I read the rule book – and am not that sure anymore if the Irish GDP figures were calculated ‘according to the rules’. Due to the relocation of headquarters of the headquarters of some large multinational corporations the Irish statisticians mapped an increase of, especially, profit income of the Irish economy of 60 billion euro in two years. Which is a lot, for a country of 4 million people. Eurostat agrees, as it was, according to Eurostat, calculated according to the Eurostat rules. But was it? I don’t think so. According to the ESA 201o (the rule book) just relocating a headquarter (or a ‘centre of predominant economic interest’, as it’s called in the rule book), is not enough. The same for ‘transfer pricing’. It is also about where production actually takes place. An excerpt (article 2.07) from the rulebook, emphasis added: Read more…
There has recently been a fuzz about the 26% Irish 2015 GDP growth rate. For more timely discussion of this phenomenon,look here and here on this blog (though I have to admit that I was flabbergasted too by the upward revision of Irish growth from about 9% to about 26%: beyond imagination). What to make of this? The Irish Central Statistical Office is not happy about it, too, and states: “the CSO intends to convene a high-level cross-sector consultative group” to address this situation. Two points for this discussion: Read more…
from Norbert Häring
On Monday the World Bank made it official that Paul Romer will be the new chief economist. This nomination can be seen as a big step back toward the infamous Washington Consensus, which World Bank and IMF seemed to have left behind. This is true, even though Paul Romer has learned quite well to hide the market fundamentalist and anti-democratic nature of his pet idea – charter cities – behind a veil of compassionate wording.
Romer won significant academic merits with his theory of endogenous growth. He modelled the production of new knowledge within his model rather than letting it drip from sky in convenient increments, as growth theory had done before. At first sight, this sounds like a good qualification for the task at hand. However, Romer has admitted in an interview that it is of rather little use for development economics, because it fails to discriminate between the production of new knowledge at the knowledge frontier, i.e. in highly developed industrial countries, and the adaption of knowledge, which is of particular importance for catch-up processes in poor countries. Still is honors him, that he knows and talks about the limits of his theory. Read more…
from Lars Syll
Reasoning is the process whereby we get from old truths to new truths, from the known to the unknown, from the accepted to the debatable … If the reasoning starts on firm ground, and if it is itself sound, then it will lead to a conclusion which we must accept, though previously, perhaps, we had not thought we should. And those are the conditions that a good argument must meet; true premises and a good inference. If either of those conditions is not met, you can’t say whether you’ve got a true conclusion or not.
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.
from Robert Locke
In a recent article,”The Milton Friedman Doctrine is Wrong. Here’s How to Rethink the Corporation,” Susan Holmberg and Mark Schmitt intoned: “We won’t fix the problem until we address the nature of the corporation.” at http://economics.com/milton-friedman-doctrine-wrong-heres-rethink-corporation/. Egmont Kakarot-Handtke asserts that sciences of society make no contribution to economics because they are scientifically invalid — to which I replied that his assertion is not true because the neoclassical economists who took over economics in the 20th century excluded history and social studies from the discipline’s purview. History and social studies could make no contribution since they have been ignored. The neoclassical economists’ failure to incorporate firm governance into the economists’ dialogue is a prime example of what I mean. Read more…
from Peter Radford
This is not a time to dwell on the inconsistencies and even contradictions of the recent uprising of populism in the western world. Treat it as a fact. It just is. For there can be no mistaking the trend: people, large numbers of people, in a large swathe of Europe and America really are unhappy with their lot in life. Really unhappy. Fully 52% of Republican supporters of Donald Trump tell pollsters that they are angry with the way the country is going. Not just unhappy or disappointed, but angry. Anger leads to really bad political decision making. It is not a constituent of reasoned argument. It leads too quickly to rash thought and even to hatred.
One theme that emerges from this populist moment is the identification of immigration as a source of concern. No, not just concern, but of deep unease. People in both the UK and the US can be heard demanding that they “get their country back”. Leaders in both nations have lamentably failed to identify the importance of immigration as a lightening rod for malaise. Nor have they reacted with anything sensible as policy.
Here in America the reason most often given for the failure to deal with immigration is the gridlock in Washington. It is impossible to begin a conversation about immigration policy because the pre-existing political positions are so well laid out and well established that any talk leads immediately to a conformation of gridlock. So stasis abounds and people get more and more impatient.
The same goes for economic policy. This is what interests me most of course. The failure of economics is breath-taking. Read more…
from Lars Syll
Almost a century and a half after Léon Walras founded neoclassical general equilibrium theory, economists still have not been able to show that markets move economies to equilibria. What we do know is that — under very restrictive assumptions — unique Pareto-efficient equilibria do exist.
But what good does that do? As long as we cannot show, except under exceedingly unrealistic assumptions, that there are convincing reasons to suppose there are forces which lead economies to equilibria – the value of general equilibrium theory is nil. As long as we cannot really demonstrate that there are forces operating — under reasonable, relevant and at least mildly realistic conditions — at moving markets to equilibria, there cannot really be any sustainable reason for anyone to pay any interest or attention to this theory. A stability that can only be proved by assuming “Santa Claus” conditions is of no avail. Most people do not believe in Santa Claus anymore. And for good reasons. Santa Claus is for kids.
Continuing to model 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.
In case you think this verdict is only a heterodox idiosyncrasy, here’s what one of the world’s greatest microeconomists — Alan Kirman — writes in his thought provoking paper The intrinsic limits of modern economic theory: Read more…
from Asad Zaman
Ideology and Science are diametrically opposed to each other. An ideology is a set of beliefs that is maintained even in face of strong empirical evidence to the contrary. Science is primarily concerned with explaining the empirical evidence. Theories which conflict with observations are rejected. This does not mean that ideology is necessarily wrong or bad – we must maintain our belief in justice, morality, honesty, trust, integrity without any empirical evidence; indeed, even when strong empirical evidence suggests that these beliefs will not bring us popularity or personal benefits. However, ideological beliefs in wrong ideas can blind us to the facts and prevent learning which is essential to progress. Nobel Laureate Joseph Stiglitz remarked that modern Economics represents the triumph of ideology over science. This essay explains the reasons for his remarks.
Modern economic theory is founded on axioms for rational behavior, which is equated with selfish behavior by economists. No empirical evidence is presented for this axiom; rather it is taken to be self-evident. In the 1980’s some psychologists, perplexed by the economic theories of human behavior, decided to test these theories via some experiments. Amazingly, nearly all experiments conducted showed human behavior to be strongly in conflict with the economic axioms. A widely replicated experiment is called “The Prisoner’s Dilemma”. This game is similar to many real life situations, where an individual can benefit by betraying a social agreement, as long as other parties stick to the agreement. However, if all people betray the agreement, then everybody loses. Economic theory predicts that selfish individuals will betray agreements, and social conventions of cooperation will break down. However, real life experiments show that cooperation and maintenance of social conventions, even with complete strangers, is quite common. Generally, economic theory assumes that selfish motives dominate all others. However, real life behavior in experiments displays a large variety of motivations, based on reciprocity, trust, generosity, charity, morality, and other motives which are assumed absent in economic theories. read more
from Maria Alejandra Madi
In the post-war boom era of 1945 to 1971, the U.S. surplus was at the center of the global economic order. Throughout the Bretton Woods period, the United States recycled part of its surplus via foreign direct investment – mainly in Western Europe and also in Japan. Within the system of international economic flows, the U.S. exported goods to the rest of the world and also finance these purchases. Besides, the United States created demand for the exports of foreign countries, primarily Germany and Japan.
After the 1970s, this system of international economic flows changed. From 1971 to 2008, there is the expansion of the age of high finance where the U.S. deficits have been at the center of the global economic order. Considering this background, What Yanis Varoufakis (2013) calls the “Global Minotaur” is the system of international economic flows built after the 1970s. According to this system, the whole world surpluses aimed to finance the unsustainable expansion of a double deficit on which the US built its political and economic hegemony. The American trade surplus turned into a large and increasing deficit that joined the government deficit to form the twin deficits. These twin deficits characterize the “Global Minotaur era”. read more
from Dean Baker
Paul Krugman actually did not make any predictions on the stock market, so those looking to get investment advice from everyone’s favorite Nobel Prize winning economist will be disappointed. But he did make some interesting comments on the market’s new high. Some of these are on the mark, but some could use some further elaboration.
I’ll start with what is right. First, Krugman points out that the market is horrible as a predictor of the future of the economy. The market was also at a record high in the fall of 2007. This was more than a full year after the housing bubble’s peak. At the time, house prices were falling at a rate of more than 1 percent a month, eliminating more than $200 billion of homeowner’s equity every month. Somehow the wizards of Wall Street did not realize this would cause problems for the economy. The idea that the Wall Street gang has some unique insight into the economy is more than a bit far-fetched.
The second point where Krugman is right on the money (yes, pun intended) is that the market is supposed to be giving us the value of future profits, not an assessment of the economy. This is the story if we think of the stock market acting in textbook form where all investors have perfect foresight. The news that the economy will boom over the next decade, but the profit share will plummet as workers get huge pay increases, would be expected to give us a plunging stock market. Conversely, weak growth coupled with a rising profit share should mean a rising market. Even in principle the stock market is not telling us about the future of the economy, it is telling us about the future of corporate profits.
Okay, now for a few points where Krugman’s comments could use a bit deeper analysis. Read more…
from Michael Hudson
Review of William Goetzmann, Money Changes Everything:
How Finance Made Civilization Possible (Princeton University Press, 2016)
Debt mounts up faster than the means to pay. Yet there is widespread lack of awareness regarding what this debt dynamic implies. From Mesopotamia in the third millennium BC to the modern world, the way in which society has dealt with the buildup of debt has been the main force transforming political relations.
Financial textbook writers tell happy-face fables that depict loans only as being productive and helping debtors, not as threatening social stability. Government intervention to promote economic growth and solvency by writing down debts and protecting debtors at creditors’ expense is accused of causing an economic crisis (defined as bankers and bondholders not making as much money as they thought they would). Creditor lobbyists are not eager to save indebted consumers, businesses and governments from bankruptcy and foreclosure. The result is a biased body of analysis, which some extremists project back throughout history.
The most recent such travesty is William Goetzmann’s Money Changes Everything, widely praised in the financial press for its celebration of finance through the ages. A Professor of Finance and Management at the Yale School of Management, he credits “monetization of the Athenian economy” – the takeoff of debt – as playing “a central role in the transition to … democracy” (p. 17), and assures his readers that finance is inherently democratic, not oligarchic: “The golden age of Athens owes as much to financial litigation as it does to Socrates” (p. 1). That litigation consisted mainly of creditors foreclosing on the property of debtors. Read more…