comments on RWER issue no 76

real-world economics review issue no. 76  – 30/09/16
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  1. September 30, 2016 at 5:58 pm

    Fortunately we do have alternatives to DSGE macroeconomic theorizing that permit careful attention to the actual physical constraints, institutional arrangements, and behavioral dispositions characterizing real-world economic systems. Please see the many annotated pointers to this work at the following site:

    Agent-Based Macroeconomics

    Suggestions for additional work to include at this site are welcome.

    Leigh Tesfatsion
    Professor of Economics, Mathematics, and
    Electrical & Computer Engineering
    Iowa State University, Ames, IA 50011

  2. September 30, 2016 at 11:56 pm

    Green capitalism has always failed. i heard paul Hawken spek in 1993, and knew he was wrong them. We need a smaller economy

  3. Bart Klein Ikink
    October 1, 2016 at 8:54 am

    I would like to comment on the negative interest rates or 100% reserves article. The first issue I would like to take up is the criticism of fractional reserve banking. It boils down to defining what money actually is, and because debt can be money, deciding that debt can’t be money, means introducing inefficiencies in the economy. Let me explain that.

    Banning fractional reserve banking would cause it to be reinvented via arbitrage. A simple example can demonstrate this. Assume that banks only lend out money in savings accounts and that only savings yield interest. Imagine that Eve and Adam only do business with each other and that they both have 100 money units that they use for their daily business transactions. They could get rid of cash and give each other credit so that they both could put 100 money units in a savings account.

    They accept each other’s credit risk because they trust each other. Similar schemes can be devised so that savings can be fabricated out of credit. In fact, when banks create money, they do what Eve and Adam do on a larger scale. They can act as an intermediary between Eve and Adam so that they can give each other credit, even when they do not business with each other or do not trust each other. As a consequence the distinction between savings and credit tends to be ficticious and arbitrary. Banning fractional reserve banking would produce a number of schemes that replace it, rendering such a ban meaningless.

    Creating money is just a specific example of the bank’s main business. It only means that depositors can take out their deposits at any time regardless of the end dates of the loans backing them. Loans and deposits tend to mature on different dates. In order to end all risk of banks not being able to repay deposits because of this issue, deposits and loans should match each other exactly in time, which is impossible. When loans are made out of savings, banks can still go bankrupt when loans are not repaid or when people do not renew their deposits when they are due.

    Second, it is not correct to argue that growth is only limited by natural resources. For example, if you find more efficient ways of doings things with the same resources, this can bring growth. Interest rates on capital have long exceeded the rate of economic growth, and if most of the returns of capital are reinvested, then simple arithmetic can show that this development cannot continue indefinitely. This is the main reason why interest rates went down, even when there is more innovation. In the past wars have destroyed a lot of capital, so that it had to be rebuilt, but if World War I and II hadn’t happened, this situation may already have emerged many decades ago.

    Third, if you accept no-growth or low growth as a given, then it is uneconomic to argue that negative interest rates are absurd, most notably if you realise that it is the logical consequence of the given situation. By what logic do you call this logical consequence absurd? The lower interest rates go, the more projects become feasible, and the more wealth is possible. If you want to build a sustainable economy, interest rates should be as low as possible. That is because of discounting. With positive interest rates, money in the future is worth less than money now. This has a major impact on investment choices. Interest promotes short term thinking. If no interest was charged, long-term investments would be more attractive.

    In fact, interest contributes to wealth inequality, depletion of resources, as well as financial and economic crises, so that negative interest rates are a blessing, see:

  4. David Chester
    October 1, 2016 at 6:48 pm

    An agent-based macroeconomics model should contain all of the active agents in the macroeconomics system or it will not simulate properly the various activities. There are at least agents that work in a proper model here such as in my model DiagFuncMacroSyst.pdf . Anything less, including the model used here, with only 3 entities, will not work properly.

    • October 3, 2016 at 3:17 pm

      d chester—from my view that model is a diagram; it needs to include or be rephrased as a set of equations to be understandable. agent based models theoretically can encompass your variables (which are macro-entities) although the ones i’ve seen in general don’t do that (they deal with micro behavior).

  5. chassavage
    October 1, 2016 at 7:06 pm

    I welcome Richard Smith’s powerful thoughts and the lively discussion throughout the article.

    Yet, why should we blindly believe that “greed” and “self-interest” are a core element of human nature? Is it not time to reread Bernard Mandeville’s “The Fable of the Bees, Private Vice, Publik Benefit?” As you will remember, Harvey, the Royal Physician in London, discovered the circulation of blood in the human body in 1628 (for the West, others knew this already). Mandeville, trained in medicine in Leiden, moved to the UK in the 1690s. He asked, “What is the circulation of blood in the body-politik?” This was in the 1707 to 1724 period. As you know, Mandeville seems to have influenced Smith’s notion of the ‘Invisible Hand,’ so key to justifying our greediness. Nice to see “visible minds” challenging this now!

    P. Kanagasabapathi’s “Indian Models of Economy, Business and Management,” New Dehli, PHI Learning, 2012 shows India and China had the largest economies up until the early 1700s. Upon close reading, we see an economy that could become a prototype for a truly Low-Carbon Economy, were we to be imaginative enough. The best anecdote might be the wisdom of yesterday, as it creates a wiser context of understanding. Have some suggestions if anyone is interested.

    Thanks, this is a wonderful and very needed reflective dialoguing, especially if we truly want to learn to “Live Lightly, Lively and Wisely!”

  6. Ron Goldring
    October 2, 2016 at 1:17 pm

    Comment regarding Ted Trainer’s article:
    This article gives rise to major questions: Is the current use of GDP and its correlation with resource use valid for prediction and setting development policies?
    If it is, the discrepancy between capitalist “growth” imperative and resource constraints must lead to a clash. Are we all going to “hit the wall” at some foreseeable future? Long before “the wall is hit”, we should expect to encounter soaring prices of raw materials, food, water, etc., and rampant deterioration of air and water quality. Are such phenomena observed? If they are not, why?
    Or, perhaps, GDP is such an irrelevant measure that we should replace it with another, relevant measure?
    These are tough, but extremely important questions. Are they addressed at all by mainstream scholars?

  7. Walter Hanschitz-Jandl
    October 18, 2016 at 8:52 pm

    I want to comment on Thomas Palley‘s article „Why negative interest rate policy (NIRP) is ineffective and dangerous“. If I have not missed anything, it is the first publication in the „real-world economics review“ on negative interest rate policy (NIRP). The outcome is more than questionable.
    I think that no one has thought about interest more deeply than Nobel laureate Maurice Allais. – And Keynes‘s „General Theory“ is a work on interest (and money), too. Both Allais and Keynes come to conclusions which are absolutely contrary to those of Palley. On the lines of Allais and Keynes one can on good grounds criticize the zero or negative interest rate policy of central banks today. But the problem which Allais and Keynes see is not that low interest rates as such are a danger to employment, or exploit labourer households. On the contrary – both intend to euthanize the rentier, ie they propagate a zero rate of interest. For the benefit of the working population. And they analyze the obstacles which prevent low interest rates, resp. explain in which surrounding low interest rates can indeed cause problems.
    The great danger with low interest rates is the liquidity trap. And this already with an interest rate of above zero! The lower bound in the theories of Keynes and Allais is positive. This means that even low interest rates, designed to foster inflation, have, on the contrary, a deflationary effect.
    The lower bound of the interest of an asset is set (at first approximation, Allais‘s theory is much more complex) through Keynes‘s „total return“ or „own rate of interest“ of an asset (the „q – c + l“ in his „General Theory“). This is positive for money (cash), says Keynes, because the liquidity premium „l“ exceeds the carrying costs „c“ (interest „q“ is zero for cash).
    So it is easy to see what would be needed after this theory to make a zero or negative interest rate (on long-term deposits) possible, without a liquidity trap. It would be a zero or a negative total return on cash. This would require a carry tax on cash.
    What Allais adds is the problem of private property of land, which makes a zero rate of interest impossible. I will not go into this, but Palley is right to say that land prices rise when interest rates sink. Which does not mean that low interest rates are bad, but that private property of land is not compatible with a zero or negative rate of interest. This is why Allais proposed the nationalization of land.
    It is not so that low, zero or negative interest rates would be bad for the economy or the working people. They are absolutely desirable in the interest of the working people. But we have structures which are not compatible with them. It is this which makes NIRP risky.

  8. November 16, 2016 at 5:33 pm

    Forgive me for perhaps sounding harsh, but I don’t understand why Mohammad Muaz Jalil’s “Industrial policy in the 21st century” found its way into an RWER issue. I recognize that he is well-intentioned and attempting to find a development path for the Global South within the current dominant neoliberal model, but at best his prescriptions of maintaining an export orientation with a modicum of industrial planning could be described as “neoliberal lite.”

    More of the same, and in fact less of the same given the straitjacket in which developing economies find themselves, is surely not a road destined for success. Every country can’t be a producer of high-end electronics for export, and basic mathematics dictates that every country can’t be a net exporter. There is only so much room at the top in global capitalism and only so many countries that can rise to the higher levels of the international pecking order.

    Most countries that try to “develop” through sweatshops are destined to remain at that level. What this paper demonstrates in my mind is how thoroughly neoliberal ideology has gripped the imagination – if even something published here can’t get beyond that mindset, the task is daunting indeed. Markets are not natural like the tides of oceans, they are human creations.

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