from David Ruccio
The capitalist machine is broken—and no one seems to know how to fix it.
The machine I’m referring to is the one whereby the “capitalist” (i.e., the boards of directors of large corporations) converts the “surplus” (i.e., corporate profits) into additional “capital” (i.e., nonresidential fixed investment)—thereby preserving the pact with the devil: the capitalists are the ones who get and decide on the distribution of the surplus, and then they’re supposed to use the surplus for investment, thereby creating economic growth and well-paying jobs.
The presumption of mainstream economists and business journalists (as well as political and economic elites) is that the capitalist machine is the only possible one, and that it will work. Read more…
from Norbert Haering
In early November, without warning, the Indian government declared the two largest denomination bills invalid, abolishing over 80 percent of circulating cash by value. Amidst all the commotion and outrage this caused, nobody seems to have taken note of the decisive role that Washington played in this. That is surprising, as Washington’s role has been disguised only very superficially.
US-President Barack Obama has declared the strategic partnership with India a priority of his foreign policy. China needs to be reined in. In the context of this partnership, the US government’s development agency USAID has negotiated cooperation agreements with the Indian ministry of finance. One of these has the declared goal to push back the use of cash in favor of digital payments in India and globally.
On November 8, Indian prime minster Narendra Modi announced that the two largest denominations of banknotes could not be used for payments any more with almost immediate effect. Owners could only recoup their value by putting them into a bank account before the short grace period expired. The amount of cash that banks were allowed to pay out to individual customers was severely restricted. Almost half of Indians have no bank account and many do not even have a bank nearby. The economy is largely cash based. Thus, a severe shortage of cash ensued. Those who suffered the most were the poorest and most vulnerable. They had additional difficulty earning their meager living in the informal sector or paying for essential goods and services like food, medicine or hospitals. Chaos and fraud reigned well into December.
Not even four weeks before this assault on Indians, USAID had announced the establishment of „Catalyst: Inclusive Cashless Payment Partnership“, with the goal of effecting a quantum leap in cashless payment in India. The press statement of October 14 says that Catalyst “marks the next phase of partnership between USAID and Ministry of Finance to facilitate universal financial inclusion”. The statement does not show up in the list of press statements on the website of USAID (anymore?). Not even filtering statements with the word “India” would bring it up. To find it, you seem to have to know it exists, or stumble upon it in a web search. Indeed, this and other statements, which seemed rather boring before, have become a lot more interesting and revealing after November 8.
from Lars Syll
The best economics article of 2016 in my opinion was Paul Romer’s extremely well-written and brave frontal attack on the theories that has put macroeconomics on a path of ‘intellectual regress’ for three decades now:
Macroeconomists got comfortable with the idea that fluctuations in macroeconomic aggregates are caused by imaginary shocks, instead of actions that people take, after Kydland and Prescott (1982) launched the real business cycle (RBC) model …
In response to the observation that the shocks are imaginary, a standard defence invokes Milton Friedman’s (1953) methodological assertion from unnamed authority that “the more significant the theory, the more unrealistic the assumptions.” More recently, “all models are false” seems to have become the universal hand-wave for dismissing any fact that does not conform to the model that is the current favourite.
The noncommittal relationship with the truth revealed by these methodological evasions and the “less than totally convinced …” dismissal of fact goes so far beyond post-modern irony that it deserves its own label. I suggest “post-real.”
There are many kinds of useless ‘post-realeconomics held in high regard within mainstream economics establishment today. Few — if any — are less deserved than the macroeconomic theory/method — mostly connected with Nobel laureates Finn Kydland, Robert Lucas, Edward Prescott and Thomas Sargent — called calibration. Read more…
from Peter Radford
I am not going to become involved in endless analysis of Trump’s presidency. I think we ought let it speak for itself.
Nor am I going to waste space critiquing the huge contribution that academic economics has made to Trump’s rise to power. I think the anti-democratic nature of mainstream economics is both palpable and speaks for itself too. Economics is largely a libertarian discipline and sneers at anything remotely involving “we the people” unless it can re-package us as some sort of mystical marketplace. In which case we all are perfect. It’s only when we vote that we, apparently, become venal, self-serving, irrational, and riddled with error.
Nor am I going to re-litigate the Clinton campaign, it was so lamentable in its total misunderstanding of the state of the nation that it deserves legendary status as an all time bust. Then again we ought to have been warned: Clinton was rejected in 2008 for very similar reasons. Quite why the Democratic Party powers-that-be allowed themselves to be fooled by her combination of incompetence and neoliberal nonsense is beyond me.
With that out of the way: we enter a new year of remarkable uncertainty. Trump is an extraordinarily weak man, he is prone to gaffes, he has no clue about economics, his foreign policy is already disrupting alliances and making the world less safe, and he will undoubtedly be at odds with the Republicans in Congress before long. My guess is that they realize how easily he can be maneuvered by the simplest of flattery and they are thus salivating at the chance to ram through their anti-social attack on workers, the safety net, and all things vaguely Obama as soon as things start up again later this month.
I would like to be able to say that Obama left the economy in reasonable shape, but the scar of inequality prevents me from being able to. The enormous gulf that has opened up in society, with one part able to trumpet opportunity, wealth, and optimism, and the much larger part facing decline, stagnation, pessimism, and decreasing healthiness is the legacy of the entire Reagan/Clinton/Bush/Obama era. It is a blot on our own sense of achievement. It is a blight that the next few decades will have to both endure and attempt to eliminate. Read more…
from Dean Baker
Breaking the taxi industry cartel’s and promoting Uber has been somewhat of a cause celebre among economists in recent years. Any card carrying economist can give you the two minute tirade on the evils of the taxi cartel and the benefits of Uber. (I can too, but the argument should be for modernized regulation, not Uber gets to do whatever it wants because it’s Uber, see pieces here, here, and here.)
What is striking is that the enthusiasm for the virtues of competition seems to disappear when we switch the topic from the taxi cartel to the doctors’ cartel. Doctors actually have been far more effective than taxi companies in limiting competition. Doctors largely get to set standards of care, which not surprisingly requires twice as high a percentage of highly-paid specialists as in other wealthy countries. They also restrict the number of doctors with a wonderfully protectionist rule that prohibits doctors from practicing in the United States unless they have completed a U.S. residency program. This means that even well-established doctors in places like Germany, France, and Canada would face arrest if they attempted to practice medicine in the United States. Read more…
from David Ruccio
When it comes to artificial intelligence and automation, the current White House seems to want to have it both ways.
On one hand, it warns about the potentially unequalizing, “winner-take-most” effects of the economic use of artificial intelligence:
Research consistently finds that the jobs that are threatened by automation are highly concentrated among lower-paid, lower-skilled, and less-educated workers. This means that automation will continue to put downward pressure on demand for this group, putting downward pressure on wages and upward pressure on inequality. In the longer-run, there may be different or larger effects. One possibility is superstar-biased technological change, where the benefits of technology accrue to an even smaller portion of society than just highly-skilled workers. The winner-take-most nature of information technology markets means that only a few may come to dominate markets. If labor productivity increases do not translate into wage increases, then the large economic gains brought about by AI could accrue to a select few. Instead of broadly shared prosperity for workers and consumers, this might push towards reduced competition and increased wealth inequality.
But then it invokes, and repeats numerous times across the report, the usual mainstream economists’ nostrums about the “strong relationship between productivity and wages”—such that “with more AI the most plausible outcome will be a combination of higher wages and more opportunities for leisure for a wide range of workers.”
Except, of course, historically that has not been the case—certainly not in the United States. Read more…
from Lars Syll
The correlation between high executive pay and good performance is “negligible”, a new academic study has found, providing reformers with fresh evidence that a shake-up of Britain’s corporate remuneration systems is overdue.
Although big company bosses enjoyed pay rises of more than 80 per cent in a decade, performance as measured by economic returns on invested capital was less than 1 per cent over the period, the paper by Lancaster University Management School says.
“Our findings suggest a material disconnect between pay and fundamental value generation for, and returns to, capital providers,” the authors of the report said.
In a study of more than a decade of data on the pay and performance of Britain’s 350 biggest listed companies, Weijia Li and Steven Young found that remuneration had increased 82 per cent in real terms over the 11 years to 2014 … The research found that the median economic return on invested capital, a preferable measure, was less than 1 per cent over the same period.
Mainstream economics textbooks usually refer to the interrelationship between technological development and education as the main causal force behind increased inequality. If the educational system (supply) develops at the same pace as technology (demand), there should be no increase, ceteris paribus, in the ratio between high-income (highly educated) groups and low-income (low education) groups. In the race between technology and education, the proliferation of skilled-biased technological change has, however, allegedly increased the premium for the highly educated group. Read more…
The employment rate in Finland: from a high level equilibrium to a low level equilibrium
Is it possible for an economy to suddenly switch from a rather stable situation of high employment and prosperity to another rather stable situation of low unemployment which, surely in the longer run, puts the prosperity or large groups of people into jeopardy? Neoclassical economists say; ‘NO’! Lasting high unemployment is caused by real wages which are too high, which lures too many people into the labor force! (I’m not making this up – they want to cure unemployment by kicking people out of the labor market!). ‘Yes’ says Roger Farmer and say Marco Fioramanti and Robert Waldmann. Read more…
from David Ruccio
During the recent presidential campaign, Donald Trump promised to revitalize American manufacturing—and bring back “good” manufacturing jobs. So did Hillary Clinton.
What neither candidate was willing to acknowledge is that, while manufacturing output was already on the rebound after the Great Recession, the jobs weren’t going to come back.
As is clear from the chart above, manufacturing output has grown (by about 21 percent) since the end of the recession and is now nearing pre-recession levels (although still down from its pre-crash level by about 5 percent). But employment in the manufacturing sector is only up a small amount (8 percent) since its post-crash low and is still lower, by about 1.5 million jobs (or 11 percent), than in December 2007. Read more…
from Lars Syll
To complete the reconciliation of Keynesian economics with general equilibrium theory, Paul Samuelson introduced the neoclassical synthesis in 1955 …
In this view of the world, high unemployment is a temporary phenomenon caused by the slow adjustment of money wages and money prices. In Samuelson’s vision, the economy is Keynesian in the short run, when some wages and prices are sticky. It is classical in the long run when all wages and prices have had time to adjust….
Although Samuelson’s neoclassical synthesis was tidy, it did not have much to do with the vision of the General Theory …
In Keynes’ vision, there is no tendency for the economy to self-correct. Left to itself, a market economy may never recover from a depression and the unemployment rate may remain too high forever. In contrast, in Samuelson’s neoclassical synthesis, unemployment causes money wages and prices to fall. As the money wage and the money price fall, aggregate demand rises and full employment is restored, even if government takes no corrective action. By slipping wage and price adjustment into his theory, Samuelson reintroduced classical ideas by the back door—a sleight of hand that did not go unnoticed by Keynes’ contemporaries in Cambridge, England. Famously, Joan Robinson referred to Samuelson’s approach as ‘bastard Keynesianism.’
The New Keynesian agenda is the child of the neoclassical synthesis and, like the IS-LM model before it, New Keynesian economics inherits the mistakes of the bastard Keynesians. It misses two key Keynesian concepts: (1) there are multiple equilibrium unemployment rates and (2) beliefs are fundamental.
Not that long ago Paul Krugman had a post up on his blog telling us that what he and many others do is “sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point” and that “New Keynesian models are intertemporal maximization modified with sticky prices and a few other deviations.” Read more…
from Jonathan Nitzan
from Asad Zaman
This 7th post in a series about re-reading Keynes, starts the discussion of Chapter 2 of General Theory, which deals with the Classical (and neoclassical) Postulates characterizing the Labor market. The astonishing fact is that Keynes central arguments regarding how the labor market can fail to be at equilibrium, despite flexible wages, were never understood. As a consequence, the theory of the labor market is taught today exactly as it was prior to Keynes, and completely disregards Keynesian objections, and the Keynesian alternative. This post makes a start on Chapter 2, and the analysis will be continued in later posts.
In this chapter, Keynes formulates and rebuts the (neo)-classical theory of the labor market and presents an alternative theory of employment. This chapter was apparently never understood by economists, who mis-interpreted it as stating that unemployment arises due to price rigidities. In fact, Keynes held this position earlier, but renounces it explicitly in this chapter. His theory of employment states that the real wage is an “emergent” phenomenon. That is micro level decisions and actions of laborers and firms are based on nominal wages, but the complex economic system itself determines the general level of prices which is not in control of individual agents. So the real wage is out of reach of individual actors, and even though all parties may try to reduce real wages, they may fail to do so, because prices may respond in un-anticipated ways.
Keynes starts out be stating the classical postulates for the labor market, which continue to be the basis of modern labor economics. read more
The cemetery at Lampedusa were the locals and the drowned immigrants from Africa are buried.
from Lars Syll
In my judgment, the practical usefulness of those modes of inference, here termed Universal and Statistical Induction, on the validity of which the boasted knowledge of modern science depends, can only exist—and I do not now pause to inquire again whether such an argument must be circular—if the universe of phenomena does in fact present those peculiar characteristics of atomism and limited variety which appear more and more clearly as the ultimate result to which material science is tending …
The physicists of the nineteenth century have reduced matter to the collisions and arrangements of particles, between which the ultimate qualitative differences are very few …
The validity of some current modes of inference may depend on the assumption that it is to material of this kind that we are applying them … Professors of probability have been often and justly derided for arguing as if nature were an urn containing black and white balls in fixed proportions. Quetelet once declared in so many words—“l’urne que nous interrogeons, c’est la nature.” But again in the history of science the methods of astrology may prove useful to the astronomer; and it may turn out to be true—reversing Quetelet’s expression—that “La nature que nous interrogeons, c’est une urne”.
Professors of probability and statistics, yes. And more or less every mainstream economist!
The standard view in statistics – and the axiomatic probability theory underlying it – is to a large extent based on the rather simplistic idea that ‘more is better.’ But as Keynes argues – ‘more of the same’ is not what is important when making inductive inferences. It’s rather a question of ‘more but different.’ Read more…
from David Ruccio
There are two sides to the recent China Shock literature created by David Autor and David Dorn and surveyed by Noah Smith.
On one hand, Autor and Dorn (with a variety of coauthors) have challenged the free-trade nostrums of mainstream economists and economic elites—that everyone benefits from free international trade. Using China as an example, they show that increased trade hurt American workers, increased political polarization, and decreased U.S. corporate innovation.
On the other hand, invoking the China Shock has tended to reinforce economic nationalism—treating China as an unitary entity, a country has shaken up world trade patterns, and disregarding the conditions and consequences of increased trade with other countries, including the United States. Read more…
from Dean Baker
While Trump is right to emphasize the need for more and better infrastructure, his program is not the way to address the problem.
There is much research showing the benefits of spending on traditional infrastructure such as roads and bridges. There are also likely to be large gains from less traditional areas like broadband, where the U.S. ranks poorly among wealthy countries, and improving the quality of public drinking water to avoid more Flint disasters. Ideally, a public investment agenda would carry over into areas like early childhood education, which we know provides huge benefits to the children directly affected and the economy over the longer term.
The economy can still use a further boost to demand. The percentage of the prime age population (ages 25-54) that is employed is still down by 2 full percentage points from pre-recession levels and four points from the year 2000 peaks. There is no evidence that the economy is pushing against limits in either more rapid wage growth or accelerating inflation. There is little reason not to push the economy to see how many more workers can be employed, especially since those who would get jobs are disproportionately Hispanic, African-American, and the less-educated, who are still less likely than others to have jobs.
But based on what is known to date, the Trump plan is not likely to meet these needs. Read more…
from Lars Syll
Paul Krugman has in numerous posts on his blog tried to defend “the whole enterprise of Keynes/Hicks macroeconomic theory” and especially his own somewhat idiosyncratic version of IS-LM.
The main problem is simpliciter that there is no such thing as a Keynes-Hicks macroeconomic theory!
So, let us get some things straight.
There is nothing in the post-General Theory writings of Keynes that suggests him considering Hicks’s IS-LM anywhere near a faithful rendering of his thought. In Keynes’s canonical statement of the essence of his theory in the 1937 QJE-article there is nothing to even suggest that Keynes would have thought the existence of a Keynes-Hicks-IS-LM-theory anything but pure nonsense. So of course there can’t be any “vindication for the whole enterprise of Keynes/Hicks macroeconomic theory” – simply because “Keynes/Hicks” never existed.
And it gets even worse!
John Hicks, the man who invented IS-LM in his 1937 Econometrica review of Keynes’ General Theory – ‘Mr. Keynes and the ‘Classics’. A Suggested Interpretation’ – returned to it in an article in 1980 – ‘IS-LM: an explanation’ – in Journal of Post Keynesian Economics. Self-critically he wrote: Read more…
Next year we’ll witness the hundreth anniversary of the Russian Revolution. Here a link from the Marginal Revolution blog. Below a letter by Pjotr Aleksejevitsj Prpotkin, a leading anarchist and one of the keenest scientific minds of the decades around 1900, to Vladimit Iljitsj Lenin. Note that he wrote this as early as March 1920, note also that at this time a civil war not completely unlike the present turmoil in Syria was raging in Russia. Read especially the last part. Read more…
New paperback from WEA Books
Narrative Fixation in Economics
by Edward Fullbrook
Here are the book’s various Amazon pages: United States $20, Brazil, Canada, France, Germany, India, Italy, Japan, Mexico, Spain, United Kingdom £15
Chapter 1: The narrative pluralism of physics
Chapter 2: Intersubjective reality, intrasubjective theory
Chapter 3: Concealed ideology
Chapter 4: From the natural to the social
Chapter 5: Narrative rationality
Chapter 6: What is the difference between theories about “economic man” and theories about rats?
“This is a great book. Against the background of the dogmatism of much of modern economics, Fullbrook has produced an innovative, wide-ranging argument for narrative pluralism. The timely book is beautifully written, accessible to all, provocative, extraordinarily insightful, and extremely compelling.”
Tony Lawson, Cambridge University, UK Read more…
Oké. I’m a teacher. So, I’m primed and educated to be an arrogant nitpicker. But let’s make the best of a this dire situation and trash the work of Ferdinando Giugliano and Christian Odendahl who defile the language of scientific economics. Which is not just a mistake but a dangerous act which might cause misunderstandings and destructive economic policies. On the website of the Centre for European Reform they state about Italy: “But Italy mostly has itself to blame. The abysmal productivity growth over two decades is also down to successive governments’ failure to invest in infrastructure, research, education and skills; to make its public institutions and judicial system more efficient in order to help the most successful and productive businesses grow; to raise the employment rate of both men and women; and to promote the deployment of labour and capital to productive companies”. I agree (though not entirely, the investment rate in Italy is not that low and, as in other European countries, the average level of education is higher than ever while. And when good companies can not attract good workers they should fire the managers). But they also state: Italy should: ‘switch expenditure from public consumption, such as the pension system, towards public investment’.
Sigh. State financed pensions are not ‘government consumption’ but ‘transfer incomes’. ‘Government consumption’ is the kind of spending on education and the judicial system which Odendahl and Giugliano want to increase. As the Odendahl and Giugliano article will be read an all kind of civil servants will look at the statistics and advice the politicians to get ‘government consumption’ down, without realizing what ‘government consumption’ actually is, this might have dire consequences. This may sound far-fetched, but neoclassical macro-models make this grave mistake, too. And see this article about the demise of the Greek health system. One of the hallmarks of a proper science is a systematic use of words and definitions. Neoclassical macro does not pass this test. Which is a bad thing – and not just for science.