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 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.
The case for free international trade now lies in tatters, which of course played an important role in the Brexit vote as well as in the U.S. presidential campaign.
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.
Are neoclassical macro models post-truth? It might very well be. The ‘workhorse’ neoclassical macro ‘DSGE’ models used by for instance central banks state that lower real wages will solve unemployment, largely because these lower wages will entice ‘marginal’ workers, like the elderly and women to leave the labor force (read this, by Lawrence Christiano, Mathias Trabandt and Karl Walentin (2011). Less workers, unemployment solved! But does this also happen? Ehhmmm…no (graph2). Read more…
from David Ruccio
Neil Irwin is right: “Poor and working-class Americans have fallen behind over the last generation, receiving few of the gains of an expanding economy.” So, he wants to devise a tax plan to change that.
The problem is, Irwin only looks at raising the income of the bottom 20 percent of families to where they would be if they shared equally in the gains since 1979. Read more…
from Lars Syll
Reasoning is the process whereby we get from old truths to new truths, from the known to the unknown, from the accepted to the debatable … If the reasoning starts on firm ground, and if it is itself sound, then it will lead to a conclusion which we must accept, though previously, perhaps, we had not thought we should. And those are the conditions that a good argument must meet; true premises and a good inference. If either of those conditions is not met, you can’t say whether you’ve got a true conclusion or not.
Mainstream economic theory today is in the story-telling business whereby economic theorists create make-believe analogue models of the target system – usually conceived as the real economic system. This modeling activity is considered useful and essential. And it’s used both in micro- and macroeconomics. Since everything the economist wants to know is put in to the model, it’s a piece of cake to prove whatever in a ‘rigorous’ and valid way. Deductive certainty is achieved — in the model. Unfortunately, the price one has to pay for getting at ‘rigorous’ and precise results in this way, is making outright ridiculous assumptions that actually impair the possibility of having anything of interest to say about the real world. Read more…
from David Ruccio
My students are worried—many of them obsessed by the possibility—they’re not going to be better off than their parents.
As it turns out, they’re right. Read more…
from Dean Baker
Economists are not very good at economics. We repeatedly get reminded of this fact when we see the economy act in ways that catch the bulk of the profession by complete surprise.
The most obvious example is the housing bubble, whose collapse gave us the financial crisis and the Great Recession. Almost no economists saw the bubble or the potential hazards posed by its bursting. But this is just the beginning of what economists got wrong in recent years.
Not only did the bubble and its collapse catch them by surprise, the recovery turned out to be much weaker than almost anyone predicted. Part of this was due to the austerity policies demanded by Congress, but even accounting for these policies, we didn’t see the rapid growth projected by the Congressional Budget Office (CBO) and other forecasters. In 2010, CBO projected average GDP growth of 4.4 percent for the years from 2012 to 2014. The actual number was less than half this amount.
The housing bubble wasn’t the first bubble CBO and other forecasters failed to see. The collapse of the stock bubble, which gave us the 2001 recession, also caught almost all economic forecasters by surprise. In short, the ability of economists to predict the future state of the economy, or understand the present state, is really poor.
This history is relevant in assessing Donald Trump’s plans for infrastructure and tax cuts because much of what economists say about these plans is likely to be wrong. Just to be clear, from what we have heard to date, both the infrastructure and tax plans seem like they are primarily designed to make Trump’s wealthy friends richer. Read more…