Piketty and the non-applicability of neoclassical economics

from Lars Syll

In yours truly’s On the use and misuse of theories and models in economics the author of Capital in the Twenty-First Century is criticized for not being prepared to fully take the consequences of marginal productivity theory — and the alleged close connection between productivity and remuneration postulated in mainstream income distribution theory — over and over again being disconfirmed both by history and, as shown already by Sraffa in the 1920s and in the Cambridge capital controversy in the 1960s, also from a theoretical point of view:

Economics and the value of art

from David Ruccio

Neoclassical economists don’t have a lot to say about the value of art.

The Pope is a heterodox if you are a Greek or a Russian

Well, heterodox is relative, isn’t it? The Pope is a heterodox if you are a Greek or a Russia. I don’t particularly like it but wouldn’t mind if people use it as an easy way of saying that I am not a neoclassical economist. But, as I have explained in my latest book (Economics: The User’s Guide), I don’t entirely subscribe to one school or another. I have been influenced by many different schools. I believe—not only for political reasons but for intellectual reasons too—we need pluralism in economics. Different schools have different methodological approaches, have different interests (some more interested in production, while others are more interested in exchange, for instance) or make different political and ethical assumptions. We need all of them to understand fully the complexity of the world.

Economic theory creates the world we live in, and the rules we live by.

How does it happen that we have given our quiet assent to a situation where the richest 85 individuals have more money than the bottom 3.5 billion? Where vultures wait for starving children to die, while others eat luxurious meals on private resort islands? Where horrendous military and commercial crimes leading to deaths, misery, and deprivations of millions are routinely committed by highly educated men with multimillion dollar salaries in luxury corporate and government suites?

A core component of the answer to these critical questions is that we have been educated to believe that this is a normal state of affairs, which comes about through the operation of iron laws of economics. Economic theories currently being taught in universities all over the world are an essential pillar which sustains the economic system currently in operation. These theories state that we (human beings) are cold, callous, and calculating. Microeconomic theory says rational individuals are concerned only with their own consumption. They are callous; completely indifferent to the needs of others. They maximize, calculating personal benefits to the last penny. They are cold – their decisions are not swayed by emotions of any kind. All this theorizing is not without power – it creates the world we live in, and the rules we live by.

Asad Zaman

‘Rational expectations’ — nonsense on stilts

from Lars Syll

Assumptions in scientific theories/models are often based on (mathematical) tractability (and so necessarily simplifying) and used for more or less self-evidently necessary theoretical consistency reasons. But one should also remember that assumptions are selected for a specific purpose, and so the arguments (in economics shamelessly often totally non-existent) put forward for having selected a specific set of assumptions, have to be judged against that background to check if they are warranted.

This, however, only shrinks the assumptions set minimally – it is still necessary to decide on which assumptions are innocuous and which are harmful, and what constitutes interesting/important assumptions from an ontological & epistemological point of view (explanation, understanding, prediction). Especially so if you intend to refer your theories/models to a specific target system — preferably the real world. To do this one should start by applying a Real World Filter in the form of a Smell Test: Is the theory/model reasonable given what we know about the real world? If not, why should we care about it? If not – we shouldn’t apply it (remember time is limited and economics is a science on scarcity & optimization …)

I came to think of the importance of applying the Smell Test when re-reading Mark Thoma’s article — in The Fiscal Times — on “Do people have rational expectations?”:

Science or Politics?

from Peter Radford

Paul Krugman, with whom I do not always agree, asks two very pertinent questions:

“Were the freshwater guys always just pretending to do something like science, when it was always politics? Is there simply too much money and too much vested interest behind their point of view?”

Let’s set aside our differences for a moment and unite behind those questions.

Yes. It was always politics.

Yes. There is simply too much money and too much vested interest behind their point of view.

Orthodox economics is a sham as a science. It is an ideology masquerading as science. How else can we describe a body of thought that appears totally inflexible and immune to contradictory evidence? It does not adjust. It’s believers do not learn. They preach. They proselytize. Their theory lies exposed for all to see as a mere prop for a particular point of view. A point of view that justifies inequality of outcomes and mean spirited indifference to the plight of vast swathes of our fellow citizens in the name of pseudo-efficiencies in the allocation of our collective resources. These supposed efficiencies are neither observable nor measurable in the real world, but only within the enclosed, cramped spaces of models specially created to produce a very limited and desired outcome. Desired, that is, by those who value extreme individualism over community, excessive competition over cooperation, and an almost pathological belief in rational behavior over human cognitive frailty.

Self-righteous Chicago drivel — far from everything you need to know about economics

from Lars Syll

In 2007 Thomas Sargent gave a graduation speech at University of California at Berkeley, giving the grads “a short list of valuable lessons that our beautiful subject teaches”:

1. Many things that are desirable are not feasible.
2. Individuals and communities face trade-offs.
3. Other people have more information about their abilities, their efforts, and their preferences than you do.
4. Everyone responds to incentives, including people you want to help. That is why social safety nets don’t always end up working as intended.
5. There are trade offs between equality and efficiency.
6. In an equilibrium of a game or an economy, people are satisfied with their choices. That is why it is difficult for well meaning outsiders to change things for better or worse.
7. In the future, you too will respond to incentives. That is why there are some promises that you’d like to make but can’t. No one will believe those promises because they know that later it will not be in your interest to deliver. The lesson here is this: before you make a promise, think about whether you will want to keep it if and when your circumstances change. This is how you earn a reputation.
8. Governments and voters respond to incentives too. That is why governments sometimes default on loans and other promises that they have made.
9. It is feasible for one generation to shift costs to subsequent ones. That is what national government debts and the U.S. social security system do (but not the social security system of Singapore).
10. When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation.
11. Most people want other people to pay for public goods and government transfers (especially transfers to themselves).
12. Because market prices aggregate traders’ information, it is difficult to forecast stock prices and interest rates and exchange rates.

What is neoclassical economics?

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.

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. 

Macroeconomic machine dreams

from Lars Syll

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.

Two concept proposals: from neoclassical economics to neoliberal economics and from neoliberalism to plutocratism

from Deniz Kellecioglu

It is important to talk about concepts that reflect reality. This is especially true if we are concerned about people’s emancipation – it is easier to struggle when your nemeses are conceptualised and visible. In my opinion, one of the greatest obstacles of recent history is the evasive and concealed character of hegemony.

In our context of economics, it has been obvious for a while that we can no longer use the term neoclassical economics (NCE) to describe the current mainstream economics (theory and education). NCE has been so distorted and so disfigured over the past decades that it no longer reflects mainstream theoretical narratives (see Lawson 2013 for a recent discussion). From one perspective, as the economist Joan Robinson talked about “bastard Keynesianism” in the 1960s, we have now a “bastard Neoclassicism”. This followed from an elite capture and customisation of NCE. The fundamental flaws of NCE, as we real-world economists see it, were actually sources of strength for the elites and elite-oriented individuals. The basics of NCE functioned brilliantly to advance their perspectives, interests and power (not only economical and political, but also social and cultural). A “free” world is wonderful if you start with a stronger upper hand, i.e. unequal point of departures. Because NCE was moulded at the hands of neoliberal forces, I think it should now be called neoliberal economics. 

Unequal austerity and its economics

from Peter Radford

Inequality is much discussed nowadays. Pundits of all political stripes are weighing in on its causes and on its effects. As usual there is no agreement. So, also as usual, I suspect there will be no action.

This is not a new problem, nor is it trivial. The steadily increasing privilege afforded capital – higher profits, dividends, and rents, and the consequent steady erosion of the rewards to work – wages and salaries, have been accumulating beneath the surface for decades. I believe that in the years ahead the emergence of our highly unequal society will be the hallmark of the entire Reaganite era.

I don’t think this problem is as complicated as some people make it out to be. It is a direct consequence of the shift in the dominant economic theory that infuses our decision making across all relevant domains of activity in our economy. It was an intentional consequence. It was not, as Bill Gross tries to make sound, a happy accident of being alive at the right moment. If you’re  capitalist that is. If you’re a regular worker, then tough.

What happened?

Well, back before the shift took place the dominant economic theory guiding decision making was the post-war version of Keynesianism. It seemed to explain things well, and seemed to produce excellent results: the western world bounced back from its wartime trauma and produced a golden age of growth that propelled living standards, wages, and profits all together.

Then it hit a snag.

Getting business school reform wrong, Why it happened, and what to do about it

from Robert Locke

Post WWII business schools deans, philanthropic foundation bureaucrats (Ford and Carnegie), and businessmen carried through radical reform of US business school curricula in the 1960s to get rid of “unimaginative, non-theoretical, second rate …students,” working in, to use Herbert Simon’s phrase, “a wasteland of vocationalism,” (Khurana, 236). Their goal was to replace the existing curriculum with a scientific education in which neoclassical economics played a “dominant role within the emerging tinplate for disciplines-oriented business studies.” (Khurana, p. 265, Locke, 1989, Management and Higher Education Since 1940) Rakesh Khurana tells this story in detail in his 2007 book, From Higher Aims to Hired Hands (Princeton UP), without much comment, however, about whether the reform, which was thorough, actually succeeded in improving economic performance. I suggest it did not.

Why the Postwar Business School reform

Most histories of this transformation of business studies stress a two step process. First, neo-classical economics imbibed the scientific toolkit that operational research developed during WWII and the Cold War in government agencies and think tanks like the Rand Corporation, therewith claiming to have turned itself into a “prescriptive” science. Then, in a second step, reformers made this new neo-classical economics the dominant force in the subsequent transformation of business school curricula and research.

But the penetration of business schools by neoclassical economics

British Test Case

from Peter Radford

For those austerity advocates amongst you: may I draw your attention to the plight of the British economy?

Its’ headed down again. There’s a distinct possibility that it will enter recession. Make that a third recession. A rare triple dipper. The prolonged slump pervading Britain has now lasted longer than the Great Depression. It is taking an enormous toll. It is steadily eroding the future potential of the economy.

And it is entirely a manmade problem.

Manmade as in Conservative party made..

The British government, for ideological reasons, decided to trash the British economy, It is doing a fine job. So good is its effort that it surely would be eligible for some prize, were prizes given for most asinine, antisocial, deliberately destructive, and all round stupid economic policy.

Plight of workers in Europe continues to worsen (graph)

from David Ruccio

Fighting back against the Eurozone tyrants

from Dean Baker

The eurozone crisis countries still have not developed a workable strategy for countering the policies being imposed by the troika — the European Central Bank (ECB), the IMF and the European Union. Their main problem is not profligate government spending, as fans of data everywhere have long known; the problem is an imbalance in relative prices between the crisis countries and Germany and other northern countries.

This imbalance is causing the crisis countries to run chronic trade deficits. Prior to the collapse of housing bubbles in the peripheral countries, this deficit was financed primarily through massive lending to the private sector in the crisis countries by banks in the northern countries. Since the collapse, the trade deficit has been largely financed with official lending to peripheral country governments. However the core problem is the trade deficit, not government borrowing in the crisis countries.

Prior to the creation of the euro, this problem of competitiveness would be easily addressed by a fall in the value of the currencies of the peripheral countries relative to the currencies of the core countries. However with the single currency, this is not an option. 

Finding a framework for a New Economics

from Geoff Davies

The challenge, and reactions to it

Many economists, and more non-economists, agree that economics needs new ideas, given the comprehensive failure of the mainstream to foresee the Global Financial Crisis and its continuing failure to lift the US and Europe out of deep recession or depression.

Few in the mainstream seem to have any idea where to start. Many non-mainstream economists offer ideas, and many of those ideas are important, but not the whole story. Many of the non-mainstream proposals reach back to older ideas (Keynes, the Austrians, etc., often with valuable but incomplete insight) rather than reaching forward to new and more comprehensive approaches. There seems to be little agreement on which things to change, nor on how much the subject needs to change.  

The economics behind the killings of South African mine workers

from Deniz Kellecioglu

“We were only tolerated simply because our cheap labour is needed.” (Steve Biko)

The killings of 34 demonstrating mine workers in South Africa last month has several background factors, but two of them stand out: police brutality and the exploitation of workers. And they are interlinked.

The aggressiveness of the security forces’ represent the conditioning produced by the governmentality of national and international elites. Thus, the assault in Marikana, South Africa is not an isolated event, it’s a global phenomenon. One major difference is the explicitness of this event – workers usually perish in silence due to, for instance, poor health or social violence, away from the cameras.

The economics behind this governmentality propose that the labour market has to be “flexible” to the demands of “the market”. In other words,

Interests and ideas

from David Ruccio

Self-interest is central to neoclassical economics.

My students certainly know that. According to the neoclassical economics they’ve learned, all choices made by economic agents can be reduced to and explained in terms of self-interest.

But Dani Rodrik [ht: kd] is right:

Interests are not fixed or predetermined. They are themselves shaped by ideas – beliefs about who we are, what we are trying to achieve, and how the world works. Our perceptions of self-interest are always filtered through the lens of ideas.

And, according to Rodrik, neoclassical economics has played a key role in shaping interests: 

Mainstream economics must fall

from David Ruccio

The current spectacle of infighting is one more reason mainstream economics must fall.

It’s not that we needed any more reasons—since, for all their claims to the mantle of science, mainstream economists have continued to move back and forth between contrasting positions. It’s unemployment, no it’s inflation. Fiscal stimulus works best; what we really is expansionary austerity. Let’s see more monetary easing; but watch out for policy uncertainty. And so on and so forth.

But the debate among mainstream economists has entered a new stage—with one group endorsing Team Republican, arguing that “The negative effect of the administration’s ‘stimulus’ policies has been documented in a number of empirical studies,” while the other group accuses them of “giving economics a bad name.”

Technology or Power?

from John Schmitt

Within the economics profession, the standard explanation for rising inequality over the last three decades is that we have been experiencing a long-term shortage of college-educated workers. Technological progress, the story goes, has increased demand for the kind of highly skilled workers that colleges produce, but, young people have not been going to college in sufficient numbers to meet that demand. The result, these economists argue, is that the earnings of the third or so of the workforce with a college degree have pulled ahead of the rest, creating a widening gap between the top and bottom of the income scale.