Archive for the ‘The Economy’ Category

Perfecting the automated surveillance of the world’s population.

September 28, 2020 Leave a comment

from Norbert Häring

The President of the EU-Commission plans to give all EU citizens a European digital identity which can “be used anywhere in Europe to do anything from paying taxes to renting a bike”. She wants to implement for Europe what ID2020, the World Economic Forum, the World Bank and Homeland Security are pushing worldwide – to perfect the automated surveillance of the world’s ppopulation.

In Ursula von der Leyen’s speech on the State of the Union on September 16, an important announcement was lost due to the attention given to a tightened climate target. The President of the Commission said:

We want a set of rules that puts people at the centre. Algorithms must not be a black box and there must be clear rules if something goes wrong. The Commission will propose a law to this effect next year. This includes control over our personal data which still have far too rarely today. Every time an App or website asks us to create a new digital identity or to easily log on via a big platform, we have no idea what happens to our data in reality. That is why the Commission will soon propose a secure European e-identity. One that we trust and that any citizen can use anywhere in Europe to do anything from paying your taxes to renting a bicycle. A technology where we can control ourselves what data and how data is used.

You have to read between the lines to decipher the perfidious plan. Read more…

What’s the use of economic models?

September 27, 2020 5 comments

from Lars Syll

chameleonOne can generally develop a theoretical model to produce any result within a wide range. Do you want a model that produces the result that banks should be 100% funded by deposits? Here is a set of assumptions and an argument that will give you that result. That such a model exists tells us very little …

Being logically correct may earn a place for a theoretical model on the bookshelf, but when a theoretical model is taken off the shelf and applied to the real world, it is important to question whether the model’s assumptions are in accord with what we know about the world. To be taken seriously models should pass through the real world filter.

Chameleons are models that are offered up as saying something significant about the real world even though they do not pass through the filter. When the assumptions of a chameleon are challenged, various defenses are made … In many cases the chameleon will change colors as necessary, taking on the colors of a bookshelf model when challenged, but reverting back to the colors of a model that claims to apply the real world when not challenged.

Paul Pfleiderer

Pfleiderer’s absolute gem of an article reminds me of what H. L. Mencken once famously said: Read more…

The problems of economics as an academic pursuit have a sociological origin

September 26, 2020 19 comments

from Gerald Holtham (originally a comment)

The problems of economics as an academic pursuit have a sociological origin. The subject matter of economics is of interest to nearly everyone who lives in a commercial society and has to make a living. Intelligent people develop opinions about it and advance opinions in a way they would not do about astronomy or quantum physics. Similarly every politician has a story about the economic policy to be followed. This situation has created a strong form of credentialism among academic economists, evidenced by the use in the USA of the term “PHD economist” i.e. distinguishing a “real” economist from an economic journalist or mere informed commentator. This desire to define and secure a profession of economists has led not only to credentialism but to formalism. There must be hoops to jump through, filters to pass, if “real” economists are to be distinguished. An emphasis on mathematical technique is just such a filter. From credentialism and formalism comes a self-referential approach that holds “economic problems must have economic explanations and economic solutions”. That makes it illegitimate to introduce “non-economic” elements into economic theory. Demarcation and the exclusivity of “economics” is thereby reinforced. Non-economic elements are often considered to include any form of “irrational” behaviour. Unfortunately some schools of economics at that point finalise their separation from the real world by failing to distinguish “procedural rationality”, which is a useful simplifying assumption, from “substantive rationality”, which assumes a never-never land of near-perfect knowledge and ubiquitous equilibrium. The distinction, due to Herb Simon, was apparently too subtle for the neo-classical school. Ideology also plays a part in promoting some schools of economics. Theories that depict a self-stabilising system in which everyone is doing as well as possible are remote from reality but convenient for the conservative interests in society that wish to resist change. Once this structure is in place it is difficult to pursue a career as an academic economist without going along with a substantial part of it. Read more…

It’s not vaccine nationalism, it’s vaccine idiocy

September 25, 2020 3 comments

from Dean Baker

Last week an official with China’s Center for Disease Control and Prevention (CDC) said that the country may have a vaccine available for widespread distribution by November or December. This would almost certainly be at least a month or two before a vaccine is available for distribution in the United States, and possibly quite a bit longer.

While we may want to treat statements from Chinese government officials with some skepticism, there is reason to believe that this claim is close to the mark. China has reported giving its vaccines to more than 100,000 people. In addition to giving it to tens of thousands of people enrolled in clinical trials, it also has given them to front line workers, such as medical personal, through an emergency use authorization.

This may not have been a good policy, since these workers faced the safety risks associated with a vaccine that has only undergone limited testing, but it does mean that a large number of people have now been exposed to China’s leading vaccine candidates. If there were serious side effects, it would be hard for China to bury evidence of large numbers of adverse reactions. If no such evidence surfaces, we can assume that bad reactions to the vaccines were either rare and/or not very serious. Read more…

Inequality in the United States—pandemic edition

September 24, 2020 Leave a comment

from David Ruccio

Year 3 of the Trump presidency was absolutely terrific—indeed, record-breaking—for Americans.

At least that’s how things look in terms of the headline numbers from the Census Bureau: median household income was up (by 6.8 percent, a record) over 2018 and the official poverty rate decreased (by 1.3 percentage points, to 10.5 percent, the lowest rate observed since estimates were initially published for 1959).*

And then there’s Kevin Hassett, former chair of Trump’s White House Council of Economic Advisers (who returned to the White House to lead its pandemic-response team, downplaying the danger of coronavirus and pushing the administration to re-open the economy amid lockdowns and social distancing) who seized on the report to make another of his wild claims:

If you’re a social justice warrior and you’re looking at the data, you would have to say that the Trump years, through the beginning of the pandemic, were the sort-of best years for advances in social justice since World War II.

The problem is that other data in the same report show nothing of the sort. Read more…

Evidence-based policies

September 23, 2020 1 comment

from Lars Syll

Evidence-based theories and policies are highly valued nowadays. Randomization is supposed to control for bias from unknown confounders. The received opinion is that evidence based on randomized experiments, therefore, is the best.

More and more economists have also lately come to advocate randomization as the principal method for ensuring being able to make valid causal inferences.

rowsonYours truly would, however, rather argue that randomization, just as econometrics, promises more than it can deliver, basically because it requires assumptions that in practice are not possible to maintain. Just as econometrics, randomization is basically a deductive method. Given the assumptions (such as manipulability, transitivity, separability, additivity, linearity, etc.) these methods deliver deductive inferences. The problem, of course, is that we will never completely know when the assumptions are right. And although randomization may contribute to controlling for confounding, it does not guarantee it, since genuine randomness presupposes infinite experimentation and we know all real experimentation is finite. And even if randomization may help to establish average causal effects, it says nothing of individual effects unless homogeneity is added to the list of assumptions. Real target systems are seldom epistemically isomorphic to our axiomatic-deductive models/systems, and even if they were, we still have to argue for the external validity of the conclusions reached from within these epistemically convenient models/systems. Causal evidence generated by randomization procedures may be valid in ‘closed’ models, but what we usually are interested in, is causal evidence in the real target system we happen to live in. Read more…

Modern Monetary Theory

September 22, 2020 31 comments

from Asad Zaman

This continues from the previous post on Post-Keynesian Response. A large number of contributions from different areas need to be integrated to build an economics for the 21st Century. For an acknowledgement of the failure of 20th Century Macro from one of its architects, see Romer’s Trouble With Macro. This post explains Modern Monetary Theory briefly.

Since the time of Keynes, major changes have taken place in the global financial system. Against wishes of Keynes, Bretton-Woods created a dollar centered system based on notional exchangeability of dollars for gold. The Nixon Shock in 1971 removed the gold backing from dollars, leading to the modern world of floating exchange rates. Dramatic changes in the monetary exchange systems and financial institution play no role in orthodox modern macroeconomics, since money and finance are not (supposedly) part of the real economy. Taking the nature of modern money and the financial institutions into serious considerations leads to many important insights which lie at the core of MMT. Three major innovations lie at the foundations of this theory. These are summarized below:

Endogenous Money: MMT reflects an institutional perspective on the creation of money. When Central Banks set discount rates, they lose control of the quantity of money, which must be issued in amounts required to equilibrate the demand/supply of money at the policy rate. Private creation of money depends on bank-lending, which in turn depends on the investment climate. Bank credit depends on expectations, sound collaterals, and also a keeping-up-with-the-Joneses effect – if everyone is lending, banks cannot afford to stay out. Theories of endogenous money underlie Minsky’s Financial Fragility Hypothesis, which suggests that the money creation process is inherently destabilizing because private credit is expanded at the top of the business cycle and contracted at the bottom, exactly the opposite of what is required for good economic management.

Functional Finance: read more

Beyond the Mainstream

September 21, 2020 4 comments

from David Ruccio

In this post, I continue the draft of sections of my forthcoming book, “Marxian Economics: An Introduction.” This, like the previous two posts, is for chapter 1, Marxian Economics Today.

This is certainly not the first time people have looked beyond mainstream economics. There is a long history of criticisms of both mainstream economic theory and capitalism from the very beginning. Although students won’t have read about them in traditional economics textbooks.

Those texts are generally written with the presumption there’s only one economic theory and one economic system. The existence of Marxian economics opens up the debate, creating space for both multiple ways of thinking about economics and a variety of different economic systems.

Criticisms of Mainstream Economic Theory

In the history of economic thought, criticisms of the mainstream approach were formulated early on. Adam Smith, David Ricardo, and others (such as Jean-Baptiste Say, Thomas Robert Malthus, and John Stuart Mill) developed classical political economy in the late-eighteenth and early-nineteenth centuries, when the new economic system we now call capitalism was just getting off the ground—and almost immediately their approach was debated and challenged. Read more…

Expected utility theory — an ex-parrot

September 20, 2020 4 comments

from Lars Syll

If a friend of yours offered you a gamble on the toss of a coin where you could lose €100 or win €200, would you accept it? Many of us probably wouldn’t. But if you were offered to make one hundred such bets, you would probably be willing to accept it, since most of us see that the aggregated gamble of one hundred 50–50 lose €100/gain €200 bets has an expected return of €5000 (and making our probabilistic calculations we find out that there is only a 0.04% ‘risk’ of losing any money).

Unfortunately – at least if you want to adhere to the standard mainstream expected utility theory – you are then considered irrational! A mainstream utility maximizer that rejects the single gamble should also reject the aggregate offer.

Expected utility theory does not explain actual behaviour and choices. But still — although the theory is obviously descriptively inadequate — economists and microeconomics textbook writers gladly continue to use it, as though its deficiencies were unknown or unheard of.

That cannot be the right attitude when facing scientific anomalies! Read more…

Trade wars are class wars: even more than Klein and Pettis say

September 19, 2020 2 comments

from Dean Baker

I have long enjoyed reading Matthew Klein’s columns in the Financial Times and elsewhere. They are invariably insightful and I have learned much from them. I am less familiar with Michael Pettis’ work, but I have liked what I have read. Therefore, I expected a lot from their book, Trade Wars are Class Wars, and I was not disappointed.

The basic point is that the major trade imbalances in the world over the last four decades have been driven by the suppression of wage growth, with income being redistributed from labor to capital. This has led to shortfalls in aggregate demand that countries try to offset by having trade surpluses. The main actors in that picture are China and Germany.

In the Klein-Pettis view, the U.S. has also suffered from this upward redistribution, although it has taken a somewhat different form, since the country has run persistent trade deficits over this period. While I largely agree with this framing, I have some minor quibbles with the story they lay out and one very large one.

In the minor quibble category, Klein and Pettis (KP) criticize Trump adviser Peter Navarro for focusing on the bilateral trade deficits the United States runs with China and other countries. I have no stake in defending Peter Navarro, but at least some of us who are concerned about the trade deficit with China have argued that the U.S. should be pressing China to raise the value of its currency relative to the dollar. Read more…

The value of economics — a cost-benefit analysis

September 18, 2020 7 comments

from Lars Syll

Screenshot 2020-09-16 at 09.06.35Economists cannot simply dismiss as “absurd” or “impossible” the possibility that our profession has imposed total costs that exceed total benefits. And no, building a model which shows that it is logically possible for economists to make a positive net contribution is not going to make questions about our actual effect go away. Why don’t we just stipulate that economists are now so clever at building models that they can use a model to show that almost anything is logically possible. Then we could move on to making estimates and doing the math.

In the 19th century, when it became clear that the net effect of having a doctor assist a woman in child-birth was to increase the probability that she would die, western society faced a choice:

– Get rid of doctors; or
– Insist that they wash their hands.

I do not want western society to get rid of economists. But to remain viable, our profession needs to be open to the possibility that in a few cases, a few of its members are doing enormous harm; then it must take on a collective responsibility for making sure that everyone keeps their hands clean.

Paul Romer

Mainstream economic theory today is still in the story-telling business whereby economic theorists create mathematical make-believe analogue models of our real-world economic system. Read more…

A tale of two capitalisms

September 17, 2020 4 comments

from David Ruccio

Marxian economists recognize, just like mainstream economists, that capitalism has radically transformed the world in recent decades, continuing and in some cases accelerating long-term trends. For example, the world has seen spectacular growth in the amount and kinds of goods and services available to consumers. Everything, it seems, can be purchased either in retail shops, big-box stores, or online. And, every year, more of those goods and services are being produced and sold in markets.

That means the wealth of nations has expanded. Thus, technically, Gross Domestic Product per capita has risen since 1970 in countries as diverse as the United States (where it has more than doubled), Japan (more than tripled), China (almost ten times), and Botswana (where it has increased by a factor of more than 22). Read more…

Friedman-Savage and Keynesian uncertainty

September 16, 2020 42 comments

from Lars Syll


An objection to the hypothesis just
presented that is likely to be raised by
many … is that it conflicts with the way human beings actually behave and choose. … Is it not patently unrealistic to suppose that individuals … base their decision on the size of the
expected utility?

While entirely natural and under-
standable, this objection is not strictly relevant … The hypothesis asserts rather that, in making a particular class of decisions, individuals behave as if they calculated and compared expected utility and as if they knew the odds. The validity of this assertion … depend  solely on whether it yields sufficiently accurate predictions about the class of decisions
with which the hypothesis deals.

M Friedman & L J Savage

‘Modern’ macroeconomics — Dynamic Stochastic General Equilibrium, New Synthesis, New Classical and New ‘Keynesian’ — still follows the Friedman-Savage ‘as if’ logic of denying the existence of genuine uncertainty and treat variables as if drawn from a known ‘data-generating process’ with known probability distribution that unfolds over time and on which we therefore have access to heaps of historical time-series. If we do not assume that we know the ‘data-generating process’ – if we do not have the ‘true’ model – the whole edifice collapses. And of course, it has to. Who really honestly believes that we have access to this mythical Holy Grail, the data-generating process? Read more…

Human rights and fiscal policy: a necessary link

September 15, 2020 1 comment

from Grazielle David, Pedro Rossi,and Sergio Chaparro and WEA Commentaries

Human rights and the economy are intrinsically linked issues. There is an important economic dimension to human rights in terms of the resources needed to guarantee rights and how they can be socially allocated for this purpose. On the other hand, human rights are, or should be, an important normative parameter for the organization of activities and the economic system itself. However, the fiscal implications of human rights obligations are not fully systematized and are not regularly considered. This “disconnection” has many negative consequences, which are aggravated in contexts of instability or economic crisis and in the face of fiscal austerity measures.

The evident analytical, academic and political detachment of the two fields may explain the incomprehension and indifference of many professionals in both areas and also in a scarce bibliography that articulates these themes.  read more

Friedman’s bad turn

September 14, 2020 17 comments

from Peter Radford

Today is quite an anniversary.  It is fifty years since Milton Friedman’s article on the responsibilities of corporate management appeared in the New York Times.  Whilst it was not the only argument in favor of the shift towards a narrow focus on shareholder value, it was certainly one of the more persuasive and influential.  I have long held that Friedman’s reputation was ill-deserved because of his overt ideological bias and thus lack of any pretenses to scientific thought, but I realize he is well respected and protected by his peers.  His academic peers keep pointing us to his many “contributions” and accomplishments in order to prevent too dramatic a revision of his stature.  I prefer to reflect on the enormous impact his relentless pursuit of libertarian politics under the guise of economic theorizing has had on working people throughout the world.  He and his fellow travelers have a great deal of responsibility for the current fiscal insecurity that their ideas produced.

Friedman’s ability to straddle between academia and public media stardom made whatever he said more potent than it might have been otherwise.  His legacy is questionable.  His contribution to the malaise of those unfortunate enough to be caught in the vise of the corporate rush for every last scintilla of profit is not.  He was one of the main actors in the bad turn in economics  that blinded the discipline to reality, to the cost that it imposed on society, and to its inability to force the disaster of 2008. Read more…

Does it — really — take a model to beat a model? No!

September 13, 2020 14 comments

from Lars Syll

Many economists respond to criticism by saying that ‘all models are wrong’ … But the observation that ‘all models are wrong’ requires qualification by the second part of George Box’s famous aphorism — ‘but some are useful’ … The relevant  criticism of models in macroeconomics and finance is not that they are ‘wrong’ but that they have not proved useful in macroeconomics and have proved misleading in finance.

kaykingWhen we provide such a critique, we often hear another mantra to which many economists subscribe: ‘It takes a model to beat a model.’ On the contrary, we believe that it takes facts and observations to beat a model … If a model fails to answer the problem to which it is addressed, it should be put back in the toolbox … It is not necessary to have an alternative tool available to know that the plumber who arrives armed only with a screwdriver is not the tradesman we need.

A similar critique yours truly sometimes encounters is that as long as I cannot come up with some own alternative model to the failing mainstream models, I shouldn’t expect people to pay attention.

This is, however, not only wrong for the reasons given by Kay and King, but is also to utterly misunderstand the role of philosophy and methodology of economics!

As John Locke wrote in An Essay Concerning Human Understanding: Read more…

New book from WEA Books

September 13, 2020 Leave a comment

Public law and economics after the financial crisis

Mstis Fernanda Madi, Renny Reyes, and Vicente Bagnoli (editors)

Kindle Edition $5.89 –  US  UK  DE  FR  ES  IT  NL  JP  BR  CA  MX  AU  IN

Paperback $12.99 –  US  UK  DE  FR  ES  IT  JP  CA

Is this the end of globalisation (as we know it)?

September 11, 2020 1 comment

from  Karim Errouaki and WEA Commentaries

The health, economic, social and political crisis created by the COVID-19 pandemic will reconfigure the geopolitics of international relations and globalization. We are only at the beginning of this crisis, particularly on the economic and social fronts. Many sectors, such as tourism, transportation and entertainment, will only recover over a very long time; many jobs will be destroyed. In contrast, other sectors are insufficiently developed and cruelly lacking in production. Therefore, we must act now to give the economy a new direction and to harness new engines of development.

French Economist Patrick Artus (2020) argued that the current pandemic and its consequences could precipitate a slowdown in ‘’Globalization’’ or even result in a process of ‘’Deglobalization’’. We can expect to see an acceleration in the structural changes that we have already been seeing in the process of globalization. Indeed, COVID-19 and the way of addressing it is slowing physical globalization down. At the same time, it is also promoting an important digital, online form of globalization.  read more


September 10, 2020 2 comments

This conference is open for submissions  SUBMIT YOUR PAPER

Call for Papers

The United States declared an economic war on China in early 2018. Economic warfare is a unilateral action that questions the existence of multilateralism and places the question of what regime we are about to enter after the weakening of the existing multilateral trade agencies. US trade policy opens the door for new relationships between emerging market economies and international financial institutions on issues of liberalisation but mostly it ends a period started in the 1980’s of unregulated international trade and opens a new one. The solution to the structural economic problems of the US, similar to those of Britain in the 1960’s is not tariffs and trade restrictions. The trade war is above all a war that will be won by one side at some point.

The recent outbreak of coronavirus has just added more uncertainties to the global trade war scenario

This conference calls for a deep reflection to matters related that includes, among other questions:

Read more…

Michael Woodford on models

September 10, 2020 18 comments

from Lars Syll

woodfordBut I do not believe that the route to sounder economic reasoning will involve an abandonment of economists’ penchant for reasoning with the use of models. Models allow the internal consistency of a proposed argument to be checked with greater precision; they allow more finely-grained differentiation among alternative hypotheses, and they allow longer and more subtle chains of reasoning to be deployed without both author and reader becoming hopelessly tangled in them. Nor do I believe it is true that economists who are more given to the use of formal mathematical analysis are generally more dogmatic in their conclusions than those who customarily rely upon more informal styles of argument. Often, reasoning from formal models makes it easier to see how strong are the assumptions required for an argument to be valid, and how different one’s conclusions may be depending on modest changes in specific assumptions. And whether or not any given practitioner of economic modeling is inclined to honestly assess the fragility of his conclusions, the use of a model to justify those conclusions makes it easy for others to see what assumptions have been relied upon, and hence to challenge them. As a result, the resort to argumentation based on models facilitates the general project of critical inquiry that represents, in my view, our best hope for some eventual approach toward truth.

Michael Woodford

This is — sad to say — a rather typical view among mainstream economists today. Read more…