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

November 12, 2018 8 comments

Unemploymentlonger

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 1 comment

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 Leave a 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:

Prescott

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’.

Yves Mersch, ECB banker: we really don’t care (about house price inflation)

September 8, 2018 2 comments

There we go again. According to mister Mersch, a central banker, the ECB only has to care about consumer price inflation and not about financial stability. Mister Mersch knows this isn’t right. Legally, the ECB do has to care about financial stability. It’s part of the mandate of the bank. In a practical sense, caring about financial stability is what central banks do. While they do not excel at influencing the rate of consumer price inflation (which is influenced by wages, profit margins, productivity changes, prices of intermediate products like oil and also, but only to a limited extent, by interest costs). Mister Mersch knows all this. He is an old man. he must have studied ancient textbooks. What did the textbooks of yonder state about central banks (and I have little to add)?

  • They are the bank of banks
  • They are the bank of the government
  • They have to take care of  a well-functioning payment system
  • They guard financial stability
    • which means that they have to guard the liquidity and solvability of banks
    • which means that they have to investigate (not the same thing as ‘guard’) the liquidity and solvability of households as far as this is related to banks (read: mortgage lending, but also student loans and payday lending)
    • which means that they have to take care that banks and financial institutions are not overstepping their boundaries
    • which means that they have to make sure that money creating credit is provided for productive loans only, not for purchases of existing assets (read: houses)
  • They have a role to play when it comes to the external value of the currency
  • They do not really have a large role to play when it comes to the internal value of the currency. Central banks can control interest rates. They can control the economy downwards: just increase the interest rate to a very high level and the economy will tank. But they can’t really stimulate the economy (though they can create asset price bubbles). Proof: the investment rate in the EU is still low, after all these years of low rates.

Read more…

Bitcoin and Yap stone money, once again.

July 29, 2018 5 comments

In October 2015 I wrote a post in which I compared Bitcoin with Yap island stone money. Farfetched? No. Today, Sciencenews published an article by Bruce Bower. He states that archeologists nowadays argue the same thing. An excerpt:

Archaeologist Scott Fitzpatrick and finance professor Stephen McKeon, both of the University of Oregon in Eugene, see parallels between the public, decentralized way in which rai limestone money on the island of Yap was valued and distributed and the modern-day blockchain technology used for Bitcoin and other digital currency transactions. Read more…

Discussing the GDP production boundary in a serious way

July 21, 2018 14 comments

A well-known criticism of national income is thr\e ‘Ïf you marry your maid you will diminish national income‘ mrmr. Sigh. We should forget about this silly male fantasy and give women their due by replacing it by what really happened. Domestic workers did not marry their single masters. They left them, as they had better paying things to do. Or the income of their family rose, which enabled them to get an education or to care for their own kids. Unprotected labor by Vanessa May is a good book about the work and life of domestic servants in new York, 1870-1940. The influence of this on how we have to understand GDP is important. So, what happened?

Once upon a time, every middle class family and many other families had a maid living in. Read more…

Shifting attention: two ideas for a genuine micro founded macro-economic master thesis

July 16, 2018 9 comments

from Merijn Knibbe

I’m trying to write a book about the relation (not) of neoclassical macro-economic concepts to the concepts of macro-economic statistics. Which leads one to interesting places one can’t explore. If there is anybody out there in search for an interesting idea for a master thesis or something light that, these might do:

  1. A qualitative and quantitative exploration of ‘hoboism’ in the 1930’s looking at it using the lens of ‘involuntary part time unemployment’
  2. An international and historical extension of existing estimates of domestic servants and how this relates to our estimates of GDP.

Read more…

What did I learn from my students? Market boundaries are shifting.

July 13, 2018 2 comments

A lot of my students do internships or write theses based upon problems of companies or NGO’s. Many teachers want them to play the research game. I prefer them to design something for the company or organisation as I really want them to learn that they don’t have to learn what their teacher wants them to learn…. or wait….

Anyway: what did I learn? Read more…

Italian situation is highly worrisome!

June 9, 2018 10 comments

Considering the present architecture of the Eurozone – there is according to Erwan Mahé no obvious way to solve the Italian Euro crisis…

From: Erwan Mahé

I sent this little collage on 25 May, via IB Bloomberg chat, as the BTP began to decline, since it seemed to sum up the best attitude to take towards the near hysteria afflicting the Italian debt market at the time.

eerste.png

From a high of 132.88 on Monday 25 May, it plunged to as low as 120.10 the next day, reflecting a full one per cent rate shift on the eurozone on the 10-year maturity! Read more…

The big bad pension scare.

June 6, 2018 14 comments

On Voxeu, Hervé Boulhol and Christian Geppert  published an article a about population ageing and pensions which tries to scare us: “on average in the OECD, stabilising the old-age dependency ratio between 2015 and 2050 requires an increase in retirement age of a stunning 8.4 years. This number far exceeds the projected increase in longevity and increases in retirement age driven by pension reforms alone.”. The pension age has to go up. But not for the reasons and by the amount they state. What’s wrong with their article?

  1. Their base line is wrong. They calculate a post 1980 dependency ratio (the number of young and old people per person in the working age) by using a 20 year and a 65 year threshold. During the 1980-2015 period, many people retired before 65 which means that the dependency ratio was higher than calculated in the article. Which in it turn mean that the rise of the dependency will be lower which means that less of an increase in the pension age is needed to stabilize it.
  2. As they admit in a footnote, they do not take changes in employment rates into account. Employment rates of people and especially women above 50 are rising spectacularly, which means that the dependency ratio per working person rises less than they calculate.
  3. Their assumptions about the rise of the pension age between today and 2050 is wrong. They assume an increase to 66,5 years of age. At present the pension age in many countries (Italy, Greece) is already while the pension age in the Netherlands and in 2050 even the German retirement age will be higher. This will lower future dependency ratio’s.
  4. In their world, unemployment does not exist. In countries like Spain, Italy and Greece total unemployment (including unemployment) is however around 25% while in a country like France it is close to 20%. Putting a large part of these people to work will solve a large part of the problem.
  5. They assume that pensions have to be paid using a ‘paygo’ system, i.e. by taxes. Surprisingly, they assume that only wage incomes will be taxed. One could however also tax capital income (or raise the labour share).
  6. If need be, people can start to work longer. A 4 hour increase of working weeks which are on average 32 hours leads to a 12,5% in total hours worked per person, which can also solve a part of the problem.
  7. Productivity can increase. A modest 0,5% increase of productivity per year between now and 2050 translates in a total rise of productivity of 17%. Together with an increase of hours of 12% this translates in a growth of production of 30% per working person.

Read more…

‘Free EU movement of workers’: new rules. But we need better economic policies.

June 2, 2018 9 comments

Fig 1

Inter-EU flows of ‘labour’ have dramatically increased (figure 1, figure 2), which leads to problems in sending as well as receiving countries. New EU legislation tries to restrict the extent to which entrants can be used to circumvent existing labour laws to unfairly undercutting labour in the receiving countries (and ‘fairness’ is as fundamental an incentive to people working as their wage). This legislation is welcome. But it is too late. Or is it ‘too little’? Can sending countries afford to lose up to 15% of their active labour force in a few years? Can receiving countries deal with the influx? Aside – this is not just about the EU. Albania has a population of about 2,9 million people. About 500.000 of these seem to be residing in Italy alone… Read more…

President Mattarella of Italy: from moral drift to tactical blunder

May 28, 2018 2 comments

By Yanis Varoufakis.  Source

I concede that there are issues over which I would welcome the Italian President’s use of constitutional powers that (in my humble opinion) he should not have.(*)  One such issue is the outrageous policy of the Lega and the promise of its leader, Mr Salvini, to expel five hundred thousand migrants from Italy. Had President Mattarella refused Mr Salvini the post of Interior Minister, on the basis that he rejects such a monstrous project, I would be compelled to support him. But, no, Mr Mattarella had no such qualms. Not even for a moment did he consider vetoing the formation of a 5S-Lega government on the basis that there is no place in a European country for scenes involving security forces rounding up hundreds of thousands of people, caging them, and forcing them into trains, buses and ferries before expelling them goodness knows where. Read more…

Doubting the benefits of trade: a somewhat fuzzy discussion.

May 28, 2018 23 comments

There is a somewhat fuzzy discussion going on about exports, imports and the economy: are (net) exports (imports) good for Australia a country, or not. Look here. And here. It is a complicated question, which made Steve Keen state: “I don’t want to see, and obviously won’t tolerate, further arguments about exports as costs and imports as benefits. I want to see a detailed double-entry bookkeeping exploration of the monetary (and capacity-utilization/real GDP/physical) implications of trade surpluses and deficits“. The good news: such systems are available. No need to invent them. ‘Supply and use’ tables which also keep track of physical flows are alive and kicking, see graph, source here. Same for input-output models, here a bit on the influence of exports on German employment.

First

Read more…

A short note on the production boundary of neoclassical macro models

May 18, 2018 1 comment

The neoclassical macro ‘DSGE’ models do not seem to have a rigorous model consistent ‘production boundary’.

A ‘prior’ in macro economics is the production boundary: what are we talking about? Famously, Adam Smith more or less excluded services – or at least services from personal servants. While the present national accounts  basically include everything which yields a monetary income, including illegal activities. The phrases ‘more or less’ and ‘basically’ of course indicate that delineating the boundary is not easy. Daniel Urban wrote a very clear piece about the classical boundary, the national accounts boundary, the neoclassical micro boundary (everything which yields ‘utility’, whatever that is) and the Marxian boundary (everything wich employs wage labour which produces surplus value which can be used to increase ‘capital’ or wealth of the owning class). But he does not discuss neoclassical macro models. I do not know about any serious discussion of the production boundary of these models.

Implicitly, the boundary seems to be quite narrow. Take the next phrase from a long paper by Jesus Fernandez-Villaverde, Juan Rubio-Ramirez and Frank Schorfheide  about how to solve neoclassical macro models: “Consumption is defined as Personal Consumption Expenditure on Services (PCESV) plus Personal Consumption Expenditure on nondurable goods”. One has to distill this essential information about the models from a footnote… Of course, one can argue that durable consumption goods are in fact an investment – but the whole 150+ pages piece only mentions ‘investment’ once, in the sense that the model could be enriched with ‘a non-negative investment constraint’. Which to me, also considering other models, means that durable consumer goods are excluded. And this is not the only thing excluded in most models. A list:  Read more…

Marx, 200.0

Tomorrow will be the 200th anniversary of Marx. A lot of people write about this. The most interesting pieces I read were by Veblen (1906 part 1 and part 2). Some excerpts (the beginning of part 1 and the end of part 2, as always with Veblen one has to read the whole thing). One of the main points of Veblen is that Marx takes the ideas of ‘bourgeois’ economists more serious than these economists themselves, culminating among other things in the idea that, in an economics sense, ‘capital’ is not machines or buildings but ownership rights of such assets, ownership rights which enable the owners to drain money from companies and to boss labour around.

Part 1:  Read more…