India’s central bank launches new campaign against cash

from Norbert Häring

India’s central bank will withdraw the largest banknote from circulation. The then largest note is only worth about as much as the smallest in the euro area. The move is intended to force people to use electronic money instead of cash. With this, they can be better monitored and controlled and the financial and IT industries get their percentages and data with every purchase. India, as a favorite guinea pig of the global cash abolitionists, often provides the blueprint for what is in store for us.

The Reserve Bank of India announced on 20 May that it will withdraw the 2000 rupee note, worth the equivalent of almost 23 euros, from circulation by 30 September. The new largest banknote will then be the 500 rupee note worth about 5.7 euros.

Clearly, this makes the use of cash very unwieldy and forces many traders and buyers to switch to digital money. By using digital money, a bank account becomes a logbook of a bank customer’s life. This helps to monitor and control people by use of computer algorithms. Sanctions can be imposed in the event of unacceptable or simply suspicious behaviour.

Why Krugman and Stiglitz are no real alternatives to mainstream economics

from Lars Syll

Little in the discipline has changed in the wake of the crisis. Mirowski thinks that this is at least in part a result of the impotence of the loyal opposition — those economists such as Joseph Stiglitz or Paul Krugman who attempt to oppose the more viciously neoliberal articulations of economic theory from within the camp of neoclassical economics. Though Krugman and Stiglitz have attacked concepts like the efficient markets hypothesis … Mirowski argues that their attempt to do so while retaining the basic theoretical architecture of neoclassicism has rendered them doubly ineffective.

First, their adoption of the battery of assumptions that accompany most neoclassical theorizing — about representative agents, treating information like any other commodity, and so on — make it nearly impossible to conclusively rebut arguments like the efficient markets hypothesis. Instead, they end up tinkering with it, introducing a nuance here or a qualification there … Stiglitz’s and Krugman’s arguments, while receiving circulation through the popular press, utterly fail to transform the discipline.

Paul Heideman

Despite all their radical rhetoric, Krugman and Stiglitz are — where it really counts — nothing but die-hard mainstream economists, just like Milton Friedman, Robert Lucas or Greg Mankiw.

The only economic analysis that Krugman and Stiglitz  — like other mainstream economists — accept is the one that takes place within the analytic-formalistic modelling strategy that makes up the core of mainstream economics.

In Thrall to the Infallible Hand

from Duncan Austin

While Adam Smith’s Invisible Hand has many beneficial attributes, somewhere along the way the Invisible Hand was recast as the Infallible Hand, seeding today’s widespread faith that markets can solve large-scale social and ecological problems they are ill matched for.

In the formidable shadow of the Infallible Hand, non-market solutions – policy, regulatory, cultural, behavioural – are often deemed ‘impractical’, so remain under-utilized. ‘Green growth’, ‘sustainable profit’ ‘shared value’ etc. are the solutions of the day.

Yet, if a market system denies its external costs and consequences – as contemporary markets do in spades – then the Hand is not Infallible at all, but rather it is powerfully, ubiquitously, and possibly existentially very fallible indeed.

Excess faith in markets is starting to feel like a major wrong turn of human cognition – indeed, a trap that seems very difficult to reverse out of.

Irrational Exuberance — Robert Shiller’s modern classic

Lars Syll

At the beginning of the year 2000, a book titled Irrational Exuberance was published. The American economics professor and Nobel laureate Robert Shiller warned that the extensive deregulation in the financial market that had taken place since the Thatcher-Reagan era had led to a rapid credit expansion. Banks and financial institutions saw a skyrocketing increase in lending, and the pursuit of gaining larger market shares led to neglecting creditworthiness checks and accepting poor customer relationships. Above all, the values of IT stocks were disproportionately high. It would inevitably lead to a financial crisis.

Shiller was proven right. Less than two months after the book was published, the usual happened. The bubble burst, and the financial market crisis became a reality.

Because human memory is short, new concerns reappeared after a few years. The crisis that the American economy once again found itself in had its origins in the speculative bubble that developed in the American housing market between 1997 and 2006. Despite falling interest rates and construction costs, housing prices rose by an average of 85 per cent over the ten years when the bubble was inflated.

The underlying pattern is the same in almost all financial crises. For some reason, a shift occurs (war, innovations, new rules, and more) in the economic cycle that leads to changes in banks’ and companies’ profit opportunities. Demand and prices rise, pulling more and more parts of the economy into a kind of euphoria. More and more people get involved, and soon speculative frenzy – whether it’s about tulip bulbs, properties, or mortgages – becomes a reality. Sooner or later, someone sells to cash in their profits, triggering a rush for liquidity. It’s time to jump off the carousel and convert securities and other assets into cash. A financial emergency arises and spreads. Prices begin to decline, bankruptcies increase, and the crisis accelerates, turning into panic.

To prevent the final crash, credit is tightened, and calls for a lender of last resort who can guarantee the supply of the demanded cash and restore confidence arise. If that fails, the crash becomes a reality.

The Religion of Economics

from Asad Zaman 

Maeshiro (2016) in “The Capitalist Religion and the Production of Idols“, writes that Capital is the God, and Capitalism is the religion of modern society. Gauthier’s review of Nelson’s Economics As Religion states that “economics became the modern theology that replaced traditional theology as the set of doctrines that give meaning to our social reality and hope to our endeavors to improving our lives … (Nelson analyses) the works of the major twentieth century American economists to show how professional economists are equivalent to the priesthood of this religion of economics which justify, disseminate and legitimize in scientific discourse, normative foundations required for a rapidly growing modern economy”. These articles provide numerous additional sources which assert that modern Economics is a religion. Nonetheless, Economists vehemently deny this charge, and argue that their discipline consists purely of positive and descriptive statements about how modern economies function, without any value judgments.  We can achieve substantial clarity about this dispute by studying the history of the origins of economic theory.

Over a century of enormously destructive religious wars in Europe convinced everyone that social theory could not be built on religious foundations. The scholastic approach, building on the Bible, was rejected, and the entire structure of the social sciences was rebuilt from scratch. Because of urgent need, political science was the first of these secular social sciences to emerge. In Religion and the Rise of Capitalism, Tawney describes the replacement of religion by reason as follows: read more

Economic methodology — Lawson, Mäki, and Syll

from Lars Syll

We are all realists and we all — Mäki, Cartwright, and I — self-consciously present ourselves as such. The most obvious research-guiding commonality, perhaps, is that we do all look at the ontological presuppositions of economics or economists.

Where we part company, I believe, is that I want to go much further. I guess I would see their work as primarily analytical and my own as more critically constructive or dialectical. My goal is less the clarification of what economists are doing and presupposing as seeking to change the orientation of modern economics … Specifically, I have been much more prepared than the other two to criticise the ontological presuppositions of economists—at least publically. I think Mäki is probably the most guarded. I think too he is the least critical, at least of the state of modern economics …

One feature of Mäki’s work that I am not overly convinced by, but which he seems to value, is his method of theoretical isolation (Mäki 1992). If he is advocating it as a method for social scientific research, I doubt it will be found to have much relevance—for reasons I discuss in Economics and reality (Lawson 1997). But if he is just saying that the most charitable way of interpreting mainstream economists is that they are acting on this method, then fine. Sometimes, though, he seems to imply more …

I cannot get enthused by Mäki’s concern to see what can be justified in contemporary formalistic modelling endeavours. The insights, where they exist, seem so obvious, circumscribed, and tagged on anyway …

As I view things, anyway, a real difference between Mäki and me is that he is far less, or less openly, critical of the state and practices of modern economics … Mäki seems more inclined to accept mainstream economic contributions as largely successful, or anyway uncritically. I certainly do not think we can accept mainstream contributions as successful, and so I proceed somewhat differently …

So if there is a difference here it is that Mäki more often starts out from mainstream academic economic analyses accepted rather uncritically, whilst I prefer to start from those everyday practices widely regarded as successful.

Tony Lawson

Tony Lawson and Uskali Mäki are both highly influential contemporary students of economic methodology and philosophy. Yours truly has learned a lot from both of them.

Something about prices II. The introduction of Multi Component Pricing for milk…

I’m tinkering with the idea of a kind of periodic table for prices. Below, a very rough sketch of what I have in mind relating to administered prices and market prices as well as the sectors of the national accounts (cost prices, shadow prices etcetera have to be added).

Gardiner Means defined the difference between market and administered prices (quoted in Gu (2012) on p. 13):

“In an engineering economy prices are fixed by administrative action for periods of time. Price is determined before a transaction occurs. In a trading economy prices are developed in the process of trading andprice is not determined until the transaction occurs. In an engineering economy supply and demand never equate except by coincidence“.

Earlier I discussed how the Dutch central bank introduced the ‘risk free interest rate structure’ for Dutch pension funds (an administered price and covered by the yellow triangle in figure 1). Today I’ll discuss a company-company administered price: the ‘Multi Component’ farm price of milk (covered by the pink triangle).

Figure 1. The Administered Prices/Market Prices matrix for the institutional sectors of the National Accounts 

We can do better with a thousand years

Review of Power and Progress, by Daron Acemoglu and Simon Johnson

from Dean Baker

When I saw that two of the country’s most prominent economists wrote a book on “our 1000-year struggle over technology and prosperity,” I expected a lot. I was disappointed. To be clear, there is much here to like and I’m sure that most readers will get much from it, as I did. But, the book fails to follow through adequately on the key point in its analysis, which is that the gains from technology are a matter of struggle, not an outcome given by the technology itself.

I’ll start with the positives. The book gives a cursory, but useful, account of the major developments in technology going back more than a thousand years. Some of their discussion deals with the origins of agriculture, an innovation that goes back many thousands of years. However, most of the book does describe events in the promised thousand-year horizon.

It points out that there were important technological innovations in the Middle Ages, which did allow for very modest gains in productivity and living standards across much of Europe until the 13^th or 14^th century. At that point, the rate of increase accelerated, although it was still much slower than in later centuries.

One of the points it makes, which was underappreciated (at least by me), was the extent to which the gains in this period were siphoned off by the church.

Robert Lucas (1937-2023)

from Lars Syll

Economic theory, like anthropology, ‘works’ by studying societies which are in some relevant sense simpler or more primitive than our own, in the hope either that relations that are important but hidden in our society will be laid bare in simpler ones, or that concrete evidence can be discovered for possibilities which are open to us which are without precedent in our own history. Unlike anthropologists, however, economists simply invent the primitive societies we study, a practice which frees us from limiting ourselves to societies which can be physically visited as sparing us the discomforts of long stays among savages. This method of society-invention is the source of the utopian character of economics; and of the mix of distrust and envy with which we are viewed by our fellow social scientists. The point of studying wholly fictional, rather than actual societies, is that it is relatively inexpensive to subject them to external forces of various types and observe the way they react. If, subjected to forces similar to those acting on actual societies, the artificial society reacts in a similar way, we gain confidence that there are useable connections between the invented society and the one we really care about.

Robert Lucas

Although plenty of more or less hagiographic obituaries have acknowledged Lucas ‘brilliance’ and ‘influence’, I find it more appropriate to just honestly address the reasons his whole project to reform macroeconomics was such a blatant failure.

Neither yours truly, nor anthropologists, will recognise anything in Lucas’ description of economic theory even remotely reminiscent of practices actually used in real sciences, this quote still gives a very good picture of Lucas’ methodology.

A student among the econ: Seeing through mathemagics

from Asad Zaman

In my article on “Education of an Economist”, I have explained how I gradually came to realize that all I had learnt during my Ph.D. training at Stanford University was false. I would like to make this more specific and concrete, by providing some examples. A leading example is a paper on Power and Taxes which I studied as a graduate student. But, let me start from the beginning.

Leijonhufvud, in his classic “Life Among the Econ” explains how the priestly caste of the Math-Econ is the most admired and revered among the Econ. With a math degree from MIT, I was eager to join the ranks of the Mathematical Economists, the most prestigious among the alternatives facing me. But a few experiences soured me on this idea. I ended up with a degree in Econometrics, which also makes heavy use of mathematics, under the illusion that this may be closer to reality. I learned much later that all the theory I studied at Stanford pertains to a fantasy world created by economists, which has no relationship to the real world. read more

Weekend read – Minsky and Keynes show the way out of the crisis

from Lars Syll

American economist Hyman Minsky described capitalism as a “two price” system. On one side are asset prices—both financial, like government or corporate bonds, and physical like residential or commercial property. On the other, there are consumer prices—goods and services that determine current output and consumer price inflation.

In the contemporary global economy, asset prices are much more sensitive to interest rate adjustments than consumer prices. The present value of assets is determined by expected flows of future returns, which are in turn estimated using today’s interest rates: a five-year bond that pays a fixed 2 percent rate of interest would sell at a lower price than it was purchased for following interest rate hikes. In this way, the prices of fixed income assets and market interest rates are inversely related: tighter monetary policy necessarily results in lower asset values …

The recent turmoil in financial markets has shown that the main tool central banks use to try to achieve price stability can destabilize the financial system. Monetary policy makers need to recognize that capitalist economies have two price systems which need different medicines. To marry modern-day price and financial stability requires greater coordination between fiscal, monetary, and wider industrial policy. Some examples of this could be seen in the response to the Covid-19 pandemic, where policies created fiscal space for massive investment in health care and the maintenance of jobs, and liquidity to support particular sectors. This more imaginative policymaking now needs to be scaled up to meet the multiple crises facing today’s world.

Josh Ryan-Collins

As all students of economics know, time is limited. Given that, there have to be better ways to optimize its utilization than spending hours and hours working through or constructing irrelevant economic models. I rather recommend my students allocate some time to study great forerunners like Keynes and Minsky, helping them to construct better and more relevant economic models — models that really help us to explain and understand reality.

The representative consumer has to die

Recently, Robert Lucas, who was called an economist, died. This is not about him, but about his kind of economics as tweets and obituaries show that it is not yet generally understood what kind of science the neoclassical macro-economist like him produced. Their most egregious failure: after decades of work, they do not even have a shimmer of anything which could pass for a neoclassical way to estimate the macro economy, even when their ideas are squarely at odds with the macro economy as we measure it. Theory without measurement.

Lucas used – like many others – the concept of the representative consumer. A macro economic model which presupposes that the economy consists of 1 person, A Robinson Crusoe model – or fantasy? Which is faulty, as the essence of a macro economy – its foundational essence, its sine qua non, its deepest core – is that a macro-economy consists of multiple persons who are interrelated by economic, political and legal ties. And by monetary ties, too. Money is undefined in the 1 person economy of much neoclassical macro. I now: nowadays we have HANK models, Heterogenous Agent models which have more than 1 consumer/producer, like: capitalists owning all the capital used to employ others and workers only owning capital they use themselves, to give it a Marxist twist. That’s better – but not yet good enough.

What’s special about macro-economics? Macro economics studies interpersonal concepts like:

Decolonization: a necessary first step

from Asad Zaman

This is part 3 of a talk on Current Economic Crisis in Pakistan and Solutions, from an Islamic Perspective. A summary of the first two parts is given below. This third part explains that colonization requires the assent of the colonized, which is achieved by an educational system which teaches the inherent superiority of the colonizers, and the inferiority of the colonized. To solve the problems created by colonial institutions meant for extraction of resources, we must first decolonize our minds. In this process, learning to see through economic theories which keep us dependent is a necessary first step.  Read more

The deadly sin of statistical reification

from Lars Syll

People sometimes speak as if random variables “behave” in a certain way, as if they have a life of their own. Thus “X is normally distributed”, “W follows a gamma”, “The underlying distribution behind y is binomial”, and so on. To behave is to act, to be caused, to react. Somehow, it is thought, these distributions are causes. This is the Deadly Sin of Reification, perhaps caused by the beauty of the mathematics where, due to some mental abstraction, the equations undergo biogenesis. The behavior of these “random” creatures is expressed in language about “distributions.” We hear, “Many things are normally (gamma, Weibull, etc. etc.) distributed”, “Height is normally distributed”, “Y is binomial”, “Independent, identically distributed random variables”.

There is no such thing as a “true” distribution in any ontological sense. Examples abound. The temptation here is magical thinking. Strictly and without qualification, to say a thing is “distributed as” is to assume murky causes are at work, pushing variables this way and that knowing they are “part of” some mathematician’s probability distribution.

To say a thing “has” a distribution is false. The only thing we are privileged to say is things like this: “Give this-and-such set of premises, the probability X takes this value equals that”, where “that” is calculated via a probability implied by the premises … Probability is a matter of ascribable or quantifiable uncertainty, a logical relation between accepted premises and some specified proposition, and nothing more.

William Briggs

In econometrics one often gets the feeling that many of its practitioners think of it as a kind of automatic inferential machine: input data and out comes casual knowledge. Like pulling a rabbit from a hat. Great — but first you have to put the rabbit in the hat. And this is where assumptions about distributions and probabilities come into the picture.

The “Which way is up?” problem in economics

from Dean Baker

Economics famously suffers from a “which way is up?” problem. The issue is whether an economy is suffering from too much demand or too little demand. On its face, that seems like it should be a very simple question, but in fact it can be complicated and people often get it wrong, with very serious consequences.

The Great Depression was the classic too little demand story. We had millions of people out of work through the decade of the 1930s because there was not enough demand in the economy. With the benefit of hindsight, or a good Keynesian understanding of the economy, this demand problem is very clear, but it did not seem that way to many people living at the time.

Most immediately, people saw families who didn’t have food, adequate clothing, or housing. That looks a lot like a problem of having too little of the things that are necessary to meet society’s needs.

But the reality was the opposite. We know this for certain because once the government spent lots of money, the economy was able to meet these needs and considerably more.

Unfortunately, it took World War II to provide the political will to get the government to spend the money needed to get the economy back to full employment. But, if we had the political will to spend the money, we could have ended the depression in 1931 instead of 1941. The key point was the need to spend lots of money, it didn’t have to be spending on a war. (This is why all the talk of a Second Great Depression around the 2008-09 financial crisis is so silly. We know how to spend money. That’s all we need to do to avoid a Second Great Depression.)

Your new and improved digital currency is brought to you by: The World Economic Forum! (whether you want it or not)

from Norbert Häring

The lobby of the largest international corporations has networked central banks working on digital central bank currencies and published a “toolkit” to guide the decision making process. Central banks are actually using this guidebook. This might help to explain why the interests of citizens count for so little in this matter, while those of financial corporations are promoted without restraint.

The Central Bank of Kazakhstan published a report in July 2022 that developed the criteria for deciding on the design of the planned digital tenge. The tenge is the national currency of Kazakhstan. At the heart of the report is the conceptual groundwork of two guides from the International Monetary Fund and the World Economic Forum, the lobby of the 1,000 largest international corporations. The World Economic Forum’s guide is the one which is quoted more extensively.

Reading this report from Kazakhstan – not exactly a mass medium – was the first time I read about this role of the World Economic Forum in the development of central bank digital currencies (CBDC). This is despite the fact that I follow quite closely what is going on at the World Economic Forum and the central banks. They don’t seem to want to tell us about it.

If one assumes, as I do, that the interests of the largest international corporations do not always coincide with those of the populations, one is inclined to consider it problematic when central banks let a corporate lobby explain to them how they should do their work.

Why MMT is needed

from Lars Syll

Mainstream economists do not believe that “countries that borrow in their own currency should not worry about government deficits because they can always create money to finance their debt.” Looking at the result from a survey, not a single economist agreed with that statement. If these economists had been right, we would see lots of governments running out of money in 2020 and 2021. After all, tax revenues collapsed, government spending was increased and accordingly public deficits and public debts skyrocketed. Surely, the Greek government, surpassing 200 percent of public debt-to-GDP in 2021, would be in for a repeat of the Euro crisis? Nothing of that kind happened. As we all know by now, a government cannot run out of its own money for technical reasons … In the Eurozone, all national governments made their payments on time — all of them. This needs to be explained.

The explanations of mainstream economists seem unconvincing. Krugman (2021), for instance, writes: “But is the Fed really financing the budget deficit? Not really. At a fundamental level, households are financing the deficit: the funds being borrowed by the government are coming out of the huge savings undertaken by families saving much of their income in an environment where much of their usual consumption hasn’t felt safe.” The problem with this is that obviously the Fed does not borrow household savings (or rather saving, since this is about flows). It sells sovereign securities to banks only.

Dirk Ehnts

Few issues in politics and economics are nowadays more discussed — and less understood — than public debt.

Weekend read – Bizarre methodology blinds us to solutions

from Asad Zaman

“A University Economics degree today is more of a lobotomy than an education” – Steve Keen.

The truth-sensing section of the brain is lobotomized by Friedman’s methodology, according to which wildly inaccurate assumptions lead to the most significant theoretical advances. But also, complete omission of power and class struggle makes it impossible to find solutions to our economic problems.

Even though the current economic crisis in Pakistan has a simple cause, and an equally simple solution, policy debate in Pakistan focuses almost entirely on irrelevant red herrings! Why? Because Economic Theory puts blindfolds on our eyes, and makes it impossible to see the problem, or the solutions.  To remove these blindfolds, we must learn to situate economic theories within their historical context. Applying this principle, we study the historical origins of the Washington Consensus policies currently being widely discussed throughout Pakistan, as the solutions to our economic crisis:

Something about prices I. ‘Risk free’ rates as administered prices in the sense of Gardiner Means.

On this blog, I’ve stated that economics needs a ‘periodic table of prices’. There are many different prices beyond ‘market prices’: Cost prices, Administrated prices, Government prices, Factor prices and whatever. We need a grid which enables a classification. As I, clearly, do not seem to be your average inspiring charismatic direction setting economists, nobody followed up on my statements…. With this blog, I want to start my journey towards the framework, to boldly go from where people like Frederic Lee, Philip Pilkinton and Gyun Cheol Gu have brought us. More about them in later blogs. Today (and in two blogs to follow): the prices which I encounter in my own research.

I’ll focus on three topics: multi factor pricing of milk, risk free (not) interest rates and cost-, market, insurance and liquidation prices of hay. What kind of prices did I encounter? Just market prices – or is there more to exchange that just markets? To answer this, we first have to define market prices.

Google AI expert warns of massive uptick in productivity growth: No problems with Social Security

from Dean Baker

We have long known that people in policy debates have difficulty with arithmetic and basic logic. We got yet another example today in the New York Times.

The NYT profiled Geoffrey Hinton, who recently resigned as head of AI technology at Google. The piece identified him as “the godfather of AI.” The piece reports on Hinton’s concerns about the risks of AI, one of which is its implications for the job market.

“He is also worried that A.I. technologies will in time upend the job market. Today, chatbots like ChatGPT tend to complement human workers, but they could replace paralegals, personal assistants, translators and others who handle rote tasks. ‘It takes away the drudge work,’ he said. ‘It might take away more than that.’”

The implication of this paragraph is that AI will lead to a massive uptick in productivity growth. That would be great news from the standpoint of the economic problems that have been featured prominently in public debates in recent years.

Most immediately, soaring productivity would hugely reduce the risks of inflation. Costs would plummet as fewer workers would be needed in large sectors of the economy, which presumably would mean downward pressure on prices as well. (Prices have generally followed costs. Most of the upward redistribution of the last four decades has been within the wage distribution, not from labor to capital.)

A massive surge in productivity would also mean that we don’t have to worry at all about the Social Security “crisis.”