The logic of financial markets

from Lars Syll

Professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each​ competitor has to pick not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgement are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.

J M Keynes General Theory

Still the best description of the logic of financial markets. Professional money management is at heart a guessing game where investors try to guess what other investors guess about other investors guess about the future …

4 ways in which humanity’s consciousness needs to shift

from Richard Norgaard

1 – From material progress to holistic survival and morality

The coevolution of economism with the Econocene has led humanity to the brink of disaster. Faith in progress has long been a part of the problem. Actions to stave off climate change have been trimmed and delayed on the presumption that countering environmental destruction has the opportunity cost of foregone human wellbeing through further investments in technology that further increase the production or provide novel forms of material goods.  And yet studies show that wellbeing increases little, if at all, with further material assets after basic needs are met. Shifting from faith in progress toward a consciousness of holistic survival would be more appropriate given the challenges of climate change. I include the word holistic to remind us that we need to be more fully conscious of all peoples and other species too.

Most of the questions we face today are moral questions. We have neither fully faced our moral responsibilities to future generations raised by past environmental destruction nor faced climate change over the past three decades. Economists have avoided addressing moral issues in order to meet legislators’ and the public’s expectations and need for so-called “objective” answers. Hence economists talk of economic efficiency when moral issues are at stake. This shriveling of economists’ ability to think and discuss moral issues is the essence of economism. Economics, in theory, cannot say what is moral, but if political processes determine what is moral, economics can talk about alternative efficient economies that meet moral obligations and paths to them. It is past time for economics to work with moral reasoning and political decision-making rather than falsely standing in for them.

2 – From knowledge hubris to knowledge humility 

New issue of WEA Commentaries

WEA Commentaries
Volume 11, Issue 3
Download whole issue

An egalitarian carbon tax: revenue-neutral and dual policy package
     Fausto Corvino

WHAT IS ECOLOGY? What Economics Should Have Been
     Gregory A Daneke

The Theory of Competition of F.A.Hayek as an Inspirer of the Neoliberal Turn of the 1980s
     Arturo Hermann

Don Webber discusses his book, How to enhance your re- search: 100 practical tips for academics

A golden age for macro economic statistics. Part 1: homestead rents or house rents?

The post 2009 decade will stand out as a golden age for economic statistics. I do not mean econometric analysis, I mean statistics like asset prices, rents or estimates of inequality and household income. The empirical basis for a truly scientific macro economics has finally become less shaky. On an irregular basis, I will publish some posts on some of the treasure troves which have become available.

Here, already one example, based on the recent PhD of Matthijs Korevaar., ”Financial lessons from the long history of housing markets”. Finally a long term series of one of the most important price series there is: rents. How could we ever have done proper macro without it!

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On Diane Coyle’s Cogs and Monsters

from Lars Syll

Macroeconomists seem to me the biggest offenders in not taking such empirical issues (of practical data handling) seriously enough. This might sound like sheer contrarianism given that macroeconomists are constantly wielding data; after all, their business is analysing the behaviour of the whole economy and forecasting its future path. My concerns are, first, that too few think about the vast uncertainty associated with the statistics they download and use; and secondly, how difficult it is to draw definitive conclusions about economy-wide phenomena, the aggregated outcomes of choice made by millions of businesses and consumers interacting in specific historical and geographic contexts, and social and political relations.

There’s a lot in this new book by Diane Coyle that I like, and I highly recommend reading it.

Unfortunately, there are also some things in it I find very hard to swallow.

A recurrent theme in the book — as in her earlier The Soulful Science (2010) — is Coyle’s view that much of the critique waged against mainstream economics from heterodox economists like yours truly and others are more or less of a straw-man kind and that we haven’t really understood the fact that economics “has changed a lot in two decades.”

One example she refers to — to underpin her view — is the development of the ‘new’ behavioural, ‘experimental,’ and ’empirical turn’ in economics.

So let’s take a look at that and what some of us ‘heterodox’ economists really have had to say about it.

Common MMT and post-Keynesian beliefs

from Marc Lavoie

MMT is without a doubt part of the post-Keynesian tradition. Besides the link between the government and the central bank, as well as a few claimed novelties, such as the MMT view of the Phillips curve, the implicit MMT macroeconomic theory relies on post-Keynesian macroeconomics and its belief that the market cannot be left on its own and thus must be tamed; MMT relies on a credit-creation view of banking – the endogenous money view of post-Keynesians, more specifically I would say the horizontalist view – where banks are special financial institutions which are something more than financial intermediaries and where central banks essentially pursue defensive operations; there are obvious similarities between the circuit of State money as described by MMT authors and the circuit of private money as described in the Franco-Italian post-Keynesian monetary circuit approach; MMT authors, just like (almost ?) all post-Keynesians reject 100 percent reserve-related schemes that have regained popularity since 2008; both MMT and post-Keynesian economists believe that fiscal policy, not monetary policy, should be the main tool to stabilize the economy, and hence that quantitative easing is unlikely to jump-start the economy. They also favour functional finance à la Abba Lerner, or at least some version of it.

Unmeasured “illth” increasing faster than measured wealth

from Herman Daly

The basic issue of limits to growth that the Club of Rome did so much to emphasize in the early 1970s needs to remain front and center, with recycling considered as a useful accommodation to that limit, but not a path by which the growth economy can continue. Well before becoming physically impossible the growth of the economic subsystem becomes uneconomic in the sense that it costs more in terms of sacrificed ecosystem services than it is worth in terms of extra production. That richer is better than poorer is a truism. No dispute there. But is growth in GDP in wealthy countries really making us richer by any inclusive measure of wealth? That is the question. I think it is likely making us poorer by increasing unmeasured “illth” faster than measured wealth. Even a steady-state economy can be too big relative to the ecosphere.  The neoclassical circular flow picture can never be too big by virtue of its being an isolated system. However, neoclassical economists do recognize that the economy can grow too fast (over-allocation of resources to investment relative to consumption), even though its scale can never be too big.

26 billionaires had as much as the world’s bottom 50%

Of what use are RCTs?

from Lars Syll

In her interesting Pufendorf lectures Nancy Cartwright presents a theory of evidence and explains why randomized controlled trials (RCTs) are not at all the “gold standard” that it has lately often been portrayed as. As yours truly has repeatedly argued on this blog (e.g. here and here), RCTs usually do not provide evidence that their results are exportable to other target systems. The almost religious belief with which its advocates portray it, cannot hide the fact that RCTs cannot be taken for granted to give generalizable results. That something works somewhere is no warranty for it to work for us or even that it works generally.

DISCOUNTING means “economists have grossly undervalued the lives of young people and future generations”

from The Guardian

discrimination by date of birth

Many economic assessments of the climate crisis “grossly undervalue the lives of young people and future generations”, Prof Nicholas Stern warned on Tuesday, before the Cop26 climate summit in Glasgow.

Economists have failed to take account of the “immense risks and potential loss of life” that could occur as a result of the climate crisis, he said, as well as badly underestimating the speed at which the costs of clean technologies, such as solar and wind energy, have fallen.

Stern said the economics profession had also misunderstood the basics of “discounting”, the way in which economic models value future assets and lives compared with their value today. “It means economists have grossly undervalued the lives of young people and future generations who are most at threat from the devastating impacts of climate change,” he said. “Discounting has been applied in such a way that it is effectively discrimination by date of birth.”  Climate crisis: economists ‘grossly undervalue young lives’, warns Stern | Climate crisis | The Guardian

Milton Friedman — an intellectually dishonest peddler of neoliberalism

from Lars Syll

Last Friday, November 9, saw the big “Milton Friedman Centennial” celebration at the University of Chicago’s Becker Friedman Institute for Research in Economics. It was a big day for fans of one of the Founding Fathers of neoliberal/libertarian  free-market ideology …

One episode in Milton Friedman’s career not celebrated (or even acknowledged) at last week’s centennial took place in 1946, the same year Friedman began peddling his pro-business “free market economics” ideology.

According to Congressional hearings on illegal lobbying activities ’46 was the year that Milton Friedman and his U Chicago cohort George Stigler arranged an under-the-table deal with a Washington lobbying executive to pump out covert propaganda for the national real estate lobby in exchange for a hefty payout, the terms of which were never meant to be released to the public.

The arrangement between Friedman and Stigler with the Washington real estate lobbyist was finally revealed during he Buchanan Committee hearings on illegal lobbying activities in 1950. But then it was almost entirely forgotten, including apparently by those celebrating the “Milton Friedman Centennial” last week in Chicago.

Mark Ames

In the U.S. between 1989 and 2020, spending on prescription drugs rose from 0.6 percent of GDP to 2.4 percent of GDP

from Dean Baker

That simple point might have been worth mentioning in an article reporting on efforts by Democrats to rein in prescription drug costs since 1989. The current level of spending of roughly $500 billion a year comes to more than $1,500 for every person in the country. Annual spending on prescription drugs is roughly one and a half times as much as the proposed spending in President Biden’s Build Back Better proposal.

It’s also worth noting that this piece repeatedly refers to Democrats’ efforts to “control” drug prices. This is inaccurate. The government already controls drug prices by granting companies patent monopolies and related protections. As a result, drug companies can charge prices that are often several thousand percent above the free market price. In the absence of these protections, we would likely be spending less than $100 billion a year on drugs, for a saving of $400 billion annually.

The point is that it is not necessary to have the government intervene to bring prices down. We could have the government not intervene, or intervene less, to avoid allowing drug companies to charge such high prices.

World money, world creditocracy

from Radhika Desai and Michael Hudson  

We are now ready to approach the question of how these national monetary orders of capitalism relate to one another internationally. One key contradiction has powered the history of world money under capitalism. On the one hand, money is created by states or those delegated and controlled by them. On the other, there can be no world state under capitalism, and thus no world money. When dominant states nevertheless seek to foist their currency on the world as world money, they add new layers of contradictions and volatilities to the already unstable logic inherent in the geopolitical economy of capitalism (Desai, 2013), the “relations between [its] producing states” as Marx once put it (Marx, [1858]1973, p. 886).

Dominant states and their capitalists seek to externalise onto other states or territories the consequences of their capitalism’s contradictions, such as excess commodities and capital, or the need for cheap labour and raw materials. These efforts victimize subordinated economies, but make rivals of states that are able to contest this domination. When the latter happens, there are confrontations – diplomatic, economic or even military – like those between Britain and her nineteenth century rivals, such as Germany. The result then was a Thirty Years’ Crisis (1914-45), including two world wars and a Great Depression.  Today, we are witnessing rising tensions between the US and countries like China and Russia.

Rich jerks in space

from Dean Baker

As a big fan of the original Star Trek, I have to confess that it was kind of neat to see Captain Kirk actually go into space. But there is a real issue here about the silly games of the super-rich that is worth some thought.

There have been numerous stories and papers about the huge increase in the wealth of the super-rich since the pandemic began. Virtually all of this is due to the run-up in the stock market during this period. Part of that is bounce back, the S&P 500 lost almost one-third of its value between its pre-pandemic peak in February of 2020 and its pandemic trough a month later. If we want to tell a really dramatic story we can start at the pandemic trough and take the rise in the stock market from March 20^th.

But even if we are being serious, there has been an extraordinary runup in the stock market in the last twenty months. The S&P 500 is more than one-third higher than its pre-pandemic peak.

There are several different explanations for this increase. One is simply that low-interest rates generally boost stock prices. Interest rates did plummet during the pandemic shutdown, with the 10-year Treasury rate falling from a bit over 1.8 percent in February of 2020 to lows of under 0.6 percent last summer. As a general rule, lower interest rates will mean higher stock prices.

But this explanation will not go too far: the interest rate on 10-year Treasury bonds is currently over 1.6 percent. The gap between a 1.8 percent pre-pandemic Treasury yield and the current 1.6 percent yield could only explain a small portion of the rise in the stock market.

A second possibility is

Soft-wars

from Blair Fix

Political economist Chris Mouré has a new paper out in the Review of Capital as Power. It’s called ‘Soft-wars’, and it is a fascinating case study of the behavior of big tech.

The story starts in 2011, when Microsoft led a $4.5 billion consortium purchase of Nortel and Novel. Later than year, Google responded by buying Motorola for $12.9 billion. The funny thing is that Google then proceeded to sell off what it had just bought. By 2014, almost nothing was left of Google-owned Motorola. Nothing except patents. And that, Mouré thinks, was the whole point.

Mouré argues that this acquisition war was ultimately a battle over intellectual property. Google and Microsoft were competing to control the mobile market. And the way to do that was not to ‘produce’ anything. It was to command property rights.

The timing of the 2011 patent war, Mouré notes, was no coincidence. It corresponded with the moment when Google’s profits caught up to Microsoft. Figure 1 shows the trend. This is Mouré’s analysis of ‘differential profit’ — the profit of Microsoft and Google measured relative to the average profit of the S&P 500. You can see that Google entered the 21st century as a bit player. But by the 2010s, Google was a behemoth whose profits matched those of Microsoft.

David Card and the minimum wage myth

from Lars Syll

Back in 1992, New Jersey raised the minimum wage by 18 per cent while its neighbour state, Pennsylvania, left its minimum wage unchanged. Unemployment in New Jersey should — according to mainstream economic theory’s competitive model — have increased relative to Pennsylvania. However, when ‘Nobel prize’ winning economist David Card and his colleague Alan Krueger gathered information on fast food restaurants in the two states to check what employment effects the minimum wage really have — using a basic difference-in-differences approach — it turned out that unemployment had actually decreased in New Jersey relative to that in Pennsylvania. Counter to mainstream theory we had an anomalous case of a backward-sloping supply curve.

Lo and behold!

But of course — when facts and theory don’t agree, it’s the facts that have to be wrong …

WEA letter of support for scientists in Mexico

Prosecutors in Mexico seeking arrest warrants for more than 30 scientists

“The World Economic Association –with its 15,000 members-is committed to the development, promotion and diffusion of economic research and knowledge; advocating plurality of thought, method and philosophy. We are convinced that these activities can only be carried out in a context of freedom, exempt of intimidation and harassment. In this spirit we voice our apprehension for  the 31 Mexican scientists and scientific administrators accused by the Mexican government of grave financial crimes. In this regard, we fully subscribe the concerns raised by the International Secretaries of the U.S. National Academies of Sciences, Engineering and Medicine in a public letter to the President of Mexico dated October 6, 2021″

If this is a wage-price spiral, why are profits soaring?

from Dean Baker

That’s the question millions are asking, even if economic reporters are not. The classic story of a wage price spiral is that workers demand higher pay, employers are then forced to pass on higher wages in higher prices, which then leads workers to demand higher pay, repeat.

We are seeing many stories telling us that this is the world we now face. A big problem with that story is the profit share of GDP has actually risen sharply in the last two quarters from already high levels.

How emerging markets hurt poor countries

from C. P. Chandrasekhar and Jayati Ghosh

It is by now well known that three decades of financial globalization have led to massive increases in income and asset inequalities in the United States and Europe. But in the developing world, the effects of financial globalization have been even worse: along with new inequality and instability, the creation of “emerging markets” to support investment in poor countries has undermined development projects and created a relationship in which poor countries supply financial resources to rich ones. This is exactly the opposite of what was meant to happen. Yet this growing disparity in per capita incomes across the global North and South is not a bug in the system but a result of how global financial markets have been allowed to function.

The biggest promise of neoliberal finance, initially pushed by economists such as Ronald McKinnon from the late 1970s onward, was that it would enable greater and more secure access to resources for development for countries deemed too poor to generate enough savings within their own economies to fund necessary investment. To access savings from abroad, they were encouraged to tap into global financial markets.

At the same time, changes in the economies of the developed world in the late 1980s generated mobile finance willing to slosh around the globe in search of higher returns.

Weekend read – Red Giant

from Shimshon Bichler and Jonathan Nitzan

Introduction

In 2012, we published a paper in the Journal of Critical Globalization Studies titled ‘Imperialism and Financialism: The Story of a Nexus’. Our topic was the chameleon-like Marxist notion of imperialism and how its different theories related to finance. Here is the article’s summary:

Over the past century, the nexus of imperialism and financialism has become a major axis of Marxist theory and praxis. Many Marxists consider this nexus to be a prime cause of our worldly ills, but the historical role they ascribe to it has changed dramatically over time. The key change concerns the nature and direction of surplus and liquidity flows. The first incarnation of the nexus, articulated at the turn of the twentieth century, explained the imperialist scramble for colonies to which finance capital could export its excessive surplus. The next version posited a neo-imperial world of monopoly capitalism where the core’s surplus is absorbed domestically, sucked into a black hole of military spending and financial intermediation. The third script postulated a World System where surplus is imported from the dependent periphery into the financial core. And the most recent edition explains the hollowing out of the U.S. core, a red giant that has already burned much of its own productive fuel and is now trying to financialize the rest of the world in order to use the system’s external liquidity. The paper outlines this chameleon-like transformation, assesses what is left of the nexus and asks whether it is worth keeping. (p. 42)

In the second part of the paper, we looked a little closer at the red-giant argument. Specifically, we wanted to gauge the degree to which U.S. capital had declined and examine whether this decline indeed forced the rest of the world to financialize. And what we found surprised us: the ‘financial sector’ did seem to become more important everywhere, but its rise was led not by the United States, but by the rest of the world!

Our article was published almost a decade ago, so we though it would be interesting to update our figures and see what has changed, if anything.