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.

The human capital controversy

from Lars Syll

I came to think about this dictum when today reading yet another piece on Piketty — this time on his refusal to use the term “human capital” in his inequality analysis.

I think there are many good reasons not to include human capital in economic analyses. Let me just give one — perhaps analytically the most important one — reason and elaborate a little on that.

Recruiting for Revolutionary Reviews Brigade

from Asad Zaman

Ideological propaganda is a very important in all types of warfare — many armies now have large sub-units exclusively dedicated for this purpose. Those who read Amazon book reviews can easily find attempts by ideological devotees of neoclassical economics to block access to good literature on real world economics. We need to counteract this act of vandalism vigorously. Readers  of the RWER Blog  are requested to post reviews of good eye-opening books on Amazon, and also to solicit other readers to do the same, so as to create some volume of good reviews of books on real world economics.

Questions – Add Your Voice

from Peter Radford

There’s been a lot of excitement about changing the substance of economics and the way it is taught. Rightly so. But that, it seems to me, just begs the question: “What is economics?” Or, rather, it begs a series of questions. None of us can pretend to have the answer since the answer is surely to be found in the collective voice of those who are interested enough to respond. Social intelligence is a more robust repository of ‘truth’ than any single intelligence can ever be.

So.

What are the questions? Tell me.

Once we have a good set of questions, let’s then survey our friends and colleagues to get answers. Oh. And let’s restrict ourselves to limited space. Those answers must be short. Let’s say a few paragraphs at the very most.

Once we have the questions and all the answers we can assemble them as a collective voice.

A hundred or so answers to, say, fifteen good questions would give us a very quick but deep insight into the state of economics.

Let’s not place any limits on ourselves just yet – other than the need for brevity.

So go ahead. Add your voice to the collective.

Now.

The human capital controversy

from David Ruccio

Like the capital controversy of the 1960s, the current controversy over human capital pits neoclassical economics against its critics.

The capital controversy (also known as the Cambridge controversy, because it was staged between neoclassical economists at MIT, and thus of Cambridge, Massachusetts, and non-neoclassical economists at Cambridge University, and thus of Cambridge, England), which actually took place between the mid-1950s and mid-1970s, was narrowly about the internal consistency of neoclassical economics and more generally about the role of capital in economic theory. The basic idea is that, in a world of heterogeneous capital goods (e.g., a shovel and an automobile assembly-line), you need to know the price of capital (the interest rate or rate of return on capital) in order to determine the quantity of capital (i.e., in order to add up all those different kinds of physical capital). But, in neoclassical economics, you need to use the quantity of capital in order to determine the price of capital (via supply and demand in the “capital market”), which creates a fundamental problem for the neoclassical theory of capital.

An open letter to economics student groups

from Stuart Birks

Well done, your concerns about the economics curriculum are getting attention. There are also many practicing economists who have concerns about the current emphasis and direction of economics as a discipline.

As in any such situation, the process of change can be crucial in determining the outcome. Often many different initiatives are called for. There is one initiative which may be effective in the short term and also instrumental in shaping developments in the long term. I am referring to the World Economics Association’s Textbook Commentaries Project.

The project involves the development of an online platform containing brief commentaries which can be used right now in existing and new economics courses. This growing collection is designed to increase critical understanding of economics approaches and awareness of alternative perspectives. The commentaries are each short and stand-alone, so can be easily be incorporated into existing courses without greatly increasing the workload. They do generate an awareness of the concerns about various approaches and the diversity of thought that exists, even if no longer included in the standard curriculum. Many commentaries draw directly on alternative literature by recognised experts in the field. It is important that students be made aware of these sources, if only to put their own knowledge in a wider context. Additional pages also highlight other accessible material (books and online teaching resources).

How can you participate?

Game theory—in practice

from David Ruccio

 

source*

Back when I taught Principles of Microeconomics, I offered a lecture or two on game theory. Given how terrible most textbook presentations are, I used to borrowed heavily from the work of Judith Mehta and Shaun Hargreaves-Heap and Yanis Varoufakis to explain the key assumptions behind and the tensions generated within game theory.

Now, Varoufakis is back—in a very different capacity, of course—to explain the lesson he learned from his studies of game theory:

Model assumptions and reality

from Lars Syll

In a previous article posted here — What are the key assumptions of linear regression models? — yours truly tried to argue that since econometrics doesn’t content itself with only making optimal predictions, but also aspires to explain things in terms of causes and effects, econometricians need loads of assumptions — and that most important of these are additivity and linearity.

Let me take the opportunity to cite one of my favourite introductory statistics textbooks on one further reason these assumptions are made — and why they ought to be much more argued for on both epistemological and ontological grounds when used (emphasis added):

Rats! History does repeat itself

from Peter Radford

And clearly economists don’t learn from it.

Ponder this:

“It was all very well for the rich, who could raise all the credit they needed, to clamp rigid deflation and monetary orthodoxy on the economy … it was the little man who suffered, and demanded easy credit and financial unorthodoxy.”

That’s the voice of E. J. Hobsbawm in his book, “The Age of Revolution 1789 – 1848″, and he is talking about post Napoleonic Europe.

But how contemporary is that sentiment?

We are stuck in a similar situation. Our elite, both here and in Europe, is managing the economy  for its own ends. The disconnect with everyday folk is astonishing. The hubris and plain meanness of it all is equally astonishing.

Look at Greece: the attempt to impose a teutonic fiscal ‘discipline’ via stringent austerity has simply led to the debt that was the target of the policy becoming an even larger problem. It is an example of epic policy failure. The Greeks, for all their previous laxity and fiscal ineptitude, are to be applauded for calling for an end to the stupidity.

Finding equilibrium

from Lars Syll

Finding Equilibrium explores the post–World War II transformation of economics by constructing a history of the proof of its central dogma—that a competitive market economy may possess a set of equilibrium prices. The model economy for which the theorem could be proved was mapped out in 1954 by Kenneth Arrow and Gerard Debreu collaboratively, and by Lionel McKenzie separately, and would become widely known as the “Arrow-Debreu Model.” While Arrow and Debreu would later go on to win separate Nobel prizes in economics, McKenzie would never receive it. Till Düppe and E. Roy Weintraub explore the lives and work of these economists and the issues of scientific credit against the extraordinary backdrop of overlapping research communities and an economics discipline that was shifting dramatically to mathematical modes of expression.

Based on recently opened archives, Finding Equilibrium shows the complex interplay between each man’s personal life and work, and examines compelling ideas about scientific credit, publication, regard for different research institutions, and the awarding of Nobel prizes. Instead of asking whether recognition was rightly or wrongly given, and who were the heroes or villains, the book considers attitudes toward intellectual credit and strategies to gain it vis-à-vis the communities that grant it.

Telling the story behind the proof of the central theorem in economics, Finding Equilibrium sheds light on the changing nature of the scientific community and the critical connections between the personal and public rewards of scientific work.

Although I find Düppe’s and Weintraub’s book a well-researched and interesting reading , I still can’t get rid of the feeling that all these efforts at modeling a world full of agents behaving as economists — “often wrong, but never uncertain” — and still not being able to show that the system under reasonable assumptions converges to equilibrium (or simply assume the problem away), is a gross misallocation of intellectual resources and time. 

Greg Mankiw on loanable funds — so wrong, so wrong

from Lars Syll

The loanable funds theory is in many regards nothing but an approach where the ruling rate of interest in society is — pure and simple — conceived as nothing else than the price of loans or credit, determined by supply and demand — as Bertil Ohlin put it — “in the same way as the price of eggs and strawberries on a village market.”

In the traditional loanable funds theory — as presented in mainstream macroeconomics textbooks like Greg Mankiw’s — the amount of loans and credit available for financing investment is constrained by how much saving is available. Saving is the supply of loanable funds, investment is the demand for loanable funds and assumed to be negatively related to the interest rate. Lowering households’ consumption means increasing savings that via a lower interest.

From a more Post-Keynesian-Minskyite point of view the problems with the standard presentation and formalization of the loanable funds theory by Greg Mankiw and other “New Keynesian” macroeconomists  are quite obvious:

1 As already noticed by James Meade decades ago, the causal story told to explicate the accounting identities used gives the picture of “a dog called saving wagged its tail labelled investment.” In Keynes’s view — and later over and over again confirmed by empirical research — it’s not so much the interest rate at which firms can borrow that causally determines the amount of investment undertaken, but rather their internal funds, profit expectations and capacity utilization.

Economics curriculum reformulation

from Lars Syll

One of the main ideas underlining the book is that “being an economist” in the XXI century requires a radical change in the training of economists and such change requires a global effort. A new economics curriculum is needed in order to improve the understanding of the deep interactions between economics and the political forces and the historical processes of social change. The need for trans-disciplinary and interdisciplinary work is highlighted.

Discussions include the following. Main critiques of current practices on theory, methods and structures. Current gaps in the economics curriculum. What should economics graduates know? The contributors are: Nicola Acocella, Sheila Dow, David Hemenway, Arturo Hermann, Grazia Ietto-Gillies, Maria Alejandra Madi, Lars Pålsson Syll, Constantine Passaris, Paul Ormerod, Jack Reardon, Alessando Roncaglia, Asad Zaman.

Yours truly’s contribution to the collection is on “Economics textbooks – anomalies and transmogrification of truth.”

On abstraction and idealization in economics

from Lars Syll

When applying deductivist thinking to economics, neoclassical economists usually set up “as if” models based on a set of tight axiomatic assumptions from which consistent and precise inferences are made. The beauty of this procedure is of course that if the axiomatic premises are true, the conclusions necessarily follow. The snag is that if the models are to be relevant, we also have to argue that their precision and rigour still holds when they are applied to real-world situations. They often don’t. When addressing real economies, the idealizations and abstractions necessary for the deductivist machinery to work simply don’t hold. 

If the real world is fuzzy, vague and indeterminate, then why should our models build upon a desire to describe it as precise and predictable? The logic of idealization is a marvellous tool in mathematics and axiomatic-deductivist systems, but a poor guide for action in real-world systems, in which concepts and entities are without clear boundaries and continually interact and overlap. 

Or as Hans Albert has it on the neoclassical style of thought: 

Zero Shocker

from Peter Radford

What with the World Economic Forum folks wading in on inequality ahead of the annual Davos shindig for the great and beautiful, here’s what Oxfam has to say:

“Global wealth is increasingly being concentrated in the hands of a small wealthy elite … These wealthy individuals have generated and sustained their vast riches through their interests and activities in a few important economic sectors, including finance and pharmaceuticals/healthcare. Companies from these sectors spend millions of dollars every year on lobbying to create a policy environment that protects and enhances their interests further.”

Moreover Oxfam predicts that the top 1% will have more wealth than the bottom 99% by about 2016. Here’s their chart:

Brad DeLong and the true nature of neoclassical economics

from Lars Syll

I think that modern neoclassical economics is in fine shape as long as it is understood as the ideological and substantive legitimating doctrine of the political theory of possessive individualism. As long as we have relatively-self-interested liberal individuals who have relatively-strong beliefs that things are theirs, the competitive market in equilibrium is an absolutely wonderful mechanism for achieving truly extraordinary degree of societal coordination and productivity. We need to understand that. We need to value that. And that is what neoclassical economics does, and does well.

Of course, there are all the caveats to Arrow-Debreu-Mackenzie:

Piketty’s response to Mankiw et al.: “and some consume academics.”

from David Ruccio

I didn’t attend the most recent American Economic Association/Allied Social Sciences Association meetings in Boston. But, according to Chuck Collins, several sessions focused on the sensation of French economist Thomas Piketty and his 2014 book on inequality, Capital in the Twenty-First Century.

As an outsider to academic economics, I was struck by just how compartmentalized and smug the field appears. At one point, [Gregory] Mankiw even put up a slide, “Is Wealth Inequality a Problem?” Any economist who ventures across the disciplinary ramparts will, of course, find a veritable genre of research on the dangerous impacts of extreme inequality.

We now have over two decades of powerful evidence that details how these inequalities are making us sick, undermining our democracy, slowing traditional measures of economic growth, and turning our political system into a plutocracy.

Mankiw, at another point in his presentation, had still more embarrassing comments to make. Piketty, he intoned, must “hate the rich.” Piketty’s financial success with his best-selling book, Mankiw added, just might lead to self-loathing.

These clearly well-rehearsed quips, aimed at knee-capping the humble French economist, fell flat. Mankiw’s presentation, entitled “R > G, so what?,” came across as little more than an apologia for concentrated wealth.

And Piketty’s response?

University of Greenwich shows the way!

from Lars Syll

The last seven years have not been easy for the global economy as well as the teaching of economics. The recent financial crisis and the Great Recession have led many economists, non-economists and students in economics to question the state of the discipline, wondering to what extent it provides the necessary tools to interpret the complex world we live in, signalling a deep dissatisfaction with economists’ ability to provide solutions to real world problems. Employers have recognised that the economics graduates that the standard curriculum generates are not equipped with the skills that the real world requires. Likewise, students themselves have recognised that the tools and theories they learn don’t enable them to make sense of the world they live in, let alone to address and solve real world problems …

The reason the revalidation of the economics programmes at the University of Greenwich is special is that it constitutes one of the first institutional responses to current pressures from students, faculty, employers and policy makers to produce more ‘world-ready’ graduates. In redesigning our economics programmes we – the economics programmes team – have decided to: 

Read my lips — validity is NOT enough!

from Lars Syll

Neoclassical economic theory today is in the story-telling business whereby economic theorists create make-believe analogue models of the target system – usually conceived as the real economic system. This modeling activity is considered useful and essential. Since fully-fledged experiments on a societal scale as a rule are prohibitively expensive, ethically indefensible or unmanageable, economic theorists have to substitute experimenting with something else. To understand and explain relations between different entities in the real economy the predominant strategy is to build models and make things happen in these “analogue-economy models” rather than engineering things happening in real economies.

Formalistic deductive “Glasperlenspiel” can be very impressive and seductive. But in the realm of science it ought to be considered of little or no value to simply make claims about the model and lose sight of reality. As Julian Reiss writes:

Extraordinarily absurd things called ‘Keynesian’

from Lars Syll

Today, it seems, just about anyone can get away with calling themselves a Keynesian, and they do, no matter what salmagundi of doctrinal positions they may hold dear, without fear of ridicule or reproach. Consequently, some of the most extraordinarily absurd things are now being attributed to Keynes and called “Keynesian theories”. For instance, J. Bradford DeLong, a popular blogger and faculty member at Berkeley, has in a (2009) paper divided up the history of macroeconomics into what he identifies as a “Peel–Keynes–Friedman axis” and a “Marx–Hoover–Hayek” axis: clearly he has learned a trick or two from the neoliberals, who sow mass confusion by mixing together oil and water in their salad dressing versions of history. The self-appointed “New Keynesians” of the 1990s (including Gregory Mankiw, David Romer and Michael Woodford) took the name of Keynes in vain by unashamedly asserting a proposition that Keynes himself had repeatedly and expressly rejected, namely that market-clearing models cannot explain short-run economic fluctuations, and so proceeded to advocate models with “sticky” wages and prices (Mankiw, 2006).

Economics is what?

from Peter Radford

This week’s Economist magazine includes an article designed to uplift the hearts of depressed economists everywhere. It devotes a whole page under the headline “Meet the market shapers”, to a catalog of what it regards as cutting edge examples of economists doing useful stuff at the ‘micro’ level. By micro in these cases the Economist means working inside or alongside a business firm.

All the cases in the article are about some clever folk doing some clever analysis that, so we are told, really and truly helps the firms in question do better. In particular a theme emerges that the work seems to help the firms match what they have to sell with people who are likely, though not certain, to buy.

Naturally, although the magazine doesn’t admit to any added value in this, all the firms cited are Silicon Valley start ups and the like. As we know all Silicon Valley firms are very, very smart – they disrupt the dullards who have only managed to survive a few decades by shooting into orbit and surviving [gasp] for months and even years. So to help firms that are already clever is a real feather in anyone’s cap.

All this cutting edge stuff has the Economist really excited. Not only does it give the story a full page, but it even devotes one of its editorial columns to explaining what micro-economists do: