from Robert Locke
Ken Zimmerman’s reference to the hermeneutic circle in Asad Zaman’s post about the Education of an Economist sent me scurrying in my mind back fifty years to the seminars on historiography I took in my PhD studies in history and to Widepedia, where I found the following about the hermeneutic circle:
Eurostat has published regional data on unemployment (map). For several reasons I include Turkey in Europe, hence the title of this blog. In the rest of Europe, there is some bewilderment why these Turks (often smart, well-educated people) vote for an unenlightened autocrat like Erdogan. The map gives a clue: except for the Kurdish area of Turkey, unemployment is at least not disastrous and sometimes even pretty low. Turkey does much better than either Greece, Italy or Spain. At this moment, Greek emigration to Turkey is a more realistic idea than Turkish emigration to the rest of Europe. Read more…
from Peter Radford
There are a few thoughts or words in a normal economics discourse that trigger what I call my ‘market reflex’. Asad Zaman just triggered it. Of course he didn’t mean to, and the sentence in question is in an article I agree with. Further, the sentence, on the surface, looks and sounds so innocuous. Here it is:
“Free market economists believe that markets work best when left alone, and any type of government intervention to help the economy can only have harmful effects”
See what I mean? Innocuous. Asad is totally correct, they do think that. Worse: they mean it. And even more worse: they teach it.
Which gets me truly bothered.
The entire enterprise of contemporary economics, aside from its fringes, is built on this shady and unsubstantiated premiss. It’s shady because it is laden with ideological bias, and it’s unsubstantiated because, well, its unsubstantiated.
Which gets me even more annoyed. Read more…
from Lars Syll
In the standard mainstream economic analysis — take a quick look in e.g. Mankiw’s or Krugman’s textbooks — a demand expansion may very well raise measured productivity in the short run. But in the long run, expansionary demand policy measures cannot lead to sustained higher productivity and output levels.
In some non-standard heterodox analyses, however, labour productivity growth is often described as a function of output growth. The rate of technical progress varies directly with the rate of growth according to the Verdoorn law. Growth and productivity is in this view highly demand-determined, not only in the short run but also in the long run.
Given that the Verdoorn law is operative, expansionary economic policies actually may lead to increases in productivity and growth. Living in a world permeated by genuine Keynes-type uncertainty, we can, of course, not with any greater precision forecast how great those effects would be.
So, the nodal point is — has the Verdoorn Law been validated or not in empirical studies? Read more…
from Asad Zaman
Many leading economists have come to agree with Nobel Laureate Stiglitz that modern economic theory represents the triumph of ideology over science. One of the core victories of ideology is the famous Quantity Theory of Money (QTM). The QTM teaches us that money is veil – it only affects prices, and has no real effect on the economy. One must look through this veil to understand the working of the real economy. Nothing could be further from the truth.
In fact, the QTM itself is a veil which hides the real and important functions of money in an economy. The Great Depression of 1929 opened the eyes of everyone to the crucial role money plays in the real economy. For a brief period afterwards, Keynesian theories emerged to illuminate real role of money, and to counteract errors of orthodox economics. Economists believed in the QTM, that money doesn’t matter, and also that the free market automatically eliminates unemployment. Keynes started his celebrated book “The General Theory of Employment, Interest and Money” by asserting that both of these orthodox ideas were wrong. He explained why free markets cannot remove unemployment, and also how money plays a crucial role in creating full employment. He argued that in response to the Depression, the government should expand the money supply, create programs for employment, undertake expansionary fiscal policy, and run large budget deficits if necessary. read more
from David Ruccio
Here’s a description of the minimum-wage machine [ht: sm]:
This machine allows anyone to work for minimum wage for as long as they like. Turning the crank on the side releases one penny every 4.97 seconds, for a total of $7.25 per hour. This corresponds to minimum wage for a person in New York. This piece is brilliant on multiple levels, particularly as social commentary. Without a doubt, most people who started operating the machine for fun would quickly grow disheartened and stop when realizing just how little they’re earning by turning this mindless crank. A person would then conceivably realize that this is what nearly two million people in the United States do every day…at much harder jobs than turning a crank. This turns the piece into a simple, yet effective argument for raising the minimum wage.
The machine can also be reprogrammed to pay the minimum wage of wherever it happens to be currently exhibited.
In the comments to this post, there is some discussion about credit provided by Eurozone banks to their governments. I stated that ‘credit to the government’ is at this moment (!) the most important reason the stock of money in the Eurozone is increasing, some comments are skeptical. A re-investigations shows that it is all slightly complicated. According to the Eurozone law, national central banks are not allowed to provide credit to their governments. Normal banks are however allowed to do so. And according to ECB statistics, they do (see the graph, source). Bank ‘credit’ to the government is growing at a 10% a year rate, while the growth rate of credit to other Euro area residents is barely positive. I do however seem to have misread or at least misunderstood the word ‘credit’ in this graph.
According to this source (p. 111), credit is defined by the statisticians of the ECB as: Read more…
from Lars Syll
Thus your standard New Keynesian model will use Calvo pricing and model the current inflation rate as tightly coupled to the present value of expected future output gaps. Is this a requirement anyone really wants to put on the model intended to help us understand the world that actually exists out there? Thus your standard New Keynesian model will calculate the expected path of consumption as the solution to some Euler equation plus an intertemporal budget constraint, with current wealth and the projected real interest rate path as the only factors that matter. This is fine if you want to demonstrate that the model can produce macroeconomic pathologies. But is it a not-stupid thing to do if you want your model to fit reality?
I remember attending the first lecture in Tom Sargent’s evening macroeconomics class back when I was in undergraduate: very smart man from whom I have learned the enormous amount, and well deserving his Nobel Prize. But…
He said … we were going to build a rigorous, micro founded model of the demand for money: We would assume that everyone lived for two periods, worked in the first period when they were young and sold what they produced to the old, held money as they aged, and then when they were old use their money to buy the goods newly produced by the new generation of young. Tom called this “microfoundations” and thought it gave powerful insights into the demand for money that you could not get from money-in-the-utility-function models.
I thought that it was a just-so story, and that whatever insights it purchased for you were probably not things you really wanted to buy. I thought it was dangerous to presume that you understood something because you had “microfoundations” when those microfoundations were wrong. After all, Ptolemaic astronomy had microfoundations: Mercury moved more rapidly than Saturn because the Angel of Mercury left his wings more rapidly than the Angel of Saturn and because Mercury was lighter than Saturn…
Brad DeLong is of course absolutely right here, and one could only wish that other mainstream economists would listen to him … Read more…
from Peter Radford
Some things get too expensive. When they do, people tend to buy less. Duh. This quite simple and intuitive observation sits at the heart of all that fancy math we call economics. We don’t need the math to understand the relationship between the cost of, and the demand for, something, but having lots of complicated looking equations gives us comfort: there is a universal law lurking in the intuition. With exceptions of course. This is, after all, economics. There are always exceptions.
One of the things that is getting too expensive, if it hasn’t already arrived there, is higher education. The cost of going to college is becoming prohibitive. Sooner or later the cost of college will cut into the demand for education.
Just as it ought.
In our contemporary economy we are accustomed to being told that ever higher levels of education are not just desirable, but they are essential. One idea endlessly tossed about, especially on the right in politics, is that our workers are insufficiently skilled to compete with their foreign peers, and so the nation is at risk of losing its competitive edge. This is then twisted into the follow-up idea that we need a higher percentage of our population at college.
But what happens when we arrive at saturation? What is saturation? What is the value of a college degree when everyone, or nearly everyone, has one? Do we all then need to go on and get a post-graduate education? And once we all have PhD’s, then what?
Clearly there is something amiss in the thinking. Read more…
from David Ruccio
It’s been more than seven years and yet we’re still haunted by the spectacular crash that took place on Wall Street.
The big banks have been fined but no one, at least at or near the top, has been prosecuted let alone gone to jail.
The question is, why?
We know why the Eric Holder and the Justice Department didn’t go after the top executives: they were afraid of undermining the fragile recovery.
What about the Securities and Exchange Commission (which, remember, was set up during the first Great Depression to stem the fraud and abuses on Wall Street)?
We now know, thanks to Jesse Eisinger (based on a treasure-trove of internal documents and emails released by James A. Kidney, a now-retired SEC lawyer) that in the summer of 2009 lawyers at the SEC were preparing to bring charges against senior executives at Goldman Sachs (over a deal known as Abacus) but they never took the case to trial.
Larry Motuz, Paul Davidson and Don John weigh in on this post about central banks, different inflation metrics and monetary stability. What can we learn from them? Below, the comments. Below these, some remarks from me. First, however, the fact that a broader metric of inflation like domestic demand inflation (graph, source: Eurostat) shows a dramatically different development than consumer price inflation. ‘Dramatically’ as the differences add up. The total increase of the consumer price level in Germany between 1999 and 2009 was about 22%, the total increase in the domestic demand price level (which includes consumer prices!) was about 12%. Looking at one of the other does make a difference (and small wonder German households are so inflation averse!)! The comments:
- Motuz totally agrees with the idea that central banks should not target (only) the price level but ‘monetary stability’ which includes sustainable (private) debts.
- Paul Davidson is however quite critical:
from Lars Syll
Listen to the program here.
Mainstream economists like Paul Krugman and Simon Wren-Lewis think that yours truly and other heterodox economists are wrong in blaming mainstream economics for not being real-world relevant and pluralist. To Krugman there is nothing wrong with ‘standard theory’ and ‘economics textbooks.’ If only policy makers and economists stick to ‘standard economic analysis’ everything would be just fine.
I’ll be dipped! If there’s anything the last decade has shown us, it is that economists have gone astray in their tool shed. Krugman’s ‘standard theory’ — mainstream neoclassical economics — has contributed to causing today’s economic crisis rather than to solving it.
In an interesting article Cinzia Alcidi, Matthias Brusse and Daniel Gros argue that central banks should not target consumer price inflation but should look at GDP inflation instead. They are right to discuss the target variable of central banks. They are wrong about the alternative. As the GDP deflator (which is used to calculate GDP inflation) is influenced by the terms of trade, it is not a reliable indicator of domestic price developments.
from Peter Radford
A nice way to end the week:
I overheard a conversation between two high school students this morning.
The first person was asking about which classes the second was going to take next. One of those mentioned was microeconomics.
“Oh, that’s easy” said the first, “You just have to remember that its all rubbish – they want you to believe that people are rational, and that there’s all this perfection in the world.”
“Really?” responded the second, “That’s really dumb. I wonder why they do that?”
“It doesn’t matter, it’s economics”
“Well maybe I’ll take history instead, at least I might learn something useful.”
And, yes, this was the conversation.
A small ray of hope?
from Peter Radford
Paul Krugman has this in his blog today:
The name is a takeoff on Noah Smith’s clever writing about “101ism”, in which economics writers present Econ 101 stuff about supply, demand, and how great markets are as gospel, ignoring the many ways in which economists have learned to qualify those conclusions in the face of market imperfections. His point is that while Econ 101 can be a very useful guide, it is sometimes (often) misleading when applied to the real world.
My point is somewhat different: even when Econ 101 is right, that doesn’t always mean that it’s important – certainly not that it’s the most important thing about a situation. In particular, economists may delight in talking about issues where 101 refutes naïve intuition, but that doesn’t at all mean that these are the crucial policy issues we face.
So why is 101 what it is?
from Peter Radford
Yesterday’s election result in New York State effectively ended Bernie Sander’s tilt at the Democratic windmill. Here’s what I wrote to a friend who was intent on parsing the numbers:
And, the point is?
We can analyze all we want. It doesn’t alter the result. It provides nice fodder for coffee shop talk, but doesn’t help anyone.
It’s time to move on. Bernie will keep going. Clinton will become even more annoyingly patronizing. Her surrogates [like Krugman] will gloat. She will likely win in November. And America will struggle on regardless.
Clearly 2016 is not the year of change. It is a year of upheaval on the right, complacency in the center, and only the beginnings of rebirth on the left.
I never imagined that the Democrats would be the party of centrist corporate establishment thought. Or that it would be the Democrats enforcing the wishes of big business over and above those of the working people. But that’s where we are.
I suppose none of this is a surprise. The total dominance of social/cultural issues as a defining line in politics has obscured the equally powerful dominance of right wing economics across the board. Neoliberalism is the monotone ideology of both parties.
The revolution will have to wait.
Buried in there is my attitude towards economics. By enabling neoliberal ideology, and following the lead of Hayek and Friedman, economics debases the role of liberal democracy and representative government. This casts a long dark shadow across the subject.