from David Ruccio
On the eve of their presidential election, the French people and politicians continue to debate how they should respond to the end of “Les Trente Glorieuses,” a period that appears to receding into ancient history.
Except, as it turns out, for those at the very top, for whom the last thirty years have been quite glorious.
According to new research by Bertrand Garbinti, Jonathan Goupille-Lebret, and Thomas Piketty, between 1983 and 2014, average per adult national income rose by 35 percent in real terms in France. However, actual cumulated growth was not the same for all income groups: Read more…
from Assad Zaman
Based on ideas derived from my study of the methodology of Polanyi’s Great Transformation, I have come to the conclusion that history and social theories are entangled — they co-evolve in time. We cannot understand social theories (like economics) outside the historical context, just as we cannot understand history without understanding the social theories in use by different groups to try to interpret events in ways that would lead to policy actions in their favor. It is only in context of the struggle of groups with competing interests to impose favorable interpretations upon historical events that we can understand the emergence of theories like comparative advantage. We cannot understand them from the standard “scientific” point-of-view based on the binary of True/False. This dominant mode of understanding will leave us forever confused as to why theories so dramatically at variance with facts can come to dominate, and be widely taught and believed by people who are, by all appearances, perfectly intelligent.
from Lars Syll
Two hundred years ago, on 19 April 1817, David Ricardo’s Principles was published. In it he presented a theory that was meant to explain why countries trade and, based on the concept of opportunity cost, how the pattern of export and import is ruled by countries exporting goods in which they have comparative advantage and importing goods in which they have a comparative disadvantage.
Although a great accomplishment per se, Ricardo’s theory of comparative advantage, however, didn’t explain why the comparative advantage was the way it was. In the beginning of the 20th century, two Swedish economists — Eli Heckscher and Bertil Ohlin — presented a theory/model/theorem according to which the comparative advantages arose from differences in factor endowments between countries. Countries have a comparative advantages in producing goods that use up production factors that are most abundant in the different countries. Countries would mostly export goods that used the abundant factors of production and import goods that mostly used factors of productions that were scarce.
The Heckscher-Ohlin theorem — as do the elaborations on in it by e.g. Vanek, Stolper and Samuelson — builds on a series of restrictive and unrealistic assumptions. The most critically important — beside the standard market clearing equilibrium assumptions — are Read more…
I always use some famous Chicago School economist as my representative fool when I am describing mainstream economics to my uninitiated friends. How does one, after all, defend such a ludicrous body of thought? By reference to Monty Python?
Here is Gary Becker explaining why mainstream theory is so ridiculous:
“The combined assumptions of maximizing behavior, market equilibrium, and stable preferences, used relentlessly and consistently, form the heart of the economic approach.”
And thus Becker’s economic approach remains firmly nailed to its perch looking for all the world like a dead bird. A very dead bird. It would be funny, indeed hilarious, were it not for the rather dismal fact that people like Becker win prizes and accolades for believing such tripe. There is, apparently, no satire sufficiently cutting, no mirth sufficiently loud, and no critique sufficiently detailed to stop the farce from continuing.
Economics, especially the Becker sort, is dead. It died at its inception. It is a joke that needs sensitive burial so we can move on and look for a real economics that engages real problems and real economies and not the fetid fantasies of the type inhabiting too many professor’s minds.
I often wonder whether economists realize how funny they sound. Or whether they even care about economies. The evidence isn’t reassuring. They press on teaching rubbish as if it were golden. They press on writing ever longer papers riddled with details and mathematics that describe absolutely nothing. They continue to paint pictures that amount to fog. They are, in short, wasting everyone’s time. Read more…
from David Ruccio
Skellington is right: in my post on Tuesday, I did not separate out people at the very top from the rest of those at the top. That’s because, in the data I presented, those in the top 0.1 percent were included in the top 1 percent.
Unfortunately, I don’t have the same kind of breakdown in the composition of incomes as I used in those charts. What I do have are data on the shares of income and wealth for the top 0.1 percent versus the remainder of the top 1 percent (so, top 1 percent to but not including the top 0. 1 percent).
from Lars Syll
In Dani Rodrik’s Economics Rules it is argud that ‘the multiplicity of models is economics’ strength,’ and that a science that has a different model for everything is non-problematic, since
economic models are cases that come with explicit user’s guides — teaching notes on how to apply them. That’s because they are transparent about their critical assumptions and behavioral mechanisms.
That is at odds with yours truly’s experience from studying mainstream economic models during four decades.
When — just to take an example — criticizing the basic (DSGE) workhorse macroeconomic model for its inability to explain involuntary unemployment, its defenders maintain that later ‘successive approximations’ and elaborations — especially newer search models — manage to do just that. However, one of the more conspicuous problems with those ‘solutions,’ is that they are as a rule constructed without seriously trying to warrant that the model immanent assumptions and results are applicable in the real world. External validity is more or less a non-existent problematique sacrificed on the altar of model derivations. This is not by chance. These theories and models do not come at all with the transparent and ‘explicit user’s guides.’ And there’s a very obvious reason for that. For how could one even imagine to empirically test assumptions such as ‘wages being determined by Nash bargaining’ or ‘actors maximizing expected utility,’ without coming to the conclusion that this is — in terms of realism and relevance — far from ‘good enough’ or ‘close enough’ to real world situations? Read more…
from David Ruccio
Who’s running away with the surplus, those at the top or those at the very top? Read more…
from Mark Weisbrot
If the first round of the French presidential election on Sunday is now too close to call, that’s partly because of Jean-Luc Mélenchon’s last-minute surge in the polls. The media describe him as a populist from the far Left, and as he has risen, attacks on him have intensified.
One common criticism is that his economic proposal to jump-start growth in France while reducing mass unemployment and inequality is pie in the sky.
Is it, though?
Mr. Mélenchon would certainly face significant political hurdles if elected, including the need to build political support for his program in Parliament. But the French economy, despite serious problems, could sustain, as well as benefit from, his proposals.
He wants to reduce unemployment from 10 percent, its current level, to about 6 percent over the next five years, partly by increasing government spending by some 275 billion euros, or about 2.3 percent of GDP. The money would go to major public spending in renewable energy and environmental projects, housing and antipoverty programs, as well as toward lowering the retirement age and increasing wages in the public sector.
Mr. Mélenchon’s critics say that France is already living beyond its means. The French enjoy a level of economic security and living standards that most Americans can only dream about: universal health care, free childcare and public-university education, a 35-hour workweek, higher life expectancy, and lower per capita energy consumption and greenhouse gas emissions. The new government, say people who oppose Mr. Mélenchon’s views, will have to focus on reducing the public debt.
But the numbers do not bear them out.
from Thomas Palley
A key element of Trump’s political success has been his masquerade of being pro-worker, which includes posturing as anti-globalization. However, his true economic interest is the exact opposite. That creates conflict between Trump’s political and economic interests. Understanding the calculus of that conflict is critical for understanding and predicting Trump’s economic policy, especially his international economic policy.
from Peter Radford
When, for reasons too byzantine to recount here, I decided to re-engage with economics a couple of decades ago I did so through the prism of business. After all I had just finished a stint in banking and was thinking about the way in which the rise of digital technology would change the way in which business is conducted.
The reason for this point of re-entry was that I believed then, and still do, that economies are movements of information as much as, if not more than, anything else. So if digital technologies make information more tractable, abundant, and accessible then they must affect business. My earliest basic assumption was that a business firm is simply a system of thought whose objective is to protect and exploit its information advantage. This brings it into conflict with both its suppliers and its customers who are seeking to overcome the asymmetries of information that occur “naturally” in the landscape. I described the space that firms occupy as “operating space” that is a wedge preventing direct contact between customers [end users] and suppliers [or resources].
That was back in the mid 1990’s and, by and large, since then the disintermediation of operating space that we observe as a consequence of the “digitalization” of the economy has gathered pace.
The most obvious manifestation of this is the steady redesign of business itself. More and more business firms are reducing their operating space by jettisoning what they consider to be “non-core” activities. The idea being to reduce their logical space only to that in which their information advantage resides, and to allow those aspects of their older form that represent no advantage to go elsewhere to be repurchased at lower cost if, and when, needed. Read more…
from David Ruccio
Liberal stories about who’s been left behind during the Second Great Depression are just about as convincing as the “breathtakingly clunky” 2014 movie starring Nicolas Cage.
For Thomas B. Edsall, the story is all about the people in the “rural, less populated regions of the country” who have been left behind in the “accelerated shift toward urban prosperity and exurban-to-rural stagnation” and who supported Republicans in the most recent election. Read more…
from Edward Fullbrook
Steve Keen has a new book out: Can we avoid another financial crisis? Keen, as you probably know, was one of those economists – Nouriel Roubini, Dean Baker, Ann Pettifor, Michael Hudson, Wynne Godley and others – who warned well in advance that the Global Financial Crash was coming if preventive measures were not taken. How did these economists clearly see the crash coming when neoclassical economists did not, not even the day before it happened? Keen’s new book reminds me that a few years ago in an interview I offered an explanation when answering the following question.
The first distinction you draw is that the old paradigm (OPE) is anti-pluralist (as in classical physics), while the new paradigm (NPE) is pluralist (as in modern physics). Can you give me a concrete example or two that illustrates what this means?
Of the ten points that I listed to distinguish between OPE and NPE, the most important is the first: monism versus pluralism. Why? Because it is this choice that sets down the general framework under which the pursuit of knowledge is conducted. And this choice, in terms of its effect on the advancement of knowledge and thereby human welfare, is, as I will illustrate, absolutely enormous.
There is a famous quote from Albert Einstein that points to the reason why for the advancement of science this choice is so critical. “Whether you can observe a thing or not depends on the theory which you use. It is theory which decides what can be observed.”
It just happens that the lead news story today in the UK illustrates Einstein’s proposition. It goes like this. Read more…
from Maria Alejandra Madi
A relevant feature of the current crisis in economic knowledge is the recurrence of the Ricardian Vice. Joseph A. Schumpeter coined this term in his book History of Economic Analysis when he criticized the habit assigned to Ricardo to represent the economy by a set of simplified assumptions and to use tautologies to develop practical economic solutions. Indeed, Schumpeter rejected the kind of economic thought that mainly favours deductive methods of inquiry – based on mathematical reasoning- because the habit known as the Ricardian Vice generates analytical unrealistic results that are irrelevant to solving the real-world economic problems.
Also Keynes warned that the understanding of the economic phenomena demands not only purely deductive reasoning, but also other methods of inquiry along with the study of other fields of knowledge- such as History and Philosophy. In his own words:
“The study of economics does not seem to require any specialised gifts of an unusually high order. Is it not, intellectually regarded, a very easy subject compared with the higher branches of philosophy and pure science? Yet good, or even competent, economists are the rarest of birds. An easy subject at which very few excel! The paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts. He must reach a high standard in several different directions and must combine talents not often found together. He must be mathematician, historian, statesman, philosopher – in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician.” (Keynes, Collected Writings, vol. X: Essays in Biography) read more
The ECB buys lots of bonds from large oil companies, not from small and medium enterprises.
Rapid money supply growth does not cause inflation (measurements!)
New UK guidelines on how to estimate natural capital. Surely worth the effort! But some things do not have a price for a good reason. And when you look really, really hard at statistics of the stock of capital it turns out that statisticians measure the value of rights to the monetary yield of ownership of certain items. And not any kind of intrinsic welfare or utility produced by machines or houses (or an Easter Monday trip to the woods). Do not commodify Nottingham Forest!
Economists like me measure productivity. Can we trust these statistics? Only if they are very carefully crafted. From a OECD manual standard methods used to calculate ‘real’ production can even result in estimates of negative production.
“Another issue is the occasional occurrence of negative value added figures when double deflation operates with Laspeyres quantity indices. Nothing ensures that the subtraction of constant-price intermediate inputs from constant-price gross output yields a positive number. The SNA 93 notes that negative real value added can occur when relative prices change: “a process of production which is efficient at one set of prices, may not be very efficient at another set of relative prices. If the other set of prices is very different, the inefficiency of the process may reveal itself in a very conspicuous form, namely negative value added”. … In these circumstances, a different accounting method should be used to estimate an aggregate like value added, such as the methods based on “superlative” index numbers
from Lars Syll
Of course economics involves cases where economists appear too reluctant to give up their favoured models. You can find similar stories in the hard sciences. There will be more such stories in economics because the inexact nature of economics makes it easier to discount any single piece of evidence. What I cannot understand is what leads someone … to argue against the use of evidence, and instead that “economics is primarily a way of organizing one’s thinking”. Astrology is also a way of organising one’s thinking, but it fails because evidence does not back it up.
That comparison is slightly unfair, because while the theory behind astrology is obviously implausible, the basic principles of microeconomics are not. In a class on economic methodology I once drew a huge tree that showed how most of economics could be derived from principles of rational choice. But go beyond the basics, and add in complications involving information and transactions costs (to name but two) and you very quickly derive competing models. There is no single model that comes from thinking like an economist, so for that reason alone we need data to tell us which models are more applicable.
It’s hard not to agree that economics is a very inexact science. But — that’s actually not at all the way its mainstream überpriests present it. Especially not in their textbooks. There economics — the queen of social sciences — is portrayed as a rock-solid science on a par with physics. Read more…