Lamppost Economics?

January 12, 2016 29 comments

from Peter Radford

Paul Krugman came remarkably close to giving economics a big negative review in his New York Times blog last week. To sum up his argument: economics is very good at talking about, although not resolving, issues that are tractable to formal modeling — anything else not so much. You see there’s this gigantic blind spot in modern economics. If a topic cannot be modeled then it doesn’t attract too much attention. At least in the bright lights of the mainstream version of the subject. Which, of course, begs the question: what is economics missing?

Krugman’ attention was brought to this blight by an article by Justin Fox who bemoans the early lack of interest in inequality displayed by a profession whose core focus seems to encompass such a vital topic.

Here’s what Krugman said:

“I’m a few days late on this characteristically lucid Justin Fox column on why it took so long for economists to focus on income inequality. But as one of the economists who did write about inequality — especially the rise of the one percent — pretty early, I think Fox has missed one important aspect: it’s a hard issue to model.”

Well, that’s pretty straightforward. Read more…

Models and forecasts

January 11, 2016 7 comments

from Lars Syll

Yesterday John Kay had an interesting article about models and forecasting in Financial Times:

A bane of this economist’s life is the belief that economics is clairvoyance. I should, according to this view, be offering prognostications of what gross domestic product growth will be this year and when the central bank will raise interest rates …

What was the right answer on January 1 1989 to the question “will the Berlin Wall be pulled down in 1989?” A shrewd commentator would have said (though few did) something like “almost certainly the Wall will stand but you should understand the potentially destructive forces undermining the Soviet engine and the East German state”. That type of response combines probabilistic and narrative thinking.

But people long for certainties, though they know they cannot have them. I have learnt that few really want answers when they ask me to predict GDP growth or advise whether interest rates will rise in the third quarter. It is usually easy to move the subject on to something more interesting than macroeconomic forecasting.

Kay’s remarks — and Tony Yates comments on them — made me think about an article that Oxford macroeconomist Simon Wren-Lewis wrote on models and forecasts a couple of years ago, saying that “macroeconomic forecasts are always bad,” but, on the other hand, since they are “probably no worse than intelligent guesses” and anyway are “not obviously harmful,” we have no reason to complain. Read more…

The simple political economy of secular stagnation

January 11, 2016 8 comments

Yes, after 2008 we did entered an era of secular stagnation – i.e. depressed demand. Why do I think this? Macro demand consists of household consumption, government consumption, investments and exports. About this:

A) During the last decades, the labor share has declined (graph 1). Source. This leads to lower household consumption. Here more about this. Lowering the share of labor has been official government policy, by the way.

Graph 1. the secular decline of the wage share.

goodhart_20141103_fig1

B) During these same decades, the rate of fixed investment has declined, too. Read more…

Divergence at the top in the U.S.

January 10, 2016 2 comments

from David Ruccio

top01

I don’t attend the American Economic Association annual meetings. And I’m not in San Francisco this year. However, according to Nelson D. Schwartz, mainstream economists have finally discovered the obvious: income inequality is a real problem in the United States. Read more…

Krugman on models (II)

January 9, 2016 5 comments

from Lars Syll

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Last year Alex Rosenberg — chair of the philosophy department at Duke University and renowned economic methodologist — had an interesting article on What’s Wrong with Paul Krugman’s Philosophy of Economics in 3:AM Magazine: Read more…

Why Teach Economics?

January 9, 2016 9 comments

from Peter Radford

No I am not going to get upset about mainstream economics. Today I have a different issue to be vexed about: why do degrees in economics exist?

It makes no sense to me to teach economics in a vacuum. None at all. The economy is simply one part of a very complicated and intertwined thing called society, so why isn’t that the centerpiece, possibly with specialization at a later stage?

This isn’t new of course. People have been arguing about this for ages, but if we want to rid the world of the hyper-specialized-to-the-point-of-irrelevance oddity that economics has become we have to try to drag it back towards reality.

A reality that is not simply endless reflection on the machinery of markets either. Successive waves of formalization have reduced the study of markets to meaningless applied mathematics. I suppose it’s nice to understand all that stuff, but it doesn’t provide an understanding of actual markets.

Let me take another hack at this:  Read more…

Refugees. Lots of them.

January 8, 2016 4 comments

In 2011 there were thousands. In 2012 there were tens of thousands. In 2013 hundreds of thousands. In 2014 millions, mainly in refugee camps in Turkey (2,2 million), Lebanon (1,2 million) and Jordan (1,4 million). Source: Wikipedia. In 2015 these refugees started to wash up on the shores of Europe. Surprise! By the millions. That’s not anything new. The Syrian crisis dislocated 12 million people and is the largest refugee crisis since WW II (look here for a very good WAPO infographic). But it is far from the only one. We’ve seen this before.

And everybody knows the solution: lasting peace in the Middle East. Nobody even talks about it. They will keep coming.

Asylum

The EU can, theoretically and historically, easily absorb millions of immigrants a year (more about the culture thing below). After WW II, 12 million people or so immigrated to the new, much smaller Germany which enabled the Wirtschaftswunder (though it would take until the end of the fifties before unemployment was really low, this contrary to the situation in some neighbouring countries). But those were not normal times or, more important, this was at that time not a normal country. And today some EU countries are clearly stressed to the breaking point – during the last months of 2015 the number of asylum seekers in Sweden was about 0,4% of the population. Per month. Read more…

5 things I would like economics majors to know before they graduate

January 8, 2016 6 comments

I have been teaching microeconomics for more than four decades, and over the past months I have been seriously thinking about this question: “What are some of the most important things I would like economics majors to know before they graduate?” At first I was leaning to such important and well-known ideas as opportunity cost, marginal analysis, moral hazard, externalities, and the prisoners’ dilemma game. Now I am leaning to important ideas that are not well-covered in economic textbooks, and indeed are often omitted entirely. Five of the ideas that I would recommend are:

1. people are not solitary creatures but social animals;

2. tastes are malleable and particularly so among children and adolescents;

3. there are lots of children and adolescents in the world (though few in economic textbooks);

4. retail purchasers rarely have detailed information about the products they buy:

5. large corporations (and other economic institutions) often have a substantial social and political power.

I am not claiming that economists do not occasionally write about these ideas, for economists write about virtually everything, but that these important ideas have not sufficiently made it into most economic textbooks.

David Hemenway

 

Capitalism collapses when money flows to the financial sector per se.

January 7, 2016 7 comments

It is normal that capital floods to the newest and most profitable industries that display the highest rate of technical change and growth, be it Carnegie’s steel mills, Ford’s assembly lines or Bill Gates and his Microsoft. Capitalism collapses, on the other hand, when money flows to the financial sector per se, as if finance were an industry on par with steel, cars, or software. Thus, the fundamental flaw behind today’s global situation is the failure to distinguish sufficiently between the real economy and the financial economy (see Fig. 1 below). This clear distinction was once understood – not only in Islamic economics as today – but all along the political axis from Marx and Lenin on the left, to social democrat Rudolf Hilferding – a Jew who was killed by the Gestapo – to the conservatives Schumpeter and Keynes, all the way to Hitler’s economists on the far right. The German distinction between schaffendes Kapital (creative capital) and raffendes Kapital (roughly: capital which grabs existing wealth) is a useful parallel to good and bad greed, but unfortunately it was created by persons too close to fascism.

As Karl Polanyi points out, what communism, fascism and the New Deal had in common was a distrust of laissez faire. This included an understanding of the need to control the financial sector. Of the three ideologies that aimed at controlling the financial sector, it should be pretty obvious which one to choose: we need to recreate policies in the spirit of the New Deal.

Erik S. Reinert  

DeLong, Summers & Krugman on models

January 6, 2016 7 comments

from Lars Syll

Larry Summers, Brad DeLong, and Paul Kugman are having an extended discussion on the role of models in economics on their blogs this week.

That’s good. Since the model is the message in economics today, that is actually the most important discussion possible to have in economics.

reality-header3

Krugman is arguing that models are not ‘always the right guide for policy, but still necessary for disciplining our policy preferences.’ According to Krugman, ‘the discipline of thinking things through in terms of models is really important.’

Read more…

Secular stagnation, yes or no?

January 6, 2016 6 comments

Zweden1

At this moment there is quite some talk of ‘secular stagnation’, i.e. the possibility that demand is, considering potential supply, continually depressed. Reasons cited for such a situation are demographics (a large amount of middle-aged people who save too much), balance sheet recessions (private debts are too high and people and companies try to pay them off ), overly high exchange rates, a banking sector in distress or combinations of such factors. In the EU, the ‘Troika’ might be added.

But: does secular stagnation exist? Yes. Read more…

The Business of War

January 5, 2016 10 comments

from Asad Zaman and the WEA Pedagogy Blog

Twarishellhe highly decorated war hero, Major General Smedley Butler, described a well-hidden secret in his classic book, War is a Racket: “I made Mexico safe for American oil in 1914 … I helped in the raping of a half a dozen Central American republics for the benefit of Wall Street … In China in 1927 I helped see to it that Standard Oil went its way unmolested.” Butler came to see himself as a gangster, a muscle-man for the protection of business interests. History textbooks fail to mention what Butler saw as the main cause of the First World War: the more than 20,000 millionaires and billionaires created by war profiteering.

Butler writes that a “racket” is a deception: war is not what it appears to be to the majority of people. Only a small “inside” group knows the truth, and makes huge fortunes from war while the masses sacrifice their lives for fabricated causes. A recent article in Foreign Policy re-iterated the message that “War is still a racket” by showing how some groups are making trillions in profits from the perpetual war against terror.

As plans for war against Syria heat up, new myths are being manufactured to support it.  read more 

What does the post WW II decline in hours worked in the USA teach us about the economy – and about economics?

January 5, 2016 6 comments

What does the post WW II decline in hours worked in the USA teach us about the economy – and about economics? Why do economists gloss over this momentous event and why are they often not even aware of it? It’s not because of its size, as this decline was of the same magnitude as decline during the Great Depression [graph source: Higgs (2009)]

Knibb graph

This lack of interest in the comparison between the 1929-1933 and the 1944-1949 period becomes even more remarkable when we look at unemployment.

Read more…

Production of inequality ignorance and knowledge

January 4, 2016 5 comments

from David Ruccio

One Percent

Greg Mankiw is not sure why we’re talking about income inequality now: Read more…

America’s two-player Nash dynamics

January 4, 2016 1 comment

Figure 1, Nash dynamics of the wealthy, powerful, and privileged, diagrams the macro-social ‘Prisoner’s Dilemma’ in American politics currently. In this two-player ‘Nash dynamics’ the state mutually most beneficial to both the ruling elite and populist middle class is the utopian alliance {P, E} (see Figure 1 below for key to letters). However, if the ruling elite were to fail to follow through in choosing P, then {E, E}, the alliance most favorable to the ruling elite and less favorable to the middle class, would follow. Similarly, if the middle class were to fail to follow through in choosing E, then {P, P}, the alliance most favorable to the middle class and less favorable to the ruling elite, would follow. Read more…

Blogging the 2016 ASSA conference. Why the labor market is different.

January 3, 2016 1 comment

One of the sessions at the conference is titled: ‘Why Labor Is Not Like Broccoli: Session in Honor of Robert E. Prasch III‘ . Robert Prasch, who died in 2015, is famous for publishing an article which analyses the differences between the market for broccoli (or sacks of concrete or whatever) with the most important market of them all (when we look at the number of people engaged and the money involved): the labor market.  Differences are, according to him, caused by fundamental points: “1) Labor cannot be separated from its providers. (2) Labor cannot be stored. (3) Labor embodies the quality of self-consciousness. (4) Labor is the one “factor of production” that most of us wish, in the end, to see well compensated”. To understand the significance of this it might be added that even (self-conscious) monkeys go on strike when one ‘earns’ a grape and the other ‘only’ a piece of cucumber. Really. Wages are set according to such standards of fairness too, according to the Akerlof and Shiller ‘Animal spirits’ book.

prasch

One of the contributions to the session is by Daphne T. Greenwood, who elaborates such ideas in her paper: “Institutionalist Theories of the Wage Bargain: Beyond Demand and Supply. Her conclusion:

In sum, a host of contemporary issues such as the right level for minimum wages as well as growing wage inequality within occupations and educational levels or the ability to raise minimum wages without causing unemployment are better explained by the extended family of institutionalist models. Identifying core principles and propositions is an attempt to make the richer and more complex analysis of wage determination in institutionalist models more accessible to those accustomed to one general model.” Read more…

Tax rates for top 400 earners in the US – 1992 to 2012

January 3, 2016 2 comments

from David Ruccio

400

Each of the top 400 U.S. taxpayers took home, on average, about $336 million in 2012—but they only paid 16.72 percent in federal income taxes. That’s down from tax rates in the 28-29 range in the early 1990s, according to the latest data from the Internal Revenue Service (pdf).

What happened? Basically, the tiny group at the top has used a portion of the surplus they’ve been able to capture—amounting to about $134 billion or 1.5 percent of U.S. (adjusted gross) income—to purchase favorable tax policy and hire an army of lawyers and accountants to shield much of their income from U.S. taxes.

In the meantime, their incomes have grown dramatically: on average (in 1990 dollars), from $47 million in 1992 to $76 million in 2012, and, as a total (also in 1990 dollars), from $17 billion to $76 billion.

As F. Scott Fitzgerald explained, these careless people, who smash up things and creatures, are able to retreat back into their money and let other people clean up the mess they have made. . .

Dani Rodrik and the ’empirical turn’ in economics (VII)

January 3, 2016 4 comments

from Lars Syll

alchemyIn Economics Rules, Dani Rodrik maintains that ‘imaginative empirical methods’ — such as game theoretical applications, natural experiments, field experiments, lab experiments, RCTs — can help us to answer questions conerning the external validity of economic models. In Rodrik’s view they are more or less tests of ‘an underlying economic model’ and enable economists to make the right selection from the ever expanding ‘collection of potentially applicable models.’ Writes Rodrik:

Another way we can observe the transformation of the discipline is by looking at the new areas of research that have flourished in recent decades. Three of these are particularly noteworthy: behavioral economics, randomized controlled trials (RCTs), and institutions … They suggest that the view of economics as an insular, inbred discipline closed to the outside influences is more caricature than reality.

I beg to differ. When looked at carefully, there  are in fact few real reasons to share  Rodrik’s optimism on this ’empirical turn’ in economics.  Read more…

World arms industry statistics by country (4 tables and charts)

January 1, 2016 3 comments

from David Ruccio

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Last year, the United States led the world in arms sales, with a total of $36.2 billion in worldwide arms transfer agreements. Russia took a distant second place with $10.2 billion in agreements, out of a global total of $71.8 billion in 2014.

Read more…

Blogging the 2016 ASSA conference. Gender, fertility, globalisation and all that

January 1, 2016 Leave a comment

Two of the papers presented at the ‘Inside Institutions: Feminist Perspectives‘ at the 2016 ASSA conference leave me puzzled. Both have highly interesting topics: the influence of globalisation on the gender gap and even fertility. But both are disappointing. Look here for Alicia Girón and Eugenia Correa (Gender Gaps Post-Crisis: Women Workers, Employment and Precarity), look here for Mizuki Komura and Hikaru Ogawa (Globalization, Gender Empowerment and Fertility).

Let me explain: Read more…

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