An ECB article on credit, house prices and the flow economy

September 1, 2016 4 comments

In the latest Research Bulletin of the ECB Gerhard Rünstler rightly states that ‘historical evidence suggests that many financial crises have been preceded by credit and housing booms‘ and ‘the emerging stylised facts have by no means been digested by the scientific economics community‘. But his implicit suggestion that these findings about credit, housing booms and economic downturns are new is wrong. According to Fred Foldvary (in 2007),

In the United States there has been a real estate cycle with a typical duration of about 18 years. This is shown on the table on the next page. This cycle was discovered by real estate economist Homer Hoyt (1960 [1970], p. 538), who explained, “While there were variations in timing between different cities and different types of property, the urban real estate cycle was approximately 18 years in length.” Hoyt adds, “The urban real estate cycle has been closely associated with the general business cycle.” Hoyt, however, did not fully understand the economics of the real estate cycle, at least the way it is analyzed here. He thus thought that the real estate cycle had been eliminated by 1960, whereas in fact it had already resumed. In real prices, after adjusting for inflation, real estate prices fell in 1973 and in 1990, and then again in 2006 and 2007.‘. Read more…

“Bougie playground”—now, then, and in the future

September 1, 2016 2 comments

from David Ruccio
wealth shares

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Robert Lucas’ warped methodology

August 31, 2016 1 comment

from Lars Syll

Economic theory, like anthropology, ‘works’ by studying societies which are in some relevant sense simpler or more primitive than our own, in the hope either that relations that are important but hidden in our society will be laid bare in simpler ones, or that concrete evidence can be discovered for possibilities which are open to us which are without precedent in our own history.

1643.Lebowski.jpg-610x0Unlike anthropologists, however, economists simply invent the primitive societies we study, a practice which frees us from limiting ourselves to societies which can be physically visited as sparing us the discomforts of long stays among savages. This method of society-invention is the source of the utopian character of economics; and of the mix of distrust and envy with which we are viewed by our fellow social scientists. The point of studying wholly fictional, rather than actual societies, is that it is relatively inexpensive to subject them to external forces of various types and observe the way they react. If, subjected to forces similar to those acting on actual societies, the artificial society reacts in a similar way, we gain confidence that there are useable connections between the invented society and the one we really care about.

Robert Lucas

Although neither yours truly, nor anthropologists (I guess), will recognise anything in this description even remotely reminiscent of practices actually used in real sciences, this quote still gives a very good picture of Lucas’ warped methodology.

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Valuing Education?

August 30, 2016 1 comment

from Peter Radford

Ben Casselman at throws us some back to school numbers. They make for depressing reading. America is not committed to education, far from it. Priorities seem to be elsewhere. And short term thinking dominates. Here are a few key highlights:

  • The US had roughly 8.4 million teachers back in 2008. Now it has 8.2 million
  • This is despite adding about 1 million new students
  • So student/teacher ratios have risen back to levels last seen in the 1990’s
  • School funding has fallen 6.6% at the sate level, and 1% at the local level [local governments supply about 45% of all school funding]
  • Federal funding has increased but not by enough to prevent a total decline in funding of about 2.4% in real terms
  • Fifteen states cut funding between 2000 and 2014 by more than 10%, with Arizona leading the way by cutting around 25%
  • Some states have increased spending – oil boom rich North Dakota doubled spending between 2008 and 2014
  • Weekly wages for teachers have declined 5% over the last five years, causing teaching to become even less attractive as a career for college educated people
  • Things are about to get worse: baby boom retirement will put pressure on local and state budgets as health care costs rise and retirement costs need to be funded

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Will the IMF become irrelevant before it changes?

August 30, 2016 21 comments

from Mark Weisbrot

The neoliberal reforms it has imposed on countries around the world have been disastrous.

The UK’s vote in June to leave the European Union, combined with an extraordinary backlash against trade agreements as manifested in the US presidential election, has set off an unprecedented public debate about globalization and even some of the neoliberal principles that it embodies in its current form. It is therefore of great relevance to look at what is happening to one of the most powerful promoters of neoliberal globalization in the world economy: the International Monetary Fund.

An article in the June issue of the IMF’s quarterly magazine, Finance and Development, raised a lot of eyebrows in Washington policy circles. “Neoliberalism: Oversold?” was the title, and the authors presented some evidence in the affirmative, for at least some important neoliberal policies. To most of us, it was like an op-ed from Donald Trump titled “Insulting Your Opponents: Oversold?”

Neoliberalism refers to a set of policies that the IMF has been promoting all over the world for decades. These include tighter fiscal and monetary policies (sometimes even when the economy is weak or in recession); an indiscriminate opening up of countries to international trade and capital flows; the abandonment of state-led industrial and development policies; privatization of public enterprises; and various forms of deregulation, including financial.

It’s not exactly a household word in the United States, but in South America in the 21st century, for example, most of the winning presidential campaigns were against it. There were some solid reasons for their opposition: During the last two decades of the 20th century, when neoliberal reforms were being implemented, income per person in Latin America barely grew. Whereas in the previous two decades — when governments did most of the things that neoliberalism was designed to reverse — income per person nearly doubled.

If we look at the world as a whole during the decades of neoliberal reform (1980–2000), there was also a sharp slowdown in economic growth in the vast majority of low- and middle-income countries, as well as a decline in progress on such indicators as life expectancy and infant mortality. So yes, neoliberalism appears to be worse than oversold.

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Re-Introducing Ethics in Education

August 29, 2016 8 comments

from Asad Zaman

A driving spirit of the modern age is the desire to banish all speculation about things beyond the physical and observable realms of our existence. This spirit was well expressed by one of the leading Enlightenment philosophers, David Hume, who called for burning all books which did not deal with the observable and quantifiable phenomena: “If we take in our hand any volume; of divinity or school metaphysics, for instance; let us ask, Does it contain any abstract reasoning concerning quantity or number? No. Does it contain any experimental reasoning concerning matter of fact and existence? No. Commit it then to the flames: for it can contain nothing but sophistry and illusion.”

This is a breathtakingly bold assertion. The literate reader may examine his or her bookshelf to see what little, if anything, would survive after applying Hume’s prescriptions. Nonetheless, the spirit of the secular age was very much in tune with Hume, and relegated vast areas of human knowledge captured in literature, history, and the arts, to second-class citizenship. The modern world has been shaped by this downgrading of the spiritual, intuitive, and mystical, and the elevation of the rational as supreme judge and arbiter over all other faculties.

The leaders of the Enlightenment advocated rationality as the sole criterion for establishing an authoritative system of ethics, aesthetics, and knowledge. This has led to a dualism which has become firmly embedded in the foundations of Western thought, and has created a social science incapable of perceiving, let alone solving the problems currently being faced by humanity as a whole. Western hegemony has led to the global and widespread acceptance of this dualism, clearly expressed by Hume, in embracing the quantitative and passionately and violently rejecting the qualitative. Exploring the full range of difficulties caused by this dualism would take several books. In this essay we consider just one of the salient problems. Harvard Professor Julie Reuben expressed it as follows: “Truth was (a united whole) embracing spiritual, moral, and cognitive knowledge. By the 1930’s, this unity was shattered; factual cognitive knowledge (was separated from) moral/spiritual knowledge.”  read more

Unhealthy healthcare: workers pay

August 27, 2016 4 comments

from David Ruccio


On Tuesday, I began a series on the unhealthy state of the U.S. healthcare system—starting with the fact that the United States spends far more on health than any other country, yet the life expectancy of the American population is actually shorter than in other countries that spend far less.

Today, I want to look at what U.S. workers are forced to pay to get access to the healthcare system.
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Why the study of transnational companies should be part of the economics curriculum

August 26, 2016 Leave a comment

from Grazia Ietto-Gillies

The business media is awash with news about transnational companies (TNCs) be they in the services or manufacturing or agriculture sector. The news may refer to performance or strategies or plans for real investment (or the lack of them) or takeovers. There is currently also considerable interest in their tax minimization strategies.

Yet economics textbooks and courses are still shying away from this most relevant part of our contemporary economies. This is true of both orthodox/neoclassical approaches and – I regret to say – of alternative ones as a quick analysis of textbooks recommended in the WEA Pedagogy page shows.

It could be argued that the nationality of the investor, employer, or producer does not matter: a firm is a firm and the task of economics is to study it independently of where it invests or its nationality. I have argued (Ietto-Gillies, 2004 and 2012: introduction and Ch. 14) that the existence of nation-states with their different regulatory regimes makes a specific study of the TNC necessary. The regulatory regimes refer to taxation or labour and social security or currencies or environmental laws. The differences in regulatory regimes across different countries generate opportunities for alternative, profitable strategies for firms able to operate across national frontiers. Such operations allow the TNC to take advantage of different fiscal, currency or labour and social security or environmental regulations. Most relevant, transnationality increases the bargaining power of TNCs over labour as we see on an almost daily basis throughout the world. On the fiscal side the advantages that TNCs derive from their tax minimization strategies are partly linked to strategic location of their headquarters in tax-friendly countries and partly to the widely used manipulation of transfer prices (Eden, 2001; OECD, 2010).  read more

Keynes-Hicks macrotheory — a ‘New Keynesian’ unicorn fantasy

August 25, 2016 2 comments

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.

Unicorn-s-fantasy-227928_300_312The 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…

A schocker for Sumner

August 25, 2016 3 comments

1.pngWhy did the crisis last so long in Italy, the Netherlands, Spain and Denmark (graph 1) and much shorter (four years!) in the UK, Poland and Sweden (graph 2, at the end)? Lack of Aggregate Demand in the former countries? Not according to Scott Sumner. This post will however show, point by point, some counterexamples to the ideas of Scott Sumner about what he calls ‘AD voodoo‘- and especially his claim that “there is almost no theoretical or empirical support for the new voodoo claims, and lots of evidence against“. Let’s quote Scott: Read more…

Unhealthy healthcare

August 24, 2016 1 comment

from David Ruccio



While I was finishing up the latest right-wing libertarian dystopian finance novel, I was also trying to figure out the dystopia that the U.S. healthcare system has become.

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Open Ended [A note to myself]

August 23, 2016 21 comments

from Peter Radford

One of the major reasons, perhaps the major reason, economics is oftentimes irrelevant to our understanding of economies is that it fails to notice a rather salient fact: economies have no end. They have no beginning either. Or, rather, the choice of an ending or a beginning are merely arbitrary selections by an analyst needing to close up the system for analytical purposes. But this act of closure destroys the validity of any results from the subsequent analysis.


Precisely because economies have no end. They have no end as in purpose. They have no end as in time. They just are. They emerge from the myriad interactions of however many people exist at any point in time, they are channeled along a path highly dependent upon whatever happened recently, they are in constant turmoil and evolution, and they are driven by the availability of information and energy sufficient to do work and create local order. That’s it.

They don’t inevitably move towards equilibrium because it is impossible ever to reach such a point. Let me put that differently: even were the economy miraculously to arrive at some sort of equilibrium no one would know because the task of calculating whether or not it was is impossibly complex. So an equilibrium is unrecognizable. Besides, given the inexorable change, any possible equilibrium is so ephemeral as to be irrelevant. Instead of moving an economy towards equilibrium the twin pressures of supply and demand simply contrive to move it into tomorrow. Whatever that is. The economy is a process or a perpetual unfolding without end. It is in a constant state of becoming, but never actually of being.

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Employment and the labour force in the EU, 1992 (2000) – 2016. 4 graphs.

August 22, 2016 Leave a comment

1How are the EU and the Euro Area doing? some graphs about the labour force. Main points:

Very fast employment and labour force growth in Germany during the last year (‘despite’ the new the minimum wage in many sectors). The labour force is increase is not just about refugees but to quite an extent about non-German inhabitants of the EU. Mind the employment decline after the Harz reform’ around 2001. I’m not sure if the fast increase also shows in the data of the Statistisches Bundesamt.
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Steve Keen, Noah Smith and heterodox ‘anti-math’ economics

August 22, 2016 1 comment

from Lars Syll

4816e5631fdce0191e6f8ba67d81758dResponding to the critique of his Bloomberg View post on heterodox economics and its alleged anti-math position, Noah Smith approvingly cites Steve Keen telling us there is

a wing of heterodox economics that is anti-mathematical. Known as “Critical Realism” and centred on the work of Tony Lawson at Cambridge UK, it attributes the failings of economics to the use of mathematics itself…

Although yours truly appreciate much of Steve Keen’s debunking of mainstream economics, onthis issue he is, however, just plain wrong! For a more truthful characterization of Tony Lawson’s position, here’s what Axel Leijonhufvud has to say: Read more…

Food and Justice – The next WEA Conference

August 21, 2016 Leave a comment

from Maria Alejandra Madi

The Call for papers for the current conference Food and Justice is now open.

We invite you to submit a paper to by 15th  September, 2016. 

A paperback, Food and Justice, of conference papers will be published by WEA Books in the new year.

Visit the Conference website

Food production has always been present in the economic debate because of the concern about population growth and demographic changes. In spite of the Malthusian concern, new methods of food production have emerged which allowed the increase in food supply. Technological changes, however, have not occurred uniformly throughout the world. Indeed, some countries have managed to expand their production and trade surpluses while situations of hunger remained a reality in many parts of the world.

In addition to technological factors in food production, other political and economic issues are involved in the access to food. In the 21st century, the scenario of changes in food production means that even with a larger supply of food, many people, mainly the poor ones, still live in a situation of starvation. In addition to the challenges in food access, other relevant issue is food waste. Actually, a large percentage of the world food production is lost throughout the different stages of production, transportation, processing and consumption. Indeed, among the current concerns, there is the need to search for actions that can reduce the food losses that could face the situation of hunger of millions of people.

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Not so fast!

August 20, 2016 2 comments

from David Ruccio

real wages-revised

Everyone has read or heard the story: the labor market has rebounded and workers, finally, are “getting a little bigger piece of the pie” (according to President Obama, back in June).

And that’s the way it looked—until the Bureau of Labor Statistics revised its data. What was originally reported as a 4.2 percent increase in the first quarter of 2016 now seems to be a 0.4 decline (a difference of 4.6 percentage points, in the wrong direction).

What’s more, real hourly compensation for the second quarter (in the nonfarm business sector) is down another 1.1 percent.

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On the irrelevance of Milton Friedman

August 19, 2016 7 comments

from Lars Syll

In producing theories couched in terms of isolated atoms that are quite at odds with social reality, modellers are actually compelled to make substantive claims that are wildly unrealistic. And because social reality does not conform to systems of isolated atoms, there is no guarantee that event regularities of the sort pursued will occur. Indeed, they are found not to …

milton_friedman_1Friedman enters this scene arguing that all we need to do is predict successfully, that this can be done even without realistic theories, and that unrealistic theories are to be preferred to realistic ones, essentially because they can usually be more parsimonious.

The first thing to note about this response is that Friedman is attempting to turn inevitable failure into a virtue. In the context of economic modelling, the need to produce formulations in terms of systems of isolated atoms, where these are not characteristic of social reality, means that unrealistic formulations are more or less unavoidable. Arguing that they are to be preferred to realistic ones in this context belies the fact that there is not a choice.

What amazed me about the initial responses to Friedman by numerous philosophers and others is that they mostly took the form: prediction is not enough, we need explanation too. Rarely, if ever, was it pointed out that because the social world is open, we cannot have successful prediction anyway.

So my own response to Friedman’s intervention is that it was mostly an irrelevancy, but one that has been opportunistically grasped by some as a supposed defence of the profusion of unrealistic assumptions in economics. This would work if successful prediction were possible. But usually it is not.

Tony Lawson

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Trade, Truth and Trump

August 18, 2016 71 comments

from Dean Baker

Donald Trump seems to have driven a substantial portion of the media into a frenzy with his anti-trade rhetoric. While much of what Trump says is wrong, and his solutions are at best ill-defined, the response in the press has largely been dishonest.

For example, a New York Times editorial tried to imply that there was an ambiguous relationship between the size of the trade deficit and employment in manufacturing. It pointed out that Japan and Germany, both countries with trade surpluses, had seen a comparable percentage decline in the number of workers employed in manufacturing as the United States over the last quarter-century.

What the editorial for some reason chose to ignore was that Japan and Germany have seen near-stagnant labor force growth over the last quarter-century. Other things equal, we should therefore expect to see a smaller increase or larger percentage point decline in manufacturing jobs in these countries than in the United States, where the labor force has grown by more than 25 percent over this period.

The editorial also neglected to mention that Japan now has just under 17 percent of its workforce employed in manufacturing, while in Germany the share is almost 20 percent. This compares to 8.6 percent in the United States. If the United States had the same share of its workforce employed in manufacturing as Japan, we would have another 11 million manufacturing jobs. If we had the same share as Germany, we would have another 16 million manufacturing jobs. That would make a huge difference in the US labor market.   Read more…

Education, inequality, and power

August 17, 2016 7 comments

from David Ruccio

Is education the solution to the problem of growing inequality?

As I wrote in early 2015,

Americans like to think that education is the solution to all economic and social problems. Including, of course, growing inequality.

Why? Because focusing on education—encouraging people to get more higher education—involves no particular tradeoffs. More education for some doesn’t mean less education for others (at least in principle). And providing more education doesn’t involve any structural changes in society—just more funding. (Of course, suggesting more education under current conditions—when public financing of higher education continues to decline, and students and their families are forced to take on more and more debt—is itself disingenuous).

As a result, there’s a broad consensus in the middle—among conservatives and liberals alike—that encouraging more young people who have yet to enter the labor market and existing workers who want to get ahead to obtain a college education will solve the problem of inequality.

And I proceeded to show how, in terms of declining wages for workers at various levels of education and increasing inequality within the top 1 percent, more education does not actually solve the problem of inequality.

But education is still the preferred solution of mainstream Democrats, and inequality itself is receiving less attention. And Thomas Frank [ht: sm] (in an interview with Jennifer Berkshire aka EduShyster) explains why:  Read more…

Financialization of corporate behaviour

August 16, 2016 Leave a comment

from Maria Alejandra Madi

The global scenario has restated the menace of deep depressions among the economic challenges. Indeed, in the current setting, the principles of corporate behaviour have reinforced the lack of commitment to long-run social and economic sustainability.

Looking backward, in the context of the 1930 Great Depression, John Maynard Keynes pointed out that the evolution of capital markets increases the risk of speculation and instability since these markets are mostly based upon conventions whose precariousness affects the rhythm of investment and employment. Keynes called attention to the fact that the capitalist system has endogenous mechanisms capable of destabilizing the levels of spending, income and employment. He suggested a reconsideration of the understanding of the relations among individuals, society and governments within the market where institutions and conventions could shape human behaviour. Aware of the need to overcome the concept of rationality that overwhelms the homo oeconomicus, his contribution enhances a more extended understanding of the entrepreneurs’ and investors’ behaviour, as well as of their strategies and decisions.   read more