from Peter Radford
I lead a local discussion group here in Vermont. The group is small, about 16 members, most retired, 30% women, a good mix of ex-business managers and owners, and all highly interested in politics. Yesterday’s discussion managed to blur two topics. One was secular stagnation. The other was Bernie Sanders win in the New Hampshire primary and what that may mean for the political future.
I have seen other commentators and writers reacting to Robert Gordon’s book about the relative lack of economic growth going forward. I am not sure I agree with Gordon, but his argument is, to say the least, interesting. The general idea being that all the truly “big” innovations are in the past and because of that the great waves of increased prosperity that came from the middle years of the Industrial era will not be matched going forward. We are, according to Gordon, in for much more normal and much slower growth rates in future.
So what did my group make of this? None are economists. None are political scientists.
from Lars Syll
The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes … I believe that there is social and psychological justification for significant inequalities of income and wealth, but not for such large disparities as exist to-day.
John Maynard Keynes wrote this in General Theory (1936).
Four decades later the Iron Lady appeared in the Parliament with this gobsmacking attempt at explaining away the problem: Read more…
from Dean Baker
As the Democratic presidential race heats up, the debate on financial reform has taken a bizarre twist. Somehow the measure of a good reform is its ability to prevent another 2008-type financial crisis.
While it is reasonable to subject a reform agenda to the 2008 test, this should be at most a side issue. After all, it is virtually certain that our next crisis will not look our last crisis. Financial reform first and foremost is not about preventing the last crisis, but rather about designing a financial system that more effectively serves the rest of the economy.
Finance is an intermediate good like trucking. It does not directly provide value like food or health care, the value in the financial sector depends exclusively on its ability to make the rest of the economy function better. This means effectively getting money to businesses and households who need to borrow. And it means providing safe investment vehicles for people to save for retirement or other purposes.
An efficient financial sector provides these services using as few resources as possible. With that in mind, it is hard to make the case that our financial system is efficient. It has exploded in size relative to the rest of the economy over the last four decades, with the narrow commodities and securities trading sector increasing fourfold.
There is no doubt that, eight years after the crash of 2008, the world economy continues to stagnate. The problem of slow growth is confirmed by Joseph Stiglitz [ht: ja], who bases his argument on the latest report from the United Nations, World Economic Situation and Prospects 2016 (pdf). Read more…
from Steve Keen
The great tragedy of the global economic malaise is that it is caused by a shortage of something that is essentially costless to produce: money.
Both banks and governments can produce money at physically trivial costs. Banks create money by creating a loan, and the establishment costs of a loan are miniscule compared to the value of the money created by it—of the order of $3 for every $100 created.
Governments create money by running a deficit—by spending more on the public than they get back from the public in taxes. As inefficient as government might be, that process too costs a tiny amount, compared to the amount of money generated by the deficit itself.
But despite how easy the money creation process is, in the aftermath to the 2008 crisis, both banks and governments are doing a lousy job of producing the money the public needs, for two very different reasons.
Banks aren’t creating money now because they created too much of it in the past. The booms that preceded the crisis were fuelled by a wave of bank-debt-financed speculation on some useful products (the telecommunications infrastructure of the internet, the DotCom firms that survived the DotCom bubble) and much rubbish (the Liar Loans that are the focus of The Big Short). That lending drove private debt levels to an all-time high across the OECD: the average private debt level is now of the order of 150% of GDP, whereas it was around 60% of GDP in the “Golden Age of Capitalism” during the 1950s and 1960s—see Figure 1. Read more…
from Lars Syll
BBC report on the need for rethinking economics and the way we teach it.
from David Ruccio
Contemporary capitalism has a big problem. And no one seems to be able to refute it.
The problem, as Robert J. Gordon sees it, is that economic growth is slowing down, it has been for decades, and there’s no prospect for a resumption of fast economic growth in the foreseeable fure. After fifty (from 1920 to 1970) years of relatively fast growth, and a single decade (the 1950s) of spectacular growth, the prospects for continued growth seem to have dimmed after 1970. Read more…
from Asad Zaman
After having examined a lot of relevant, useful and insightful material on the failure of orthodoxy, some of which that came up in the responses to my post, I have come to a conclusion that there is a viable project we could undertake together, which has the chance of creating a revolution. There are several points that need to be taken in consideration to shape the project.
Insight Number 1:
The first point comes from Edward Fullbrook’s remark that:
If Samuelson had any claim to genius it was that he understood better than anyone else that nothing in economics is nearly as important as Economics 101. Marshall, Samuelson’s target, understood it also.
Samuelson’s was the textbook which defined economics in the twentieth century. I propose that we work together on writing the textbook which will define economics in the twenty first century. Read More
from David Ruccio
The United States suffers from an obscene cult of CEOs. Whether we’re talking about “Neutron Jack” Welch (who was celebrated for raising GE’s market value while laying off tens of thousands of workers) or Bill Gates (who made Microsoft competitive by engaging in anticompetitive practices) or Lloyd Blankfein (head of the “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”)—they’re routinely feted as being ruthless, “transgressive” leaders who make change happen in the corporate world.
I suppose it comes as no surprise, then, that two business professors—Hamid Bouchikhi and John R. Kimberly [ht: kc]—would extend that celebration to CEOs in the academy, by studying the decision by Dean of Arts and Letters Mark Roche to divide the Department of Economics at the University of Notre Dame.* Read more…
Times are crucial for Europe. It will either disintegrate or find a new political constitution. Below, something about the efforts of the ECB to prevent disintegration of at least the price level (and probably much more…)
From: Erwan Mahé
I am still working on my paper on QE, following the wonderful reading of 3000 pages of the FED 2010 meetings transcripts, so a very short piece today, because Draghi’s speech this morning looks like it had a ‘secret’ message in it. In fact, just a copy and paste of what I just sent to my customers by …, but this seems important to me.
After careful reading, I wonder if he is not preparing to modify the country allocation key of the APP…
Full Excerpt for the context (my emphasis):
Expanding the stance
The second, specific challenge we have faced in the euro area has come when we needed to expand our monetary stance – specifically, when we shifted from interest rates as the main instrument of monetary policy to asset purchases via the APP [asset purchases program, M.K.].
In part, large-scale asset purchases aim at reducing the risk-free rate by taking out duration from the market for sovereign bonds. In the euro area, however, we do not have a single risk-free rate since we do not have a single fiscal issuer that acts as a benchmark. And there is no national market which could act as a substitute, not only due to volume constraints, but also because no government security in the euro area is truly risk-free. The prohibition on monetary financing means that every sovereign bond carries a degree of credit risk. Read more…
from Lars Syll
Mathematics, especially through the work of David Hilbert, became increasingly viewed as a discipline properly concerned with providing a pool of frameworks for possible realities …
This emergence of the axiomatic method removed at a stroke various hitherto insurmountable constraints facing those who would mathematise the discipline of economics. Researchers involved with mathematical projects in economics could, for the time being at least, postpone the day of interpreting their preferred axioms and assumptions. There was no longer any need to seek the blessing of mathematicians and physicists or of other economists who might insist that the relevance of metaphors and analogies be established at the outset. In particular it was no longer regarded as necessary, or even relevant, to economic model construction to consider the nature of social reality, at least for the time being
from David Ruccio
It’s impossible to defend the grotesque—and growing—levels of inequality that characterize U.S. capitalism.
But, as they have throughout American history, some people still try. Their most common argument is that there’s nothing wrong with unequal outcomes as long as there is equal opportunity.* Read more…
from Edward Fullbrook
Below are some comments by Steve Marglin, Peter Radford and myself that appeared in 2010 in the RWER in response to an essay by Peter Radford and that seem relevant to the discussion that Asad Zaman has recently launched in this blog: Is there a core of heterodox economics that we can all believe in? and Fundamental Flaws of Conventional Economics
Comments and reply on Peter Radford’s “Whither economics? What do we tell the students?”
Steve Marglin [Harvard University, USA]
Dear Mr Radford,
I agree with most of what you say about economics, except that it is not as easy as you suggest to separate the study of economics from the study of economies. Keynes said it very well in the preface to the General Theory: the hardest part of coming to his new ideas was getting rid of the old ones. The problem is that one needs some kind of framework for studying economies and is thus plunged willy nilly into the study of economics.
from Dean Baker
I have tremendous respect for Paul Krugman. I also consider him a friend. For these reasons I am not eager to pick a fight with him, but there is something about his criticisms of Bernie Sanders that really bothered me.
In a blog post last week, Krugman told readers:
“As far as I can tell, every serious progressive policy expert on either health care or financial reform who has weighed in on the primary seems to lean Hillary.”
While I already had some fun with the idea of Krugman revoking the credentials of everyone who works in these areas who does not back Clinton, the appeal to the authority of the “experts” is more than a bit annoying. The reason is that the “experts” do not have a very good track record of late and still have a long way to go to win back the public’s trust.
To start with the obvious, almost none of the experts saw the 2008 collapse coming. Almost all of them dismissed the idea that there was a housing bubble and even the few that grudgingly acknowledged the possibility of a bubble insisted that it could not have much consequence for the economy.
When residents of Ferguson, Missouri, took to the streets last August to protest the death of Michael Brown, an unarmed black teenager killed by a white police officer, the events dramatically exposed an image of modern policing that most Americans rarely see: columns of police pointing military weaponry at peaceful protestors. But the ongoing tension between residents and police in Ferguson was also indicative of another, less visual development in how the police are used to oppress impoverished communities: using law enforcement to extract revenue from the poor.
from Lars Syll
So far we have shown that for two prominent questions in the economics of education, experimental and non-experimental estimates appear to be in tension. Furthermore, experimental results across different contexts are often in tension with each other. The first tension presents policymakers with a trade-off between the internal validity of estimates from the “wrong” context, and the greater external validity of observational data analysis from the “right” context. The second tension, between equally well-identifed results across contexts, suggests that the resolution of this trade-off is not trivial. There appears to be genuine heterogeneity in the true causal parameter across contexts.
These findings imply that the common practice of ranking evidence by its level of “rigor”,
without respect to context, may produce misleading policy recommendations … Read more…
from Peter Radford
So where are we?
Nowhere further forward. Except, perhaps, that we now know about half of the Democrats in Iowa think Clinton is an extension rather than a repudiation of the past.
And I think that matters.
The time has come for us all to assess just where we are. There is way too much confusion and anger in that air for this bizarre election simply to be an oddity. I think it has meaning. Deep meaning that we need to understand if we are to venture into the future with anything other than bemused silence.
I really think this matters.
Let me venture to say that Clinton’s lost gloss – a truly accepted ‘presumptive’ nominee would not have lapsed into a tied race in Iowa – is cause for reflection amongst all those who profess to be well versed in American politics and government. She simply cannot resonate with a message for the future. She has no message of the future. In one of her last rallies before last night’s caucus she waxed lyrical about pressing on with the current agenda. Yet, surely, the electorate is no mood for continuation. The post recession muddle and thirty years of neoliberal economics have eroded voter’s confidence in our economic institutions, in our leadership, and even in our capability to get anything done. The electorate is losing both its nerve and its patience. Bad things happen when that occurs. Bad things like Donald Trump.
from Asad Zaman
On the RWER Blog, Paul David would like heterodox economists to see reason — read and understand the original Keynes. Justaluckyfool would like us to read, understand and implement Soddy’s financial engineering. On the WEA Pedagogy Blog, Paul Grignon ridicules economists’ understanding of money, and offers an alternative. Egmont Kakarot-Handtke , Xavi Mir, and Jeff offer alternative axiomatizations, and principles which would fix the problems with neoclassical theories. Others who have not spoken up on these threads have their own solutions to the problems of the world.
I am trying to offer a meta-analysis here, as noted by davetaylor1. All heterodox economists agree on one thing, by definition of heterodoxy: orthodox economics contains (huge) errors. INSTEAD of explaining what these errors are and trying to fix them, I would like to stand back from the fray and try to examine what is going on from a distance. WHAT makes certain theories popular? WHY do most people come to believe in theories? WHAT causes changes in these beliefs? By studying the Methodology of Polanyi’s Great Transformation, I came to the understanding that theories can only be understood within their historical context. This understanding is violently in conflict with the conception of knowledge, based on positivist ideas, that I learned in the universities. Contrary to positivist ideas, to understand the process of emergence of theories, and how these theories change over time, one has to do analysis at three levels simultaneously:
LEVEL 1: The Historical Facts, the Context, The Various Groups engaged in the struggle for power, and their interests and ideological positions.
from Lars Syll
We must learn WHY the argument for revealed preference, which deceived Samuelson, is wrong. As per standard positivist ideas, preferences are internal to the heart and unobservable; hence they cannot be used in scientific theories. So Samuelson came up with the idea of using the observable Choices – unobservable preferences are revealed by observable choices … Yet the basic argument is wrong; one cannot eliminate the unobservable preference from economic theories. Understanding this error, which Samuelson failed to do, is the first knot to unravel, in order to clear our minds and hearts of the logical positivist illusions.
Asad Zaman’s blog post made me come to think about an article on revealed preference theory that yours truly wrote almost twenty-five years ago and got published in History of Political Economy (no. 25, 1993).
Paul Samuelson wrote a kind letter and informed me that he was the one who had recommended it for publication. But although he liked a lot in it, he also wrote a comment — published in the same volume of HOPE — saying: Read more…
Here is a comment on Asad Zaman’s Fundamental Flaws of Conventional Economics that deserves its own post.
graccibrosJanuary 29, 2016 at 5:52 pm
Yes, let me wade in but not too deeply. I was intrigued by your very first itemization about logical positivism having failed as a theory of knowledge, and especially your mention of it excluding morality. Since I am reading the late Joe Bageant’s “Deer Hunting with Jesus,” his book about the alienation of white working class Americans from upper middle class liberals, and them not voting the logical positivistic formulations of their own economic self interest, please note that this segment of America is where the morality contained in the Evangelical Movement/Fundamentalism has its deepest roots. They listen to Larry Summers tone, condescension (even as Larry has moved left, which he tries to hide by using terms like “secular stagnation) and run into the arms of Donald Trump, not Hillary Clinton…and who knows about Bernie Sanders.