In praise of the Institutional Nature of the National Accounts

January 6, 2018 3 comments

A variable like GDP (Gross domestic Product) receives a lot of flack from economists. Much of this is misguided. The economists should not look at GDP but at the national accounts (of which GDP is one, but only one, variable). And they should not criticize the accounts but praise them. A 2016 ECB working paper about the flagship ECB ‘EAGLE-FLI’ neoclassical macro-model (Bokan e.a. (2016)) shows why: neoclassical have no idea about how and what to measure. National account statisticians do.

According to the abstract of the ECB paper new features of the EAGLE-FLI model were the inclusion of ‘deposits’ and banks. Bokan e.a. go on to state: ‘banks collect deposits from domestic households’.

Auch

Banks don’t collect  deposits. As they can’t collect what they already have.  Read more…

Modern economics — an intellectual game without practical relevance

January 5, 2018 31 comments

from Lars Syll

mblaugphotoModern economics is sick. Economics has increasingly become an intellectual game played for its own sake and not for its practical consequences for understanding the economic world. Economists have converted the subject into a sort of social mathematics in which analytical rigour is everything and practical relevance is nothing. To pick up a copy of The American Economic Review or The Economic Journal these days is to wonder whether one has landed on a strange planet in which tedium is the deliberate objective of professional publication. Economics was once condemned as “the dismal science” but the dismal science of yesterday was a lot less dismal than the soporific scholasticism of today …

If there is such a thing as “original sin” in economic methodology, it is the worship of the idol of the mathematical rigour invented by Arrow and Debreu in 1954 and then canonized by Debreu in his Theory of Value five years later, probably the most arid and pointless book in the entire literature of economics.

The result of all this is that we now understand almost less of how actual markets work than did Adam Smith or even Léon Walras. We have forgotten that markets require market-makers, that middlemen have to hold inventories to allow markets to function, that markets need to be organized and that property rights need to be defined and enforced if markets are to get started at all. We have even forgotten that markets adjust as often in terms of quantities rather than prices, as in labour markets and customer commodity markets, as Alfred Marshall knew very well but Walras overlooked; so well have we forgotten that fact that a whole branch of economics sprang up in the 1960s and 70s to provide “microfoundations” for Keynesian macroeco- nomics, that is, some ad hoc explanation for the fact that a decline in aggregate demand causes unemployment at the same real wage and not falling real wages at the same level of employment …

Indeed, much of modern microeconomics might be fairly described as a kind of geography that consists entirely of images of cities but providing no maps of how to reach a city either from any other city or from the countryside.

Mark Blaug

Mark Blaug (1927-2011) did more than any other single person to establish the philosophy and methodology of economics a respected subfield within economics. His path-breaking The methodology of economics (1980) is still a landmark (and the first textbook on economic methodology yours truly had to read as a student).   Read more…

WEA Commentaries – new issue

January 5, 2018 Leave a comment

Volume 7, Issue No. 6  Download the issue as a PDF

In this issue
A Philosophical Framework for Rethinking Theoretical Economics and Philosophy of Economics
Gustavo Marqués

Interview on The Fascist Nature of Neoliberalism
Flavia Di Mario

Doomed to Repeat
Peter Radford

The Invisible Hand in Context

Global Rentier Capitalism
David F Ruccio

Perfect Competition and Counterfactuals
Stuart Birks

Keynes was right about Quantitative Easing
Merijn Knibbe

How UBER Money Dominates and Distorts Economic Research on Ride-Hailing Platforms
Norbert Häring

Announcements and WEA contact details

Please support the WEA by paying a membership fee
or making a small donation.

Making merry on Bitcoin

January 4, 2018 11 comments

from C.P. Chandrasekhar

Bitcoin has left the world of finance gasping. Though the total market value of all of that cryptocurrency in circulation is only a fraction of the value of the world’s financial assets, the rapid rise in the value of the currency has made it the most wanted of those assets. On January 1, 2017, the currency was trading at between $972 to $990 a unit. By December 7 that range had risen to $14,063 to $17,363. According to a calculation by Reuters, an investment of $1000 in bitcoins at the beginning of 2013 would be worth around $1.2 million now. Sensing the opportunity this offers by serving as a platform for speculation, the Chicago Board Options Exchange and Chicago Mercantile Exchange launched bitcoin futures on December 10, with the contracts opening at $15,460 a unit and rising more than 20 per cent to $18,700, before shedding some of those initial gains. With these developments, a shadowy currency with a still elusive originator named Satoshi Nakamoto, moved to centre stage in financial markets.

Launched in 2009, the role of bitcoin has always been in question. What its advocates regard as its strength, decentralised management by a community that can ensure integrity through verification of transactions over a ‘public’, peer-to-peer network, many of its critiques see as its weakness, because of the absence of an issuing authority in the form of a central bank and the backing of a state. Moreover, while there are a few establishments that accept bitcoin payments, the currency is still nowhere a ubiquitous means of payment in day-to-day exchange and commodity circulation. At the end of 2013 researchers from the University of San Diego and George Mason University had estimated that 64 percent of the 12 million bitcoins that had been mined till then had not been used in an exchange transaction.   Read more…

Perfect competition and counterfactuals

January 4, 2018 3 comments

from Stuart Birks and new issue of WEA Commentaries 7(6)

From: P.17 of Birks, S. (2015). Rethinking economics: from analogies to the real world. Singapore: Springer.

Market failure is defined in comparison to the ideal of perfect competition. An alternative is needed for comparison, and value judgments must be applied to justify one situation being considered superior to another. This raises two questions:

(i) Is perfect competition the right ‘ideal’?

(ii) If it is, then given that the counterfactual is an important aspect of any policy analysis, should economic analyses compare a real situation with an unattainable ideal such as perfect competition?  Read more…

DSGE models — unparalleled and spectacular failures

January 4, 2018 3 comments

from Lars Syll

The unsellability of DSGE models — private-sector firms do not pay lots of money to use DSGE models — is one strong argument against DSGE.

But it is not the most damning critique of it.

To me the most damning critiques that can be levelled against DSGE models are the following two:

DSGE models are unable to explain involuntary unemployment

In the basic DSGE models the labour market is always cleared – responding to a changing interest rate, expected lifetime incomes, or real wages, the representative agent maximizes the utility function by varying her labour supply, money holding and consumption over time. Most importantly – if the real wage somehow deviates from its ‘equilibrium value,’ the representative agent adjust her labour supply, so that when the real wage is higher than its ‘equilibrium value,’ labour supply is increased, and when the real wage is below its ‘equilibrium value,’ labour supply is decreased.

In this model world, unemployment is always an optimal choice to changes in the labour market conditions. Hence, unemployment is totally voluntary. To be unemployed is something one optimally chooses to be.

The D WordAlthough this picture of unemployment as a kind of self-chosen optimality, strikes most people as utterly ridiculous, there are also, unfortunately, a lot of neoclassical economists out there who still think that price and wage rigidities are the prime movers behind unemployment. DSGE models basically explain variations in employment (and a fortiorioutput) with assuming nominal wages being more flexible than prices – disregarding the lack of empirical evidence for this rather counterintuitive assumption.   Read more…

Diverting class warfare into generational warfare: round LVIII

January 3, 2018 8 comments

from Dean Baker

With the Republicans having just passed a $1.5 trillion tax cut, the bulk of which goes to the richest one percent, it was inevitable that the generational warriors would come out of the woodwork and resume the attack on Social Security and Medicare. Generational warriors try to divert attention away from how our economy has redistributed income upwards over the last four decades, and convince a large portion of today’s workers that their real problems stem from their parents’ and grandparents’ overly generous retirement benefits.

The opening shot in this new round of generational warfare showed up earlier this month in The Atlantic Magazine. It told the classic story about how seniors are getting too much money back from Social Security and Medicare, the same thing we’ve been seeing for decades. (There is little expectation of originality if you’re in the business of promoting generational warfare.)

In fact, middle-income seniors will get somewhat less back from Social Security than they paid into the system. The cost of Medicare benefits does exceed their taxes, but this is because Americans pay twice as much for our doctors, drugs, medical equipment and other health care items than people in other wealthy countries.   Read more…

It’s the profits, stupid!

January 2, 2018 7 comments

from David Ruccio

profits-stocks

There’s no real mystery behind the spectacular gains in the stock market over the course of 2017. Much of it can be explained by the rise in U.S. corporate profits.  Read more…

Krugman’s misapplication of neoclassical growth models

January 1, 2018 10 comments

from Lars Syll

The fallacies loanable funds theory commits might be explainable by the misapplication​ of some ideas and concepts of neoclassical growth models … to the sphere of money and finance …

The+Bankruptcy+of+Neoclassical+EconomicsThe Ramsey and Solow models are models of real investment only. Financial markets, financial assets and financial saving do not play any role in those models. There is only one good which, for simplicity, will be called “corn”. Corn has three functions: it can be consumed, invested and used as a means of payment since wages and interest payments are made with it. Full employment is assumed … Without money and other financial assets, the only way units can save is to increase their tangible assets, i.e. to invest …

Since the problems of different financial saving plans are not dealt with in Solow’s model, the model cannot be used to make any predictions about economic units’ financial saving behavior, its inconsistencies and thus about the paradox of thrift – neither in the short, medium or long run. There is no miraculous way of short-run financial saving somehow being transformed into long run investment in tangible assets. The two are simply quite different phenomena …

How pervasive this approach is, is shown by Eggertsson and Krugman (2012) who add some features … to a basic neoclassical model. Again, no money but goods are borrowed and lent. Naturally, potential lenders have to save some of their goods before they can lend them to borrowers. But since in the real world money is normally not eaten or planted and keeps circulating in the economy when it is spent or lent, those models cannot be any guide for the analysis of a monetary economy. Specifically, what is true in a one good economy – units have to consume less to lend and invest more – is fundamentally wrong in a monetary economy.

Fabian Lindner

This should come as no surprise. Paul Krugman has repeatedly over the years argued that we should continue to use neoclassical hobby horses like Ramsey style growth, IS-LM, and AS-AD models.

Read more…

Body parts—from gifts to exchanges

December 31, 2017 4 comments

from David Ruccio

Over the course of the last two days, I’ve discussed mean gifts (which promise significant tax relief only to a small group of corporations and wealthy individuals) and mean exchanges (which leave middle-class Americans with a declining share of national income).

Now, thanks to recently completed Reuters investigation, we’re forced to confront the reality in the United States of mean exchanges that transform generous donations into desperate, mean gifts. I’m referring to the largely unregulated trade in body parts.

The selling of body parts—heads, knees, feet, torsos, and entire bodies—actually begins with the gifting of the bodies of deceased Americans, who have decided to donate their bodies to science. But in many cases it’s a mean gift, not because of the intentions of the givers (who in many cases do want to contribute to the advancement of the scientific study of the human body), but because body brokers often prey on poor people (who can’t afford the price of a proper burial).

The industry’s business model hinges on access to a large supply of free bodies, which often come from the poor. In return for a body, brokers typically cremate a portion of the donor at no charge. By offering free cremation, some deathcare industry veterans say, brokers appeal to low-income families at their most vulnerable. Many have drained their savings paying for a loved one’s medical treatment and can’t afford a traditional funeral.

“People who have financial means get the chance to have the moral, ethical and spiritual debates about which method to choose,” said Dawn Vander Kolk, an Illinois hospice social worker. “But if they don’t have money, they may end up with the option of last resort: body donation.”

Read more…

Thoughts about the sharing economy

December 31, 2017 2 comments

AirBnBRecently, Eurostat published data on the sharing economy. Its huge (graph, source: Eurostat). And this digital enhanced sharing economy should be (and is) included in GDP. But the private, non-monetary use of digital GPS apps which enhance your life as they enable you to find your way when, after attending a wedding, you get lost in rural Kent, 2:00 AM (happens…): not. There is a discussion going on if GDP tracks the changes in our life caused by the use of all kind of digital gadgets. It doesn’t. And it shouldn’t. Read more…

Is it time to ditch the natural rate hypothesis?

December 31, 2017 4 comments

from Lars Syll

Fifty years ago Milton Friedman wrote an (in)famous article arguing that (1) the natural rate of unemployment was independent of monetary policy, and (2) trying to keep the unemployment rate below the natural rate would only give rise to higher and higher inflation.

The hypothesis has always been controversial, and much theoretical and empirical work has questioned the real-world relevance of the ideas that unemployment really is independent of monetary policy and that there is no long-run trade-off between inflation and unemployment.

Although Olivier Blanchard also has his doubts — after having played around with a ‘toy model’ and looked at the data — he lands on the following advice:

iwf-chefvolkswirt-olivierFailure of either of the hypothesis leads to a more attractive trade-off​ between output and inflation, and, in the presence of shocks, suggests a stronger role for stabilization policy. If the independence hypothesis fails, adverse shocks are more costly, and stabilization policy more powerful. If the accelerationist hypothesis fails, there is more room for stabilization policy​ to be used at little inflation cost.

Where does this leave us? It would be good to have a sense of … the specific channels at work. The empirical part of this paper has shown that we are still far from it. Thus, the general advice must be that central banks should keep the natural rate hypothesis (extended to mean positive but low values of b and a) as their baseline, but keep an open mind and put some weight on the alternatives. For example, given the evidence on labor force participation and on the stickiness of inflation expectations presented earlier, I believe that there is a strong case, although not an overwhelming case, to allow U.S. output to exceed potential for some time, so as to reintegrate some of the workers who left the labor force during the last ten years.

My own view on the subject is that the natural rate hypothesis does not hold water simply because the relations it describes have never actually existed.  Read more…

1937

December 30, 2017 2 comments

from Peter Radford

Hayek says this:

“The problem which we pretend [to] solve is how the spontaneous interaction of a number of people, each possessing only bits of knowledge, brings about a state of affairs in which prices correspond to costs, etc., and which could be brought about by deliberate direction only by somebody who possesses the combined knowledge of all those individuals … “

This is from his essay ‘Economics and Knowledge’ which was published in 1937.

Hayek’s thrust is, of course, to demolish the notion that an economy can be centrally planned to any degree of efficiency. His argument is simplicity itself: the body of knowledge that exists within an economy is so asymmetrically distributed, so extensive, and so diverse, that it is not possible for anyone sitting at the center to know whether their proposals and policies are the “best” solution to whatever problem is being solved.

The “we” in that first sentence is the economics profession — his essay is based on his 1936 presidential address to the London Economic Club, so he addressing an audience of economists and attacking their assumption that everyone knows everything, which is really an assumption to make modeling more tractable rather than an effort to understand the world.

And I think he’s correct.

Knowledge is scattered about the economic landscape. It is clumpy rather than smoothly available to everyone. People hoard and protect knowledge in order to extract value from it. A pictorial representation of the spread of knowledge would look decidedly granular.

But having made this point, Hayek then goes on to commit an error:  Read more…

Resources for study of Polanyi’s Great Transformation

December 30, 2017 11 comments

from Asad Zaman

Summary: My 1000+ word summary of Polanyi’s classic: “The Great Transformation: The Political and Economic Origins of Our Times” has been wildly popular, remaining constantly among the top ten on the RWER Blog since it was was published nearly five years ago.  I have recently (25/12/26) revised and updated the post to clean up extraneous elements and clarify the substance in light of readers comments as well as my own improved understanding. Perhaps the most important element of this post is that it explains how living in a market society shapes our thoughts to conform with the commercialization it creates. Creating radical changes requires the first step of liberating our selves from these blinders, to be able to imagine radical alternatives.  I have also recorded a 28m video-talk on this topic, which has been added to the original post. This post provides links to additional material that I have written about Polanyi over the past five years.

Methodology: Moving forward from critique, Polanyi’s analysis is based on methodological principles radically different from those currently in use. Understanding and implementing these principles woujld allow us to create a new approach to economics and social sciences. My 20 page paper explaining the three fundamental principles used by Polanyi was published in the WEA Journal: Asad Zaman (2016) ‘The Methodology of Polanyi’s Great Transformation.’ Economic Thought, 5.1, pp. 44-63. A brief 1000 word explanation of this methodology is available in a WEA Pedagogy Blog post:    The Methodology of Polanyi’s Great Transformation. The post also provides a link to a 45m video lecture on this topic. (This lecture has been by far my most popular video-lecture, with more than 2000 views.) Polanyi’s analysis provides the basis for a radically different approach to economics, which considers politics, society, environment, and economics as inter-related subjects which cannot be understood in isolation. One of the deep insights of Polanyi is that economic theory itself is a product of a power struggle between different social classes and cannot be understood outside its historical context.

Ecological Collapse read more

Mean exchanges

December 29, 2017 1 comment

from David Ruccio

1-40

Yesterday, I discussed the mean-spiritedness of the Republican tax cuts—which are being sold as a gift to the middle-class but, in reality, represent a massive transfer to a small group of large corporations and wealthy individuals.

But, of course, the real violence associated with the tax-cut gift occurs before federal taxes are even levied, in the pre-tax distribution of income.

As is clear from the chart above, since the mid-1970s, the share of income captured by the top 1 percent (the red line, measured on the right-hand side) has almost doubled, rising from 10.6 percent to over 20 percent. Meanwhile, the share of income going to the middle 40 percent (the blue line, on the left) has eroded, falling from 45.2 percent to 40.4 percent.

 

Read more…

Heretics and mainstream defenders

December 28, 2017 18 comments

from Lars Syll

Larry Elliott wrote a Guardian article the other day criticizing mainstream economics, arguing that

math15we should stop treating economics as a science because it is nothing of the sort. A proper science involves testing a hypothesis against the available evidence. If the evidence doesn’t support the theory, a physicist or a biologist will discard the theory and try to come up one that does work empirically.

Economics doesn’t work like that. Theories can be shown to work only by making a series of highly questionable assumptions – such as that humans always behave predictably and rationally. When there is hard evidence that disputes the validity of the theory, there is no question of ditching the theory.

Mainstreamers, of course, were not too happy about this critique, and a bunch of them published a responseRead more…

Economists — nothing but a bunch of idiots savants

December 23, 2017 40 comments

from Lars Syll

Let’s be honest: no one knows what is happening in the world economy today …

Policymakers don’t know what to do. They press the usual (and unusual) levers and nothing happens. Quantitative easing was supposed to bring inflation “back to target.” It didn’t. Fiscal contraction was supposed to restore confidence. It didn’t …

Most economics students are not required to study psychology, philosophy, history, or politics. They are spoon-fed models of the economy, based on unreal assumptions, and tested on their competence in solving mathematical equations. They are never given the mental tools to grasp the whole picture …

Good economists have always understood that this method has severe limitations. They use their discipline as a kind of mental hygiene to protect against the grossest errors in thinking …

Today’s professional economists have studied almost nothing but economics. They don’t even read the classics of their own discipline. Economic history comes, if at all, from data sets. Philosophy, which could teach them about the limits of the economic method, is a closed book. Mathematics, demanding and seductive, has monopolized their mental horizons. The economists are the idiots savants of our time.

Robert Skidelsky

Yes indeed — modern economics has become increasingly irrelevant to the understanding of the real world. In his seminal book Economics and Reality (1997) Tony Lawson traced this irrelevance to the failure of economists to match their deductive-axiomatic methods with their subject. As shown by Skidelsky, it is as relevant today as it was twenty years ago.   Read more…

Christmas eve, 1717

December 23, 2017 4 comments

IMG_20171222_115854[1]

Source

On 24 December 1717, three hundred years ago today, a northwesterly storm hit the coasts of North Europe. About 14.000 died, over 2.000 of these in the Dutch province of Groningen but only 150 in neighboring Friesland. Why this difference? We do know the answer: Friesland had better coastal defences. Frisian ‘dijken’ were better designed, higher and, especially, better maintained than in Groningen. As Frisian public governance of these public goods was better. In 1716, the Groningen government had been warned, see the extensive report by Thomas van Seeratt, the newly appointed ‘master of coastal defences’, available and transcribed here. After 1717, money became available and the very able and dynamic van Seeratt did a good job to improve the Groningen ‘dijken’. The history of coastal defences is long, simple and somewhat repetitive: ‘After the storm, we improve our public coastal defences’ (why do you think these Frisian ‘dijken’ were better): again and again taxes are increased and monetized, governance is centralized, and designs and maintenance are improved, leading to lasting improvements. I love taxes (plus good government).

Happy Christmas.

The European Commission on how (not) to change the Eurozone

December 23, 2017 1 comment

Previous posts in this series on central banking: ideas of Willem Buiter, Richard Werner, Thomas Mayer, excerpts from a recent paper by Mike Konczal and Josh Mason, Edward Harris and ideas from the German Handelsblatt shadow council. Today: the European Commission.

Why? A lot of people want to change (European) monetary policy and central banking. This includes the members of the European Commission. They want 2 things:

  • A larger Eurozone
  • Some kind of ‘transfer’ union which somehow transfers either investments or income or financial funds to members in need (but also restricts discretionary powers of members to increase or decrease government spending).

The first point is delusional. The idea behind the second point: the Eurozone is a ‘free flow of funds’ zone. As freely flowing funds can, thanks to ‘markets’, stop suddenly or reverse course, a ‘free flow of funds’ zone is prone to financial havoc which brings entire economies to the ground. Remember above 25% unemployment in Spain and Greece, not even counting ‘broad’ unemployment. According to the EC we need better institutions to counter this. Bill Mitchell about this (excerpt):

This is the second part of my two-part series analysing the latest offering from the European Commission on Eurozone ‘reform’. Today, I consider the two ‘concrete’ proposals to emerge from last week’s – Completing Europe’s Economic and Monetary Union – policy package. The two ‘concrete’ proposals are: Creation of a European Monetary Fund to absorb the intergovernmental European Stability Fund and the integration of the Fiscal Compact into the Treaty on the Functioning of the European Union. Neither are reforms worth considering. Read more…

My philosophy of economics

December 22, 2017 24 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​e 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 — clear obstacles to science.

Read more…