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Sweden hit by deflation — a sad and worrying reminder of the impotence of mainstream economics

April 17, 2014 3 comments

form Lars Syll

Sweden is according to new statistics from  Statistics Sweden in a state of deflation. The inflation rate was -0.6 percent in March.

To a large extent the deflation is caused by tight monetary and fiscal policies  pursued by Sweden’s  Central Bank and the government. With a very defensive fiscal policy and a targeted inflation rate set at a very low level, real inflation has during the last 2-3 years been very close to zero, and now even negative. Another consequence of the austere fiscal and monetary policies is that overall unemployment is still at almost 9 % and youth unemployment close to 26 %.

This is deeply worrying.

So yours truly thought he should give the Swedish Fed and the Swedish finance minister - Anders Borg –  a suggestion for reading …

Zoltan Pozsnar and Paul McCulley have written an absolutely splendid essay on what a liquidity trap means and why mainstream neoclassical economics has nothing to offer in way of solving the problems that it brings along – and why it is so important to get hold of the insights that Fisher, Keynes, Minsky and Krugman have given us on debt-deflation processes and liquidity traps: Read more…

Class Based Economics

April 16, 2014 22 comments

from Peter Radford

Buried somewhere in the pile of stuff I have accumulated as I think about inequality are these statistics:

  1. Of all the income generated between 2009 and 2011 in the US 121% went to the top 1% of income earners
  2. The top 1% owns just over half of all investment assets including 64.4% of all bonds
  3. And, the bottom 90% incurs 72.5% of all debt

Think through the consequences of these numbers.

Basically we have an economy where the top 1% reaps all the rewards; where less well off people constantly fall further behind; and where the top folk lend to the bottom folk so that the less well off can keep on consuming and thus boosting the profits of the businesses the top folk own. This is a nice game for the rich as long as it lasts. Here in the US that would be the past forty years or so.

This is really simple.

It explains why our economic policies focus on preserving creditors, bailing out lenders, and keeping the inflation alarms ringing even when there is no inflation. Those policies benefit Read more…

Krugman on Piketty

April 15, 2014 11 comments

from Edward Fullbrook

Now Paul Krugman has gotten into the Piketty act.  The just published issue of the New York Review of Books features a long  review essay by Krugman (it’s open-access) on Capital in the Twenty-First Century.   Here is how it begins.

Thomas Piketty, professor at the Paris School of Economics, isn’t a household name, although that may change with the English-language publication of his magnificent, sweeping meditation on inequality, Capital in the Twenty-First Century. Yet his influence runs deep. It has become a commonplace to say that we are living in a second Gilded Age—or, as Piketty likes to put it, a second Belle Époque—defined by the incredible rise of the “one percent.” But it has only become a commonplace thanks to Piketty’s work. In particular, he and a few colleagues (notably Anthony Atkinson at Oxford and Emmanuel Saez at Berkeley) have pioneered statistical techniques that make it possible to track the concentration of income and wealth deep into the past—back to the early twentieth century for America and Britain, and all the way to the late eighteenth century for France.

Read more…

INET — marginalizing heterodox economics rather than transforming the discipline

April 15, 2014 Leave a comment

from Lars Syll

In a report published by The Association for Heterodox Economics, INET is criticized for actually marginalizing heterodox economics:Big-vs-Small

Our main concern is that the positive potential of INET is steadily being closed down. What began as recognition of fundamental problems that require fundamental change is becoming a more modest set of alterations. A sense of failure is, for all intents and purposes, being translated into a context of relative success requiring more limited changes – though these are still being seen as significant. Part of the reason that they are seen as significant is that changes from within mainstream economics do not have to be major in order to appear radical. It is our contention that heterodox economics is being marginalised in this process of ‘change’ and that this is to the detriment of the positive potential for transforming the discipline …

Marginalising heterodoxy creates problems for teaching economics as a discipline in which economists constructively disagree and can be in error. This is important because it is through a conformity that suppresses a continual and diverse critical awareness that economics becomes a dangerous discourse prone to lack of realism, complacency, and dogmatism. Marginalising heterodoxy reduces the potential realisation of the different components of economics one might expect to be transformed as part of a project to transform the discipline …

Read more…

A Pedagogical Paradox

April 12, 2014 14 comments

from Asad Zaman and the WEA Pedagogy Blog

What is really strange is the contrast between the strength of the arguments against conventional economics, and difficulties involved in teaching common sense. It is like someone who has been convinced that day is night, and great effort is involved in pointing out the sun to him. I sometimes give the following example.

Look at that old lady purchasing tomatoes. You know what she is doing? She is differentiating a multivariate utility function and setting up a simultaneous equations system of first order conditions. Now she is solving the nonlinear system. Fantastic, she just solved it to find the utility maximizing purchase under budget constraints is exactly 12.8 oz of tomatoes. Alas, she cannot slice them with such precision, and does not know the integer programming techniques required to solve the more complex optimization problems. OOPS, she miscounted the money she paid, and did not notice the change in the budget constraint when the greengrocer shortchanged her.

While this is usually good for a few laughs, especially from deeply indoctrinated students, because we are poking fun at the sacred principle of utility maximization, there is a serious point involved. Our personal experience, observations of others behavior, and general knowledge of how markets and shopping works, provide overwhelming evidence against microeconomic theory of consumer behavior. Yet we set it all aside when we read Samuelson. If a Nobel prize winner said so, it must be right. My survey which provides a summary of this evidence is linked below:
The Empirical Evidence Against Neoclassical Utility Theory: A Review of the Literature” [with Mehmet Karacuka] International Journal for Pluralism and Economics Education Vol. 3 (4) 2012, p 366-414

As a group, why are we such complete failures at persuading the public of something which is plain as the sun? I have the following hypotheses:  read more here

 

Economics textbooks on ‘capital’ — how to get away with scientific fraud

April 11, 2014 Leave a comment

from Lars Syll

It is important, for the record, to recognize that key participants in the debate openly admitted their mistakes. Samuelson’s seventh edition of Economics was purged of errors. Levhari and Samuelson published a paper which began, ‘We wish to make it clear for the record that the nonreswitching theorem associated with us is definitely false’ … Leland Yeager and I jointly published a note acknowledging his earlier error and attempting to resolve the conflict between our theoretical perspectives … However, the damage had been done, and  Cambridge, UK, ‘declared victory’: Levhari was wrong, Samuelson was wrong, Solow was wrong, MIT was wrong and therefore neoclassical economics was wrong. As a result there are some groups of economists who have abandoned neoclassical economics for their own refinements of classical economics. In the United States, on the other hand, mainstream economics goes on as if the controversy had never occurred. Macroeconomics textbooks discuss ‘capital’ as if it were a well-defined concept — which it is not, except in a very special one-capital-good world (or under other unrealistically restrictive conditions). The problems of heterogeneous capital goods have also been ignored in the ‘rational expectations revolution’ and in virtually all metric work.
Edwin Burmeister

burmeister

 

The capital controversy — when ignorance is bliss

April 8, 2014 1 comment

from Lars Syll

The production function has been a powerful instrument of miseducation.   The student of economic theory is taught to write Q = f(L, K) where L is a quantity of labor, K a quantity of capital and Q a rate of output of commodities. He is instructed to assume all workers alike, and to measure L in man-hours of labor; he is told something about the index-number problem in choosing a unit of output; and then he is hurried on to the next question,  in the hope that he will forget to ask in what units K is measured. Before he ever does ask, he has become a professor, and so sloppy habits of thought are handed on from one generation to the next.
Joan Robinson The Production Function and the Theory of Capital (1953)

joan

 

 

How not to win an economic argument

April 7, 2014 9 comments

from Steve Keen

A critique of a yet-to-be-published paper of mine (“Loanable Funds, Endogenous Money and Aggregate Demand”, forthcoming in the Review of Keynesian Economics later this year; the link is to a partial blog post of that paper) by non-mainstream economist Tom Palley reminds me of one of my favourite ripostes by a politician, back in the days before spin doctors stopped them saying anything offensive — or indeed anything interesting.

As Sir Robert Menzies, former Australian prime minister and leader of the conservative Liberal Party, was giving a campaign speech in 1954, a heckler called out “Mr Menzies, I wouldn’t vote for you if you were the Archangel Gabriel”. Menzies shot back: “Madam, if I were the Archangel Gabriel, you would not be in my constituency.”

So it is with Tom’s critique. He criticises me for a whole range of things that I didn’t discuss, that he thinks I should have discussed, and for techniques I used that he thinks I shouldn’t have used. But Tom wasn’t in my intended audience for this paper — and not because he “wouldn’t be in my constituency”, but because he is. We have our differences, but we’re generally on the same side on the topic of this paper — and I didn’t write it for people who agree with me, but for those who don’t on two key issues: the role of banks, debt and money in the economy, and the role of the change in debt in aggregate demand. Read more…

Rational expectations metaphysics

April 3, 2014 2 comments

from Lars Syll

It is now claimed by this group of American monetarists that the … proper cognition of the economy enables rational expectations to be formed which will prevent all but ‘surprise’ departures from an equilibrium path and will, therefore, render nugatory any attempt to reduce unemployment below its ‘natural’ level even in the short run. The centrepiece of this argument is that both workers and employers realise that the quantity theory of money is correct and that wages and prices must rise in the same proportion as the money supply. As a result, it is argued that increased expenditure will cause increases in wages and prices directly without affecting real variables such as output, employment or the real wage rate. They contend that they will base their expectations not on a projection of past trends in the price level or one of its time derivatives (such a procedure would usually be ‘irrational’) but on the ‘correct’ understanding of the economy which takes changing trends into account …

Read more…

Today’s headlines

April 1, 2014 3 comments

“Paul Davidson has converted to Monetarism”

 “Paul Krugman admits that he has never read Keynes’ ‘General Theory’, but promises to give it a go this summer” 

“Chicago University’s Economics Department has offered Steve Keen a chair” 

“The NCTers and MMTers kiss and makeup” 

“Alan Greenspan and Robert Lucas ask to be forgiven for facilitating the GFC” 

“James Galbraith announces that his real father was Milton Friedman” 

“George Soros’ INET announces that henceforth it will support grassroots reform of the economics profession” 

“Joan Robinson has been reincarnated as an app promoting Prince William” 

“Edward Fullbrook was seen at a conference”

The ultimatum game — the ultimate empirical evidence neoclassical economics is wrong (with video)

March 18, 2014 Leave a comment

from Lars Syll

Given that a normative theory is defined as a theory prescribing how a rational agent should act, neoclassical economic theory certainly has to be considered a normative theory. The problem is — besides that it standardly assumes not only rationality and selfishness, but also  e. g. common knowledge of people’s utility functions — that loads of research show that people almost never act in accordance with the theory:

There is a tendency among economists to think of themselves, and the agents in their models, as having hard hearts … Homo economicus is usually assumed to care about wealth more than such issues as fairness and justice. In contrast, many economists think of other social scientists (and the agents in their models) as “softies.” The research on ultimatum games belies such easy characterisations. There is a “soft” tendency among the Allocators to choose 50-50 allocations, even when the risk of rejection is eliminated. Yet the behavior of Recipients, while inconsistent with economic models, is remarkably hard-nosed. They say, in effect, “Take your offer of epsilon and shove it!” Read more…

What is neoclassical economics?

March 14, 2014 7 comments

from Lars Syll

For your edification, I offer this link to an elegant explanation of why neoclassical economics presents itself as purely scientific and denies any ideological commitments, and strangles pluralism.

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In brief: Arnsperger and Varoufakis define “neoclassical” economics in terms of three “meta-axioms.” First, neoclassicism assumes “methodological individualism,” i.e. that economists must ultimately posit individuals’ behaviors as the root cause of broad economic phenomena. Second, it assumes “methodological instrumentalism,” i.e. that these actors are somehow or other acting instrumentally in pursuit of goals, are “irreversibly ends-driven.” Third, it assumes “methodological equilibration,” i.e. rather than asking whether or under what conditions shall a state of affairs continue unchanged, it seeks to show that if equilibrium occurs, then it will endure.  Read more…

A Science of Economies?

March 10, 2014 12 comments

from Geoff Davies

Debates about whether economics is or can ever be a science appear frequently on this site, such as making economics a relevant science.  Perhaps more in the subsequent comments than in the articles themselves, there are some recurring confusions and misconceptions, such as whether mathematics should be involved, about what the role of mathematics might be, about “prediction” as a necessary part of a science, about the role of assumptions and approximations, about whether any study involving people can ever be a science and, fundamentally, about what science really is.

I have commented in passing on this topic before, for example here, but in this comment I’d like to offer a more focussed discussion.

My day job has been studying the Earth, using physics.  This has taught me some distinctions between science and not-science, and it has led me to expand my view of what science might encompass.  Here are a few points.

The Earth is rather messy (though not as messy as people), so one has to learn to sift carefully through many observations, that are often confusing, to find a nugget of insight.

The deep interior of the Earth, my subject, is remote from direct observation, so one infers what might be down there, from indirect observations made at the Earth’s surface.  This led me to realise that all observations, in any field, are interpreted through such inference.  The notion of a “fact” becomes slippery.  So I talk about observations, not facts.

One cannot experiment with the Earth, one can only observe the effects of “natural experiments”.  The goal is always to figure out how the Earth got to its present condition.

It is also a historical science, so one has to be careful what one means by prediction from a theory, and perhaps to use a different expression: deducing the implications of a theory.

Good science does not have to involve complicated mathematics or high precision.  The precision required of measurements or calculations depends on the context.  Sometimes a very rough measurement or estimate can yield a crucial insight, whereas other times an elaborate and high-precision measurement or calculation might be called for.  The mathematics involved might be simple, or highly sophisticated, or even just logical relationships: before, after, bigger than, smaller than.

Science can be presented as a two-stage process:  Read more…

Economics, trust and the economics curriculum

March 5, 2014 1 comment

from Maria Alejandra Madi at the WEA Pedagogy Blog

The recent Great Financial crisis has restated the menace of deep depressions among the current economic challenges while the livelihoods turned out to be subordinated to speculation, financial instability and the bailout of domestic financial systems. Looking backward, in the context of the 1930 Great Depression, John Maynard Keynes pointed out that the evolution of capital markets increases the risk of speculation and instability since these markets are mostly based upon conventions whose precariousness affects the rhythm of investment and increases pressures on the political sphere.

Keynes called attention to the fact that the capitalist system has endogenous mechanisms capable of destabilizing the levels of spending, income and employment.  read more

Categories: Economics Curriculum

“The American Dream and the Boston Economics Party”

from Edward Fullbrook

An invitation to speak at next year’s ASSA annual conference in Boston has reminded me of attending the same event in Boston twenty years ago and of a short article I wrote about it (“No Reality, Please. We’re Economists”, The Times Higher Education Supplement, March 25, 1994). The observations I made then seem no less pertinent today.  Here is a draft of that article.

The American Dream and the Boston Economics Party

Edward Fullbrook
January 1994

When at this year’s American Economic Association meetings a speaker used the word conscience, embarrassment fluttered through the hall.  “The c-word” is taboo among economists. Its effect on our notion of “rational­ity”, which admits only isolated self-interest, is like a lighted match in a gas tank.

The unfortunate speaker (he was later publicly admonished for his impropri­ety) was one of 7200 economists from over 50 countries gathered in Boston for a three-day bash of reading and listening to learned papers.  Astonishingly, this global event for “the queen of the social sciences”, addressed scarcely a word to the world’s mounting economic ills. Read more…

Taking rational expectations seriously? You’ve got to be joking!

February 27, 2014 7 comments

from Lars Syll

If at some time my skeleton should come to be used by a teacher of osteology to illustrate his lectures, will his students seek to infer my capacities for thinking, feeling, and deciding from a study of my bones? If they do, and any report of their proceedings should reach the Elysian Fields, I shall be much distressed, for they will be using a model which entirely ignores the greater number of relevant variables, and all of the important ones. Yet this is what ‘rational expectations’ does to economics.

G. L. S. Shackle

shackle

Since I have already put forward a rather detailed theoretical-methodological critique of the rational expectations hypothesis in Rational expectations – a fallacious foundation for macroeconomics in a non-ergodic world (real-world economics review, issue 62, 2012), I will limit myself here to elaborate on a couple of the rather unwarranted allegations that defenders of rational expectations put forward in their attempts at rescuing the rational expectations hypothesis from the critique.  Read more…

Explaining stagnation: Why it matters?

February 26, 2014 4 comments

from Thomas Palley

Larry Summers (HERE) and Paul Krugman (HERE) have recently identified the phenomenon of stagnation.  Given that they are giants in today’s economic policy conversation, their views have naturally received enormous attention. That attention is very welcome because the issue is so important. However, there is also a danger that their dominance risks crowding out other explanations of stagnation, thereby short-circuiting debate.

Krugman has long emphasized the liquidity trap – zero lower bound to interest rates which supposedly prevents spending from reaching a level sufficient for full employment. Summers has added to this story by saying we have been in the throes of stagnation for a long while, but that has been obscured by years of serial asset price bubbles.

That is a good start to the conversation, but there are other views that dig deeper regarding the causes of stagnation.  Read more…

Hicks on the inapplicability of probability calculus

February 25, 2014 2 comments

from Lars Syll

To understand real world “non-routine” decisions and unforeseeable changes in behaviour, ergodic probability distributions are of no avail. In a world full of genuine uncertainty — where real historical time rules the roost — the probabilities that ruled the past are not necessarily those that will rule the future.

When we cannot accept that the observations, along the time-series available to us, are independent … we have, in strict logic, no more than one observation, all of the separate items having to be taken together. For the analysis of that the probability calculus is useless; it does not apply … I am bold enough to conclude, from these considerations that the usefulness of ‘statistical’ or ‘stochastic’ methods in economics is a good deal less than is now conventionally supposed … We should always ask ourselves, before we apply them, whether they are appropriate to the problem in hand. Very often they are not … The probability calculus is no excuse for forgetfulness.  Read more…

Is medicine a model for ethics in economics?

February 24, 2014 7 comments

from Peter Radford

A recent correspondent asks whether medicine could act as a template for the importation of ethical standards into economics. On balance I don’t think it can. Here’s why:

Medicine consists of a practical part that faces outward towards its customers. We call those customers patients. From the earliest times medicine has adopted the credo ‘first do no harm’ which forms the ethical bedrock for all subsequent standards. This is relatively easy to do since ‘doing harm’ is quite quickly identified. Even then such an ethical background failed to stop the development and implementation of some outrageous and harmful medical techniques. In the modern era the ‘doing no harm’ ethic has allowed the creation of a number of rules that govern doctor activity and provide a measure of protection to patients. Those rules are enforced by various governing bodies that not only establish and monitor the rules, but also govern the very process that allows someone to call themselves a doctor in the first place. This governance structure gives practical medicine a coherence and shape that are identifiable by the public, and ensures that the profession recognizes it relationship with society at large. Read more…

Macroeconomic machine dreams

February 18, 2014 2 comments

from Lars Syll

blog_robot_overlords

Are macro-economists doomed to always “fight the last war”? Are they doomed to always be explaining the last problem we had, even as a completely different problem is building on the horizon?

Well, maybe. But I think the hope is that microfoundations might prevent this. If you can really figure out some timeless rules that describe the behavior of consumers, firms, financial markets, governments, etc., then you might be able to predict problems before they happen. So far, that dream has not been realized. But maybe the current round of “financial friction macro” will produce something more timeless. I hope so.

Noah Smith (emphasis added)

So there we have it! This is nothing but the age-old machine dream of neoclassical economics — an epistemologically founded cyborg dream that disregards the fundamental ontological fact that economies and societies are open — not closed — systems. Read more…

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