Author Archive

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.


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.


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…

Progress, farmers and the government – no easy solutions.

April 30, 2018 3 comments


I’ve always been wondering why small farmers enjoying ‘Fair Trade’ privileges are not modernizing faster in the sense that they invest and modernize, capture the market and do not need ‘us’ anymore. Yes, I know that many international trade rules are not exactly fair. And the words ‘Banana republic’ and ‘Banana wars‘ come from somewhere – the official phrase for such ‘politically enforced’ global value systems is ‘empire‘ (TTIP anyone?). But even then – why do many small farmers and even slaves (cocoa production!) in more or less stable countries still need western NGO’s and benevolent consumers and companies like Chocolonely? There are reasons for this – as it surely is possible that, when circumstances are ‘right’, development can be very fast. My ideas about this were influenced by my Ph. D. about Dutch agriculture. Between about 1890 and 1910 Dutch farmers managed to change input, output and credit markets in a fundamental way by establishing literally thousands of local cooperative purchasing, selling, production and saving and credit cooperatives while they also invested in new production systems; the government did its part by establishing an (grass roots) education and (grass roots) research system. Also, the Netherlands were in those days basically a low corruption, high trust society while the government (but also local dairy factories and railway entrepreneurs) enhanced basic education and roads and railways. On top of this, local teachers and other well-educated elite often did a very good job as voluntary secretaries or accountants of the boards of the cooperatives. Everything was ‘right’. And change did happen.  Read more…

John Stuart Mill and the end of monetarism

April 3, 2018 2 comments

I apprehend that bank notes, bills, or cheques, as such, do not act on prices at all. What does act on prices is Credit, in whatever shape given, and whether it gives rise to any transferable instruments capable of passing into circulation or not.

John Stuart Mill, 1848

The relation of changes in M (money) to Y (income) and r (the interest rate) depends, in the first instance, on the way in which changes in M come about.”

John Maynard Keynes, 1936

John Cochrane has an interesting post about a Milton Friedman article. But the post does, fifty years after Friedman published the article, still not address the Main Monetarist Mistake: ignoring credit.  The entire discussion if money is neutral is redundant as money creating credit is not. Definitely not. Changes in credit – to be more precise: in the stocks of debt, in the flows of new credit and in the terms of availability of credit –  do influence the short and the long term development of an economy. Debts and credits make a large difference to the long run development of countries. Here a fine Reinhart and Rogoff working paper about this, which also shows that financial crises are not rare. This is not just about bank credit – Microsoft financed the transfer of its intellectual property by intercompany payables which do show up in the statistics on international capital flows! Credit is an essential part of a capitalist and even a market economy. And, as Keynes suggested, it makes quite a difference if banks provide credit to enable households to buy existing houses or to enable companies or governments to invest in new roads and houses. Read more…

The interest rates. An institutional view.

Mortgage rateOnly after Mario Draghi’s ‘Whatever it takes’ (26 July 2012) low ECB policy interest rates started to translate decisively to lower rates for Mediterranean Eurozone borrowers. But ‘WIT’ did not only save (or at least: made live a little easier for) Italian and Spanish borrowers with legacy debts. Somehow, Dutch mortgage rates were also tied to the European bond rate instead of the ECB rate oor Dutch government bond rates (second graph) which meant that it was only after 26 July 2012, four years after the onset of the crisis, that Dutch households too could start with decreasing the amount of ‘debt service’ they had to pay (interest on savings accounts is of course also lower – but those rates did start to decline before 26 July 2012). Read more…

Female and male participation and employment


According to the accepted narrative after about 1950 female participation rates started to rise thanks to inventions like the washing machine and kept rising forever after. Reality is more confusing. According to a recent book by Julia Sophie Wörsdorfer, washing machines were, contrary to the ideas of Ha-Joon Chang, not that important. Neither cross sectional data nor time series analysis yields a strong correlation between ownership of a washing machine and high female labour force participation. But there is a strong link between the rise of the washing machine and a rise of public and personal cleanliness standards – more kinds of clothes were washed more often than before in less time. The Japanese data also contradict the washing machine thesis. It explains neither the post 1960 decline of the female Japanese participation rate nor the recent increase in Japan or, for that matter, Turkey.  Clearly, the female participation rate is to quite an extent a cultural phenomenon, though it is no doubt also influenced by education, fertility decisions and urbanization. The idea that the washing machine enabled women to emulate men is, however, wrong. They made and make their own choices, often more family oriented than those of men. Which is not necessarily a bad thing.  Read more…

Regraphing USA unemployment history. An addendum to the USA data

February 25, 2018 3 comments


Source: Bureau of Labor Statistics

Broad unemployment today is, compared with the period before 1994, worse than you think. A new way of estimating ‘part time workers for economic reasons’ shifted this series downward with almost 1% of the labor force. To gain a proper understanding of historical developments present day data have to be increased or historical data have to be decreased a little.  Read more…

Modern macro-economists: money is not ‘neutral’. Bordo, Meissner, Sufi and Mian do a good job.

February 16, 2018 1 comment

Hardcore neoclassical economist John Taylor has edited a new handbook of macro-economics. The good news: the sands are shifting. After 2008, more attention has been paid to the obvious fact that we’re living in a monetary world. Guess what: it  turns out that money is non-neutral after all. Two examples (summaries below):

(A) Bordo and Meissner claim that whenever a country has a large banking sector it has a choice, during a financial crisis. It can bail out the banks or it can try to mitigate the crisis and prevent unemployment to increase to extreme levels.

And (B): Mian and Sufi’s work implicates that the ‘representative consumer’ is bogus: differences between renters and house owners in combination with data on indebtedness and house price booms and busts explain a lot of the severity of the 2008 crisis.

Bordo and Meissner:

(A) Interconnections between banking crises and fiscal crises have a long history. We document the long-run evolution from classic banking panics toward modern banking crises where financial guarantees are associated with crisis resolution. Recent crises feature a feedback loop between bank guarantees and bank holdings of local sovereign debt thereby linking financial to fiscal crises. Earlier examples include the crises in Chile (early 1980s), Japan (1990), Sweden and Finland (1991), and the Asian crisis (1997). Read more…

A pan-European living wage as a condition for authentic Freedom of Movement

February 4, 2018 4 comments

From Yanis Varoufakis

At the source a link to the UK House of Commons discussion where this idea was put forward can be found.

Britain used to have wage councils that set the minimum wage per sector. Mrs Thatcher saw to it that they were abolished, together (effectively) with trades unions and council houses – thus yielding the present Precariat-Proletariat whose palpable anger and frustration is evident across the land. There is no doubt that we need to bring back a modernised for of wage councils. Not just in the UK but across Europe! It is the only way we can safeguard genuine freedom of movement. Here is why:

The oligarchs in Eastern Europe, and elsewhere, want the freedom of moving their money around and the freedom to export surplus labour from their country – people who would rather stay at home if a living wage were available locally. These oligarchs must be told in no uncertain terms: Your freedom of movement (and that of your money) is conditional on legislating a living wage in your own country for your citizens. This is a condition for being part of a European free movement area. And this condition must be imposed by the EU! Why does Brussels think it has a right to come to, say, Greece, to impose cuts to the lowest of the low pensions? How about imposing, instead, across Europe a minimum living wage and pension which terminates instantly involuntary migration, and thus safeguards genuine freedom of movement?

Low unemployment rates are here again (at least in parts of Europe). Surprise (not): productivity increases, too.

February 4, 2018 1 comment

3.8It seems that at this moment in time lower unemployment does not lead to higher inflation but to increasing wages, lower profits and increasing productivity. Read more…

The text in which Thorstein Veblen introduced the phrase ‘neo-classical’

February 1, 2018 10 comments

On this blog neoclassical economics are discussed on a regular basis. Thorstein Veblen is credited by Tony Aspromorgous with introducing, around 1900, the phrase ‘neo-classical’ (see the excerpt below from  ‘The preconceptions of economic science, part III, the Quarterly Journal of Economics 14 (1900), available  on the AFEE website. A lot of his criticisms of neo-classical authors still apply today: they assume what they should explain. The Keynes in the text is the father of John Maynard Keynes. Veblen was a very talented writer – which shows when you read the excerpt (and the entire text) twice.

Of the foundations of later theory, in so far as the postulates of later economists differ characteristically from those of Mill and Cairnes, little can be said in this place. Nothing but the very general features of the later development can be taken up; and even these general features of the existing theoretic situation can not be handled with the same confidence as the corresponding features of a past phase of speculation. With respect to writers of the present or the more recent past the work of natural selection, as between variants of scientific aim and animus and between more or less divergent points of view, has not yet taken effect; and it would be over-hazardous to attempt an anticipation of the results of the selection that lies in great part yet in the future. As regards the directions of theoretical work suggested by the names of Professor Marshall, Mr. Cannan, Professor Clark, Mr. Pierson, Austrian Professor Loria, Professor Schmoller, the group, — no off-hand decision is admissible as between these candidates for the honor, or, better, for the work, of continuing the main current of economic speculation and inquiry. No attempt will here be made even to pass a verdict on the relative claims of the recognised two or three main “schools” of theory, beyond the somewhat obvious finding that, for the purpose in hand, the so-called Austrian school is scarcely distinguishable from the neo-classical, unless it be in the different distribution of emphasis. Read more…

What Mark does. Lack of institutional precision in neoclassical macro leads to an incoherent monetary model

January 26, 2018 2 comments

SMore garbled

Source (p. 32)

Oops. Mark Gertler (with Kiyotaki and Prestipino) does it again: “There has been considerable progress in developing macroeconomic models of banking crises. However, most of this literature focuses on the retail sector where banks obtain deposits from households.” After ‘obtaining’ deposits, these banks are supposed to lend the ‘money’  to households and companies. Source: the 2000+ pages Handbook of [neoclassical, M.K.] Macroeconomics edited by John Taylor. As we know, this is not true. Read more…

Edward Prescott and the illicit use of garbled language

January 23, 2018 5 comments

Update 24/1/2018 Today Simon Wren-Lewis published a blogpost about model consistent preferences of the government. According to him, model consistent preferences of the government show that inflation is a worse curse and unemployment is less worse curse than was expected by economists. Of course it is. When economists model unemployment as ‘leisure’ this is bound to happen. Garbage in, garbage out.

John Taylor edited the new 2000+ pages plus ‘Handbook of macro-economics’, effectively a ‘Handbook of neoclassical macroeconomics’. Neoclassical economics is known for its illicit use of garbled language which hides and convolutes instead of explains. As the title of the book exemplifies. An interesting example is the chapter by Edward Prescott, titled ‘RBC Methodology and the Development of Aggregate Economic Theory’ ). Let’s first give the floor to him (emphasis added), mind that ‘leisure’ means ‘measured unemployment’.:

“What turned out to be the big breakthrough was the use of growth theory to study business cycle fluctuations … based on micro theory reasoning, dynamic economic theory was viewed as being useless in understanding business cycle fluctuations. This view arose because, cyclically, leisure and consumption moved in opposite directions. Being that these goods are both normal goods and there is little cyclical movement in their relative price, micro reasoning leads to the conclusion that leisure should move procyclically when in fact it moves strongly countercyclically. Another fact is that labor productivity is a procyclical variable; this runs counter to the prediction of micro theory that it should be countercyclical, given the aggregate labor input to production. Micro reasoning leads to the incorrect conclusion that these aggregate observations violated the law of diminishing returns. In order to use growth theory to study business cycle fluctuations, the investment-consumption decision and the labor-leisure decision must be endogenized. Kydland and Prescott (1982) introduced an aggregate household to accomplish this. We restricted attention to the household utility function for which the model economies had a balanced growth path, and this balanced growth path displayed the growth facts. With this extension, growth theory and business cycle theory were integrated. It turned out that the predictions of dynamic aggregate theory were consistent with the business cycle facts that ran counter to the conclusion of those using microeconomic reasoning”

Translation: “Depressions are caused because people want to work less. Read more…