from Lars Syll
We have indeed come round in a circle. The whole vision of the working of the macrosystem presented, in terms of the AD/AS model, by far too many contemporary textbooks, is essentially pre-Keynesian. Monetary spending may fluctuate, but whether or not such fluctuations affect employment and output is said to depend on reactions affecting real wages. Slow adjustment of money wages to price changes is held to account for cyclical variations in employment and output. With respect to the longer term, it is presumed that real wages return to their proper full-employment level …
As regards the fundamental elements of the Keynes conception … all have disappeared.
How have we got into this situation? In the 1970s, reflecting a general change in the political and intellectual climate, economic theorists and commentators of a right-wing, free-market persuasion began to advance, with renewed vigour, old ideas which had for the last few decades been put to the side. Under novel labels such as ‘New Classical’ and ‘New Keynesian’ theory, explanations of unemployment being simply of a voluntary or merely frictional character were reasserted, attracted sympathetic listeners and soon found their way into the burgeoning crop of macro textbooks coming on the market. Over the years distinctive features of the Keynes theory – such as the concepts of involuntary unemployment, of the marginal efficiency of capital as distinct from the marginal productivity of capital, of uncertainty as something different from mathematically measurable risk, and the understanding that the macro economy contained within itself, even in the long run, no reliable self-righting mechanism to guarantee the automatic establishment of full employment – tended to slip out of the mainstream picture. Indeed, more than that: the Keynes theory is frequently misrepresented – it is typically asserted that an assumption of wage-stickiness is the critical factor differentiating the Keynes theory from the classical theory. Scholars who should have known better have been all too ready to adopt the old classical labour market theory of unemployment as embodied in the AS curve, apparently seeing the AD/AS model as a convenient and acceptable device for allowing analysis to be extended beyond the fix-price world of IS/LM. The upshot is that mainstream teaching of macroeconomic theory is today typically propounding a view of the working of the economy which is a very long way from the vision presented in the General Theory or from the conventional wisdom of the immediate post-war years, but strikingly similar to views current long ago, before the ‘Keynesian Revolution’. It is not going too far to say that the practical common-sense of the Keynesian perspective has (at least in some not un-influential quarters) been replaced by irrelevance and fantasy.
from David Ruccio
Mainstream economists, such as Harvard’s Gregory Mankiw, celebrate international trade (including outsourcing, which they argue is just another form of international trade) at every opportunity. But right now, voters—especially in the United States and the United Kingdom—aren’t buying what mainstream economists are selling. They are (as I’ve argued here, here, and here) ignoring the so-called experts.
That rejection clearly disturbs Mankiw, who just adds fuel to the fire by arguing that the more education people acquire the more they will eventually come around to his view. The implication, of course, is that being against free trade is a sign of ignorance.
We all know that Mankiw and his mainstream colleagues have spent an enormous amount of time and effort—in abstract modeling and lending their support to trade agreements, in the classroom, research, and the public arena—extolling the benefits of more international trade.
But it’s clear, not only from the Brexit vote and the rhetoric on both sides of the current U.S. presidential campaigns, but also from a survey earlier this year by Bloomberg, that many people remain opposed to free international trade: 65 percent favor restrictions on imported goods to protect American jobs, 44 percent think NAFTA has been bad for the U.S. economy, and 82 percent are willing to pay more for U.S.-made goods. Read more…
from Mouvement des étudiants pour la réforme de l’enseignement en économie (MEPREE) France and RWER #75
The basic background ideology: free individuals, free markets and “invisible hand”
The e-Book overtly proclaims that it adheres to “methodological individualism”. That is, individuals are society’s point of departure. They are “free to choose”, between consumption and leisure for “Angela the farmer” and “Mary the employee”, e-Book’s typical consumer, and between leisure and school-grades for “student Alexei”, e-Book’s typical producer.
They are selfish, at least as a first approximation, but happily there is the “invisible hand”. The e-Book, as almost all textbooks do, quotes Adam Smith:
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest,” he wrote, adding that each would be “led by an invisible hand to promote an end which was no part of his intention” (Unit 1 page 7, our italics).
and, like other textbooks, forgets to tell the readers that several hundred pages separate the first phrase from the second – the first is in chapter 2 book I, the second in chapter 2 book IV. Only ideology – or ignorance? – can explain the fact that Smith’s two phrases are artificially linked by the expression “adding that”.
Like other textbooks, the e-Book expresses its admiration for the way prices, “governed by supply and demand”, coordinate the choices of “millions of people”:
“The amazing thing about prices determined by markets is that individuals do not send the messages; they result from the anonymous interaction of sometimes millions of people, governed by supply and demand. And when conditions change — a cheaper way of producing bread, for example — nobody has to change the message (“put bread instead of potatoes on the table tonight”). A price change results from a change in firms’ costs. The reduced price of bread says it all” (Unit 8.0, our italics).
The “invisible hand” again… Read more…
from Lars Syll
New Keynesian’ macroeconomist Simon Wren-Lewis has a post on his blog discussing how evidence is treated in modern macroeconomics (emphasis added):
It is hard to get academic macroeconomists trained since the 1980s to address this question, because they have been taught that these models and techniques are fatally flawed because of the Lucas critique and identification problems. But DSGE models as a guide for policy are also fatally flawed because they are too simple. The unique property that DSGE models have is internal consistency. Take a DSGE model, and alter a few equations so that they fit the data much better, and you have what could be called a structural econometric model. It is internally inconsistent, but because it fits the data better it may be a better guide for policy.
Being able to model a credible world, a world that somehow could be considered real or similar to the real world, is not the same as investigating the real world. Even though all theories are false, since they simplify, they may still possibly serve our pursuit of truth. But then they cannot be unrealistic or false in any way. The falsehood or unrealisticness has to be qualified (in terms of resemblance, relevance, etc.). At the very least, the minimalist demand on models in terms of credibility has to give away to a stronger epistemic demand of appropriate similarity and plausibility. One could of course also ask for a sensitivity or robustness analysis, but the credible world, even after having tested it for sensitivity and robustness, can still be a far way from reality – and unfortunately often in ways we know are important. Robustness of claims in a model does not per se give a warrant for exporting the claims to real world target systems. Read more…
from Mouvement des étudiants pour la réforme de l’enseignement en économie (MEPREE) France and RWER #75
“Students in economics all over the world were asking, just as I had asked a few years previously: why has the subject of economics become detached from our experience of real life?” (Camila Cea, Member of the CORE project, University of Chile.)
The CORE project is a response to students’ protests against teaching in economics. It wants “to make economics accessible and relevant to today’s problems”. Sadly, it doesn’t distinguish itself from usual (mainstream) “projects” as regards to ideology and basic theory. As a consequence, the CORE project e-Book doesn’t escape textbooks’ absurdities. We pinpoint five of them and we wonder if the book would still be viable if all these absurdities were eliminated.
The point of departure of the so-called “French students movement” against teaching in economics was their desire to “escape from imaginary worlds”, especially in microeconomics. The “post-autistic economics movement” emerged on the same ideas all over the world. Since then, student protests in economics surge regularly (Pepséconomie, Harvard, Manchester…). They were boosted by the 2008 crisis, but also by the rise of inequality and of precarious jobs, especially for young people.
Much of social science has come to rely on a set of analytical approaches intended to identify specific influences within a range of confounding factors. The object of analysis is to separate the strands, to distinguish different influences, to attribute influence to particular variables. This has to be done in the face of multiple, competing influences.
As a discipline, economics goes about this in different ways. The traditional approach of classical economics is theoretical and deductive. Economic reasoning typically depends on theorisation about patterns of behaviour, subject to the assumption that ‘other things are equal’. A range of models have been developed as a potential guide to analysis. Once the initial outline of a model has been determined, it is then possible successively to test the assumptions to see what the implications are of each further variable. This is the approach of much of what is done in microeconomic theory, including models of the actions of rational consumers or the behaviour of producers. Friedman argued that the test of theory was instrumental:
“Viewed as a body of substantive hypotheses, theory is to be judged by its predictive power for the class of phenomena which it is intended to ‘explain’…. To be important… a hypothesis must be descriptively false in its assumptions… the relevant question to ask about the ‘assumptions’ of a theory is not whether they are descriptively ‘realistic’, for they never are, but whether they are sufficiently good approximations for the purpose in hand” (Friedman, 1953, pp. 8, 14). Read more…
from Lars Syll
Noah Smith has an article up on Bloomberg View on Milton Friedman’s permanent income hypothesis (PIH). Noah argues that almost all modern macroeconomic theories are based on PIH, especially used in formulating the consumption Euler equations that make up a vital part of ‘modern’ New Classical and New Keynesian macro models.
So, what’s the problem? Well, only that PIH according to Smith is ‘most certainly wrong.’
Chris Dillow has commented on Noah’s PIH critique, arguing that although Noah is right
he overstates the newness of the evidence against the PIH. In fact, we’ve known it was flawed ever since the early 80s. He also overstates the PIH’s intellectual hegemony. The standard UK undergraduate textbook says:
“One strong prediction of the simple PIH model … is that changes in income that are predictable from past information should have no effect on current consumption. But there is by now a considerable body of work on aggregate consumption data that suggests this is wrong…This is an important result for economic policy because it suggests that changes in income as a result, say, of tax changes can have a marked effect on consumption and hence on economic activity.” (Carlin and Soskice, Macroeconomics: Imperfections, Institutions and Policies, p 221-22)”
Dillow then goes on arguing that PIH is not always wrong, that it is useful, and that it is basically all about ‘context’ and that this reinforces what Dani Rodrik has written in Economics Rules (p 5-6) : Read more…
from David Ruccio
U.S. Olympic rower Megan Kalmoe doesn’t want to talk about water quality anymore. As she explained on her blog, journalists are ruining the 2016 Olympic games by being “fixated on shit in the water.”
We are American, and we are going to Rio to represent you in this potentially flawed and imperfect setting that you are trying so desperately to get the public to love to hate. We are going to compete for medals to bring them home to you, and for you so that the US has a good shot at winning the medal tally again in Rio. We go to Rio and face incredible odds, some of us, for you so that you will be proud of us, and proud of supporting Team USA. We are supposed to be a Team–all of us–and those of you covering our stories, and those of you resting comfortably in your intellectual armchairs are supposed to have our backs. All of us owe something to our nation for getting us this far, or for believing in us, and competing under our shared colors is our way of expressing our gratitude to you. So tell me again why you want to talk about poop? . . .
I will row through shit for you, America.
Kalmoe and her fellow participants are, by her own admission, experts on only one thing: their performance.
Unfortunately, what she doesn’t take into account is the real shit in the water: the financing of the International Olympic Committee. That’s what makes it difficult for both viewers like me and athletes like her.
from Jayati Ghosh
Even before the results of the UK referendum, the European Union was facing a crisis of popular legitimacy. The result, especially in England and Wales, was certainly driven by the fear of more immigration, irresponsibly whipped up by xenophobic right-wing leaders who now appear uncertain themselves of what to do with the outcome. But it was as much a cry of pain and protest from working communities that have been damaged and hollowed out by three decades of neoliberal economic policies. And this is why the concerns of greater popular resonance across other countries in the EU – and the idea that this could simply be the first domino to fall–are absolutely valid. So the bloc as a whole now faces an existential crisis of an entirely different order, and its survival hinges on how its rulers choose to confront it.
A little history is in order first. The formation of the union itself, from its genesis in the Treaty of Rome in 1957, was as much a result of geopolitical pressure from the US as it was of the grand visions of those who led it. The six founding countries (Belgium, France, Germany, Italy, Luxembourg and the Netherlands) built on the hope of the European Coal and Steel Community that was established in 1950, that greater economic relations would secure lasting peace and prosperity. Somewhat ironically, they were egged on by the United States, which in the post Second World War period not only provided huge amounts of Marshall Plan aid to western Europe, but urged the reduction of trade barriers between them to encourage more intra-regional economic activity and provide an effective counter to eastern Europe during the Cold War. Read more…
from Maria Alejandra Madi
At the beginning of XX century, Joseph Schumpeter developed the concept of creative destruction to characterize the waves of development based on clusters of innovations -both technical and institutional. In the last decades, these waves have included petrochemical products, automobiles, information technologies and biotechnologies, especially genetic modification.
Looking back, throughout the postwar era in advanced Western societies, scientific research and technological development included research councils, scientific advisory boards, expert commissions and specialized government agencies in different areas, such as health, agriculture and especially atomic energy. The target was to transform the scientific and technological development in a profitable process. As a result, for instance, new kinds of chemical products have been introduced, especially fertilizers, insecticides and additives used in food production.
Accordingly Eric Hobsbawn (1997), deep concerns turned out to grow because of the social implications of these scientific and technological trends in the 1960s. Indeed, in Western societies, signals of social discontent included the critique of science and technology applied to military targets, and of the deleterious effects of automation technologies on labour and working conditions. In addition, high concern also arose on behalf of health and environmental costs that resulted from the widely-used chemical in agriculture. Read more
from Lars Syll
There have been over four decades of econometric research on business cycles … The formalization has undeniably improved the scientific strength of business cycle measures …
But the significance of the formalization becomes more difficult to identify when it is assessed from the applied perspective, especially when the success rate in ex-ante forecasts of recessions is used as a key criterion. The fact that the onset of the 2008 financial-crisis-triggered recession was predicted by only a few ‘Wise Owls’ … while missed by regular forecasters armed with various models serves us as the latest warning that the efficiency of the formalization might be far from optimal. Remarkably, not only has the performance of time-series data-driven econometric models been off the track this time, so has that of the whole bunch of theory-rich macro dynamic models developed in the wake of the rational expectations movement, which derived its fame mainly from exploiting the forecast failures of the macro-econometric models of the mid-1970s recession.
The limits of econometric forecasting has, as noted by Qin, been critically pointed out many times before.
Trygve Haavelmo — with the completion (in 1958) of the twenty-fifth volume of Econometrica — assessed the the role of econometrics in the advancement of economics, and although mainly positive of the “repair work” and “clearing-up work” done, Haavelmo also found some grounds for despair:
from David Ruccio
Almost five years ago, I suggested we start calling things by their correct names.
Take the working-class—people who are forced to have the freedom to sell their labor power for a wage. We refer to them as members of the middle-class (which needs to be “rebuilt“) and working families (who need to be helped) or, now as workers’ wages stagnate and the real value of the minimum wage declines, as the “feral underclass” (especially in theUK, in the aftermath of the riots) or the working-age poor (as in the recent AP report on the demographic composition of those living in poverty [ht: ja]).*
What’s the problem with calling it as it is? What are we afraid of? It’s the working-class, and its member are becoming increasingly impoverished. People who work for a living, or want a full-time job but can’t find one (whether or not they’re actively looking for one, since it’s getting increasingly difficult to find a decent job), represent nearly 3 out of 5 poor people. . .
So, from now on, in political and economic discourse, let’s call things by their correct names. The vast majority of people in the United States are members of the working-class. And they’re getting shafted.
Well, it seems, Americans are still struggling with the notion of the working-class (and of class more generally).
The best Donald Trump was able to come up with were “the great miners and steel workers of our country.” (Really? Trump wants to send American workers back into the mines and steel mills? Those jobs are mostly gone, and that’s a good thing.) Even Elizabeth Warren and Bernie Sanders weren’t able to refer to the working-class, preferring instead to use terms like “working people,” “hard-working families,” “workers,” and “working families”—although, in their case, when counterposed to corporate profits and CEOs, it was pretty clear they were referring to the growing class divide in the United States.
As Tamara Draut [ht: ja] explains, the American working-class is in fact changing.
According to the Irish Statistical Office, economic growth in 2015 was an unbelievable 26%. At the same time, employment increased with 2,4% or 151.000 jobs. A brisk but not exceptional pace and totally at odds with the 26% economic growth estimate. Subsectoral data underscore this anomaly: job growth was located in agriculture, tourism (food and beverage service activities) and construction. And to a much smaller extent in the computer, pharmaceutical and leasing sectors which showed, according to the institute, such an amazing growth.
1) What is capital? The national accounts define capital as a monetary variable. Many people however also talk about ‘natural capital’, ‘The stock of living and non-living components of the earth that provide a flow of valuable ecosystem goods or services‘. That’s from the Australian Bureau of Meteorology, which has issued a very good report ‘The environmental accounts landscape‘. They may underestimate the extent to which laws and regulations shape ‘capital’. But here’s an interesting graph from the report:
from Lars Syll
I definitely recommend everyone to watch this well-argued interview with Steve Keen.
To many conservative and neoliberal politicians and economists there seems to be a spectre haunting the United States and Europe today — Keynesian ideas on governments pursuing policies raising effective demand and supporting employment. And some of the favourite arguments used among these Keynesophobics to fight it are the confidence argument and the doctrine of ‘sound finance.’
from David Ruccio
As I have argued many times on this blog, representations of the economy are produced and disseminated in many different spaces (in addition to academic economics departments) and through many different media (in addition to the usual, mostly mainstream economics textbooks).
One example of this proliferation of economic representations is children’s literature. Children are the targets of educators and writers, most of whom (at least these days) are determined to make sure children get the “correct” understanding of key concepts and institutions. And, for the most part, they mirror the kinds of knowledges produced by mainstream economists, albeit with language and illustrations appropriate for children.
Scholastic offers such a list (which features Homer Price by Robert McClosky, through which students learn the “law of demand”). So does Choice Literacy (which includes Tomie dePaola’s Charlie Needs a Cloak, “good for discussing the four factors of production”). And then there’s the Rutgers University Project on Economics and Children, which groups books by concept (such as Markets and Competition, Opportunity Cost, and so on).
Motoko Rich’s view is that “By and large, the economic lessons in children’s books lean left of center” (and that may be true of books that teach the importance of sharing and gift-giving) but, at least for the books on the lists provided by economics educators these days, the tendency is much more mainstream, if not purely neoclassical. Read more…
from Dean Baker
The prospects for the Trans-Pacific Partnership (TPP) are not looking very good right now. Both parties’ presidential candidates have come out against the deal. Donald Trump has placed it at the top of his list of bad trade deals that he wants to stop or reverse. Hillary Clinton had been a supporter as secretary of state, but has since joined the opposition in response to overwhelming pressure from the Democratic base.
As a concession to President Obama, the Democratic platform does not explicitly oppose the TPP. However it does include unambiguous language opposing investor-state dispute settlement mechanisms — the extra-judicial tribunals that are an integral part of the TPP.
If the political prospects look bleak there also is not much that can be said for the economic merits of the pact. The classic story of gaining from free trade by removing trade barriers doesn’t really apply to the TPP primarily because we have already removed most of the barriers between the countries in the pact.
The United States has trade deals in place with six of the 11 countries in the TPP, so tariffs with these countries are already at or very near zero. Even with the other five countries, in most cases the formal trade barriers are already low, so pushing them to zero will not have much economic impact. Read more…
from Robert Locke
Erich Fromm’s 1941 book, with this title, came to mind while watching Donald Trump and his followers in the Cleveland arena. In his book
“Fromm distinguishes between ‘freedom from’ (negative freedom) and ‘freedom to’ (positive freedom). The former refers to emancipation from restrictions such as social conventions placed on individuals by other people or institutions. This is the kind of freedom typified by the Existentialism of Sartre, and has often been fought for historically, but according to Fromm, on its own it can be a destructive force…Fromm analyzes the character of Nazi ideology and suggests that the psychological conditions of Germany after the first world war fed into a desire for some form of new order to restore the nation’s pride. This came in the form of National Socialism and Fromm’s interpretation of Mein Kampf suggests that Hitler had an authoritarian personality structure that not only made him want to rule over Germany in the name of a higher authority … but also made him an appealing prospect for an insecure middle class that needed some sense of pride and certainty.” Widepedia.
Only he could save America Trump proclaimed to the cheering Trumpites, sprewing out a hate of Hillary Clinton that resembled the mindless chants of Hitler’s followers against the November criminals who made peace and “betrayed” Germany in 1918. In a Germany beset with massive unemployment and saddled with the war guilt clause by the victorious allies in the Versailles treaty, Hitler fanatics were willing to escape from the freedom of the Weimar Republic into a National Socialists dictatorship. History never repeats itself, but the hatred of Clinton and willingness to submit to Donald Trump I saw in the arena was a frightening reminder of events in the 1930s when Germany went berserk.
from Dean Baker
Thanks in large part to Sen. Bernie Sanders, the Democratic Party recently added a financial transactions tax to its platform. In his run for the presidential nomination, Sanders had promoted the idea of an FTT — a small sales tax on the purchase of stocks, bonds or other financial assets — as a way to finance free college for everyone, with money left over for infrastructure and other important needs. The idea has currency beyond the platform, too: Rep. Peter A. DeFazio (D-Ore.) recently reintroduced an earlier proposal for a tax of 3 cents on every 100 dollars on most financial transactions.
Talk of FTTs scares the financial industry: They would significantly reduce the industry’s revenue and profits. As soon as anyone starts taking FTTs seriously, the industry immediately begins issuing dire warnings — which, unsurprisingly, almost always amount to nonsense.
Of late, the industry has taken to pretending that the real victims of an FTT won’t be the high rollers on Wall Street, but rather middle-class families. If families have 401(k)s, industry complainers say, they will have to pay more for the trades done by the people who manage their funds. Likewise, if they have a traditional pension, each trade made by the pension will cost more.
There’s a basic problem with the industry’s logic. A great deal of research shows that trading of stock and other financial assets is hugely responsive to the cost of trading. In fact, most research shows that if the cost of trading goes up by a certain amount — say 20% — the number of trades will fall by an even larger amount, say 25%. Read more…