Economics and the new history of capitalism

September 13, 2017 5 comments

from David Ruccio

As I tell my students, nothing gets a mainstream economist frothing at the mouth quite like mentioning Karl Polanyi.

Or at least it used to, when mainstream economists actually knew who Polanyi was and grasped—however dismissively—what he wrote about the history of capitalism.

To his credit, Eric Hilt (pdf) appears to know something about the author of The Great Transformation and how his work influenced the new history of capitalism. And his review of ten recent books, including Edward Baptist’s The Half Has Never Been Told and Sven Beckert’s Empire of Cotton: A Global Historyis not as dismissive as those of other mainstream economists, such as Alan L. Olmstead.

Much of the research of economic historians focuses on questions originating in economic theory, which tend to be quite narrow. In contrast, these book present expansive narratives and explore questions that may not be amenable to the analytical tools of economists. The authors’ critical perspectives also distinguish their work from that of economic historians and make it relevant to the concerns of many popular readers. The historians of capitalism rightly remind us that economic growth and development can have human costs not captured in average incomes; that our economic history includes no small measure of cruelty, coercion, and expropriation, rather than free exchanges occurring in the context of secure property rights; and that the economic system we have today is not a natural condition, but the outcome of policy choices that could have been made differently.

Hilt is, I think, correct: the new history of capitalism does represent a reminder to—and thus an indictment of—contemporary mainstream economics, precisely because it includes an analysis of the “cruelty, coercion, and expropriation” of the emergence and development of capitalism and the idea that contemporary capitalism is “not a natural condition.”  Read more…

Going rogue: economic practice and hitting the orthodox wall

September 13, 2017 3 comments

from Andrew Vonnegut and WEA Commentaries

My work over almost 20 years would have pegged me as a pretty mainstream economist. I worked in company and market due diligence and risk analysis in emerging markets finance, then for two large international consulting firms in emerging markets policy advisory. A regular, mainstream, practicing economist.

Then I returned to the United States, started teaching a global economics class, and looked for a text. Like my texts 25 years ago, materials were largely locked into a Samuelson definition and optimization framework, with full chapters devoted to expositions of and extensions on the Heckscher-Ohlin and Rybczynski theorems. The skirmish between mainstream and heterodox economics might have another dog in the fight, or at least one quietly lurking nearby: practitioners in need of useful information and frameworks. Unrepentant Laffer disciples aside, are practitioners driven outside the mainstream in a quest for actionable insight?

Learning the traditional optimization based foundations of the discipline can be beneficial, in particular for students continuing in economics. But, lots of people taking classes are not on an academic track, whether students in undergrad economics programs, business schools, global studies or public policy programs, or as journalists or just curious people. The latter are my students. They need to learn what the global economy looks like, start asking the right questions, and develop a basic, but broad framework for deriving and understanding the merits of different answers. They don’t need to graph the HO theorem. I did that, and it never helped me solve any problems.

So, like many other members of the WEA, I developed my own class materials (then turned them into a book). The themes that I hope will give students a useful background don’t seem anything but mainstream in the practitioner’s world, but many are left out of a traditional economics education. Here are some examples.  read more

What makes economics a science?

September 12, 2017 20 comments

from Lars Syll

Well, if we are to believe most mainstream economists, models are what make economics a science.

economists3_royalblue_whiteIn a recent Journal of Economic Literature(1/2017) review of Dani Rodrik’s Economics Rules, renowned game theorist Ariel Rubinstein discusses Rodrik’s justifications for the view that “models make economics a science.” Although Rubinstein has some doubts about those justifications — models are not indispensable for telling good stories or clarifying things in general; logical consistency does not determine whether economic models are right or wrong; and being able to expand our set of ‘plausible explanations’ doesn’t make economics more of a science than good fiction does — he still largely subscribes to the scientific image of economics as a result of using formal models that help us achieve ‘clarity and consistency’.

There’s much in the review I like — Rubinstein shows a commendable scepticism on the prevailing excessive mathematisation of economics, and he is much more in favour of a pluralist teaching of economics than most other mainstream economists — but on the core question, “the model is the message,” I beg to differ with the view put forward by both Rodrik and Rubinstein.

Economics is more than any other social science model-oriented. There are many reasons for this — the history of the discipline, having ideals coming from the natural sciences (especially physics), the search for universality (explaining as much as possible with as little as possible), rigour, precision, etc.  Read more…

Who’s working for Facebook?

September 11, 2017 2 comments

from David Ruccio

There are plenty of reasons to be interested in—and, even more, concerned about—Facebook. Many of them are raised in the recent review of Facebook-related books by John Lanchester [ht: db]: the fragmentation of the polity (via the targeting of posts), the dissemination of “fake news” (which played an important role in the 2016 U.S. presidential election), the undermining of other livelihoods (such as journalism and music), the level of surveillance of users (much more than any national government), the violation of anti-monopoly rules (via individualized pricing), and so on.

All of them are important—and they get at what the Facebook business model is all about:

For all the talk about connecting people, building community, and believing in people, Facebook is an advertising company.

That’s right. That’s how the owners of Facebook make their money: they track users, collect information, and then sell that to advertisers.*

But it still doesn’t get at the issue of who works for Facebook, who creates that value, what the class structure of Facebook (and Google and other such companies) is.

Lanchester’s answer is that we, the two billion or so of us who use Facebook, actually work for the social-media giant.  Read more…

Time for critics of economics critics to move on!

September 10, 2017 5 comments

from David Orrell and WEA Commentaries

There is a growing trend for economists to write articles criticising the critics of economics. These articles follow a similar pattern. They start by saying that the criticisms are “both repetitive and increasingly misdirected” as economist Diane Coyle wrote, and might complain that they don’t want to hear one more time Queen Elizabeth’s question, on a 2008 visit to the London School of Economics: “Why did nobody see it coming?”

Economist Noah Smith – writing in a blanket critique of an extract from a 140,000 word book by John Rapley – agrees that “blanket critiques of the economics discipline have been standardized to the point where it’s pretty easy to predict how they’ll proceed.” Unlike the crisis then! “Economists will be castigated for their failure to foresee the Great Recession. Some unrealistic assumptions in mainstream macroeconomic models will be mentioned. Economists will be cast as priests of free-market ideology, whose shortcomings will be vigorously asserted.” And so on.

The articles criticising critics then tell critics it is time to adopt a “more constructive tone” and “focus on what is going right in the economics discipline” (Smith) because “only if today’s critics of economics pay more attention to what economists are actually doing will they be able to make a meaningful contribution to assessing the state of the discipline” (Coyle). If the critics being criticised are not economists, the articles often drive their point on tone home by implying that they don’t know what they are talking about, are attacking a straw man1, or (not these authors, but a popular choice) are like climate change deniers (see also here and here).

Speaking as an early adopter of the Queen Elizabeth story (in my 2010 book Economyths, recently re-released in extended form), allow me to say that I agree completely with these critic critics. Yes, economists failed to predict the most significant economic event of their lifetimes. Yes, their models couldn’t have predicted it, even in principle, based as they were on the idea that markets are inherently self-stabilising. And yes, economists didn’t just fail to predict the crisis, they helped cause it, through their use of flawed risk models which gave a false sense of security.  read more

Modern society

September 9, 2017 4 comments

from Lars Syll

california-state-spending-compared-170316-large

Everyone can create money

September 8, 2017 6 comments

from  Merijn Knibbe

Everyone can create money; the problem is to get it accepted.“ Hyman Minsky

Summary. Central banks the world over publish sophisticated Flow of Funds data which shows who and how and, to an extent, why all kinds of money are created and used and if stocks and flows of debt and money are becoming a threat to stability. Institutional analysis of these data, which looks at different kinds of credit as well as at different kinds of money and using a grid which enables the economist to distinguish between different kinds of economic sectors shows that they can be used to gauge the (in)stability of an economy. Macro-economists have too often however only looked at crude aggregates of total money or even purged money from their models while analysis of credit is, in 2017, still wanting as the connection between all kinds of money and all kinds of credit is still absent from the models, even if a monetary sector is increasingly added to these models.

This piece benefitted from helpful remarks by Josh Mason and Diane Coyle.

  1. Introduction: the measurement of monies  

Money is measured by statisticians working at central banks. Or rather, some kinds of money are recorded by these statisticians. Others aren’t. Stamps can be a work of art (picture 1, super model Doutzen Kroes photographed by super photographer Anton ‘Joshua tree’ Corbijn).1

But stamps are not only tokens of art. They are money, too. Even when we use the restricted functional definition of money which can be found in most textbooks, which defines money as a store of value, a means of exchange and a unit of account, it is clear that stamps are money – including, nowadays, their own unit of account. But the question why it’s a means of exchange etc. is of course more interesting: we trust ‘the post’ to deliver our letters (dwindling market) and packages (increasing market). And to honor this implicit contract. And rightly so. Dutch stamps have for some years been their own unit of account but I can still use my Euro dominated ones which occasionally surface from the occasional drawer.  read more

Beyond the trinity formula

September 7, 2017 5 comments

from David Ruccio

labor-income

John Hatgioannides, Marika Karanassou, and Hector Sala are absolutely right: mainstream macroeconomists and policymakers never venture beyond the “holy trinity” of economic growth, inflation, and unemployment.* Everything else, including the distribution of income and wealth, is relegated to the fringes.  Read more…

The history of ‘New Keynesianism’

September 6, 2017 1 comment

from Lars Syll

Stage 0. Late 1960’s. The Phelps volume, and Milton Friedman’s paper (pdf), both thinking about the microfoundations of the Phillips Curve, the difference between actual and expected inflation, and the role of monetary policy. This was the ancestral homeland of both New Keynesian and New Classical macroeconomics, which could not be distinguished at this stage …

nk-2-2Stage 1. Mid 1970’s. Now we see the difference. A distinct New Keynesian approach emerges. New Keynesians assume that prices (and/or wages) are set in advance, at expected market-clearing levels, before the shocks are known. This means that monetary policy can respond to those shocks, and help prevent undesirable fluctuations in output and employment. Even under rational expectations …

Stage 2. Late 1980’s. New Keynesians introduce monopolistic competition. This has two big advantages. First, you can now easily model price-setting firms as choosing a price to maximize profit… Second, because if a positive demand shock hits a perfectly competitive market, where prices are fixed at what was the expected market-clearing level, firms would ration sales, and you get a drop in output and employment, rather than a boom. And the world doesn’t seem to look like that.

Stage 3. Early 2000’s. New Keynesians introduce monetary policy without money. They become Neo-Wicksellians … There were two advantages to doing this. First, it let them model households’ and firms’ choices without needing to model the demand for money and the supply of money. Second, it made it easier to talk to central bankers who already thought of central banks as setting interest rates.

Which brings us to the End of History.

What about microfoundations? Well, it was an underlying theme, but there is nothing distinctively New Keynesian about that theme …

Likewise with rational expectations. New Keynesians just went with the flow.

Nick Rowe

Read more…

Stocks and wages

September 6, 2017 4 comments

from David Ruccio

DJIA-wages

The new jobs report is out and, once again, little has changed—including wage growth (the blue line in the chart above), which for production and nonsupervisory workers was only 2.3 percent.  Read more…

Two forthcoming online WEA Conferences

September 6, 2017 Leave a comment

Revealed preference theory — much fuss about ‘not very much’

September 5, 2017 3 comments

from Lars Syll

Paul-Samuelson-Pioneer-of-Revealed-Preference-TheoryWe must learn WHY the argument for revealed preference, which deceived Samuelson, is wrong. As per standard positivist ideas, preferences are internal to the heart and unobservable; hence they cannot be used in scientific theories. So Samuelson came up with the idea of using the observable Choices – unobservable preferences are revealed by observable choices … Yet the basic argument is wrong; one cannot eliminate the unobservable preference from economic theories. Understanding this error, which Samuelson failed to do, is the first knot to unravel, in order to clear our minds and hearts of the logical positivist illusions.

Asad Zaman

This blog post made me come to think about an article on revealed preference theory that yours truly wrote twenty-five years ago and got published in History of Political Economy (no. 25, 1993).

Paul Samuelson wrote a kind letter and informed me that he was the one who had recommended it for publication. But although he liked a lot in it, he also wrote a comment — published in the same volume of HOPE — saying: Read more…

New issue of WEA Commentaries

September 4, 2017 Leave a comment
The August issue of WEA Commentaries is now available at: https://www.worldeconomicsassociation.org/files/2017/09/Issue7-4.pdf
Content is as follows:
Eveybody can create money Merijn Knibbe

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Adam Smith and Altruism

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Time for critics of economics critics to move on David Orrell

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Two forthcoming WEA conferences

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Going rogue: Economic practice and hitting the orthodox wall  Andrew Vonnegutt

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Why economics needs pluralism Edward Fullbrook

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On Hayek, digital currencies and private money Maria Alejandra Madi

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An ongoing WEA conference

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Announcements and WEA contact details

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Economics in Wonderland

September 4, 2017 5 comments

from David Ruccio

“When I use a word,” Humpty Dumpty said in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”
“The question is,” said Alice, “whether you can make words mean so many different things.”
“The question is,” said Humpty Dumpty, “which is to be master—that’s all.”

Alice in Wonderland (pdf) is the key to understanding much of what is happening in the world today—especially the language of economics.

For example, we’re going to hear and read a great deal about tax reform in the days and weeks ahead. But, based on the proposals I’ve seen, nothing in the way of tax reform is being proposed.

The usual meaning of reform is that it involves changes for the better. Most of the so-called reforms that are being proposed by the Trump administration—including the vague speech by Donald Trump yesterday—are just cuts in the tax rates that will directly benefit wealthy individuals and large corporations.

fredgraph

Supposedly, the rest of us will eventually benefit because of increased investment. However, as is clear from the chart above, both corporate profits and private domestic investment are doing just fine without a cut in tax rates. But the benefits to the rest of us simply haven’t appeared.  Read more…

What is wrong with economic theory

September 3, 2017 5 comments

from Lars Syll

wea-ebookcover-syll-225x300“A wonderful set of clearly written and highly informative essays by a scholar who is knowledgeable, critical and sharp enough to see how things really are in the discipline, and honest and brave enough to say how things are. A must read especially for those truly concerned and/or puzzled about the state of modern economics.”
Tony Lawson

Table of Contents
Introduction
What is (wrong with) economic theory?
Capturing causality in economics and the limits of statistical inference
Microfoundations – spectacularly useless and positively harmful
Economics textbooks – anomalies and transmogrification of truth
Rational expectations – a fallacious foundation for macroeconomics
Neoliberalism and neoclassical economics
The limits of marginal productivity theory

About the author
Lars Pålsson Syll received a PhD in economic history in 1991 and a PhD in economics in 1997, both at Lund University, Sweden. Since 2004 he has been a professor of social science at Malmö University, Sweden. His primary research areas have been in the philosophy and methodology of economics, theories of distributive justice, and critical realist social science. As philosopher of science and methodologist, ​he is a critical realist and an outspoken opponent of all kinds of social constructivism and postmodern relativism. As a ​social scientist and economist, ​he is strongly influenced by John Maynard Keynes and Hyman Minsky. He is the author of Social Choice, Value and Exploitation: an Economic-Philosophical Critique (in Swedish, 1991), Utility Theory and Structural Analysis(1997), Economic Theory and Method: A Critical Realist Perspective (in Swedish, 2001), The Dismal Science (in Swedish, 2001), The History of Economic Theories(in Swedish, 4th ed., 2007), John Maynard Keynes (in Swedish, 2007), An Outline of the History of Economics (in Swedish, 2011), as well as numerous articles in scientific journals.

World Economics Association Books

Houston, Bangladesh, and Global Warming

September 1, 2017 Leave a comment

from Dean Baker

We are seeing many terrible pictures from Houston as a result of Hurricane Harvey. People with young children and pets are wading through high water in the hope of being rescued by boat or helicopter. Elderly people in nursing homes are sitting in waist high water waiting to be rescued. It’s a pretty horrible story.

One thing we can feel good about is that because the United States is a wealthy country, we do have large numbers of boats and helicopters and trained rescue workers able to assist the victims of the storm. We also have places where we can take these people where they will have shelter, as well access to food and medical care. However bad the human toll will be from Harvey, it would be hugely worse without these resources.

This might be a good time for people to take a moment to think about Bangladesh, a densely populated country on the other side of the world. More than 160 million people live in Bangladesh. Almost half of these people live in low-lying areas with an elevation of less than 10 meters (33 feet) above sea level.

Bangladesh experiences seasonal monsoon rains which invariably lead to flooding, as well as occasional cyclones. The monsoon rains and cyclones are likely to get worse in the years ahead, as one of the effects of global warming. This will mean that the flooding will be worse.  Read more…

Slick maneuvers

September 1, 2017 14 comments

from David Ruccio

Corporate duplicity, it seems, knows no bounds.

First, ExxonMobil misled the public about climate change for years, even as its research echoed the growing scientific consensus that global warming is real and caused by human activity. Then, while various states attorneys-general launched investigations of whether Exxon deceived shareholders and the public to protect its profits, the Wall Street Journal published 21 opinion pieces about current or potential Exxon investigations, all of which were critical of government entities investigating Exxon.

We now know, thanks to a study by two Harvard University researchers, Geoffrey Supran and Naomi Oreskes, that Exxon acknowledged that climate change is real and human-caused in 83 percent of peer-reviewed papers and 80 percent of internal documents. Yet, 81 percent of editorial-style advertisements it placed in the New York Times from 1989 to 2004 expressed considerable doubt.

Their conclusion?   Read more…

On Hayek and digital currencies

from Maria Alejandra Madi

In the book Denationalisation of Money- the Argument Refined (1976), Hayek proposed the abolition of the government’s monopoly over the issue of fiat money in order to prevent price instability. In fact, his defense of a complete privatization of money supply stemmed from his disappointment with central banks’ management, which, in his opinion, had been highly influenced by politics. Thus, the ultimate objective of the denationalisation of money advocated by Hayek was related to avoid political interference on monetary policy.

Therefore, the denationalisation of money would be achieved by the complete abolition of the government monopoly over the issue of fiat money.  In the framework of a free market monetary regime, only those currencies that have a stable purchasing power would survive.  The basic idea is that the possibility of banks issuing different currencies would open the way to market competition. Banks could issue non-interest bearing certificates and deposit accounts on the basis of their own distinct registered trade mark and the currencies of different banks would be traded at variable exchange rates. This proposal would leave the way open for a comprehensive privatisation of the supply of money.

Hayek underlined that the main advantage of the free market competitive order is that prices will convey to the acting individuals the relevant information to make decisions to adjust their activities in face of the competition of currencies. He highlighted  the uses of money that would chiefly affect the choice among available kinds of currencies: i)  as ash purchases of commodities and services, ii)  as reserves for future needs; iii) as deferred payments, and iv) as unit of account.   In his opinion, these uses are consequences of the basic function of money as a medium of exchange and  the stability of the value of a currency as unit of account is the most desirable of all uses (Hayek, 1976: 67).  read more

On the limits of game theory

August 31, 2017 8 comments

from Lars Syll

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

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

For those of you who are not familiar with game theory, but eager to learn something relevant about it, I have three suggestions:

Start with the best introduction there is  Read more…

The Indian Economy: 70 years after Independence

August 30, 2017 2 comments

from C. P. Chandrasekhar

The defining feature of the economic programme of independent India’s first government was to accelerate the transition to a modern economy dominated by industry. Agriculture and related activities at that time accounted for around half of GDP and modern industry in the form of factory establishments for just above 6 per cent. Thus, colonial rule had made India the victim of the barriers to productivity increase typical of predominantly agrarian economies.

These circumstances influenced the Nehruvian vision that made rapid diversification in favour of manufacturing the principal economic objective. The ‘big planners’ of that time did recognize that this will not deliver the jobs needed to absorb the country’s large underemployed and unemployed labour force and address the extreme poverty and deprivation that colonialism had left behind. But those challenges it was argued could be addressed separately, so long as growth got going.

At first it appeared that success was at hand. The years after 1951, and especially after 1956, did see large and rapidly rising investments in industry and infrastructure. But, it is clear, with hindsight, that the process lost momentum rather early. The share of manufacturing in GDP did rise from around 9 per cent in 1950-51 to 16 per cent in 1961. But it did not cross the 18 per cent mark for a little more than a decade after that, and touched 20 per cent at its peak in 1996. This was well short of what had been achieved in many other comparable economies. In 1971, manufacturing’s share in GDP stood at 29 per cent in Brazil and 35 per cent in China. In 1996, the figure was 27 per cent in Korea, 28 per cent in Malaysia and 26 per cent in Thailand. The contribution of manufacturing to employment in India was, as expected, was even more dismal.  Read more…