Archive for the ‘The Economy’ Category

Alternative to Mankiw’s view on tax incentives and work: maybe Europeans want more free time

September 16, 2021 4 comments

from Dean Baker

Greg Mankiw warned New York Times readers about the dangers of adopting the Biden agenda and moving more towards a European-style welfare state. In his piece, titled “Can America Afford to be a Major Welfare State,” Mankiw noted:

“Compared with the United States, G.D.P. per person in 2019 was 14 percent lower in Germany, 24 percent lower in France and 26 percent lower in the United Kingdom.

“Economists disagree about why European nations are less prosperous than the United States. But a leading hypothesis, advanced by Edward Prescott, a Nobel laureate, in 2003, is that Europeans work less than Americans because they face higher taxes to finance a more generous social safety net.”

While Prescott and Mankiw attribute the gap in annual work hours between Europe and the United States to the disincentive created by higher European taxes, there is an alternative explanation: Europeans workers may just want to have more leisure time and they have the political power to impose their will.

Supporting this view is the fact that the European welfare states all mandate far more paid time off than the United States. Germany mandates that workers get 20 days a year of paid vacation, in addition to 13 paid holidays. The Netherlands also mandates 20 days of paid vacation, in addition to 9 paid holidays. Demark mandates 25 days of paid vacation and 9 paid holidays. These countries also all mandate paid sick leave and paid family leave. Read more…

Economics 999 and “the Monday night club problem”

September 16, 2021 8 comments

from Edward Fullbrook

In 1965 in Berkeley, California the New Left came into existence by finding a solution to what its founders called “the Monday night club problem”, a problem remarkably similar to the one that decade after decade emasculates “heterodox economics”.  In Berkeley there were numerous left-wing political groups, each based on a different set of underlying ideas, texts, and key terms, and that by long tradition met on Monday evenings.  Each of these groups had its own informal hierarchy of members and its own way of describing and addressing political issues.  Each group also provided valuable social support and intellectual enhancement for its members.  But when it came to changing things, of having any real-word effect, they were no less powerless than bridge clubs.

It was not, however, that most Monday night club members did not want to bring about real-world changes; it was that they had no means of doing so.  But in the fall of 1964 Read more…

Friedman’s Feedback Loop

September 15, 2021 Leave a comment

from Duncan Austin and RWER

The “free market” advocate is in the dissonant position of wishing market actors to be the sole conferees of new property rights while also depending on the government to uphold a general rule of law which is the necessary condition for property to being meaningful at all. Indeed, because of the indispensability of the rule of law, we should be more accurate with our terminology. We never have “free markets”. We only ever have “enabled markets” – markets enabled by an authority capable of upholding the rule of law that gives property meaning. Language matters. “Free markets” is a highly misleading term – routinely deployed as an unassailable universal principle to cloak a more parochial agenda. Too often, what “free market” proponents are really advocating is a system of “enabled markets where we want them and not where we don’t.” Or, put another way, the working slogan of neoliberalism has come to be: “some markets are the solution; government is the problem”.

Government is in the loop!   Read more…

MMT and the deficit myth

September 15, 2021 5 comments

from Lars Syll

What Modern Monetary Theory (MMT) does is more or less what Knut Wicksell tried to do more than a hundred years ago, when he in 1898 wrote on ‘pure credit systems’ in Interest and Prices (Geldzins und Güterpreise). The difference is that today the ‘pure credit economy’ is a reality and not just a theoretical curiosity — MMT describes a fiat currency system that almost every country in the world is operating under.

In modern times legal currencies are totally based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the simple fact that you have to pay your taxes with them. That also enables governments to run a kind of monopoly business where it never can run out of money. A fortiori, spending becomes the prime mover, and taxing and borrowing are degraded to following acts. If we have a depression, the solution, then, is not austerity. It is spending. Budget deficits are not a major problem since fiat money means that governments can always make more of them.​ Read more…

Krugman and Eggertsson’s model of the Global Financial Crisis of 2007-8

September 14, 2021 8 comments

from Geoff Davies and RWER

Yet consider a model of the Global Financial Crisis of 2007-8 by Eggertsson and Krugman (2012), the latter a pseudo-Nobel prize winner. They made two models, one for before and one for after a crash, with the difference between the models being effectively that the amount of available credit was presumed to be less in the second. Nothing in the model determined the amount of credit, it was imposed from the outside. Their equations of optimisation did require sophisticated, though old-fashioned, analytical methods to solve, but that says nothing about the usefulness of the models.


Both models are equilibrium models. But if the “before” state of the market, with high prices, was an equilibrium state there would be no crash. Therefore the model must be missing the imbalance that drove the crash. It is therefore incapable of telling us why such a crash occurred. It cannot tell us anything about the dynamic process of boom and crash, the inflation and bursting of a debt bubble. It is not a useful model, it is a useless model, a dead end as far as understanding an observable economy is concerned.

read more:

Maybe inflation should be welcomed

September 13, 2021 3 comments

from Philip George

Until 1982 it was believed that stomach ulcers were caused by stress and lifestyle. That year,
two Australian scientists, Robin Warren and Barry Marshall, demonstrated that most gastric
and duodenal ulcers were caused by a bacterium, Heliobacter pylori. They cultivated the
bacteria which they discovered in biopsies of patients suffering from ulcers, after which
Marshall ingested the bacteria to prove that they caused gastric ulcers.

As this example shows, it is not uncommon even in science to try and explain real-world
phenomena using variables that cannot be measured, like stress. Such attempts inevitably turn
out to be incorrect.

In economics the most common of such fairy variables is “inflation expectations”; the other
popular one is of course “rational expectations”. Thus, when inflation falls short of the
targeted rate for a long time it is ascribed to the central bank’s failure to calibrate inflation
expectations high enough. That the cause could lie elsewhere is never considered.
An analogy would not be out of place. If someone fails to hit the top of a tree with his gun
you get him to aim higher, at the top of a skyscraper. If he still cannot hit the top of the tree
you get him to aim at the moon. When he still cannot hit his target you are forced to veer
around to the conclusion that his failure is because his gun is not powerful enough. With
inflation during the past few decades in the US, this has indeed been the case. But
economists are reluctant to accept this explanation. Read more…

A classical utilitarian position implicates that individuals have no moral rights

September 13, 2021 1 comment

from Tanja von Egan-Krieger and RWER

. . . the World Bank builds on a utilitarian definition of efficiency, which is of course a normative criterion. It is a criterion of judgement. The implicit aim is increasing the net value or total wealth. The World Bank refers to this idea in terms of a “social benefit”: “Even investments that are highly profitable for an investor will generate sustainable social benefits only if they are not associated with environmental externalities”.

An ethical reflection immediately raises the question for whom the net value is produced. Who does benefit from the increasing total wealth? From a utilitarian point of view this question doesn’t matter. The ethical maxim of classical utilitarianism is to maximise the sum of pleasure and pain and thereby the overall utility. The economy, and ultimately society at large which encompasses the economy, is thus regarded as a collective subject. An action is ethically right if the overall utility, in case of the economy the total wealth, is increased. Thereby individuals become mere “represents” of utility quanta. They are off-settable assets.

It was Gunnar Myrdal who named this construction of social harmony sarcastically a “communistic fiction”.  Read more…

. . . broken into multiple disconnected compartments of western understanding

September 12, 2021 5 comments

from Richard Norgaard

. . . until early in the 19th century, merely two hundred years ago, an effort to intertwine reality and morality still existed in natural theology, the project to understand the character, will, and operating manual of God through the study of nature. Isaac Newton was both an accomplished moral philosopher and a path-breaking natural philosopher (Iliffe, 2017). The Physiocrats made moral arguments about who should be taxed based directly on what they understood to be physical realities (Schabas, 2007). Adam Smith wrote a treatise on astronomy to document his knowledge of natural systems before writing moral philosophy (Ross, 2010, chapter 7). Well into the 19th century, both natural and moral philosophy students as well as students of theology, medicine, and law studied William Paley’s “Natural Philosophy, or Evidences of the Existence and Attributes of the Deity collected from the Appearances of Nature” (Paley, 1835 and earlier editions). In 1874, social philosopher and economist John Stuart Mill intertwined the science of natural laws and natural religion (Mill, 1874). Morality and reality intertwined in the minds of European intellectual elites during the rise of disciplines in the latter 19th century. Then, not only reality and morality became separated but they too were broken into multiple disconnected compartments of western understanding. The creation of disciplines, specialized realms of knowledge, implicitly entailed the assumption that the linkages between disciplines were sufficiently weak that, for “practical” purposes, they could be ignored. Pure reason combined with empirical evidence in the style of Newton’s physics was only practical by assuming reality could be divided into parts. It was in this historical context that the 20th century idea arose that economics could be a separate field of human understanding.

 ( read morePost-economics: Reconnecting reality and morality to escape the Econocene)

Rising Inequalities in OECD Countries – Gini coefficients 1985 vs 2013

September 11, 2021 Leave a comment

Weekend read – Kant: misogynist & racist

September 10, 2021 11 comments

from Asad Zaman and WEA Pedagogy Blog

Reducing politics to rational calculation allows the destruction of entire countries, and killings of
millions, for the sake of political power or corporate profits. Today this “rationality” dominates
the world where corporations are busy destroying the planet for the sake profits.

Introduction: The dark underside of leading lights of the European Enlightenment has been skillfully concealed. Nearly all major enlightenment thinkers held abhorrent views about slavery, race, democracy, women, and equality. Even though their views are public, easily available in major works, there is a conspiracy of silence, and suppression of dissent. Even though there is an abundance of nauseating quotes from major Enlightenment thinkers, these remain hard to find . One of the most striking instances Is Immanuel Kant, one of founding fathers of European Enlightenment and modern Western Philosophy. To a far greater extent than we realize, philosophy provides a foundation for our way of life. Philosophy provides answers to the central questions we all face: Who are we? What is the meaning of life? How can we lead good lives, and build a good society? These answers direct our personal and collective efforts, and have enormous, generally unrecognized influence on our lives. An amusing illustration of the foundational importance of philosophy is furnished by the Wikipedia article “Getting to Philosophy”. This article shows that clicking of the first internal link within any Wikipedia entry eventually ends up with an entry classified as philosophy. All human knowledge is built on philosophical foundations.

Even though philosophy plays a central role in shaping our lives, we are largely unaware of this. Keynes expressed this insight colorfully:  “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”. But there is a deeper and darker reason for our ignorance of the profound influence of Western philosophy on the way we lead our lives. Read more…

Analytical bias

September 10, 2021 6 comments

from Lars Syll

Expectation vs reality concept business analysis Vector ImageThe world is made up of systems.  Our body is a system, or in fact a system of systems.  What we call “society” is another system of systems, as is the natural environment …

But these systems are very complex, difficult to explain or predict.  One successful strategy, which has had a revolutionary impact on how we live, is analysis …

By biting off chewable portions of a much larger world, science makes it possible to achieve progress in our understanding of how things work …

But this approach, for all its benefits, fails to capture most of the interactive effects that make a system a system.  It leads us to overstate the separateness of the things we study and observe and to understate their connectedness.  This is not an argument against thinking analytically, but for not being surprised by what this thinking fails to see so we can at least somewhat compensate for its shortcomings.

Peter Dorman

Using the ‘analytical’ method — “biting off chewable portions of a much larger world” — may indeed sound as a convincing and good scientific approach. But — as Dorman  notices — there is a snag! Read more…

Jeffrey Sachs’ (2021) speech at the UN

September 9, 2021 18 comments

Modern macro — ‘genuine plurality’ vs. ‘axiomatic variation’

September 8, 2021 1 comment

from Lars Syll

out-of-the-fryingThe DSGE mainstream — which is made up of new classical macroeconomics and neo-Keynesianism — is unanimously based on the core assumptions that characterize the paradigm of social exchange theory. These are rationality, ergodicity and substitutionality, the exclusive acceptance of a formal mathematical-deductive, positivist reductionism. After the ‘empirical turn’ of the last two or three decades, these have been combined with sophisticated micro- and macroeconometrics, or with experimental arrangements, such as are familiar from the leading natural sciences (physics and chemistry). The postulate of stability and optimality (Walras’s law), which is implemented a priori in the core assumptions, serves as a ‘model solution,’ and thus functions as a marker of a negative heuristic. The apparently very different model prognoses of new classical macroeconomics (hyper-balanced and hyper-stable) on the one hand, and of standard and neo-Keynesianism (unbalanced, open to intervention) on the other hand are based on changes to assumptions in the ‘protective belt’ (e.g. about the speed of adjustment, the rigidity of prices and quantities, the formation of expectations etc.), but do not actually point to a different paradigmatic origin of the two schools of theory.

Arne Heise & Sebastian Thieme

Maintaining that economics is a science in the ‘true knowledge’ business, yours truly remains a skeptic of the pretences and aspirations of New Classical and ‘New Keynesian’ macroeconomics. So far, I cannot really see that they have yielded very much in terms of realistic and relevant economic knowledge. Read more…

How dynamic is global capitalism?

September 7, 2021 6 comments

from C. P Chandrasekhar and Jayati Ghosh

Capitalism is supposed to be all about economic growth, through the dynamism that is created by competition. This growth is meant to be driven by investment (or accumulation) which in turn is used to justify the shares of national income that are delivered to private profits, to the owners of capital. “Accumulate, accumulate! That is Moses and the prophets” famously said a certain Karl Marx in the first volume of Capital more than 150 years ago. It is undeniable that investment is the fundamental driving force of capitalism.

Of course, there have been and continue to be many naysayers, who object to this obsession with economic growth at all costs. There are obvious problems with using GDP as the basic indicator for even material well-being, and for all the important processes and outcomes that are important for human life. GDP does not capture human well-being, and can even disguise adverse outcomes. Per capita income is a poor estimate of general welfare when there are pervasive and growing economic inequalities. Many dimensions of human life that economies are supposed to provide a frame for, are ignored in this perspective.

But within the terms set by market-driven profit orientation, GDP is what matters, since capitalism is really concerned only with whatever is commercialised. Investment, the associated technological progress and the resulting expansion of economic activity are the most important metrics by which capitalist systems are judged. Never mind that this has been compared to the “grow-at-all-costs-and-in-all-circumstances” proclivity of cancer cells. To judge capitalism on its own terms, look at investment and monetary incomes. 

Based on these (admittedly limited) indicators alone, how has capitalism been doing in its triumphal “globalised” phase? Read more…

On logic and science

September 6, 2021 19 comments

from Lars Syll

That logic should have been thus successful is an advantage which it owes entirely to its limitations, whereby it is justified in abstracting — indeed, it is under obligation to do so — from all objects of knowledge and their differences, leaving the understanding nothing to deal with save itself and its form. But for reason to enter on the sure path of science is, of course, much more difficult, since it has to deal not with itself alone but also with objects. Logic, therefore, as a propaedeutic, forms, as it were, only the vestibule of the sciences; and when we are concerned with specific modes of knowledge, while logic is indeed presupposed in any critical estimate of them, yet for the actual acquiring of them we have to look to the sciences properly so called, that is, to the objective sciences. 

In mainstream economics, both logic and mathematics are used extensively. And most mainstream economists sure look upon themselves as “twice blessed.”

Is there any scientific ground for that blessedness? Read more…

Market-value in the news

September 6, 2021 5 comments

from Edward Fullbrook

Over the weekend I read two articles (1, 2) in The Guardian about market-value.  One concerned the painter Bansky, the other a truffle hunter in Croatia.

I’ve been fan of Bansky for twenty years, beginning when he was a local graffiti artist in my part of town.  A couple of years ago one of his paintings, Girl With Balloon, was auctioned at Sotheby’s in London for £1.1m. 

As soon as the auctioneer’s hammer fell, Bansky’s canvass “passed through a secret shredder hidden in its large Victorian-style frame, leaving the bottom half in tatters and only a solitary red balloon left on a white background in the frame.”  Here is the one-minute video. Read more…

Weekend read – With great power comes great fear

September 4, 2021 13 comments

from Blair Fix

Over the last year, I’ve watched with horror and amusement as health agencies around the world flip-flopped their advice on how to deal with COVID.

My horror comes from knowing this flip-flopping breeds mistrust in science. But I am (morbidly) amused because I know that uncertainty is a basic part of real research. For the public, ‘science’ tends to mean authoritative knowledge. But for researchers, ‘science’ is an iterative process, filled with wrong turns, new evidence, and revised ideas.

With COVID flip-flops in mind, I thought I’d tell you a story about science in progress. It’s a story about how we should understand the stock market.

Three stories about the stock market

Here are three stories about how the stock market works.

The first story says that the stock market reflects the productivity of the underlying economy. When stocks go up, the thinking goes, everyone should celebrate because the tide of productivity is rising. This is the story that neoclassical economists believe. Read more…

Labor Day: US labor’s future may depend on monetary and fiscal policy

September 3, 2021 1 comment

from Mark Weisbrot

Labor Day is a good time to reflect upon how American workers have been doing — especially the majority who have been left behind for most of the past 40 years. From 1979 to 2018, the median wage has grown by just 11.6 percent. If we compare this to prior decades, e.g., 1948 to 1979, that increase was 93.2 percent. These two facts tell a big part of the story of a social transformation that is both inexcusable and historically unusual: a high-income country becoming vastly more unequal, as most workers’ pay fails to rise with most of the gains in productivity that has accompanied their work.

Then came COVID, which has disproportionately harmed and killed lower-wage and Black workers. Hopefully, the current wave will subside and pass soon, as more people are vaccinated. But the struggle for equality and decent living standards in the world’s richest country continues even through the pandemic.

Fortunately, there have been some recent changes in national economic policy that could vastly change how the next 40 years look. But only if we can keep them.

These changes are in monetary and fiscal policy. Monetary policy is set by the Federal Reserve, which generally determines how many people are unemployed. Here is the current chairman of the Fed, Jerome Powell, speaking to the Senate in February about the wonders of pre-pandemic, 3.5 percent unemployment: Read more…

How the past allows us to imagine – and see the future

September 2, 2021 1 comment

from Richard Parker and current issue of RWER

Let me now try to connect this little synoptic “longue duree” to the present and to the matter before us: neoliberalism and what might succeed it. We live in the early 21st century and the conventional economics we’ve inherited has now arrived at a moment when once-novel Victorian-era ideas seem not just inadequate but irrelevant.

A similar moment seemed, to many, to have arrived before, back in the 1930s. But apostles of marginalism such as Lionel Robbins or Mies or Hayek – faced with what they saw as the socialist implications of Rooseveltian politics and Keynesian ideas about states and economies – insisted on the singular “efficiency” purpose of “economics” as theory, and theory’s realization in the modern market world around them.  For these men, the matter was supremely “intellectual” and “scientific”, not a story of competing classes in capitalist societies.  Robbins’ magisterial dictum that economics was “the science which studies human behavior as a relationship between ends and scarce means which have alternative uses” was in fact by the 1930s already, well, Victorian. Read more…

Levels of aspiration among economists

September 1, 2021 43 comments

from Lars Syll

225px-allais_pn_maurice-24x30-2001bSubmission to observed or experimental data is the golden rule which dominates any scientific discipline. Any theory whatever, if it is not verified by empirical evidence, has no scientific value and should be rejected.

Maurice Allais

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 models and lose sight of reality.

Mainstream economics has since long more or less given up on the real world and contents itself with proving things about thought up worlds. Empirical evidence — still — only plays a minor role in economic theory, where models largely function as a substitute for empirical evidence. Hopefully humbled by the ever growing manifest failure of its theoretical pretences, the one-sided, almost religious, insistence on axiomatic-deductivist modeling as the only scientific activity worthy of pursuing in economics will give way to methodological pluralism based on ontological considerations rather than formalistic tractability.

To have valid evidence is not enough. What economics needs is sound evidence. Why? Simply because the premises of a valid argument do not have to be true, but a sound argument, on the other hand, is not only valid, but builds on premises that are true. Aiming only for validity, without soundness, is setting the economics aspiration level too low for developing a realist and relevant science.