from David Ruccio
We all know that the distribution of income has been increasingly unequal in recent decades—in the years leading up to the crash of 2007-08 and, now, during the current economic recovery.*
But, as I explained to my students in class this week, there are two different ways of conceiving of and measuring inequality within capitalism. One is the size or interpersonal distribution of income—the distribution of income to individuals or individual households. Thus, for example, the Gini coefficient, the share of income going to the top 1 percent, and the 90-10 ratio are all ways of measuring the size distribution of income. The other way is the functional distribution of income—the distribution of income to groups that are functionally related to the production of total income. Thus, we often refer to and measure the income shares going to capitalists and workers (and, less often these days, to landlords).
The question is, what is the relationship between the functional distribution of income and the size distribution of income?
from Lars Syll
Using formal mathematical modeling, mainstream economists sure can guarantee that the conclusion holds given the assumptions. However, the validity we get in abstract model worlds does not warrantly transfer to real world economies. Validity may be good, but it isn’t enough. From a realist perspective both relevance and soundness are sine qua non.
In their search for validity, rigour and precision, mainstream macro modellers of various ilks construct microfounded DSGE models that standardly assume rational expectations, Walrasian market clearing, unique equilibria, time invariance, linear separability and homogeneity of both inputs/outputs and technology, infinitely lived intertemporally optimizing representative household/ consumer/producer agents with homothetic and identical preferences, etc., etc. At the same time the models standardly ignore complexity, diversity, uncertainty, coordination problems, non-market clearing prices, real aggregation problems, emergence, expectations formation, etc., etc.
1) Why is German unemployment relatively low? Partly, because of a steady increase in jobs. But also because people left the labour force. According to a new Eurostat study about worker flows in 11 EU countries, it was also because of:
“the decrease of the flows from inactivity into unemployment in Germany, whose contributions to keeping unemployment low were relatively important. In contrast, in the rest of the countries, the contribution of (increased) flows from inactivity into unemployment and (decreased) flows from inactivity into employment was towards pushing the unemployment rate up, while the (decreased) flows from unemployment into inactivity contributed to increasing the unemployment rate (except in Portugal).”
Translated: in many country the response to rising unemployment was to increase the labour force, despite the decline in available jobs. In Germany, the opposite happened. And oh, are Austrians right and do crises lead to ‘cleansing’, i.e. a purge of unproductive, outdated companies? Nope: “we examine if the crisis has led to some employment reallocation across sectors, finding that, so far, there is no clear evidence in favor of cleansing effects“. The whole thing shows that high unemployment, contrary to classical ideas, does not spur economic development.
from Asad Zaman and the WEA Pedagogy Blog
The vision of a government of the people, by the people and for the people is enchanting, and powerfully attractive to the masses yearning to be free. However, the title of Nobel laureate Joseph Stiglitz’s article, Of the 1%, by the 1%, and for the 1% is a far more accurate description of the reality of US democracy. Prophetically, Eisenhower had warned against the threat to democracy posed by the powerful military-industrial complex. Today the power of a tiny minority to control the US, and thence the world, exceeds his worst nightmares. read more
from Peter Radford
A few things along the same lines:
Something that really bugs me at the moment here in the US is the absolutely stupid idea that freedom of speech and the possession of lots of money are somehow entangled. Put differently: how come the Supreme Court – Supreme at what I wonder? – allowed the flood gates of money to continue to pour into the American political process and not then wonder how much corruption and distortion that flood would create?
Isn’t it obvious?
I suppose not to someone cloistered for years in the American legal profession and positioning continually for promotion to the top.
It is absurd to think that wealthy people and big businesses spend all that money on elections and then don’t expect something in return. I mean really absurd. You have to go to great and other-worldly lengths to deny basic human instincts in order to convince yourself that a big political donor is giving away gobs of cash because they simply want us all to have great elections. Read more…
from David Ruccio
from Lars Syll
Standard new Keynesian macroeconomics essentially abstracts away from most of what is important in macroeconomics. To an even greater extent, this is true of the dynamic stochastic general equilibrium (DSGE) models that are the workhorse of central bank staffs and much practically oriented academic work.
Why? New Keynesian models imply that stabilization policies cannot affect the average level of output over time and that the only effect policy can have is on the amplitude of economic fluctuations, not on the level of output. This assumption is problematic at a number of levels …
The problem has always been that it is difficult to beat something with nothing. This may be changing as topics like hysteresis, secular stagnation, and multiple equilibrium are getting more and more attention …
As macroeconomics was transformed in response to the Depression of the 1930s and the inflation of the 1970s, another 40 years later it should again be transformed in response to stagnation in the industrial world.
Maybe we can call it the Keynesian New Economics.
Mainstream macroeconomics is stuck with crazy models — and ‘New Keynesian’ macroeconomics and DSGE models certainly, as Summers puts it, “essentially abstract away from most of what is important in macroeconomics. ”
Let me just give one example. Read more…
from Peter Radford
People keep asking me about interest rates. I wish they would stop. The question always make me feel like mimicking Eugene Fama: rates are rates. They are what they are. Perfect reflections of whatever they meant to be reflections of. And so on.
Such amazing analytical insight is worthy of one of those pseudo Nobel prizes.
Seriously though: people do seem a little more concerned than usual. Why?
Because rates have been low for so long and don’t seem to have accomplished much for all that. I think it’s hard for some people – including quite a few prominent economists – to grasp why interest rates are mired in this near historically low trough. I would have thought the answer is obvious: the economy sucks.
It still sucks after all these years.
Let’s look at it through the eyes of the textbook – this doesn’t imply we all agree with the textbook, so please relax. What are we looking for? Something called the “natural rate”. Let’s set aside that there’s absolutely nothing “natural” about the economy simply because it is an entirely humankind construction reflecting the complex interplay of a zillion intentions and expectations. Economists love to pretend that there are such “natural” things in the economy and this so-called natural interest rate is one of them.
What is it? Read more…
Somewhat to my surprise, I find myself reading numismatic articles. Money existed before coins were invented. So, where and why were coins invented? According to Reid Goldsborough, in an nuanced article, it’s not unlikely that the first Lydian coins (about 600 BC) were not used for ‘market exchange’ – at first they might well have been used for ‘gift exchange’, somewhat like we exchange wedding rings. What’s not a ‘maybe’ or a ‘likely’ in the history of this innovation is the crucial role of the state. An excerpt:
The Lydian Lion is the one coin I’d personally call “The Coin.” It directly preceded ancient Greek coinage, which through Rome begot all Western coinage, and which through the Seleukids, Parthians, and Sassanians begot all Islamic coinage. Indian coinage has largely been a product of Greek, Roman, and Islamic influences. Read more…
from David Ruccio
from Edward Fullbrook
Asad Zaman has called my attention to a long article in the Huffington Post that initially appeared six years ago, but is worth rereading today as a reminder of the task faced by those desiring to turn economics into a more honourable pursuit. Here are few passages from the article.
The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.
This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed’s thrall, the economists missed it, too.
One critical way the Fed exerts control on academic economists is through its relationships with the field’s gatekeepers. For instance, at the Journal of Monetary Economics, a must-publish venue for rising economists, more than half of the editorial board members are currently on the Fed payroll — and the rest have been in the past.
from David Ruccio
We forget, at our peril, the extent to which academic unfreedom is enforced in departments of economics across North America.
Most departments of economics offer—in the classroom and in terms of research and policy advice—only mainstream economics. By that I mean they hire economists who only teach, conduct research, and offer policy advice defined by one or another version of mainstream (neoclassical and Keynesian) economics. Other approaches to economics—generally, these days, referred to as heterodox economics—simply aren’t recognized by or represented within those departments. That was true in the decades leading up to the crash of 2007-08 and, perhaps even more startling, it has continued to be the case in the years since.
That’s particularly true in departments that have doctoral programs in economics. While heterodox economists are often hired by undergraduate departments (such as, most famously, the University of Southern Maine), you simply won’t find heterodox economics or heterodox economists at Harvard, MIT, Princeton, Yale, and Chicago.
from Peter Radford
Yes, I know, Chandler already wrote a famous book about it. But he was talking about something else. He was talking about strategy as structure. Hmm. Come to think about it he was right.
We have discussed the problem of expectations here many times, and it was recently argued that modern economics has a problem because it assumes that expectations are formed in the face of reality. That is to say expectations are consequent to a proper understanding of that reality.
This is wrong.
Expectations are formed as a consequence of an understanding of reality, but also with an understanding that reality is inherently uncertain and thus unknowable. Given this level of uncertainty the resultant expectations are simply ‘hopes’ or ‘wishes’. They do not represent reality accurately, but, rather, they represent hoped-for reality.
Main point: changes in net labour flows do not seem to be related to the level of unemployment which means that at least part of total unemployment can be called ‘involuntary’
On October 26 Eurostat published an important new European statistic on labour flows (on October 24 this blog had a little scoop). Such data is/are not entirely new. But it is the first time a consistent data set for Europe is available. The data require very thorough investigation, this blogpost is mainly intended to draw some attention to them. Graph 1 shows quarterly job turnover in the EU countries with the highest (Spain, Portugal) and lowest (Romania) job churn as well as for some large countries and Denmark, which is supposedly the country which most enthusiastically embraced the ‘flexicurity’ agenda: cut job and income security and increase employability of the unemployed as well as the employed. Graph 2 shows data for all countries. Data for Germany are, alas, not available.Total flows consist of flows into and out of employment, unemployment and inactivity, only one of these flows is shown here.
The data Read more…
from Steve Keen
Paul Krugman’s latest column—“Check Out Our Low, Low (Natural) Rates” (which he didn’t flag as “Wonkish”, even though it is so in spades)—noted that the “natural real rate of interest” was falling, and that this justified the low interest rate set by the Federal Reserve.
And this made me think about Karl Marx.
Why? Because the “natural real rate of interest” is an unobservable entity—in that it’s not a rate you’ll find charged by any bank, but a rate that has to be statistically derived. But more importantly, it is a fantasy: there is no such thing. However it is required as part of a theory in which the economy returns to equilibrium after it is hit by an “exogenous shock”. So Neoclassical economists—meaning both “New Classicals” and “New Keynesians”, as the two fractious clans in this economic tribe call themselves—have to go in search of this phantom.
from David Ruccio
Apparently, Hershey’s chocolate is another victim of the obscene levels of inequality we’re seeing in the United States.
Chocolate maker Hershey Co , long a staple of middle-class U.S. households, is getting squeezed as consumers either pay up for fancier sweets or seek more savings. . .
Hershey executives said the company is grappling with a growing gap between low and high-income households in the United States, which has changed buying patterns for many consumer goods. On the high-end, consumers are more willing to pay up for premium brands like Green & Black’s organic chocolate bars. On the low end, families hunt for greater discounts for products.
“We think the consumer bifurcation has been an important driver,” Hershey Chief Executive John P. Bilbrey said on an investor call, referring to the growing wage gap. Bilbrey said the company has secured more merchandising space for its products in the holiday season and expected trends to improve in the fourth quarter.
Companies ranging from Campbell Soup Co to Mondelez International Inc have spoken of similar pressures in the United States. Some have tried to introduce more products to appeal to low-income consumers at convenience stores and dollar stores.
“We are seeing a widening disparity between upper-income and lower-income” consumers, said Mondelez CEO Irene Rosenfeld in an interview.
From: Yanis Varoufakis
Since my resignation from the finance ministry, in protest at our government’s capitulation to the troika, I have been spending my time and energy to transfer the spirit of the Athens Spring to the heart of Europe – to promote the urgent need to shine the light of transparency on Europe’s decision making as a prerequisite to tackling Europe’s gargantuan democratic deficit.
In practice, this meant endless travel, and more than twenty appearances in different European cities over the space of a couple of months. As expected, the same troika-friendly media that attempted to vilify the Athens Spring during our tug-of-war with the troika also invested effort in vilifying my latest endeavours. After all, nothing upsets the powers-that-be in Brussels, Frankfurt, etc. more than the exposure of their deep contempt for democratic principles and practice.
Beginning with some Greek media outlets which have an impecable record of defamation (e.g. a grubby newspaper that ‘reported’, during my ministry, that I was conspiring with a Singaporean company to make Bitcoin Greece’s currency), a fresh campaign of vilification has begun the purpose of which is to portray my recent efforts, and travels, as part of a self-enrichment drive.
Transparency is one of the pillars of the European democracy network that I, and many others, are working towards these days, and which my travels and talks are intended to promote. For this reason, I owe a debt of gratitude to the troika-led media in the sense that, through their vilification campaign, have given me a wonderful opportunity to demonstrate in practice the principle of transparency that we want to bring to European politics.
Our campaign for Transparency Everywhere! can thus begin now, in this post. Below the reader will find, in response to the reports regarding the fees, format and travel costs of my recent and future speeches an account of where I have been, whom have I addressed, complete with fees and travel costs. Read more…
from Lars Syll
The financial crisis of 2007-08 hit most laymen and economists with surprise. What was it that went wrong with our macroeconomic models, since they obviously did not foresee the collapse or even make it conceivable?
There are many who have ventured to answer this question. And they have come up with a variety of answers, ranging from the exaggerated mathematization of economics, to irrational and corrupt politicians.
But the root of our problem goes much deeper. It ultimately goes back to how we look upon the data we are handling. In “modern” macroeconomics — Dynamic Stochastic General Equilibrium, New Synthesis, New Classical and New ‘Keynesian’ — variables are treated as if drawn from a known “data-generating process” that unfolds over time and on which we therefore have access to heaps of historical time-series. If we do not assume that we know the “data-generating process” – if we do not have the “true” model – the whole edifice collapses. And of course it has to. I mean, who really honestly believes that we should have access to this mythical Holy Grail, the data-generating process?
“Modern” macroeconomics obviously did not anticipate the enormity of the problems that unregulated “efficient” financial markets created. Why? Because it builds on the myth of us knowing the “data-generating process” and that we can describe the variables of our evolving economies as drawn from an urn containing stochastic probability functions with known means and variances. Read more…
from Asad Zaman and the Pedagogic Blog
More than a billion people live in extreme poverty, in conditions which would be unimaginable for readers of this column. Economists say that this is due to ‘scarcity’ — there are not enough resources to feed them. The solution lies in economic growth, increased production to enable us to provide for all. This diagnosis deliberately distracts attention from the real problems. One of them is the rapidly rising inequality. In 2010, the richest 388 people owned more than half the wealth of the planet, an astonishingly skewed income distribution. Although there has been substantial growth, benefits of the growth accrue only to those who are already extremely wealthy. According to recent Oxfam reports for 2014, the richest 80 people now have more than $1.3 trillion, which is more than half of the total privately-owned planetary wealth. A tax of only 33 per cent on just these 80 would suffice to feed, clothe, house, educate and provide for the health needs of all of the extremely poor. Coincidentally, global defence budgets are of similar magnitude. We don’t have to become peaceniks; just scaling back our bloodthirstiness by 33 per cent would suffice to remove extreme poverty from the planet. Just avoiding the Iraq war would have saved sufficient money to feed the planet for 30 years. read more
from Peter Radford
It has become impossible, apparently, for anyone to do a sober analysis of the torrent of fads that collectively are known as the start-ups of Silicon Valley. Instead we are given a fast paced – it has to be fast paced nowadays for fear of being disrupted five minutes later – and inevitably glowing surface-skim of the impact all these fads will have on the economy.
All we know is that the change will be total. Absolutely total.
It seems like an age ago, but there was a time when I was deeply interested in the impact that the internet and related technologies would have on business. I thought about the problem for a long time. Indeed it was the reason I re-connected with economics because I, rather foolishly in retrospect, assumed that economics would be a good source of knowledge about the fundamentals of business.
I began with the question: “why do firms exist?”. Read more…