Skidelsky on the uselessness of ‘New Keynesian’ economics

November 20, 2019 23 comments

from Lars Syll

Whereas the Great Depression of the 1930s produced Keynesian economics, and the stagflation of the 1970s produced Milton Friedman’s monetarism, the Great Recession has produced no similar intellectual shift.

This is deeply depressing to young students of economics, who hoped for a suitably challenging response from the profession. Why has there been none?

risk-uncertainty-03-e1508523129420-1024x550Krugman’s answer is typically ingenious: the old macroeconomics was, as the saying goes, “good enough for government work”  … Krugman is a New Keynesian, and his essay was intended to show that the Great Recession vindicated standard New Keynesian models. But there are serious problems with Krugman’s narrative …

The New Keynesian models did not offer a sufficient basis for maintaining Keynesian policies once the economic emergency had been overcome, they were quickly abandoned …

The problem for New Keynesian macroeconomists is that they fail to acknowledge radical uncertainty in their models, leaving them without any theory of what to do in good times in order to avoid the bad times. Their focus on nominal wage and price rigidities implies that if these factors were absent, equilibrium would readily be achieved …

Without acknowledgement of uncertainty, saltwater economics is bound to collapse into its freshwater counterpart. New Keynesian “tweaking” will create limited political space for intervention, but not nearly enough to do a proper job.

Robert Skidelsky

Skidelsky’s article shows why we all ought to be sceptical of the pretences and aspirations of ‘New Keynesian’ macroeconomics. So far it has been impossible to see that it has yielded very much in terms of realist and relevant economic knowledge. And — as if that wasn’t enough — there’s nothing new or Keynesian about it! Read more…

Should we have billionaires?

November 20, 2019 1 comment

from Dean Baker

The Democratic presidential campaign has taken a strange twist in recent days, with candidates being asked whether we should have billionaires. While there may be some grand philosophical questions at stake here, I will stick to more mundane economic ones. The real question is: How do you want the economy to work?

The basic story is that if we have a market economy, some people can get very rich. If we buy the right-wing story, the superrich got their money from their great contribution to society. If we look at it with clearer eyes, the superrich got their money because we structured the economy in a way that allowed them to get super rich.

In some cases, that can mean that they had important innovations that made large numbers of people better off. While many of us have complaints about how Steve Jobs ran Apple (e.g., exploitative labor practices in China and anti-poaching agreements with competitors for workers in the U.S.), he did produce products that people really wanted to buy. People really like iPhones, so in that sense, Jobs did contribute to making society better off.

By contrast, it is very hard to see the contributions that many of the superrich have made to improve society. The largest share of the superrich are in finance. Some of these wealthy financial types specialize in buying or selling stocks or commodities a short time ahead of the market, thereby pocketing large profits. Read more…

“That makes me smart”

November 19, 2019 20 comments

from David Ruccio

Emmanuel Saez and Gabriel Zucman begin their new book, The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay, with the moment in 2016 during the first presidential election debate between Donald Trump and Hillary Clinton when the former Secretary of State challenged the reality-show celebrity about how little he had paid in federal income taxes over the years. Trump proudly admitted it: “That makes me smart.” And Clinton, for all her carefully crafted technocratic proposals to fix the tax code, failed to effectively respond to Trump.

Jump ahead three years, and the issue of wealth inequality in America has risen to the top of the political agenda. Clinton lost the election, Trump is probably not worth what he has claimed, but the nation’s wealth is even more unequally distributed today—much worse even than the obscene inequalities in the distribution of income.

net worth

Read more…

Why Wall Street shorts economists and their DSGE models

November 18, 2019 9 comments

from Lars Syll

454770_1_En_2_Fig6_HTMLVery few Wall Street firms find the DSGE models useful … This should come as no surprise to anyone who has looked closely at the models. Can an economy of hundreds of millions of individuals and tens of thousands of different firms be distilled into just one household and one firm, which rationally optimize their risk-adjusted discounted expected returns over an infinite future? There is no empirical support for the idea. Indeed, research suggests that the models perform very poorly …

Why does the profession want so desperately to hang on to the models? I see two possibilities. Maybe they do capture some deep understanding about how the economy works … More likely, economists find the models useful not in explaining reality, but in telling nice stories that fit with established traditions and fulfill the crucial goal of getting their work published in leading academic journals.

Mark Buchanan

The unsellability of DSGE — private-sector firms do not pay lots of money to use DSGE models — is a strong argument against DSGE. But it is not the most damning critique of it. Read more…

Graphics from 4 empirical muckrakers – 1. Nitzan and Bichler’s Buy-to-Build Indicator

November 17, 2019 4 comments

from Blair Fix

During the 1990s, corporate mergers became part of the public zeitgeist. But what is the deep history of mergers and acquisitions?

Jonathan Nitzan and Shimshon Bichler piece together the puzzle with their ‘buy-to-build’ indicator. This indicator measures the dollar value of mergers and acquisitions expressed as a percentage of gross fixed investments. It tells us how much corporations are spending on buying other companies, relative to how much they are spending on actually building things. Nitzan and Bichler muckrake to put together a century of US data:

buy_to_build
Nitzan and Bichler’s Buy-to-Build Indicator (Source)

More recently, Joe Francis compiled an open source update of the buy-to-build indicator. This is great empirical muckraking.

Why philosophy and methodology matter for economics

November 14, 2019 60 comments

from Lars Syll

A critique yours truly sometimes encounters is that as long as I cannot come up with some own alternative to the failing mainstream theory, I shouldn’t expect people to pay attention.

This is, however, to totally and utterly misunderstand the role of philosophy and methodology of economics!

As John Locke wrote in An Essay Concerning Human Understanding:

19557-004-21162361The Commonwealth of Learning is not at this time without Master-Builders, whose mighty Designs, in advancing the Sciences, will leave lasting Monuments to the Admiration of Posterity; But every one must not hope to be a Boyle, or a Sydenham; and in an Age that produces such Masters, as the Great-Huygenius, and the incomparable Mr. Newton, with some other of that Strain; ’tis Ambition enough to be employed as an Under-Labourer in clearing Ground a little, and removing some of the Rubbish, that lies in the way to Knowledge.

That’s what philosophy and methodology can contribute to economics — clearing obstacles to science by clarifying limits and consequences of choosing specific modelling strategies, assumptions, and ontologies. Read more…

Bottom 50% income shares across the world, 1980–2016

November 13, 2019 1 comment

United States of inequality

November 13, 2019 12 comments

from David Ruccio

Obscene levels of economics inequality in the United States are now so obvious they’ve become one of the main topics of public and political discourse (alongside and intertwined with two others, the climate crisis and the impeachment of Donald Trump).*

Most Americans, it seems, are aware of and increasingly incensed by the grotesque and still-growing gap between a tiny group at the top—wealthy individuals and large corporations—and everyone else. And this sense of unfairness and injustice is reflected in both the media and political campaigns. For example, Capital & Main, an award-winning nonprofit publication that reports from California, has launched a twelve-month long series on economic inequality in America, “United States of Inequality: 2020 and the Great Divide,” leading up to next year’s presidential election. And two of the leading presidential candidates in the Democratic Party, Bernie Sanders and Elizabeth Warren, have responded by making economic inequality one of the signature issues of their primary campaigns, regularly describing the devastating consequences of the enormous gap between the haves and have-nots and proposing policies (such as a wealth tax) to begin to close the gap and mitigate at least some of its effects.** Read more…

Facts, fallacies and echo chambers

November 12, 2019 4 comments

from Iconoclast

The above discussion “The new minds of young people will be open to the new empirical evidence.” illustrates the difficulties encountered by heterodox thinkers. Orthodox thinkers share a dogma, or at least a set of a priori assumptions, and usually a methodology. In essence, this makes orthodox thinking an echo chamber where basic ontology is never questioned. When the heterodox argue, as in the economically heterodox here, the argument eventually descends (or ascends?) into metaphysics; into ontology and epistemology. This is both the benefit and drawback of thinking and arguing from any kind of heterodox position.

While we are all drawn here by our rejection of orthodox economics, each of us has a particular perspective. That perspective is drawn from our enculteration and areas of study. That perspective is a kind of filter through which we see and interpret the world. Our only commonality appears to be a rejection of orthodox economics. Thus I suppose, in theory, if we pooled our arguments of disagreement with orthodox economics, searched for commonalities there and then backtracked or “reverse engineered” our way to the implied ontologies and epistemologies of such disagreements with orthodox economics, we might then begin to find common ground. Read more…

The tyranny of meritocracy

November 11, 2019 5 comments

from Blair Fix

Like many Canadians, I grew up with a faith in meritocracy. Do your best, I believed, and the world would reward you.

In school, this idea seemed self-evidently true. I worked hard, and was rewarded with good grades and praise from teachers. And those students who didn’t get good grades? Well they had less skill — less merit — than me. Or so I thought.

In hindsight, I cringe at my naivety. Like many successful people, I was blind to something important. There is no objective standard by which we judge merit.

Instead, merit is judged in a social context. What counts as deserving merit is what other people think deserves merit. This social context is why meritocracy can be a tyranny. If you’re good at something that isn’t valued by other people, you won’t be rewarded.

Wait … jazz musicians aren’t well paid?

y first hint that some skills are less valued than others came in my early 20s. At the time, I was devoted to becoming a professional musician — a jazz drummer. My thinking was simple — if I practiced hard enough and become a good enough musician, the world would reward me.

Boy was I naive. Read more…

The essence of neoliberalism

November 10, 2019 30 comments

from Lars Syll

800x450The neoliberal utopia evokes powerful belief – the free trade faith – not only among those who live off it, such as financiers, the owners and managers of large corporations, etc., but also among those, such as high-level government officials and politicians, who derive their justification for existing from it. For they sanctify the power of markets in the name of economic efficiency, which requires the elimination of administrative or political barriers capable of inconveniencing the owners of capital in their individual quest for the maximisation of individual profit, which has been turned into a model of rationality. They want independent central banks. And they preach the subordination of nation-states to the requirements of economic freedom for the masters of the economy, with the suppression of any regulation of any market, beginning with the labour market, the prohibition of deficits and inflation, the general privatisation of public services, and the reduction of public and social expenses. Read more…

Income levels and emissions

November 9, 2019 4 comments

Global income growth and inequality, 1980–2016

November 8, 2019 3 comments

Why validating assumptions is so important in science

November 8, 2019 1 comment

from Lars Syll

valAn ongoing concern is that excessive focus on formal modeling and statistics can lead to neglect of practical issues and to overconfidence in formal results … Analysis interpretation depends on contextual judgments about how reality is to be mapped onto the model, and how the formal analysis results are to be mapped back into reality. But overconfidence in formal outputs is only to be expected when much labor has gone into deductive reasoning. First, there is a need to feel the labor was justified, and one way to do so is to believe the formal deduction produced important conclusions. Second, there seems to be a pervasive human aversion to uncertainty, and one way to reduce feelings of uncertainty is to invest faith in deduction as a sufficient guide to truth. Unfortunately, such faith is as logically unjustified as any religious creed, since a deduction produces certainty about the real world only when its assumptions about the real world are certain …

Unfortunately, assumption uncertainty reduces the status of deductions and statistical computations to exercises in hypothetical reasoning – they provide best-case scenarios of what we could infer from specific data (which are assumed to have only specific, known problems). Even more unfortunate, however, is that this exercise is deceptive to the extent it ignores or misrepresents available information, and makes hidden assumptions that are unsupported by data …

Despite assumption uncertainties, modelers often express only the uncertainties derived within their modeling assumptions, sometimes to disastrous consequences. Econometrics supplies dramatic cautionary examples in which complex modeling has failed miserably in important applications …

Sander Greenland

Yes, indeed, econometrics fails miserably over and over again.  One reason why it does, is Read more…

The United States is the world’s second largest economy: when it comes to climate change, it matters

November 7, 2019 4 comments

from Dean Baker

The New York Times has an article on the Trump administration’s decision to pull the United States out of the Paris Agreement on climate change. The first sentence wrongly describes the United States as “the world’s largest economy.” Actually China passed the United States as the world’s largest economy early in the decade. According to the I.M.F. its economy is now more than 25 percent larger than the U.S. economy. It is projected to be more than 50 percent larger by 2024.

This matters because China actually has moved aggressively to adopt clean energy. It is now by far the world leader in the use of solar and wind power and electric car sales. The fact that the Trump administration is determined not to cooperate in efforts to reduce greenhouse gas emissions is unfortunate, but the fact that the world’s actual largest economy is taking big steps to curb emissions is hugely important.

The US vs. Western Europe 1980 – 2016

November 6, 2019 4 comments

In 1980 the bottom 50% of the population in the US received 20% of the national income and 23% in Western Europe. By 2016 the share of the bottom 50% of the US population received declined to 13% while in Western Europe the bottom 50% held on to 22% of the national income. The top 1% in Western Europe increased their share to 12% in 2016. Meanwhile in the US the top 1%increased their share of the national income from 10% in 1980 to 20% in 2016.

A key question is what policies and forces are at play in Western Europe that maintained the bottom 50%’s share?

top 1% vs. bottom 50% national income shares in the US and Western Europe 1980-2016: diverging income inequality trajectories

Read more…

Confusing statistics and research

November 5, 2019 2 comments

from Lars Syll

140113.bigdataCoupled with downright incompetence in statistics, we often find the syndrome that I have come to call statisticism: the notion that computing is synonymous with doing research, the naïve faith that statistics is a complete or sufficient basis for scientific methodology, the superstition that statistical formulas exist for evaluating such things as the relative merits of different substantive theories or the “importance” of  the causes of a “dependent variable”; and the delusion that decomposing the covariations of some arbitrary and haphazardly assembled collection of variables can somehow justify not only a “causal model” but also, praise a mark, a “measurement model.” There would be no point in deploring such caricatures of the scientific enterprise if there were a clearly identifiable sector of social science research wherein such fallacies were clearly recognized and emphatically out of bounds.

Dudley Duncan

Wise words well worth pondering on. Read more…

Map of CO2 emissions per capita by country

November 5, 2019 1 comment

“It doesn’t feel like a boom yet”

November 5, 2019 7 comments

from David Ruccio

Trump

Across American universities, corporations, and financial institutions, researchers are honing computer models designed to predict the winner in the November 2020 presidential election in which Donald Trump will face a Democratic candidate still to be determined.

Read more…

Game theory — a scientific cul-de-sac

November 4, 2019 17 comments

from Lars Syll

Back in 1991, when yours truly earned his first PhD​ with a dissertation on decision-making and rationality in social choice theory and game theory, I concluded that “repeatedly it seems as though mathematical tractability and elegance — rather than realism and relevance — have been the most applied guidelines for the behavioural assumptions being made. On a political and social level, ​it is doubtful if the methodological individualism, ahistoricity and formalism those guidelines imply are especially valid for explaining real-world decision-making.”

This, of course, was like swearing in church. My mainstream colleagues were — to say the least — not exactly überjoyed.

Half a century ago there were widespread hopes game theory would provide a unified theory of social science. Today it has become obvious those hopes did not materialize. This ought to come as no surprise. Reductionist and atomistic models of social interaction — such as those mainstream economics and game theory are founded on — will never deliver sustainable building blocks for a realist and relevant social science. That is also — as yours truly argues in this article — the reason why game theory never will be anything but a footnote in the history of social science. Read more…