. On twitter, Lukas Freund however pointed me however to the 2018 article ‘Unemployment (fears) and deflationary spiral’ by Wouter J. den Haan, Pontus Rendahl and Markus Riegler, which does model unemployment.

Does this article require me to rewrite my stuff on ‘labor’? Nope. To be able to model unemployment they do not (yet) put a silver bullet through the heart of the models. But they do cut out its liver.

What do I mean? Read more…

What’s in a model… (an economic one, that is)

April 6, 2019 8 comments

What’s an economic model? A little semantic intro (don’t worry, we will get to Keynes in a moment)

I work together with biologists, agronomists and even test animal specialists on a regular basis. These people use words like ‘conceptual models’ or ‘even ‘animal model’ all the time. Check this:  ‘Mouse Models of Diabetic Nephropathy‘. Yes, a live animal is considered to be a scientific model. I had to get used to this as this use of the word ‘model’ transcended the boundaries used in the world I came from. But mastering these concepts prooved enightening. Conceptual models are described by Andrew Powell-Morse in the following way:

conceptual model is a representation of a system that uses concepts and ideas to form said representation… a model is intrinsically a thing unto itself, but that model also contains a concept of what that model represents — what a model is, as opposed to what a model represents.  (think of the mouse and diabetes, M.K.) … conceptual modeling is used as a way to describe physical or social aspects of the world in an abstract way. For example, in the realm of software development, a conceptual model may be used to represent the relationships of entities within a database. Whether written down via text or diagrammed visually, such a conceptual model can easily represent abstract concepts of the relationships between objects in the system, such as Users and their relationship to Accounts.

Read more…

Modern Money Theory and inflation control: look at constant tax inflation

February 17, 2019 45 comments


One of the tenets of Modern Monetary Theory (MMT) is that taxes are, ceteris paribus, deflationary. When prices of gasoline increase because of green taxes, people have less money left and know that their purchasing power declines. This is not consistent with neoclassical macro, at least not in its influential ‘Ricardian equivalence’ version, but that’s not interesting. The interesting thing is that MMT states that if inflation rises, taxes should increase to cool the economy. Which means that they will have to target some kind of inflation rate. Which rate? Read more…

The enduring popularity of ‘The Great Transformation’ by Polanyi

February 16, 2019 25 comments


Source: International Labour Organization

The most popular post on this blog is a summary of ‘The Great Transformation‘ by Polanyi. Which is remarkable as it is an old book about even older events: the transformation off traditional economies with a low rate of investment and little wage labor into modern economies with a high rate of investment and high levels of wage labor (Polanyi does not stress investments too much but see, in about the same period, Kuznets (1955) and Rostow (1959)). This economic process went together with a cultural revolution like the commodification of labor and time. Read more…

Let them pump biodiesel… Or: the French yellow vests are right about prices.

February 8, 2019 3 comments


There is a lot of ado about the French yellow vests who, somewhat violently and in a tenacious way protest the french government and battle the french police. The protests erupted when the Macron government increased gasoline and diesel prices.  Was this the proverbial drop which made the bucket overflow (”la goutte d’eau qui fait deborder la vase” or, to comply with Anglosaxon culture and to connect with the new nationalism in Anglosaxonia (not to be confused with Niedersachsen)): “the straw which broke the camels back”)? Yes, it was. Read more…

Ti auguro Buon Natale e un felicissimo Anno Nuovo

December 24, 2018 1 comment

Productivity in the Eurozone (and why it matters)

December 24, 2018 1 comment

@Brankomilan leads us to this (french) piece about Austria. It states that the Austrian government enacted a new law which authorizes working days of 12 hours and working weeks of 60 hours.

A). This is a clear case of retrogression. It’s good to read what, in 1921, the International Labor Office stated in its first annual report:  Read more…

Thomas Sargent discovered his inner Marxist. Really. Two graphs.

November 12, 2018 11 comments


Graph 1. Unemployment in the USA, % of the labor force, monthly data.

One of the central and most pressing questions of macro-economics is how to estimate and explain unemployment. Thomas Sargent, card-carrying member of the neoclassical cabal and winner of the ‘Sveriges Riksbank Prize In Economic Sciences In Memory Of Alfred Nobel’ (SRPIESIMOAN)  just made a shot at it. A somewhat Marxist shot, as far as I’m concerned. Which, considering the hard core neoclassical nature of the rest of the work of Sargent, is quite surprising. What’s the case? Read more…

Uploaded: ‘The role of money in economic theory’ by Wesley Claire Mitchell (1916)

November 4, 2018 2 comments

Is economics basically about measured monetary variables like GDP or wages (recount that ‘total wage income’ is part of GDP)? Or is it, as neoclassical economists assume, mainly about what Thorstein Veblen called ‘hedonistic’ variables like ‘utility’? This discussion is still waging. Look here. It’s an old discussion. According to a man who decisively contributed to the way we measure the ‘money economy’, Wesley ClaireMitchell, economics is about measuring the ‘money economy’ (Mitchell (1916))‘ – even when we want to know about the psychological variables. Not because money is all that matters. But as (on the practical side) monetary relations and transactions are inherently measurable. While (on the theoretical side) the development of monetary variables like wages, loans or profits, show but also shape our behavior. We don’t have to assume ‘wages’. We can measure them. We don’t have to assume ‘wage labor’. We can measure it. Mitchell chided the tendency of economists to focus on crude a- empirical ‘pain and pleasure’ psychology:

  Economic life may be regarded also as a process of making efforts and gaining satisfactions; or better, the activities of getting and using goods, of making and spending money, have a subjective aspect upon which attention may be focused. In this dim inner realm of consciousness it is difficult to make out the technique; there are no technical experts, no labor forces, no material appliances, and no capital in any sense, except by virtue of fanciful analogies.

Read more…

‘Truly revolutionary’. The November 1918 armistice and labor relations

November 1, 2018 1 comment

One hundred years ago World War I ended. This war changed everything. It did not only  end the Austrian-Hungarian and the Ottoman empires and lead to the emergence of the USA as an international hegemon. It also transformed labor relations worldwide.  According to the first Report of the Director of the new International Labour Office (ILO):

It would therefore be almost impossible to exaggerate the truly revolutionary character of the events which during the last years of the war or after the war took place in the sphere of the regulation of hours of work…. During the years 1918-19 the 8-hour day has, either by collective agreements or by law, become a reality in the majority of industrial countries … Before the war, whenever even a minimum or gradual reduction of the working day was proposed, foreign competition was one of the arguments employed in the universal controversy concerning the working day (paragraph 125 and 126).”

Read more…

‘The backward art of spending money’ by Wesley C. Mitchell.

October 28, 2018 1 comment

In 1912 Wesley C. Mitchell, Veblen’s best student and one of the three or four most important economists of the first half of the twentieth century, published ‘The backward art of spending money’ (the link will directly download the article) in the American Economic Review. The article is about the (monetary) problems housewives encounter when they have to manage a household and a family and having scant time and money to do so. It is related to the present day Levy institute ‘time poverty’ project (very much so, even).  It’s a feminist text. Maybe not all young modern readers will agree. But remember that in 1912 the 48 hour workweek was not yet introduced (in most countries this happened between 1915 and 1921) while quite some people in western countries were still illiterate. If you’re still in doubt, discuss it with your grandmother. An excerpt:

But even after many of the housewife’s present cares have been reduced by the extension of business enterprise and municipal housekeeping, and after the housewife has received better training herself and can command the expert advice of a professional class, her task in spending money will still remain perplexing to one who takes it seriously. For the ultimate problem of what is worth while to strive for is not to be solved by sounder organization, by better training, or by the advance of science. Doubtless most women, like most men, will ever continue to accept uncritically the scale of conventional values which their day and generation provides ready-made. To such souls the only non-technical problems will be problems of reconciling minor inconsistencies, or striving to attain the more decorous standards of a higher social class. But to women of conscience and insight the ends of living will always be a part of the problem of spending money — the part which is most inspiring and most baffling. In this aspect the art of spending money differs from the technical pursuits of business and science, and is allied to philosophy and ethics. There is a scheme of values embodied in every housewife’s work, whether she knows it or not, and this scheme affects for good or ill the health, the tastes, the character of those for whom she cares and those with whom she associates.

Read more…

Edward Prescott, Finn Kydland and the flooding of Fukushima

October 12, 2018 28 comments

How did this ever pass the peer-review procedure… In an article in the Journal of Political Economy Edward Prescott and Finn Kydland argue in favor of (undemocratic) rules instead of (democratic) economic policies. One of the methods they use to push their idea is the using examples. One particular famous one is the one about floodplains. But the example is wrong. Government policies are not as benevolent, rational and effective as Prescott and Kydland think they are. And people are not as rational. Here’s the example:


This is not what happens. Read more…

QE and inflation (not), Swiss edition. Two graphs.

September 30, 2018 3 comments



Graph 1. Printing Francs to satisfy external demand for Francs led to a fast increase of the amount of money in Switzerland. Did this lead to inflation?

Swiss inflation(not)

After 2008 rich people from all over the globe started to  buy Swiss Francs. This, of course led to appreciation of the Swiss Franc. The Swiss national bank didn’t like this: bad for exports. And, related to this but much worse, structural lower demand for export products of a small country like Switzerland will erode the manufacturing base of this country. Highly productive fixed capital, specialized knowledge hubs, production ecosystems – these all will flounder. Not good. What to do?  Read more…

Minskyan reflections on the ides of September

September 18, 2018 2 comments

from Jan Kregel  source

The 10th anniversary of the September collapse of the US financial system has led to a number of commentaries on the causes of the Lehman bankruptcy and cures for its aftermath. Most tend to focus on identifying the proximate causes of the crisis in an attempt to assess the adequacy of the regulations put in place after the crisis to prevent a repetition. It is interesting that while Hyman Minsky’s work became a touchstone of attempts to analyze the crisis as it was occurring last September, his work is notably absent in the current discussions.

While it is impossible to discern how Minsky might have answered these questions, his work does provide an indication of his likely response. Those familiar with Minsky’s work would recall his emphasis on the endogenous generation of fragility in the financial system, a process building up over time as borrowers and lenders use positive outcomes to increase their confidence in expectations of future success. The result is a slow erosion of the buffers available to cushion disappointment in those overconfident expectations. And disappointed these expectations must be, for, as Minsky argued, the confirmation of expectations of future results depends on decisions that will only be taken in the future. Since these decisions cannot be known with certainty, today’s expectations are extremely unlikely to be fully validated by future events. In a capitalist economy financial commitments are financed by incurring debt, so the disappointment of expectations will produce a failure to validate debt, leading to the inexorable transformation of financial positions from what Minsky called “hedge” to “speculative” to “Ponzi” financing structures. These structures refer to the ability of current cash flows to meet these commitments.

Read more…

D. Trump lies, again. But he has a point. A HUGE one.

September 10, 2018 4 comments

According to D. Trump “The GDP rate (4,2%) is higher than the unemployment rate (3,9%) for the first time in over 100 years!”. This tweet.  Comparing the rate of GDP growth with the unemployment rate surely is interesting. And situations where the unemployment rate is lower than the rate of growth (U<G) are rare and remarkable as well as agents of change.

D. Trump is wrong about the economic history of these events (graph). During WW II as well as during quite some years in the fifties and the sixties growth was higher than the unemployment rate, too. While the thirties show that we have to account for high rates of legacy unemployment. Using, as D. Trump does, annualized quarterly data would surely show more episodes. Even then, 1999 was the last time, which isn’t over 100 years ago. And personally, I would be delighted to get the source of his unemployment data for the period before 1929.

00TrumpHaving stated this, I totally agree that the ‘U<G’ situation surely is worth a presidential tweet! Josh Mason has been lambasted for pointing out the possibility for strong growth even when unemployment is low. Turns out he was right after all. Too bad we needed the policies of an egomaniac to proof this. For progressive economists, there is a lesson to be learned, here. Let’s go for a ‘BU<G’ situation, ‘B’ standing for ‘Black’.