from Lars Syll
I came to think about this dictum when reading Thomas Piketty’s Capital in the Twenty-First Century.
Piketty refuses to use the term ‘human capital’ in his inequality analysis.
I think there are many good reasons not to include ‘human capital’ in economic analyses. Let me just give one — perhaps analytically the most important one — reason and elaborate a little on that.
This weeks ´The Economist´ welcomes the election of a center right president in Argentina, mainly because this enhances the chances that Argentina will become part of the international capital market, again. Which, supposes The Economists, will not necessarily work wonders (it carefully does not state that) but which seems to be a kind of moral imperative for civilized nations. The Economist is wrong about this last idea.
- Josh Mason dissects a comparable article from the Financial times (below, an excerpt)
- Richard Werner dissects comparable nonsense from scientific articles and many, many famous economists, stating (in a somewhat Schumpeterian way) that when a country has control over its fiat money banking system, which is necessarily the case with fiat money national banking systems, countries do not need foreign investment to finance domestic investments. Banks can do it by creating credit (short-term day-to-day financing of international trade flows is another matter, M.K.).
- A whole bunch of economists show in a ´consensus narrative´ piece on Voxeu that the kind of capital flows (and sudden stops!) enabled by the not yet a national state Euro Area contributed mightily to the financial and especially the Euro crisis Read more…
- Airbnb is not new. In a general sense, it is just a another broker. In a practical sense, I´ve been using comparable (and cheaper and more dependable) sites to book accommodation for at least ten years. Look here, for instance. I really do not understand what all the fuss is about. The same for ´private´ taxicabs. At least in my language these even have a name, which has to my knowledge been in use for a long time (´snorders´).
- And these are of course very normal market transactions, they have nothing to do with a new spirit of sharing. Remember that Immanuel Rath (the teacher from the 1930 movie ´Der Blaue Engel´) lived in a room rented from a widow – ´board and lodging´ is pretty old. I´m surely not against such transactions. To the contrary! But it´s not new and they are normal market transactions.
- Which reminds me of the real difference between ´sharing´ and the market. Market prices are always known in advance, before a transaction is settled. I remember going to the cattle market in Purmerend, with my grandfather, and watching the cattle trade (full disclosure: also the first time I entered a genuine pub). I remember going to the vegetable auction in Purmerend, with my uncle Jan, who had an independent grocery-small supermarket. This situation (negotiation about prices and prices which are known before choices are made) enables at least in theory the kind or rational action neoclassical economists have sanctified (and which is ravaged by marketeers…). But such ex ante prices do not exist in the real sharing economy…
- In the sharing economy (in fact: economies, as there are many different species of sharing economies) such prices are absent. Transactions do take place. But there is no price. People for instance ´pay´ by accepting a moral obligation. When you help me when I´m moving to another house, you expect me to help you when you move. But when the time comes I might say ´no´ (for instance because I´m sick). In such instances economists can calculate shadow prices – but these do not enable, not even in theory, the kind of rational calculation which (at least in theory) is enabled by market prices. Mind: I do not say that people do not calculate or have no goals in the case of market transactions, but I do reject the hyper rationality, the universal knowledge and utter consistency of the neoclassical homo economicus.
- And the sharing economy is of course not just about helping somebody out. When we look at ´gift exchange´ we encounter comparable moral obligations, while ´exchanging´ women by families can, in some cultures and according to Lévi Strauss, cement alliances (sounds rude and it is rude, but just think of the marriages of the Habsburgs).
- And we have of course the exchange of values coupled to the exchange of tokens which by western observers are often mistakenly understood as a kind of money. An example is the wampum, which was used to transfer power and the like, like Europeans crown jewels.
- The point: there are scores of systems of non market exchange. And we might do well to enhance some of these systems in some situations (a universal 70+ EU pension, anyone?). But do not mistake the growth of internet based systems of market exchange for non-market exchange, even when these internet based systems sometimes enhance the efficiency of markets (look for instance at this internet based cattle market). But, of course, efficiency is not everything (pesonal and unimportant: the picture is of café Vlaar in Purmerend, which indeed might have been the pub of my memory, though I remember looking into instead of looking to the windows and it´s about a decade earlier. And in my memory the pub was even more smoke filled. The internet is amazing).
Can we save enough for out future pensions? No, as there is not enough capital…
A) Superficial inspection of the graph above might suggest that Dutch pensions are safe. Aren´t the Dutch pension savings as a % of GDP the highest of the entire EU? And didn´t they increase quite a bit during the last two year, despite the fact that a considerable chunk of the baby boom generation number of baby boom generation already has retired? But they are not save. The pension age is increasing with four months a year and will pretty soon reach 68 and in all probability 69, making a cut of 4 years or almost 20% of remaining years after 65 (men) and an almost 35% cut of reaming healthy years after 65… At the same time (in fact: coming April) premiums will be increased, again. Why is this happening when pensions savings are so high and pension funds managed a hefty 8% return on investments between 1990 and 2015? The answer is simple. Margins are increased. The Dutch (more precisely: the Dutch central bank who for some undemocratic reason can enact such laws) now want 130% covering of future liabilities, the interest rate used to estimate future return on investment (technically the present value of future liabilities) is getting increasingly lower and for some reason pension funds are not providing cheap but macroprudential mortgages with at least a positive interest rate to the people but are investing in bonds with a negative yield therewith financing the German and French paygo pensions systems. Be that as it may – even pension wealth of more than 200% of GDP is not enough to fund the Dutch no defined contribution no defined benefit pensions.
from Lars Syll
The increasing use of natural and quasi-natural experiments in economics during the last couple of decades has led some economists to triumphantly declare it as a major step on a recent path toward empirics, where instead of being a deductive philosophy, economics is now increasingly becoming an inductive science.
In their plaidoyer for this view, the work of Joshua Angrist and Jörn-Steffen Pischke is often apostrophized, so lets start with one of their later books and see if there is any real reason to share the optimism on this ’empirical turn’ in economics.
In their new book, Mastering ‘Metrics: The Path from Cause to Effect, Angrist and Pischke write: Read more…
from David Ruccio
An increasing number of student loan borrowers are struggling to repay their education debt as outstanding student loan balances nationwide increased by $13 billion in the third quarter of 2015, according to the New York Federal Reserve.
from Lars Syll
Lynn Parramore: It seems obvious that both fundamentals and psychology matter. Why haven’t economists developed an approach to modeling stock-price movements that incorporates both?
Roman Frydman: It took a while to realize that the reason is relatively straightforward. Economists have relied on models that assume away unforeseeable change. As different as they are, rational expectations and behavioral-finance models represent the market with what mathematicians call a probability distribution – a rule that specifies in advance the chances of absolutely everything that will ever happen.
In a world in which nothing unforeseen ever happened, rational individuals could compute precisely whatever they had to know about the future to make profit-maximizing decisions. Presuming that they do not fully rely on such computations and resort to psychology would mean that they forego profit opportunities.
Reading this post (below) from Erwan Mahé makes one ponder if the people at the head of the ECB have understood that we’re fighting for the future of Europe… and not just of the banks and the well to do.
From: Erwan Mahé (guest post)
“His references to core inflation and wage growth represent another semantic shift toward the dual mandate of the Fed, which also argues for a further monetary easing”.
The consensus of investors on what sort of moves the ECB may take following its next meeting on 3 December seems to dovetail with the opinion expressed in my last Thaler’s Corner
… “a 10-bps cut in the deposit rate, bringing it to -0.30%, and a 6-month extension of the QE to March 2017. And we cannot exclude additional measures like ending the 25% QE limit on triple-A issues and a corporate QE programme.”
from Dean Baker
As the world prepares for another round of climate negotiations, it is worth repeating a few simple points. First, it is becoming increasingly obvious that the world is already paying a substantial price for global warming.
Extreme weather events will never come with a stamp that says “caused by global warming.” We know that global warming will change weather patterns in ways that are not entirely predictable. That means that we will see unusual weather events where global warming was likely a factor, but we can never know for certain.
One of the leading candidates in this respect is the extreme drought that afflicted Syria in the last decade, destroying much of its agriculture and leading to a mass migration to its cities. This migration was likely a factor in the unrest that had led the country’s civil war. Syria’s civil war in turn has led to hundreds of thousands of deaths, the displacement of millions, and of course the rise of ISIS.
from Lars Syll
By the early 1980s it was already common knowledge among people I hung out with that the only way to get non-crazy macroeconomics published was to wrap sensible assumptions about output and employment in something else, something that involved rational expectations and intertemporal stuff and made the paper respectable. And yes, that was conscious knowledge, which shaped the kinds of papers we wrote.
More or less says it all, doesn’t it?
And for those of you who do not want to play according these sickening hypocritical rules — well, here’s one good alternative.
from David Ruccio
What are U.S. corporations doing with all the surplus they’re managing to rake in? Well, they’re not investing it. Instead, they’re paying it out to shareholders and upper-management, buying back their stock and expanding their portfolios of financial assets, and hoarding the rest in cash. The net effect is to dampen the rate of economic growth and the creation of new jobs. Read more…
This book describes the many wrong turns that the social sciences have taken to arrive at their current dismal state. Most of the space will be devoted to my own field of economics, however political science, particularly the theory of collective choice will also be treated at some length. Though I agree with much of the criticism of contemporary economics, particularly macroeconomics that comes from the Left of the political spectrum, this and the following two books differ from the conventional critique in fundamental ways.
The first is that I define each wrong turn by contrasting it with what my view would have been the correct turn in the sense that it would have advanced the field in a positive direction. Thus unlike much contemporary criticism, mine is not purely negative – the negative is always contrasted with a possible positive.
Secondly, I do not concentrate on the past several decades that saw the rise of neoclassical economics along with neoliberal economic policies. Instead, I begin with the rise of classical economics and the works of William Petty and Adam Smith. The rejection of all economic theory that is, or has been in some sense mainstream, is in my view an act of non-constructive nihilism.
The topic of this book is how economics came to its present state. What were the valid ideas discovered along the way and why were they lost? What motivated the wrong turns along the way? What role did ideologies of various kinds play in this process? The serious student will find many ideas to challenge him.
from Peter Radford
I remember sitting at business school what seems a lifetime ago and absorbing with enthusiasm the latest financial trickery. It seemed so much more rigorous than all the other stuff. I felt as if I was being taught something incisive, something with intellectual heft, something that was not subject to the whim of subjective belief, but was, rather, grounded in solid theory.
Boy, was I wrong.
Somewhere in the middle of all that mumbo jumbo was the notion of shareholder value. Here we were being taught that the only purpose of a corporation was to return the most it could to its shareholders. That most big businesses were called a ‘public’ corporation seems an irrelevancy because the word ‘public’ was simply a device to distinguish it from the alternative: a ‘private’ corporation, which was a different animal altogether.
But that word public actually has a deep meaning. Especially when we consider the near total lack of ownership that the presumed owners actually possess.
- Via Voxeu Jacques Melitz provides us with a more precise dating and geography of the origin of coins. My take away: production of coins started around 630 BC, coins spread much slower than I thought (partly because denominations were large) and especially hubs of trade were late to adopt coins as they had other means of payment. It was very much a state led innovation used, among other things, to organize armies.
- Jan Lucassen tells us, for a much later period (Netherlands, 1200-1940), how the state (again) solved the large denominations problem by producing ‘small change’. These small coins facilitated petty trade as well as the labour market. As producing small coins was not profitable, producing them could not be left to the market. This ‘coinisation’ of petty trade is nowadays called ‘deep monetization’ – mind that in the latter part of this period most trade was petty trade. Interesting fact: the Dutch VOC exported a billion of such coins to ‘The East’. Also interesting: different kinds of trade used different kinds of money – at the end of the eighteenth century there may have been as many as 14 of such ‘spheres’, all with their own markets and institutions and the like. Small change seems to have been much less of a problem in the Netherlands than in the UK.
- I’m working on the ‘loanable funds’ market in Friesland, 1537-1580. I’ve been reading a bit and, also using the data on Friesland which Paul Borghaerts unearthed and which Paul and I are starting to analyse, the next stylized patterns about pre-banking era rural lending and borrowing seem to emerge (at this moment: hypotheses!):
from David Ruccio
You can’t, of course, kill a unicorn. Because it isn’t real. It’s just a mythical creature.
Except, it seems, in the world of venture capital. There, as I’ve come to learn from Rupert Neate [ht: ja], unicorns abound. And they just may represent the beginning of the end of the current tech bubble.
On Voxeu an impressive number of economists are quite alarmed at the political and social fall out of the present situation and argue that the Financial Crisis and the Euro Crisis were not government debt crises: “Importantly, the EZ Crisis should not be thought of as a government debt crisis in its origin – even though it evolved into one. Apart from Greece, the nations that ended up with bailouts were not those with the highest debt-to-GDP ratios. Belgium and Italy sailed into the Crisis with public debts of about 100% of GDP and yet did not end up with Troika programmes; Ireland and Spain, with ratios under 40%, needed bailouts. The real culprits were the large intra-EZ capital flows that emerged in the decade before the Crisis. These imbalances baked problems into the EZ ‘cake’ that would explode in the 2010s. All the nations stricken by the Crisis were running current account deficits. None of those running current account surpluses were hit.
Mario Draghi states that QE is a success as borrowing rates for periphery non financial companies have come down quite a bit (which, though it will not by itself be a solution, is a very good thing). And I had to read this twice: “an increase in core services inflation – today close to an all-time minimum – will depend on rising nominal wage growth.” Read more…
from Lars Syll
Stylized facts are close kin of ceteris paribus laws. They are ‘broad generalizations true in essence, though perhaps not in detail’. They play a major role in economics, constituting explananda that economic models are required to explain. Models of economic growth, for example, are supposed to explain the (stylized) fact that the profit rate is constant. The unvarnished fact of course is that profit rates are not constant. All sorts of non-economic factors — e.g., war, pestilence, drought, political chicanery — interfere. Manifestly, stylized facts are not (what philosophers would call) facts, for the simple reason that they do not actually obtain. It might seem then that economics takes itself to be required to explain why known falsehoods are true. (Voodoo economics, indeed!) This can’t be correct. Rather, economics is committed to the view that the claims it recognizes as stylized facts are in the right neighborhood, and that their being in the right neighborhood is something economic models should account for. The models may show them to be good approximations in all cases, or where deviations from the economically ideal are small, or where economic factors dominate non-economic ones. Or they might afford some other account of their often being nearly right. The models may diverge as to what is actually true, or as to where, to what degree, and why the stylized facts are as good as they are. But to fail to acknowledge the stylized facts would be to lose valuable economic information (for example, the fact that if we control for the effects of such non-economic interference as war, disease, and the president for life absconding with the national treasury, the profit rate is constant.) Stylized facts figure in other social sciences as well. I suspect that under a less alarming description, they occur in the natural sciences too. The standard characterization of the pendulum, for example, strikes me as a stylized fact of physics. The motion of the pendulum which physics is supposed to explain is a motion that no actual pendulum exhibits. What such cases point to is this: The fact that a strictly false description is in the right neighborhood sometimes advances understanding of a domain.
Catherine Elgin thinks we should accept model claims when we consider them to be ‘true enough,’ and Uskali Mäki has argued in a similar vain, maintaining that it could be warranted — based on diverse pragmatic considerations — to accept model claims that are negligibly false.
from Shimshon Bichler and Jonathan Nitzan
from Peter Radford
Are we at a point of true reflection on the right in politics?
Here in the US we have the extraordinary spectacle of a bevy of outsiders of various political stripes leading in the polls not long before the election process gets into its more concrete moments. Decisions are looming very closely.
A few months back we were all amused at the sight of people like Donald Trump and Ben Carson ahead of the ‘establishment’ candidates. We all reassured each other that the closer we approached decision time the more likely its was that these oddballs would fall away and leave the field to the ‘sensible’ candidates – those with experience or gravitas in the political arena.
But that isn’t happening.
Not even after four televised debates. And those debates were very well watched. We cannot argue no one knows what’s going on any more – the viewership figures belie that idea. People know very well what’s going on.
from Lars Syll
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. This is like pulling a rabbit from a hat. Great — but first you have to put the rabbit in the hat. And this is where assumptions come in to the picture.
As social scientists — and economists — we have to confront the all-important question of how to handle uncertainty and randomness. Should we equate randomness with probability? If we do, we have to accept that to speak of randomness we also have to presuppose the existence of nomological probability machines, since probabilities cannot be spoken of – and actually, to be strict, do not at all exist – without specifying such system-contexts.
Accepting a domain of probability theory and a sample space of “infinite populations” — which is legion in modern econometrics — also implies that judgments are made on the basis of observations that are actually never made! Infinitely repeated trials or samplings never take place in the real world. So that cannot be a sound inductive basis for a science with aspirations of explaining real-world socio-economic processes, structures or events. It’s not tenable.