from Peter Radford
I think I am with Tony Judt on this one. I am reading the new collection of his essays written between 1995 and his death in 2010, and have had my memory jolted: he gave us many very considered critiques of modern economics, although they were usually dressed within the context of a book review. The point I am agreeing with is this statement he gives us in his 2009 speech called “What Is Living and What Is Dead in Social Democracy?”:
“But how did we, in our own time, come to think in exclusively economic terms? The fascination with an etiolated economic vocabulary did not come out of nowhere.”
Etiolated? Lovely, but I disagree. Our economic vocabulary is both robust and way too vigorous to be etiolated. On the contrary, economics has become a weed infesting society in every corner, and our use of it is far too frequent to consider it etiolated at all. Indeed our reliance on economic vocabulary belies the gaping holes in the theories that those words depend upon for their relevance.
But the larger point: that we overuse economics, that we see our world in economic terms rather than in other, perhaps more relevant, terms, and that we have come to depend too much on economic analysis to justify our actions is one I wholeheartedly endorse. Read more…
from Steve Ziliak
I believe that you and readers of Real World Economics Blog would like to know about an “economics rap battle” that is challenging more than orthodox economics.
Here is some discussion at Inside Higher Ed, together with the opposing videos:
Lyrics for my and my students at Roosevelt University in Chicago’ “Fear the Economics Textbook (Story of the Next Crook)” video are here:
The reply from the National Review is amusing but predictable:
In solidarity, Steve
from Lars Syll
One of the few statisticians that I have on my blogroll is Andrew Gelman. Although not sharing his Bayesian leanings, yours truly finds his open-minded, thought-provoking and non-dogmatic statistical thinking highly recommendable. The plaidoyer here below for “reverse causal questioning” is typical Gelmanian:
When statistical and econometrc methodologists write about causal inference, they generally focus on forward causal questions. We are taught to answer questions of the type “What if?”, rather than “Why?” Following the work by Rubin (1977) causal questions are typically framed in terms of manipulations: if x were changed by one unit, how much would y be expected to change? But reverse causal questions are important too … In many ways, it is the reverse causal questions that motivate the research, including experiments and observational studies, that we use to answer the forward questions … Read more…
from Dean Baker
In 2006, before the recession hit, there was not much difference in the employment rate for prime-age (ages 25–54) workers in the United States and other wealthy countries. The employment to population ratio (EPOP) for prime age workers in the United States was 79.8 percent. That was slightly below the 81.2 percent rate in France and the United Kingdom, but slightly above the 78.8 percent rate in Germany.
However, the recession has seriously altered the patterns of employment of prime age workers. According to the latest OECD quarterly data, Germany and Japan both now have EPOPs for prime age workers that are well above their pre-recession levels, at 83.4 percent and 82.6 percent, respectively. The EPOP for prime age workers in the U.K. has risen slightly to 82.3 percent, while it has fallen slightly to 80.4 percent in France.
The BIS (Bank for International Settlements) has, together with the IMF and the ECB, published a new handbook on how to estimate debt. A reason to celebrate. Mainly, of course, as the handbook enables more consistent and better measurement of debt-securities (mortgages, bonds and the like). But also as this handbook shows how much economic statistics are consistent with the ideas and concepts of institutional and Post-Keynesian statistics. And how inconsistent with mainstream economics. About the first fact we can cite the website blurb (which does not mention the phrase ‘The Great North Atlantic post 2008 debt crisis’ but we all know what this is about):
The importance of securities markets in intermediating financial flows, both domestically and internationally, underscores the need for relevant, coherent and internationally comparable statistics. This need was recognised by the G20 Data Gaps Initiative Read more…
from Asad Zaman
The bull charges the red flag being waved by the matador, and is killed because he makes a mistake in recognising the enemy. Samuel Huntington argued that the era of the clash of nations is over. However, he created a red flag when he painted the civilisation of Islam as the new enemy. Trillions of dollars have been spent in fighting this enemy, created to distract attention from the real enemy.
The financial deregulation initiated in the Reagan-Thatcher era in the 1980s was supposed to create prosperity. In fact, it has resulted in a sky-rocketing rise in inequality. The gap between the richest and the poorest has become larger than ever witnessed in history. Countless academic articles and books have been written to document, explain and attempt to provide solutions to the dramatic increase in inequality. The American public does not need these sophisticated data and theories; it experiences the fact, documented in The Wall Street Journal, that the quality of jobs and wage earnings are lower today than they were in the 1970s. Growing public awareness is reflected in several movies about inequality. For instance, Elysium depicts a world where the super-rich have abandoned the ruined surface of the planet Earth to the proles, and live in luxury on a satellite. Read more…
Production of greenhouse gas and global warming: the sectoral cumulative carbon emission budget view
Recently a new report on global warming has been published: how much do sectors like agriculture, construction and households have to increase the ‘Carbon-efficiency’ of their ‘production process’ to limit global warming to 2%? Oops – the report states (using a refined version of a methodology which has been pioneered by Ben and Jerry’s) freight transport has (as I understand it, the report is not explicit about this) increase its efficiency seven fold.
Some graphs and an excerpt.
Graph 1. Historical production of greenhouse gas, mind the increasing rate of increase.
Agriculture is a very, very important source of greenhouse gases. Read more…
There are at least three fundamental differences between ‘capital as statisticians measure it’ and ‘capital as a concept in neoclassical macro models’. Next to this, statisticians as well as neoclassical economists shy away from a crucial aspect of the ownership of capital: it’s forged in the fire of revolutions. Examples are the Protestant revolution (Cromwell, the Dutch Revolt, the Glorious Revolution, expropriation of the massive wealth (land!) of many cloisters), the Enlightenment revolutions (the French revolution, the abolishment of slavery and the Civil War) or the decolonization revolutions. This last point won’t be elaborated but it is good to remember it when rating the statistics and the models – just read ‘Capital in the twenty first century’ to get an idea about the importance of slaves as a main asset on USA balance sheets before the civil war.
The three differences (to be elaborated below): Read more…
from David Ruccio
I remember my dismay, when I first began teaching economics, how enthralled my colleagues (at least the liberal ones) were with Arthur Okun’s notion of the fundamental tradeoff between equality and efficiency (which they supplemented with John Rawls’s theory of justice). No critique of capitalism, no critique of political economy. They believed the democratic process would find the appropriate balance between market efficiencies and nonmarket interventions to create greater equality.
I was never happy with the idea of such a tradeoff (or, for that matter, with the veil of ignorance), because it was based on denying the fundamental injustice embedded in a capitalist economy—the appropriation and distribution of a surplus produced by the majority for the benefit of a tiny minority at the top. And no amount of celebrating the supposed efficiencies of capitalist markets (which, for the most part, were simply assumed) or tinkering with the distribution of income (with tax-based redistribution) was going to fix that. Read more…
from Lars Syll
At a realistic level of analysis, Keynes’ claim that some events could have no probability ratios assigned to them can be represented as rejecting the belief that some observed economic phenomena are the outcomes of any stochastic process: probability structures do not even fleetingly exist for many economic events.
In order to apply probability theory, one must assume replicability of the experiment under the same conditions so that, in principle, the moments of the random functions can be calculated over a large number of realizations …
For macroeconomic functions it can be claimed that only a single realization exists since there is only one actual economy; hence there are no cross-sectional data which are relevant. If we do not possess, never have possessed, and conceptually never will possess an ensemble of macroeconomic worlds, then the entire concept of the definition of relevant distribution functions is questionable. It can be logically argued that the distribution function cannot be defined if all the macroinformation which can exist is only a finite part (the past and the present) of a single realization. Since a universe of such realizations must at least conceptually exist for this theory to be germane, the application of the mathematical theory of stochastic processes to macroeconomic phenomena is therefore questionable, if not in principle invalid.
When, on May 10th 2013 scientists at Mauna Loa Observatory on the big island of Hawaii announced that global CO2 emissions had crossed a threshold at 400 parts per million (ppm) for the first time in millions of years, a sense of dread spread around the world and not only among climate scientists. CO2 emissions have been relentlessly climbing since Charles David Keeling first set up his tracking station near the summit of Mauna Loa Observatory in 1958 to monitor average daily global CO2 levels. At that time, CO2 concentrations registered 315ppm. CO2 emissions and atmospheric concentrations have been relentlessly climbing ever since and, as the records show, temperatures rises will follow. For all the climate summits, the promises of “voluntary restraint,” the carbon trading and carbon taxes, the growth of CO2 emissions and atmospheric concentrations has not just been relentless, it has been accelerating in what scientists have dubbed the “Keeling Curve.” Read more…
from Dean Baker
The NYT has a column by Uki Goni, warning of the bad things that will face Greece if it defaults. The default by Argentina in December of 2001 provides the basis for his warnings.
“Economic activity was paralyzed, supermarket prices soared and pharmaceutical companies withdrew their products as the peso lost three-quarters of its value against the dollar. With private medical insurance firms virtually bankrupt and the public health system on the brink of collapse, badly needed drugs for cancer, H.I.V. and heart conditions soon became scarce. Insulin for the country’s estimated 300,000 diabetics disappeared from drugstore shelves.
“With the economy in free fall, about half the country’s population was below the poverty line.”
There is no doubt that the people of Argentina suffered serious hardship due to the default. However it is important to recognize that they were suffering severe hardship even before the default. The economy contracted by 8.4 percent since its peak in 1998, and contracted by 4.4 percent in 2001 alone. The unemployment rate had risen to more than 19.0 percent. Even worse, there was no end in sight. Read more…
from John Komlos
Even conservative Republican Alan Greenspan, an ardent advocate of free markets, is beginning to see inequality as a fundamental threat to the system and admits that,
“You cannot have the benefits of capitalist market growth without the support of a significant proportion, and indeed, virtually all of the people; and if you have an increasing sense that the rewards of capitalism are being distributed unjustly the system will not stand.”
Well, the system was not standing very sturdily during the days of rage in Baltimore or in Ferguson. So we need to look beyond the ugly surface manifestations of young black men being shot in the back or suffocated and consider the deeper socioeconomic plight of this demographic in this country in 2015. The truth of the matter is that people of color are disadvantaged by the current socio-economic system from the very beginning of their lives.
Problem no. 1: babies born in low-income neighborhoods will go to bad schools. Read more…
Links. Banks, Money, Solar energy unbound, Great Depression and money, competitivety and productivity.
1) Tim Worstall has a nice piece on the shortage of (hotel quality) toilet paper in Venezuela, which shows that he mastered institutional ideas about how markets work (there is more between heaven and earth than USA chartered listed companies).
2) Nice piece about the plunging costs of storing energy. Yes, ‘Tesla batteries’ but also something as simple as compressed air. We will see hundreds of billions of investments in decentralized, sustainable energy production and storage in the coming decades (around the North Sea this even cheap storage of wind and solar will however not solve the problem of foggy december days). Read more…
The man who completely missed the housing bubble and was convinced financial disruption would be restricted to the subprime market deserves two seven-figure sinecures?
from Dean Baker
I hate to be picking on Matt O’Brien again, but come on, this is setting the bar pretty goddamn low. He began a piece reporting on a consulting gig that Bernanke will have the bond fund Pimco by telling readers:
“If anyone deserves two seven-figure sinecures, it’s Ben Bernanke.”
I won’t go over the full indictment of Ben Bernanke and will give him credit for a reasonably good job trying to boost the economy post-crash in the wake of the outraged opposition of the right-wing, but let’s get real. The housing bubble and ensuing crash were not natural disasters like Hurricane Katrina. Read more…
from Peter Radford
OK. Let’s have some fun.
Transaction costs were invented by Ronald Coase to help explain why we see business firms littering the economic landscape when orthodox economic theory argues that the marketplace is the superior and unequalled coordinator of economic activity. The Coasian idea, later extended and expanded upon by the likes of Oliver Williamson, is that there are costs of accessing the market which, under some circumstances, render market coordination more expensive than having production contained within the boundaries of what we call a business firm. These costs are what are now called transaction costs.
The problem is that they are also fairly vague. Indeed on of the main counter attacks by leading orthodox economists has always been that transaction costs are hard to pin down and thus ‘formalize’. And, as we all know, things that are not formal are considered to be dicey and not rigorous by orthodox ideologues.
Anyway, that’s for them to argue over, let’s get back to our fun. Read more…
from Lars Syll
Roman Frydman is Professor of Economics at New York University and a long time critic of the rational expectations hypothesis. In his seminal 1982 American Economic Review article Towards an Understanding of Market Processes: Individual Expectations, Learning, and Convergence to Rational Expectations Equilibrium — an absolute must-read for anyone with a serious interest in understanding what are the issues in the present discussion on rational expectations as a modeling assumption — he showed that models founded on the rational expectations hypothesis are inadequate as representation of economic agents’ decision making.
Those who want to build macroeconomics on microfoundations usually maintain that the only robust policies and institutions are those based on rational expectations and representative actors. As yours truly has tried to show in On the use and misuse of theories and models in economics there is really no support for this conviction at all. On the contrary. If we want to have anything of interest to say on real economies, financial crisis and the decisions and choices real people make, it is high time to place macroeconomic models building on representative actors and rational expectations-microfoundations where they belong – in the dustbin of history. Read more…
Are we witnessing one of these rare moments when rock solid intellectual positions suddenly become fluid and start flowing? One of the problems of neoclassical economics is the replacement of the classical ‘land, labour, capital’ trichotomy with the ‘labour, capital’ dichotomy. But suddenly it seems to leap back into the mind of economists. This might seem like an arcane detail of the history of economic though – but it isn’t. Removing ‘land’ (i.e. unproduced but valuable inputs like land, aquifers, stocks of oil, clean water and the like) from the income equations rules out rent incomes. According to Mason Gaffney (here) removing ‘land’ from economic theory was a conscious act, subsidized by land owners, to disable for instance the systematic taxation of land rent incomes. And with, according to Gaffney, dire consequences. Writing about Henry George he states Read more…