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

February 12, 2021 6 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! Read more…

Want to reverse inequality? Change intellectual property rules

February 11, 2021 2 comments

from Dean Baker

The explosion of inequality over the past four decades is appropriately a major focus of the political agenda for progressives. Unfortunately, policy prescriptions usually turn to various taxes directed at the wealthy and very wealthy. While making our tax structure more progressive is important, most of the increase in inequality comes from greater inequality in before-tax income, not from reductions in taxes paid by the rich. And, if we’re serious about reversing that trend, it is easier, as a practical matter, to keep people from getting ridiculously rich in the first place than to tax the money after they have it.

While the Reagan, George W. Bush, and Trump tax cuts all gave more money to the rich, policy changes in other areas, especially intellectual property have done far more to redistribute income upward. In the past four decades, a wide array of changes—under both Democratic and Republican presidents—made patent and copyright protection both longer and stronger. Read more…

Hans Albert turns 100

February 11, 2021 2 comments

from Lars Syll

Clearly, it is possible to interpret the ‘presuppositions’ of a theoretical system … not as hypotheses, but simply as limitations to the area of application of the system in question. Since a relationship to reality is usually ensured by the language used in economic statements, in this case the impression is generated that a content-laden statement about reality is being made, although the system is fully immunized and thus without content. In my view that is often a source of self-deception in pure economic thought …

200px-Hans_Albert_2005-2A further possibility for immunizing theories consists in simply leaving open the area of application of the constructed model so that it is impossible to refute it with counter examples. This of course is usually done without a complete knowledge of the fatal consequences of such methodological strategies for the usefulness of the theoretical conception in question, but with the view that this is a characteristic of especially highly developed economic procedures: the thinking in models, which, however, among those theoreticians who cultivate neoclassical thought, in essence amounts to a new form of Platonism.

Hans Albert

Read more…

Forecasting errors

February 10, 2021 3 comments

from Peter Radford

I suppose forecasting errors is one of those phrases that needs a bit of explanation.  Are we forecasting errors?  Or are we discussing the errors in forecasting?  I think it’s both.

Take the current debate going on about Biden’s $1.9 trillion economic relief package.

A few notable economists, including both Larry Summers and Oliver Blanchard, are arguing that Biden is proposing on spending too much.  This criticism is not based on any analysis of the level of unemployment, the ability to pay rents, the likelihood of imminent re-employment, or any other issue of urgency.  It is based on the usual orthodoxy economists trot out year after year.  The argument is this: the economy was not in distress prior to the pandemic, meaning there were none of those infamous “imbalances” that economist love to talk about; so it ought to bounce back quickly once the emergency lets us all get back to whatever we were doing before we so rudely interrupted; that it is in pretty good shape despite the headline closures, loss of jobs, and other ephemera of the crisis is shown by the facts that households still have pretty good bank balances and that consumer debt is also low[ish], meaning that there is plenty of cash around to splurge when splurging is OK once more. Read more…

Thinking about thinking

February 9, 2021 4 comments

from Lars Syll

Unfortunately, the greater part of economic controversies arise from confronting dogmas. The style of argument is that of theology, not of science … In economics, new ideas are treated, in theological style, as heresies and as far as possible kept out of the schools by drilling students in the habit of repeating the old dogmas, so as to prevent established orthodoxy from being undermined …

Image result for joan robinson further contributionsOn the plane of academic theory, the importance of the Keynesian revolution was to show that all the familiar dogmas are set in a world without time and cannot survive the simple observation that decisions, in economic life, are necessarily taken in the light of uncertain expectations about their future consequences.

Orthodox theory reacted to this challenge, in true theological style, by inventing fanciful worlds in which the difference between the past and the future does not a rise and devising intricate mathematical theorems about how an economy would operate if everyone in it had correct foresight about how everybody else was going to behave.

Read more…

Excessive stimulus and other things Larry Summers worries about

February 9, 2021 5 comments

from Dean Baker

It seems that Larry Summers is worried that the stimulus proposed by President Biden is too large. I will say at the onset that he could be right. However, at the most fundamental level, we have to ask what the relative risks are of too much relative to too little.

If we actually are pushing the economy too hard, the argument would be that we would see serious inflationary pressures, which could result in the sort of wage-price spiral we saw in the 1970s. As someone who lived through the 1970s, it actually wasn’t that horrible.

Okay, the fashions and hair styles might have been horrible, and I was never a fan of disco, but the period as whole wasn’t that bad. We didn’t have mass starvation and homelessness, but yes, the inflation of the decade was definitely a problem and we would not want to see something similar in this decade.

But will the Biden stimulus really cause us to see a 1970s-type wage-price spiral? That seems hard to imagine. We have not seen serious problems with inflation for many decades. Here’s the picture going back to the late 1990s using the personal consumption expenditure deflator, the Fed’s preferred index.
Read more…

Changing the speculative game

February 8, 2021 1 comment

from C. P. Chandrasekhar

January proved to be an unusual month in the US equity market. The shares of GameStop, a brick-and-mortar retailer of gaming consoles and video games, had in the course of that month risen by close to 2000 per cent. The price of the share rose from around $5 in August 2020 to $350 in late January 2021, with much of the rise occurring towards the end of that period. Besides the fact that no set of fundamentals can justify that rise, this was intriguing because of the recent record of the company. GameStop shares had been losing value for a couple of years or more, because of a number of reasons. Rising online purchases and game downloads had adversely affected GameStop’s sales figures. The company had been through major managerial changes with one Chief Executive quitting three months after his appointment. And an attempt by the owners to sell out their stakes did not take off. There was something clearly amiss in the remarkable share price reversal.

It turns out that a set of Wall Street majors, such as hedge funds Citron Research and Melvin Capital Management, had in fact been betting that the GameStop equity can only go downwards. Read more…

January 6th, one month on

February 8, 2021 3 comments

from Peter Radford

It’s been a month.  It seems a great deal longer.

Trump has slunk off the stage and the first signs of what the post-Trump political arena might look like are emerging.  It isn’t hopeful.  Not if you’re looking for peaceful politics.

As we become more able to adjust our focus and ask “what just happened?” with a better degree of clarity, it becomes more obvious, to me at least, that the entire movement that has come to be known as Trumpism was not actually Trump’s at all.  It pre-existed him.  He simply packaged and branded it as if it were one of those buildings that bears his name but which he does not own.  Trump was and remains a veneer.  He is always willing to push to the head of a crowd and claim it was his idea to gather.  He is always willing to present himself as the prime mover of a movement already well in motion.  He is a shallow person incapable of the intricacies of creating something complex, but quite capable enough of providing the gilded gloss once it does exist.

So it is with Trumpism.

It isn’t actually Trumpism.  The term is a gloss that satisfies Trump’s insatiable ego.  He did not summon the movement into being.  It searched for, and found him.  He needed the movement more than the movement needed him.  It gave him strength where he had none.  It gave him purpose where he had none.  It gave him courage where he had none. It gave him a path too the presidency where he had none.  It gave him substance to hide his triviality.  All he had to do was to apply some finishing touches.

What we call Trumpism has roots way back in the darker recesses of American life. Read more…

Corona as opportunity for a restart

February 7, 2021 Leave a comment

from Norbert Häring

Merkel, Macron, von der Leyen and other international leaders have described the Corona crisis as an opportunity to reorder world politics on the basis of multilateralism. The timing, shortly after the World Economic Forum’s meeting, and the echoes of the Great Reset proclaimed by the forum, are probably no coincidence, as an analysis of key passages will show.

In a joint plea printed in a number of important international newspapers, António Guterres, Ursula von der Leyen, Emmanuel Macron, Angela Merkel, Charles Michel and Macky Sall call for “Multilateral cooperation for Global Recovery

Guterres is secretary-general of the UN. As a member of the “World Economic Forum Global Agenda Council on Humanitarian Assistance,” he has co-written texts with such fine titles as “A New Business Model for Humanitarian Assistance?” As the title suggests, one of the issues is how to let the private sector earn more from post-disaster reconstruction. Read more…

The future of macroeconomics

February 6, 2021 3 comments

from Lars Syll

But why are DSGE models still in the mix at all, and in a key position? Given all the criticisms, what can such models tell us, even as a ‘first pass at important questions’? Multiple equilibria do allow for discussion of a wider range of scenarios, but any discussion of a particular scenario is still constrained by the requirements of general equilibrium theory. These requirements are at the root of the more fundamental critiques of DSGE. While Vines and Wills set out an impressive research agenda to flesh out this multiple-equilibrium approach, we need to reflect on the constraints imposed by general equilibrium theorising itself.

Image result for macroeconomics lars syllWe therefore need to revisit the fundamental problems with general equilibrium theory and the restrictions it imposes on what is admissible. Individual behaviour needs to be determinate such that indeterminacy can only enter due to an ad hoc restriction or else as a shock. Institutional structures need to be fixed, or else evolve in a deterministic way. Further, the very focus on equilibrium as an outcome of market forces severely constrains the subject matter. Read more…

Should people who want to save the world from the pandemic be demanding we pay China to produce billions of vaccine doses?

February 5, 2021 1 comment

from Dean Baker

I have written repeatedly on how we should have been looking for a collective solution to the pandemic, where countries open-source their research and allow anyone with manufacturing capacity to produce any treatment, test, or vaccine. (We pay upfront, like with Moderna, for those wondering why anyone would do the work.) Anyhow, we obviously did not go that route under Donald Trump.

Along with many others, I have argued that we should still go this route, sharing all our technology freely, as has been proposed in a WTO resolution put forward by India and South Africa. The U.S. and most European countries have vigorously opposed this measure thus far.

A main argument in the case of vaccines, is that the mRNA vaccines (Pfizer and Moderna — the only two approved thus far in the U.S.) involve complex manufacturing processes that cannot easily be replicated. While this is undoubtedly in part true, these vaccines did not exist back in March, yet the companies were able to produce large quantities of their vaccines by October, which suggests that if we started today, we could hugely increase output by October or sooner. Since few people think the worldwide pandemic will be over this year, that still sounds like something worth doing, even if does take eight months to get up and running. Read more…

Dominant capital is much more powerful than you think

February 5, 2021 21 comments

from Shimshon Bichler and Jonathan Nitzan

  1. Capital as power, differential accumulation and dominant capital

According to the theory of capital as power (CasP), capitalists and corporations are driven not to maximize profit, but to ‘beat the average’. Their yardstick is not an unmeasurable theoretical abstraction, but the readily observable performance of others. Their aim is not to increase their ‘material gain’, counted in fictitious utils or socially necessary abstract labour time, but to earn more money than everyone else. And the reason, we argue, has to do with power. In capitalism, capital is power, and to accumulate it differentially – i.e., relative to others – is to fortify and augment one’s organized power over others.

Following Kepler’s modern notion of force, CasP sees capitalized power not as a stand-alone qualitative entity, but as a quantitative relationship between entities.

First, capitalized power is not absolute, but relational. It’s not a ‘battery’ or ‘energy’ that some entities possess and use to impose their will over others. Instead, it is the actual structure of differential relationships among capitalist owners and organizations as well as between those owners and organization and others who are subjugated to them and resist their domination. Read more…

Teaching heterodox microeconomics

February 4, 2021 3 comments

from Lars Syll

In memoriam: Frederic S. Lee (1949-2014), el adiós a un “economista  blasfemo”[*] | LumpenproletariatClearly, neoclassical economists believe that neoclassical microeconomic theory is theoretically coherent and provides the best explanation of economic activity; therefore there is no good reason to not teach it, if not exclusively. Many heterodox economists also broadly agree with this position, although not with all the particulars. However, sufficient evidence exists showing that as a whole neoclassical microeconomic theory is theoretically incoherent and without empirical support (see Lee and Keen, 2004; and Keen, 2001). Moreover, the methodological underpinning of neoclassical microeconomics is open to criticisms. The methodological approach of neoclassical economics is based on a pre-vision of supply and demand and/or a Walrasian general equilibrium all combined with scarcity and constrained maximization. Accepting this vision as a matter of faith, neoclassical economists construct axiomatic-based arguments via a deductivist methodology (with or without the use of mathematics) to articulate this pre-vision. There is no attempt to establish that the pre-vision has any connection to or is grounded in the actual capitalist economy it purports to explain. Read more…

Epistemic revolution? The search for algorithmic justice

February 3, 2021 1 comment

from Peter Radford

This is a long speculation, for which I apologize, provoked by the following:

In an information civilization, societies are defined by questions of knowledge — how it is distributed, the authority that governs its distribution and the power that protects that authority. Who knows? Who decides who knows? Who decides who decides who knows? Surveillance capitalists now hold the answers to each question, though we never elected them to govern. This is the essence of the epistemic coup.”  — Shoshanna Zuboff, New York Times,  January 2021 

Coups are all the rage right now.  Is Zuboff right that we are the victims of an “epistemic coup”?  What do we even mean by an epistemic coup?

It gets complicated.

For years now we have been bombarded by articles, many of which emanate from the business consulting world where Zuboff made a living,  arguing that we are moving from a world dominated by material supply and demand into world dominated by digital supply and demand.  This new world has to be differentiated from its predecessor, so people have taken to calling it the “knowledge economy”.  This is trivial and well known to all of us.  Information has emerged as the critical ingredient.  Knowledge workers are the darlings of the media and political class.  Education is the panacea for all ills, especially the so-called hollowing out of the middle class.  The “learning”organization is the business idea du jour.

Well, not to be too curmudgeonly, but this is all a bit of an over reaction.  Yes, we are living in a digital world, but the epistemic revolution occurred ages ago.  Zuboff is right, though, to speak of an urgent need to recognize what’s going on. Read more…

Dealing with a pandemic as if human lives mattered

February 3, 2021 3 comments

from Dean Baker

It’s fair to say that the U.S. performance in dealing with the pandemic has been disastrous. With the effort led by Donald Trump, this is not surprising. His main, if not only, concern was keeping up appearances. Preventing the spread of the pandemic, and needless death, was obviously not part of his agenda.

Unfortunately, many other wealthy countries, like France, Belgium, and Sweden, have not done much better. They don’t have the excuse of having a saboteur in charge who was actively trying to prevent the relevant government agencies from doing their jobs.

Anyhow, I thought it would be worth throwing out a few points about how we should have approached the pandemic. While some of this is 20-20 hindsight, I was making most of these points many months ago. I should add, I claim zero expertise in public health, but I do have some common sense, in spite of my training in economics. Of course, if anyone with expertise in public health wants to correct or expand on any points here, I welcome the opportunity to be educated.

I will break down the discussion into three key areas:

  • Measures to reduce spread;
  • Efforts to develop effective testing, vaccines, and treatments;
  • The distribution of vaccines

Read more…

Critique of Rajan on debt

February 2, 2021 6 comments

from Asad Zaman 

“my views are based on insights acquired from MMT, but  .  . . . . . . . . . . . ”         

In this post, I will provide a critique of Raguram Rajan’s article “How Much Debt is Too Much?”. (Alternative link to Rajan’s article)

The article opens with a description of the governments “opening their coffers, to support small households and firms” in the COVID era. Required spending has been on the order of 15-20% of the GDP, and the article examines the extent to which government can finance this extra expense by borrowing at low interest rates from the private sector.

The language reminded me Robin Hood and his team swooping down on government convoys laden with coffers of gold. In face of this generosity by the government, it seems churlish to examine their coffers, to see if they contain gold, or just paper promises. Rajan’s theories are based on archaic understandings of money as gold. Rajan’s article assumes, without discussion, the following premises:

  1. Government are like households. Spending must by financed by taxes or borrowing.
  2. Borrowing from private sector increases the amount of money available for government spending.
  3. Government ability to pay off the debt created by private borrowing depends on the interest rate, and on its capabilities to raise revenues (by taxation or borrowing) in the future.

All three of these propositions are false, as would be evident to readers of my earlier post on ABC’s of MMT. It is worth clarifying that my views are based on insights acquired from MMT, but need not coincide with the official doctrines of MMT.

To begin with, we must ask why . . .  read more

Best advice to an aspiring economist — don’t be an economist

February 1, 2021 14 comments

from Lars Syll

And still, amidst all this tumult, many economists are disinclined to rethink the foundations of their field. It reminds me of the closing joke in Woody Allen’s film Annie Hall. A guy has a crazy brother who thinks he is a chicken.  The doctor asks, ‘Why don’t you turn him in?’ The guy replies, ‘I would, but I need the eggs.’ ”

wrong-focusWhy is the free-market discourse so perdurable despite so many social, ecological, and political realities that call its logic and categories of thought into question?  Because the whole field, despite its flaws, is functional enough and entrenched. It needs the eggs — the certitude of quantitative analysis aping the hard sciences, the credentialed expertise always in demand by powerful institutions, the prestige that comes with proximity to power.

But behind these factors, there is a new world a-bornin’ that economics needs to engage with and understand. There are brilliant economic thinkers like Kate Raworth, inventor of “doughnut economics” framework; the writings of degrowth economist Jason Hickel and the late anthropologist David Graeber; the thinkers associated with the web journal Real World Economics; and a number of student associations clamoring for new economic paradigms and pedagogy. Beyond reading the right things, I find that it helps a lot to hang out with the right crowd, listen to serious new voices, and bring one’s full humanity to the questions of the moment.

Economists of all ages – but especially younger ones who have the suppleness and imagination to grow – need to pay attention to these outsider voices. There is a new world that is fast-overtaking us, and it needs to be seen and explained on its own terms.

David Bollier / Evonomics

A science that doesn’t self-reflect on its own history and asks important methodological and science-theoretical questions about the own activity, is a science in dire straits. Read more…

Good news about Covid-19 vaccines and vaccinations

January 31, 2021 4 comments

Covid 19 vaccinations are going well. Quite a number of vaccines have been approved. And these are being used. At the time of writing close to 100 million ‘jabs’ have already been provided, not just of the Moderna and Pfizer vaccine but also of the Sputnic, AstraZeneca and Sinovac vaccines. And the pace is quickening, for instance in countries like Brazil and Morocco (which uses AstraZeneca and Sinopharm vaccines in its 3.000 vaccination centres).

Read more…

It’s time to tax the Wall Street casino!

January 30, 2021 3 comments

from Lars Syll

Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.8489342The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism — which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object.

These tendencies are a scarcely avoidable outcome of our having successfully organised “liquid” investment markets. It is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of Stock Exchanges … The introduction of a substantial Government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States.

The GameStop game and financial transactions taxes

January 29, 2021 3 comments

from Dean Baker

The Wall Street crew is furious over the masses at Robinhood and Reddit ruining their games with their mass buying of GameStop, which wiped out the short position of a big hedge fund. The Robinhood/Reddit masses are touting this as a victory over Wall Street. The Wall Street insiders are decrying this effort to turn the market into a casino. It’s worth sorting this one out a bit and answering the question everyone is asking (or should be), would a financial transactions tax fix this problem.

First of all, much has been made of the fact that the hedge fund Melvin Capital was shorting GameStop, as though there is something illicit about shorting a company’s stock. This one requires some closing thinking. In principle, a major purpose of the stock market (we will come back to this) is to assess the true value of a company based on the information that investors collectively bring to the market.

Often this leads people to buy stock with the idea that the price will rise. However, an analysis can also lead investors to conclude that a stock is over-valued. In that case, if they are correct, they will make money by shorting the stock.

Read more…