Origins of central banking

April 5, 2019 20 comments

from Asad Zaman

In this post, we provide some details regarding the origins of the Bank of England, the mother of all Central Banks and discuss some implications of this early history for our modern world. A link to a video-lecture on the topic is given at the bottom of the post.

We start with an excerpt from Ellen Brown in the Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free. Below, selected passages from Chapter 6: Pulling The Strings Of The King: The Moneylenders Take England: [passages in italics are my comments on the text, rest are quotes]

The first passage discusses how Queen Elizabeth asserted her sovereign right to issue money, and how the financiers worked to undermine thisread more

Why is populism on the rise and what do populists want?

April 5, 2019 3 comments

from Dean Baker

In the United States, the pay of a typical worker has badly trailed productivity growth over the last four decades, allowing only marginal improvements in living standards over this period. At the same time, a small number of people have gotten incredibly rich in the finance and tech sectors and by being top executives in major U.S. corporations. There is a similar, if somewhat less stark, picture in most other wealthy countries.

The standard story for this rise in inequality is that this is just the inevitable course of globalization and technology. While many in the elite may feel bad for those left behind, and even propose policies to help them, the line is that the rise in inequality is something that happened, not the result of conscious policy.

That is a lie. And the persistence of this lie is one of the reasons that populist politics has so much resonance in Europe and the United States.  Read more…

Economics becomes more precise and rigorous — and totally useless

April 4, 2019 34 comments

from Lars Syll

Nowadays there is almost no place whatsoever in economics education for courses in the history of economic thought and economic methodology. The standard view among mainstream economists is that students shouldn’t think about what they are doing, but just do it.

This is deeply worrying.

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.

How did we end up in this sad state?

Philip Mirowski gives the following answer:

philAfter a brief flirtation in the 1960s and 1970s, the grandees of the economics profession took it upon themselves to express openly their disdain and revulsion for the types of self-reflection practiced by ‘methodologists’ and historians of economics, and to go out of their way to prevent those so inclined from occupying any tenured foothold in reputable economics departments …

Once this policy was put in place, and then algorithmic journal rankings were used to deny hiring and promotion at the commanding heights of economics to those with methodological leanings. Consequently, the grey-beards summarily expelled both philosophy and history from the graduate economics curriculum; and then, they chased it out of the undergraduate curriculum as well.

Read more…

Economics 101: Dog barking, overgrazing and ecological collapse

April 3, 2019 12 comments

from Edward Fullbrook and RWER Special Issue: Economics and the Ecosystem

“the collapse of our civilisations and the extinction of much of the natural world is on the horizon”
(David Attenborough)

Today’s economics, especially Economics 101, is a major source of humankind’s denial of the possibility of the calamity of all calamities which our economy is engineering. Annually millions of students around the world are forced to study textbooks that indoctrinate them in to thinking that there is no significant causal connection running from our economy to the ecosphere. Once upon a time there wasn’t. Although from the first forest-clearing onwards, the economy has caused environmental damage and at an increasing rate, it was only when in the 19th century the economy began the big switch away from muscle energy that it began to acquire the means to cause lethal damage to the ecosphere.

It has now been over half a century since the natural sciences began to discover that the economy was causing fundamental and irreversible changes to the ecosphere by which we and the economy exist. Given that economics is the study of the economy, a more radical change in a science’s empirical realm is unimaginable.

In 50 years, what has economics done about it? Read more…

As US economy weakens, economists struggle to predict next recession

April 2, 2019 3 comments

from Dean Baker

Many of the people who completely missed the worst recession since the Great Depression are trying to get out front and tell us about the next one on the way. The big item glowing in their crystal ball is an inversion of the yield curve. There has been an inversion of the yield curve before nearly every prior recession and we have never had an inversion of the yield curve without seeing a recession in the next two years.

Okay, if you have no idea what an inversion of the yield curve means, it probably means you’re a normal person with better things to do with your time. But for economists, and especially those who monitor financial markets closely, this can be a big deal.

An inverted yield curve refers to the relationship between shorter- and longer-term interest rates. Typically, the longer-term interest rate — say, the interest rate you would get on a 30-year bond — is higher than what you would get from lending short-term, like buying a three-month U.S. Treasury bill.

The logic is that if you are locking up your money for a longer period of time, you have to be compensated with a higher interest rate. Therefore, it is generally true that as you get to longer durations — say, a one year bond compared to three-month bond — the interest rate rises. This relationship between interest rates and the duration of the loan is what is known as the “yield curve.”

We get an inverted yield curve when this pattern of higher interest rates associated with longer-term lending does not hold, as is now the case. For example, on March 27, the interest rate on a three-month Treasury bill was 2.43 percent. The interest rate on a 10-year Treasury bond was just 2.38 percent, 0.05 percentage points lower. This means we have an inverted yield curve.

Read more…

RCTs — a method in search of ontological foundations

April 1, 2019 6 comments

from Lars Syll

dessin2sRCTs treat social reality as though some simulacrum of laboratory conditions was a feasible and appropriate scientific method to apply, but in development research, unlike laboratory condition treatments, interventions are not manipulations of individuated and additive or simply combinable material components … but rather intervention into material social relations. While for the former, assuming away or stripping away everything other than a given effect focus can reveal the underlying invariant mechanics of that effect, in the latter one cannot take it as given that there is an underlying invariant mechanics that will continue to apply and one is just as liable to be assuming or stripping away what is important to the constitution of the material social relations … As such, RCTs may make for poor social science, because the approach is based on a mismatch between the RCT procedure and the constitution of reality under investigation—including the treatment of humans as deliberative centers of ultimate concern. In any case, technical sophistication is no guarantor of appropriately conceived “rigour” if the orientation of methods is inappropriate …

Jamie Morgan

Read more…

Traits of modern beliefs that are at the core of today’s crisis.

March 31, 2019 8 comments

from Richard Norgaard

Changes in European perceptions of themselves, both with respect to nature and social organization, also coevolved around very important new ideas about individualism that coevolved with the rise in atomism in natural philosophy. Martin Luther’s call for reform of the Catholic Church stressed that individuals were responsible for their own salvation through their own reading of the Bible, the only true source for coming to know Christ and God. Luther’s call awakened individualism, expanded education to the masses so people could read, unintentionally further separated church and state, and ignited multiple intellectual Enlightenments: English, Scottish, French and eventually in the Catholic Church and feeding back on Protestantism too (Ryrie, 2017). The natural theology that evolved into natural history and then into natural science was increasingly built on atomism and the assumption that the parts of nature could be understood apart from each other. As a result, modern science split into disciplines with each discipline learning about particular parts of nature. No one needed to understand the whole because it was thought that the parts would naturally unify into the whole. Millgram (2015) characterizes the coevolution of knowledge with technology and social organization since the Enlightenment as the Great Endarkenment. People today, scientists included, are far less conscious of the environmental system in which they live than were hunter-gatherers. The Enlightenments’ strong move toward individualism in social thinking and atomism in natural thinking became traits of modern beliefs that are at the core of today’s crisis.      Economism and the Econocene 

European Court of Justice to decide if public institutions have a right to refuse cash

March 30, 2019 2 comments

from Norbert Häring

On 27 March, the highest administrative court in Germany, the Bundesverwaltungsgericht, has referred my case to the European Court of Justice (ECJ) in Luxembourg. I have insisted to pay my legally required contributions to public radio and TV with the legal tender, euro cash. This is not possible according to their regulations. The Bundesverwaltungsgericht has ruled that there is indeed a requirement for all public institutions to accept cash based on §14 of the Bundesbank Act, which makes euro-banknotes legal tender. However, they will ask the ECJ to clarify, if this law is in agreement with higher ranking European law.

§14 Paragraph 1 Sentence 2 of the Bundesbank Act says:

“Banknotes denominated in euro shall be the sole unrestricted legal tender.”

Article 128 Paragraph 1 Sentence 3 of the Treaty on the Functioning of the European Union (TFEU) reads:

“The banknotes issued by the European Central Bank and the national central banks shall be the only such notes to have the status of legal tender within the Union.”

Read more…

Why are we getting dumber and dumber?

March 30, 2019 13 comments

from Lars Syll

Human ñ business evolution

It probably shouldn’t worry us if some pocket of the population saw a decline in IQ as things like education and diet affect IQ and these factors can vary from one group or time to another. But according to this new study it doesn’t appear to be some small segment of the population whose IQ is going down. It appears to be the entire nation of Norway.

When scientists from the Norway’s Ragnar Frisch Centre for Economic Research analyzed some 730,000 IQ tests given to Norwegian men before their compulsory military service from 1970 to 2009, they found that average IQ scores were actually sinking. And not just by some miniscule amount. Each generation of Norwegian men appear to be getting around seven IQ points dumber. Read more…

The fallacy of Ricardian equivalence

March 29, 2019 Leave a comment

from Asad Zaman

StiglitzRicardian equivalence is taught in every graduate school in the country. It is also sheer nonsense  [see “Quotes Critical of Economics” for more.] This post explains why.

In this post, we will create a simple model that demonstrates some fundamental truth of Modern Monetary Theory.  This is a variant of “.Simple Model Explains Complex Keynesian Conceptss“, We will show the following phenomena

  1. A Market Economy naturally creates an equilibrium with high unemployment and under-employment, showing existence of under-employment equilibria
  2. Government Deficit Spending increases aggregate demand, and moves the economy to full employment.
  3. Deficit Spending, also massively improves social welfare, by providing food even to the unemployed, using the additional output created by the increased aggregate demand
  4. Deficit Spending is not  “FINANCED” from any source. Government spending money which it does not have, creates welfare by injecting money into the economy. This money leads to increased output and is not inflationary. The government can continue this deficit spending forever, without worrying about sustainability or “paying back” the debt.
  5. Government Deficit injects money into the system which is exactly equal to the PROFITS of the firms, plus the SAVINGS of the laborers. Since firms work for profits while households wish to save, neither can succeed UNLESS the government runs deficits. Thus deficit spending is crucial to a capitalist economy — without it there would be no profits for business, and without profits and savings the economy would collapse.   Read more

A push to make ecocide an international crime

March 28, 2019 12 comments

Why do we wait until someone has passed away before we honour them? I believe we should overcome our embarrassment, and say it while they are with us. In this spirit, I want to tell you about the world-changing work of Polly Higgins.

She is a barrister who has devoted her life to creating an international crime of ecocide. This means serious damage to, or destruction of, the natural world and the Earth’s systems. It would make the people who commission it – such as chief executives and government ministers – criminally liable for the harm they do to others, while creating a legal duty of care for life on Earth.

It would force anyone contemplating large-scale vandalism to ask themselves, ‘Will I end up in the Hague for this?’

I believe it would change everything. It would radically shift the balance of power, forcing anyone contemplating large-scale vandalism to ask themselves: “Will I end up in the international criminal court for this?” It could make the difference between a habitable and an uninhabitable planet.

There are no effective safeguards preventing a few powerful people, companies or states from wreaking havoc for the sake of profit or power. Though their actions may lead to the death of millions, they know they can’t be touched. Their impunity, as they engage in potential mass murder, reveals a gaping hole in international law.

Last week, for instance, the research group InfluenceMap reported that the world’s five biggest publicly listed oil and gas companies, led by BP and Shell, are spending nearly $200m a year on lobbying to delay efforts to prevent climate breakdown.

George Monbiot

The real public debt problem

March 28, 2019 11 comments

from Lars Syll

The claim that our public debt is excessive has been used as a major justification for austerity – cuts in spending. That massive debt, we are told, 1) must be repaid, 2) threatens our country with bankruptcy, and 3) is a burden on future generations. All these are wrong. Let me explain why …

austerity-george-osborne-desktopBritain’s national currency is managed by our central bank, the Bank of England, owned by the citizens of the United Kingdom (that is, our elected government). As a result, the British government can never default on its bonds. Our government can replace maturing public bonds with new ones. Should private buyers, households and businesses, refuse to purchase the new bonds at the interest rate set by the British government, our government can sell them to the Bank of England …

The debt is nothing more than pieces of paper that the government promises to buy back on a specific date. These pieces of paper can be bought back with new pieces of paper (new bonds) with later buy-back dates. If the private owners of the debt paper do not want the new bonds (new debt paper), our government can sell those new bonds to the Bank of England for cash and use the cash to pay the bond holders.

John Weeks

Today there seems to be a rather widespread consensus of public debt being acceptable as long as it doesn’t increase too much and too fast. If the public debt-GDP ratio becomes higher than X % the likelihood of debt crisis and/or lower growth increases. Read more…

It is time to open up university departments of economics for alternative schools of thought.

March 27, 2019 12 comments

from Peter Söderbaum

Research and education in universities is subdivided into disciplines. There are departments of economics and departments of political science for example. Specialization and division of labour is thought of as being fruitful; Economics is about resource allocation at the micro and macro levels while political science is about democracy and governance. Something is sometimes gained through specialization but there are losses as well. This opens the door for counter-movements in terms of transdisciplinary research. Should “efficiency”, for example, be exclusively a matter for economics and economists and democracy exclusively something for political scientists?

Sustainable development is a challenge in contemporary society. It is a complex, multidimensional issue where contributions from all university disciplines can make a difference. Social sciences such as economics, business management, political science, economic history, sociology, psychology, all have something to offer. And barriers between disciplines become less relevant.

Present development is unsustainable in essential ways. Climate change and biodiversity loss are examples. This process of unsustainable development has been going on for some time and we have every reason to try to identify factors explaining the failures. This is not easy but the difficulties are no reason to refrain from attempts. Read more…

The rational expectations putsch

March 27, 2019 7 comments

from Lars Syll

The tiny little problem that there is no hard empirical evidence that verifies rational expectations models doesn’t usually bother its protagonists too much. how-many-irrational-assumptions-are-needed-for-economist-to-use-rational-expectationsRational expectations überpriest Thomas Sargent has defended the epistemological status of the rational expectations hypothesis arguing that since it “focuses on outcomes and does not pretend to have behavioral content,” it has proved to be “a powerful tool for making precise statements.”

Precise, yes, but relevant and realistic? I’ll be dipped!

In their attempted rescue operations, rational expectationists try to give the picture that only heterodox economists like yours truly are critical of the rational expectations hypothesis.

But, on this, they are, simply … eh … wrong.

Let’s listen to Nobel laureate Edmund Phelps — hardly a heterodox economist — and what he has to say: Read more…

Economic beliefs

March 27, 2019 12 comments

from Richard Norgaard

Economistic beliefs are not detrimental because they are mere beliefs. People need a belief system to live together. Yuval Harari develops this argument around the following statement.

“Any large-scale human cooperation – whether a modern state, a medieval church, an ancient city, or an archaic tribe – is rooted in common myths that exist only in people’s collective imagination” (Yuval Harari, 2014, p. 30)

Many critiques of the recent neoliberal economy make the same point that neoliberalism survives on a set of necessary public beliefs, but most critics imply that those who profit from the system orchestrate the beliefs. While not denying that those who most benefit from particular beliefs have helped push them on the masses, the process by which beliefs come to be held and sustained is more complex than this. People need beliefs to explain the system in which they live, and they need beliefs to rationalize their decisions and those of others. Furthermore, people are able to choose between alternative beliefs and rationalizations being pushed by religious organizations, interest groups, and social commentators. The dominant choice of Europeans and North Americans switched during the 20th century from Judeo-Christian explanations to neoliberal economism. And the rest of the world also made this shift on their own time scales starting from their own religious bases.  Economism and the Econocene

Mainstream versus Minsky

March 26, 2019 4 comments

from Asad Zaman

Krugman fails to understand Minsky

On the one hand, Minsky has been transformed from an eclectic outcast to a darling of the mainstream after the crisis. On the other hand, Krugman and others have failed to appreciate the central insights of Minsky, just as they did with Keynes. While Keynes had completely rejected mainstream theories on solid grounds, Hicks and Samuelson constructed a neoclassical synthesis which conceded the short-run to Keynes on the basis of short run wage rigidities, but kept the fundamentals of mainstream theories intact. Similarly, today mainstream economists like Krugman admit to being at fault in not predicting the GFC, but blame it on external factors, rather than central weaknesses in mainstream theories. Three external factors which account for the failure of economists to “see it coming” are:

  1. The GFC was Black Swan Event. A period of stability led to under-estimation of risks and a discounting of the probabilities of crisis.
  2. The Fed kept interest rates low for too long. This allowed massive credit creation, which led to bubbles
  3. Rise of Shadow Banking Industry went un-noticed. The unregulated financial sector created a crisis by making high leverage gambles, using derivatives as insurance.  read more

 

Capitalist priority to growth and profits over people and planet

March 26, 2019 7 comments

from Richard Smith

Given this unprecedented existential crisis one might expect governments would responsibly meet this climate emergency with emergency plans to prevent ecological collapse bold proposals for “deep emissions reductions in all sectors,” for “far-reaching transitions in energy, land, infrastructure, and manufacturing” and so on. After all, the 2018 IPCC 1.5°C report makes clear that on present trends we could be facing the collapse of agriculture in California, the Great Plains, India, China much of Africa, mass famine, submerging cities, destruction of the world’s last forests and worse, possibly as soon as 2040, well within the lifetimes of many leaders today and certainly their children’s and ours.  . . . . . . . . . . . . . . . .

Yet we hear no bold proposals to meet the challenge from any governments – not from European socialist parties, not from Canadians or Australians (the leading exporters of the world’s dirtiest fuels), certainly not from the Chinese (the world’s largest polluters who, moreover, are now abandoning the limits on coal-burning they just imposed last year in order to restore growth in the face of the trade war),[1] let alone from the Trump administration. Trump’s response to his own government’s prediction of a 4°C warming by 2100 is “the planet’s fate is sealed” so we may as well abandon Obama’s federal fuel-economy standards for cars and light trucks and “burn baby burn”. To the extent we hear any proposals at all, it’s just renewed calls for more of the same carbon taxes, the same fantasy tech fixes like carbon capture and storage that have manifestly failed to staunch emissions to date.  Why is that? Read more…

Global average temperature 1850 – 2018

March 25, 2019 16 comments

The real college admissions scandal is structural inequality

March 25, 2019 7 comments

from Dean Baker

The indictments last week of a number of prominent people for paying bribes to get their children into elite colleges was perhaps more amusing than shocking. The fact that rich people are often able to buy their kids into schools is hardly a secret. After all, who believes that Donald Trump would have been accepted at the University of Pennsylvania, or his son-in-law Jared Kushner would have been attending Harvard, had it not been for their wealthy fathers?

We also know about all the ways in which people who are affluent, but not super-rich, give their children a huge advantage in the college admissions process. These kids go to the best schools, either public or private, that prepare students to get into and attend an elite college. They also can count on help from tutors if they have difficulty in their classes and to improve their scores on standardized tests.

In addition, the children of the affluent can count on being able to learn and master a musical instrument, which can make an applicant more attractive to an elite school. They may become expert at a less popular sport, like fencing or horseback riding, which can also make them appear well-rounded on a college application. Read more…

Economism

March 25, 2019 5 comments

from Richard Norgaard

We live in the era of Economism. Human consciousness is deeply etched by economistic beliefs in individualism, materialism, property, markets, economic growth, and freedom as consumer choice. These beliefs are necessary to sustain the system that supports us. But the economy we have is unlikely to support our grandchildren. Natural scientists argue that we are in a new geologic era, the Anthropocene, where people have become the major force in changing the geosphere: the atmosphere, oceans, and land. But it is the economistic beliefs that describe the cosmos of most people, bind people together, support their particular behavior, and sustain the economic system. Economism is altering the physical processes of the geosphere and collapsing the diversity of the biosphere. Econocene is a more appropriate term for the new geologic era. Fossil fuels and their technologies have transformed agricultural and industrial processes, the mobility of goods and people, and the geographies of cities and rural areas. People’s values, ways of understanding, and social organization have coevolved with fossil fuels and their technologies, but it is economism that binds people together and girds the economic system we have. We need a new “ism”, a new human consciousness, to support a new relationship with Earth and its other inhabitants.     Economism and the Econocene