What’s wrong with Krugman’s economics?

October 3, 2019 15 comments

from Lars Syll

Krugman writes: “So how do you do useful economics? In general, what we really do is combine maximization-and-equilibrium as a first cut with a variety of ad hoc modifications reflecting what seem to be empirical regularities about how both individual behavior and markets depart from this idealized case.”

Alexander Rosenberg Duke UniversityBut if you ask the New Classical economists, they’ll say, this is exactly what we do—combine maximizing-and-equilibrium with empirical regularities. And they’d go on to say it’s because Krugman’s Keynesian models don’t do this or don’t do enough of it, they are not “useful” for prediction or explanation …

The trouble is that the macroeconomic evidence can’t tell us when and where maximization-and-equilibrium goes wrong, and there seems no immediate prospect for improving the assumptions of perfect rationality and perfect markets from behavioral economics, neuroeconomics, experimental economics, evolutionary economics, game theory, etc.  Read more…

How economists came to ignore the natural world

October 2, 2019 11 comments

She’s right. One of the reasons nations fail to address climate change is the belief that we can have infinite economic growth independent of ecosystem sustainability. Extreme weather events, melting arctic ice, and species extinction expose the lie that growth can forever be prioritized over planetary boundaries.

It wasn’t always this way. The fairytale of infinite growth—which so many today accept as unquestioned fact—is relatively recent. Economists have only begun to model never-ending growth over the last 75 years. Before that, they had ignored the topic for a century. And before that, they had believed in limits. If more people saw the idea of infinite growth as a departure from the history of economics rather than a timeless law of nature, perhaps they’d be readier to reimagine the links between the environment and the economy.

In 1950, the economics profession had surprisingly little to say about growth. That year, the American Economic Association (AEA) asked Moses Abramovitz to write a state-of-the-field essay on economic growth. He quickly discovered a problem: There was no field to review. Read more…

Trump’s trade war with China: Is it about to end?

October 2, 2019 4 comments

from Mark Weisbrot

The latest de-escalation of the trade war with China — with exemptions from some tariffs on both sides — has left markets uncertain as to whether it will end before there is serious escalation. But if I were managing a hedge fund, I would bet on it.

To see why, we must start with Trump himself. Distraction is Trump’s modus operandi; this was true for his 2016 campaign and he must have concluded from its success that this was also the best way to govern. Trump’s trade wars are therefore best understood as a set of distractions. The end result doesn’t matter all that much to him politically, and is therefore not worth that much political risk.

Of course there are things that some of his donors might actually want to win from this fight with China: stricter enforcement of patents to benefit the pharmaceutical giants who also gouge American consumers out of hundreds of billions of dollars annually; or greater access for US bankers to China’s financial sector. But Trump’s main goal at this point is to get reelected. And the bulk of his big donors — including the biggest contributors to the Republican Party ― don’t want this fight to drag on. Read more…

“Maybe we should change the system”

October 1, 2019 3 comments

from David Ruccio

US-gini-color

On behalf of millions of young people striking on behalf of climate justice, 15-year-old Greta Thunberg excoriated world leaders for “moving forward with the same bad ideas that got us into this mess.” Read more…

There is no economic justification for drilling in the Arctic Wildlife Refuge

September 30, 2019 1 comment

from Dean Baker

Earlier this month, the U.S. Department of the Interior released its final environmental impact study on plans to drill for oil and gas in the Arctic National Wildlife Refuge (ANWR). While the study noted environmental risks, it gave the go-ahead for drilling in this incredibly sensitive area.

This summer, my small town of Kanab, Utah, agreed to sell water to a frac sand mine and processing plant that would be operating just over 10 miles from Zion National Park. The county planning commission also approved a conditional use permit that would allow the mine to go forward.

What both of these actions have in common is that they are gratuitous acts of environmental destruction. This is not a story of tough trade-offs between the environment and the economy.

Those do exist in the world. It would be great for the environment to cut our fossil fuel consumption by 50 percent tomorrow, but that would devastate the economy, costing many jobs. But neither drilling in the ANWR nor frac sand mining near Zion will provide any great benefit to the economy. Nor would we suffer much, if any, negative economic impact by stopping these plans. They damage treasured landscapes for no good reason. Read more…

The ‘rational expectations’ hoax

September 26, 2019 3 comments

from Lars Syll

sun kiIt can be said without great controversy that no other theoretical approach in this century has ever enjoyed the same level of ubiquity throughout the social sciences as the rational choice approach enjoys today. Despite this ubiquity, the success of the approach has been very tenuous. Its advance has been accompanied by an intense debate over its relative merit. The approach has been subject to the usual criticism of blatant inaccuracy given by outsiders to any would-be theoretical hegemon and to a predictable fuzzying of its assumptions as it is adapted to a wider and wider range of empirical phenomena. More notably, however, some of the most virulent mere criticisms of the rational choice approach have come from within its own ranks.

Despite the absence of any clear-cut resolution to this debate, there appears to be a growing consensus about the strengths and weaknesses of the approach. To put it briefly, the main strengths of the approach are that its conventional assumptions about actors are parsimonious and applicable to a very broad range of environments, generating usually falsifiable and sometimes empirically confirmed hypotheses about action across these environments. This provides conventional rational choice with a combination of generality and predictive power not found in other approaches. However, the conventional assumptions of rational choice not only lack verisimilitude in many circumstances but also fail to accurately predict a wide range of human behaviors.

Read more…

The study of economies needs to be fundamentally reworked.

September 26, 2019 12 comments

from Geoff Davies

The study of economies needs to be fundamentally reworked. The dominant approach has been in a pre-scientific state, akin to medicine before Pasteur. It has not even been in a state comparable to Ptolemaic astronomy, which did make usefully quantified predictions of planetary positions in the sky.

We need to return to fundamental questions. What is the nature of an economy? What is the purpose of an economy? How does an economy relate to the larger society and natural world in which it is embedded? In this book a conception is sketched out that can accommodate not only economic phenomena but the social and natural processes with which they are inextricably entwined.

It is urgently necessary that the currently dominant competitive, free market, neoclassical economic mode be replaced, because it is incompatible with living things at every level: philosophical, theoretical and practical. As a result it is destroying our life support system, and many of us with it. The free-market mode persists in part because of fundamental misconceptions of how unfettered markets work. It is a matter of survival that we better understand this and other possible economic systems, and that we find systems that will nurture human and other life. Fortunately, healthy alternatives are available.

https://www.amazon.com/Economy-Society-Nature-systems-based-life-friendly/dp/1911156438/

Earth Overshoot Day

September 25, 2019 10 comments

from Barry Gills and Jamie Morgan

We live in a time of Climate Emergency. Nevertheless, our collective actions do not yet approximate a real understanding nor fully appropriate actions. We are not yet acting as if we are facing an urgent and life threatening Emergency. What does ‘Climate Emergency’ actually mean? According to David Attenborough:

It may sound frightening, but the scientific evidence is that if we have not taken dramatic action within the next decade, we could face irreversible damage to the natural world and the collapse of our societies.    (Attenborough, Our Planet)

History is written later, but the future is written now. Perhaps the central message of contemporary climate sciences consists in the realization that the entire planet is deeply interconnected. There are no isolated ecosystems. There are no ecosystems that are safe from the effects of climate change. All life on this planet is profoundly interrelated. What happens in one area of the globe has far reaching, but as yet insufficiently understood, effects upon and consequences for even far distant regions. . . .  Read more…

Central bank history (2/5) 1814-1914 hundred years peace

September 25, 2019 Leave a comment

from Asad Zaman

In previous post on the founding of the Bank of England, we have explained that Central Banks were created to provide financing for wars. In fulfilling this role, they had several advantages over the state, enabling them to get credit, and get it at low interest rates. For a number of reasons, this was not possible for sovereign states.  read more . . .

Can capitalists afford economic growth? An animation

September 24, 2019 2 comments

from Shimshon Bichler and Jonathan Nitzan

Despite the global dominance of capitalism, growth rates continue to trend downward. Mainstream economists blame the slowdown on various ‘distortions’, but as this animation by Elvire Thouvenot shows, the reality is quite different. Capitalists seek not more income per se, but greater power-through-redistribution, which they achieve by strategically stymying growth.

https://www.youtube.com/watch?v=gTpanudMToA

Why policy design without theory is useless

September 24, 2019 58 comments

from Lars Syll

Taking into account the methodologies that support some policy practices that favour inductive reasoning and randomized control trials of impact evaluation (RCTs), there is a controversy around the utilization of these attempts to build experimental programmes or policy intervention …

so youAs the decision-making policy process in the real world relies on institutional factors that may be different elsewhere, the methodology based on RCTs does not provide a credible basis for policy making. In short, the outcomes of inductive investigation can never be completely transported across time and space …

In fact, the methodology of RCTs runs the risk of considering worthless casual relationships as relevant causalities in the attempt to develop policy recommendations. In short, the use of the outcomes of RCTs as normative orientations for policy making should be put in question.

“What works” in the “sterile” environment of a laboratory does not necessarily work in a real-world where social interactions and the dynamics of institutions are overwhelmed by power relations. Therefore, ethical considerations should be considered in any attemp to build policy proposals.

Indeed, the transformation of the economic policy approach has evidently been a remarkable one. It is worth recalling the words of Lars Syll about the current sad state of economics as a science,

“A science that doesn’t self-reflect and asks important methodological and science-theoretical questions about the own activity, is a science in dire straits. The main reason why mainstream economics has increasingly become more and more useless as a public policy instrument is to be found in its perverted view on the value of methodology.”

Maria Alejandra Madi / WEA Pedagogy Blog

Evidence-based theories and policies are highly valued nowadays. Randomization is supposed to control for bias from unknown confounders. The received opinion is that evidence-based on randomized experiments, therefore, is the best. Read more…

“fairy-tales of eternal economic growth”

September 23, 2019 8 comments

Going digital: the forces shaping the future of business and labour – call for papers for a new WEA Conference is open!

September 23, 2019 1 comment

from Malgorzata Dereniowska

Call for Papers

The advent of digital economy creates new challenges for businesses, workers, and policymakers. Moreover, business prospects for artificial intelligence and machine learning are evolving quickly. These technologies have transforming implications for all industries, businesses of all sizes, and societies. The digitalisation of economic activities calls for a deep reflection on the forces that will shape the future of the global economy.

Aims of the Conference

The objective of this conference, led by Prof. Maria Alejandra Madi and Dr. Małgorzata Dereniowska, is to discuss recent contributions to the understanding of digital economy and its consequences for business trends and labour challenges. The conference also focuses on bridging the gap between different economic theoretical approaches and the practical applications of artificial intelligence and machine learning. Related topics include law, ethics, safety, and governance.

Topics include (but are not limited to): read more . . . 

What works? Policy design without theory is useless

September 23, 2019 4 comments

from Maria Alejandra Madi

Against a rationalist top down approach to policy making, the evidence-informed policy and practice has rapidly evolved in the last two decades.

In this line of research, a new book What Works Now? Evidence-informed Policy and Practice has been edited by Annette Boaz, Huw Davies, Alec Fraser and Sandra Nutley.  It offers not only a synthesis of the role of evidence in policy making but also an analysis of its use in recent economic models and practices in the UK, Australia, New Zealand, Scandinavia, Canada and the United States. In addition to the diversity of policy and practice settings where evidence is sought and gets applied, the book considers policy examples related to healthcare, social care, criminal justice, education, environment and international development.. At the core of the argument regarding the actual relevance of ‘know-about’, ‘know-what works’, ‘know-how’, ‘know-who’ and ‘know-why’ is the belief that evidence matters.

Considering this policy scenario, the relevant question at stake is  what are the implications of the new policy design practices that mainly rely on the belief that evidence matters?  read more . . .

Do models make economics a science?

September 22, 2019 8 comments

from Lars Syll

Well, if we are to believe most mainstream economists, models are what make economics a science.

economists_do_it_with_models_economics_humor_keychain-re3ab669c9dd84be1806dc76325a18fd0_x7j3z_8byvr_425In a Journal of Economic Literature review of Dani Rodrik’s Economics Rules, renowned game theorist Ariel Rubinstein discusses Rodrik’s justifications for the view that “models make economics a science.” Although Rubinstein has some doubts about those justifications — models are not indispensable for telling good stories or clarifying things in general; logical consistency does not determine whether economic models are right or wrong; and being able to expand our set of ‘plausible explanations’ doesn’t make economics more of a science than good fiction does — he still largely subscribes to the scientific image of economics as a result of using formal models that help us achieve ‘clarity and consistency’.

There’s much in the review I like — Rubinstein shows a commendable scepticism on the prevailing excessive mathematization​ of economics, and he is much more in favour of a pluralist teaching of economics than most other mainstream economists — but on the core question, “the model is the message,” I beg to differ with the view put forward by both Rodrik and Rubinstein. Read more…

Willian Nordhaus can’t keep his “Nobel Prize” because he doesn’t have one.

September 21, 2019 5 comments

Willian Nordhaus can’t keep his “Nobel Prize” because he doesn’t have one. Alfred Nobel never set up a prize for economics because he recognised that it is not a science – not even a “dismal science” – and that most of the research has little to do with the real world, being founded on ideas which are palpably untrue.

What Nordhaus has is a Swedish Banker’s prize for promoting neo-liberal ideas about money for the benefit of the world’s super rich. They call it the “Nobel Prize” despite Nobel’s wishes and the efforts of his family to have the title removed.

This economics prize is routinely dished out to people who promote right-wing ideas in an attempt to give them added respectability. They have been, to the world’s great loss, horribly successful on this endeavour. It is no surprise that Nordhous’s ideas are as bad as they are, firstly because classical economics is not capable of dealing with the sorts of problem climate change poses to the world; and secondly because the purpose of the award is to give the bankers/financiers/capitalists/plutocrats (add more to taste) cover for what they intended to do anyway.

I am sure Steve Keen is aware of all of this but it is sad to see someone of his stature accepting the basis of this fake “Nobel Prize”. We need more political-economic thinkers like Professor Keen to both expose the fake ideas of people like Nordhaus and also to promote real ideas about money and economics with a base in the real world and a concience about the consequences of our current path.

Ken Patterson

Nordhaus dangerous gamble for humanity’s future

September 21, 2019 12 comments

from Lars Syll

Nordhaus’s transgressions are immense. His ‘damage function’ which he uses to estimate global warming damage is incorrect and uses data that has nothing to do with climate change. Despite this, the Intergovernmental Panel on Climate Change (IPCC) uses his model to advise governments about the economic impact of global warming.

Thermometer graphicsNordhaus and other mainstream climate economists certainly have a lot to answer for. Their thinking has seriously delayed action to avert damage done from climate change.

The central problem with Nordhaus’s model is the “damage function”, which is a mathematical fiction that has little to do the real world. Using a spurious method, he calculates that 2°C of warming will only reduce global economic output – GDP – by 0.9 percent, and 4°C would cut GDP by 3.6 percent.

These are trivial changes. If it were true, there would be little to worry about. This is the reason that Nordhaus has repeatedly argued that from the point of view of economic rationality an “optimal” path would be 3.5°C of warming above preindustrial levels. Read more…

American dreams

September 20, 2019 2 comments

from David Ruccio

The American Dream is dead. Long live the American Dream!

Let me explain. The official American Dream, the one that has been produced and disseminated at least as far back as the transition from the farm to the factory (in other words, since the late-nineteenth century), lies in tatters. Americans have long been encouraged to believe that everyone gets what they deserve—and, with equal opportunity, those who start at the bottom have a real chance of working their way to the top. Within generations, all workers had a chance to “make it.” And, between generations, children would likely be better off than their parents.

That promise—let’s call it the capitalist American dream—is now in tatters. It is dead and (almost) buried.

It’s not the first time, of course, that the capitalist American Dream has been called into question. During the Great Depression of the 1930s, American capitalism was not able to deliver the goods, at least for the majority of the population. Widespread unemployment and poverty, as capitalists shuttered their factories were shuttered and banks foreclosed on farms, meant that most Americans were faced with an economic nightmare. And much the same happened after the crash of 2007-08 when, in the midst of the Second Great Depression, millions of Americans were unable to find a decent job or purchase (unless they went further into debt) the necessary goods and services, for themselves and their children. Read more…

The lack of positive results in econometrics

September 17, 2019 3 comments

from Lars Syll

For the sake of balancing the overly rosy picture of econometric achievements given in the usual econometrics textbooks today, it may be interesting to see how Trygve Haavelmo — with the completion (in 1958) of the twenty-fifth volume of Econometrica — assessed the role of econometrics in the advancement of economics.

Haavelmo intro 2We have found certain general principles which would seem to make good sense. Essentially, these principles are based on the reasonable idea that, if an economic model is in fact “correct” or “true,” we can say something a priori about the way in which the data emerging from it must behave. We can say something, a priori, about whether it is theoretically possible to estimate the parameters involved. And we can decide, a priori, what the proper estimation procedure should be … But the concrete results of these efforts have often been a seemingly lower degree of accuracy of the would-be economic laws (i.e., larger residuals), or coefficients that seem a priori less reasonable than those obtained by using cruder or clearly inconsistent methods. Read more…

Economics’ billiard-ball model

September 16, 2019 2 comments

“The social extension of atomistic methods . . . is not, of course, really a scientific project at all, though it uses scientific language.  It is a distortion that tends to discredit the whole idea of science by exploiting it to draw dubious political and moral conclusions.  This distortion itself has become obvious over the very notion of an atom – the idea of an impenetrable, essentially separate unit as the ultimate form of matter.  We know that today’s physicists no longer use this billiard-ball model.  They now conceive of particles in terms of their powers and their interaction with other particles, not as inert separate objects.  The seventeenth-century idea of a world constructed out of ultimately disconnected units has proved to be simply mistake.  Instead, physicists now see many levels of complexity; many different patterns of connection.

At an obvious level it follows that we ought no longer to be impressed by social atomism, or by behaviourism, in the way that we once were.  We can see now that it cannot have been scientific to impose on social affairs a pattern which turns out to have been so inadequate for physics.  But the moral goes much deeper.  It is one that would still hold even if physics had not changed.  That moral is that, quite generally, social and psychological problems cannot be solved by imposing on them irrelevant patterns imported from the physical sciences, merely because they are seductively simple.”

Mary Midgley, p.7-8, Science and Poetry