Discussing “Can we avoid another financial crisis?”

May 1, 2017 1 comment

from WEA Commentaries

My first book since Debunking Economics has just been released in the UK, and will come out in May in the USA. Can we avoid another financial crisis? is a brief (140 page, 25,000 word) explanation for the lay reader of how the 2008 crisis was caused by factors that mainstream economics ignores—fundamentally, the levels of private debt and credit-based demand—and why other countries that avoided a crisis in 2008 are likely to suffer a similar crisis in the near future.

My argument is based in equal measure on my interpretation and model of Hyman Minsky’s Financial Instability Hypothesis (though my book is equation-free), and my analysis of the role of endogenous money—which I now prefer to call “Bank Originated Money and Debt” or BOMD—in causing both economic booms and slumps. The book relies upon the statistical work of the BIS, which since 2014 has started publishing detailed databases on private debt, government debt, house prices, and recently consumer prices. This has made it possible for me to analyse the debt and credit dynamics of 43 countries to identify which have had a crisis, and which are likely to have one in the future.

There are two new insights developed in the book that are new for people who are otherwise familiar with my analysis: that a realistic macroeconomics can be derived directly from macroeconomics itself; and that a rough guide to whether a country is likely to experience a financial crisis can be derived from the BIS data.

Methodology: derive macro from macro   Read more…

Deep warming

From: Larry Hamilton and Merijn Knibbe

Following a twitter discussion between him and me about the question if the 2013-2015 warming of the first 700 meters of ocean was above trend or if 2016 was below trend, Larry Hamilton (@ichiloe) produced the next graph (which shows consistent and relentless warming not just of the surface of the earth but also of the first 700 meters of the oceans). These series are as far as I know measured in a totally independent way. ‘2017’ are partial data. We do not rest our case.

both.png

Complex Simplicity

April 30, 2017 10 comments

from Peter Radford

Simplification, in the context of an economy, is the eradication of all things of interest. This does not mean that studying an economy is thus doomed to be a pointless recitation of history as it unfolds. It is, rather, the recognition that as an economy moves through time it is never, to paraphrase Heraclitus, possible to see the same thing twice. Each economy is different. Each instance of the same economy is different. Any attempt to generalize eradicates those differences and thus eliminates the very substance we wish to explain. It is the existence of differences that are of interest in economics. Indeed, it is the existence of difference that allows an economy to exist in the first place.

Difference as in the spatial scarcity of resources.

Difference as in the complexity of human agency, motivation, and desire.

Difference as in the application of and resistance to power.

Difference as in variations in access to opportunity.

Difference in the chance bestowed by birth.

Difference as in variable interpretations of information.

And so on …

It is impossible to collapse all these differences into a model and then hope that such a model can capture even a modicum of reality. It couldn’t hope to. No amount of mathematical elegance and rigor can contain all the information needed to describe let alone predict an economy. Such a task is a computational impossibility. Uncertainty condemns a model’s relevance to degrade rapidly through time, if not from the very beginning.  Read more…

Economics is a form of brain damage

April 30, 2017 19 comments

from Asad Zaman

Environmentalist David Suzuki hits the nail on the head. The number of ways that economic theory systematically blinds you to the realities of the world we live in is almost uncountable. When Henry George’s land tax became widely popular, economists “disappeared” land as a factor of production from economic theories, merging it illegitimately with capital. Money is made to “disappear” by using the quantity theory of money to claim that money is veil. This makes it impossible to understand how the mechanisms of creation of money ensure that the wealthy can get rich at the expense of the rest of us. The parasitical nature of the finance industry has been covered up by the idea of “wealth creation” — when wild speculation doubles the price of stocks, financiers have created wealth, which is a socially valuable activity, instead of a fraud and deception. The ideas of cut-throat competition, survival of fittest, and social darwinism have been used to justify a large number of free market activities which harm the masses to make profits for the wealthy. There is no doubt that believing all of the textbook economic theories leads to serious brain damage, as I myself have experienced — the process of unlearning has been slow and painful. Here is the 2 minute video by David Suzuki:

The benefits of free trade — a fallacy based on a fantasy

April 29, 2017 3 comments

from Lars Syll

Plenty of people will try to convince you that globalization and free trade could benefit everyone, if only the gains were more fairly shared …

trade-copyThis belief is shared by almost all politicians … and it’s an article of faith for the economics profession.

You are right to reject it …

It’s a fallacy based on a fantasy, and it has been ever since David Ricardo dreamed up the idea of “Comparative Advantage and the Gains from Trade” two centuries ago. The best way to prove that is to apply real-world scepticism to the original argument in favour of free trade …

Ricardo’s model assumed that you could produce wine or cloth with only labour, but of course you can’t. You need machines as well, and machinery is specific to each industry. The essential machinery for making wine can’t be used to make anything else, if its use becomes unprofitable. It is either scrapped, sold at a large loss, or shipped overseas. Ditto a spinning jenny, or a steel mill: if making steel becomes unprofitable, the capital involved in its production is effectively destroyed …

Ricardo’s little shell and pea trick is therefore like most conventional economic theory: it’s neat, plausible, and wrong. It’s the product of armchair thinking by people who never put foot in the factories that their economic theories turned into rust buckets.  Steve Keen

As always with Keen — thought-provoking and interesting. But I think he misses the most powerful argument against the Ricardian paradigm — what counts to day is not comparative advantage, but absolute advantage.   Read more…

How’s the Eurozone doing?

April 28, 2017 2 comments

On 6 April, Mario Draghi made a speech titled ‘Monetary policy and the economic recovery in the Euro Area’. I would have emphasized the existing disequilibria a little more: unemployment in Germany is not far away from ‘low’ but this comes at the cost of an 8% of GDP surplus of the current account. German domestic demand (investments, public and private consumption) is i.e. about 10% too low to guarantee low unemployment. See also this recent Eurostat press release, which shows that, though some areas are by now characterized by low unemployment (<3,5%) others now levels of over 31% (not even counting ‘broad’ unemployment). But I agree: there is a recovery.

Emp

Read more…

America’s hidden pains

April 28, 2017 3 comments

from William Neil

We begin with some gross numbers from Das’ Age of Stagnation: the loss of wealth from the Great Recession of 2008-2009. Citing the work of three economists at the Federal Reserve Bank of Dallas (Tyler Atkinson, David Luttrell and Harvey Rosenblum), the figures they put on the loss to the U.S. economy come to 6-14 trillion dollars, “equivalent to U.S. $50,000 to U.S. $120,000 for every American household, or 40-90% of one year’s economic output”. We’ve seen figures of family distress ranging from $20,000-$60,000, largely representing losses in the stock market, which seem on target from direct personal experience. The other factor driving towards a more lasting economic pain are those who lost enough in straight financial terms to forestall market re-entry, matched with a psychological aversion to ever trusting it again. Additionally, pension fund retirement viability was affected by the same dynamics. These factors must be considered, as difficult as they are to quantify, to qualify the otherwise impressive performance after 2010 in the financial markets, they being supported by all the permutations known as Quantitative Easing, American and European versions.   Read more…

Mind the growing retirement gap

April 27, 2017 7 comments

from David Ruccio

I find myself thinking more these days about the fairness of Social Security and other government retirement benefits.

One reason, of course, is because I’m getting close to retirement age—and, as I discover each time I raise the issue with students, young people don’t think about it much.* Another reason is because Social Security (in addition to Medicare, Disability, and other programs) is the way the United States creates a collective bond between current and former workers, by using a portion of the surplus produced by current workers to provide a safety net for workers who have retired.

That represents a kind of social fairness—that people who have spent a large portion of their lives working (most people need 40 credits, based on years of work and earnings, to qualify for full Social Security benefits) are eligible for government retirement benefits provided by current workers. Another aspect of that fairness is the system should and does redistribute from those with high lifetime incomes to those with lower lifetime incomes. While that makes the actual “rates of return” unequal across groups, it’s designed to provide a floor for the poorest workers in society.

Many people consider the U.S. Social Security system fair on those two grounds. That’s true even though some people, by random draw, may live longer than others. However, as Alan J. Auerbach et al. (pdf [ht: lw]) report, that fairness may be put into question if there are identifiable groups that vary in life expectancy, “as this introduces a non-random aspect to the inequality.”  Read more…

The market paradigm versus the production paradigm

April 27, 2017 8 comments

from Robert Wade

Why have the large majority of professional economists, especially in the academy and in western-dominated international organizations like the World Bank and IMF, been committed to free trade policy, downplaying theoretical and empirical weaknesses in order to remain so?

The teaching of economics in just about all universities of the western world, and in large parts of the developing world, socializes students into belief in the rightness of the “market” paradigm, and the more “rigorous” the training the more thoroughly socialized they become.[1]  The paradigm focuses on price competitiveness – free labor markets, flexible prices, free international trade – as the key to national competitiveness. It treats the market system as “self-organizing”, firms being essentially passive except for competing in price. It treats technology as external to production, as something which firms can buy on the market. It has no built-in process of innovation, no conception of an “industrial ecosystem” of firms competing and cooperating with each other.[2] With all these things stripped out, the culture of the profession elevates belief in comparative advantage and free trade as the litmus test of competence to be an economist, as the earlier quote from Krugman suggests.  Read more…

Keynes on ‘money neutrality’ and the ‘classical dichotomy’

April 26, 2017 Leave a comment

from Lars Syll

Paul Krugman has repeatedly over the years argued that we should continue to use neoclassical hobby horses like IS-LM and AS-AD models. Here’s one example:

So why do AS-AD? … We do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility. Or to put it differently, you do want somehow to make clear the notion (which even fairly Keynesian guys like me share) that money is neutral in the long run.

I seriously doubt that Keynes would have been impressed by having his theory being characterized with catchwords like “tendency to return to full employment” and “money is neutral in the long run.”

alfa

One of Keynes’s central tenets — in clear contradistinction to the beliefs of mainstream neoclassical economists — is that there is no strong automatic tendency for economies to move toward full employment levels in monetary economies.

Money doesn’t matter in mainstream neoclassical macroeconomic models. That’s true. According to the ‘classical dichotomy,’ real variables — output and employment — are independent of monetary variables, and so enables mainstream economics to depict the economy as basically a barter system.

But in the real world in which we happen to live, money certainly does matter. Money is not neutral and money matters in both the short run and the long run:

The theory which I desiderate would deal … with an economy in which money plays a part of its own and affects motives and decisions, and is, in short, one of the operative factors in the situation, so that the course of events cannot be predicted in either the long period or in the short, without a knowledge of the behaviour of money between the first state and the last. And it is this which we ought to mean when we speak of a monetary economy.

J. M. Keynes A monetary theory of production (1933)

Ditch physics envy!

20 April, 2017 at 19:31 | Posted in Economics | 9 Comments

physics_envy_poster-r91c03c52279340a8b709c2a9f850372f_wad_210In the 1870s, a handful of aspiring economists hoped to make economics a science as reputable as physics. Awed by Newton’s insights on the physical laws of motion – laws that so elegantly describe the trajectory of falling apples and orbiting moons – they sought to create an economic theory that matched his legacy. And so pioneering economists such as William Stanley Jevons and Léon Walras drew their diagrams in clear imitation of Newton’s style and, inspired by the way that gravity pulls a falling object to rest, wrote enthusiastically of the role played by market forces and mechanisms in pulling an economy into equilibrium.

People and money are not so obedient as gravity, as it turns out, so no such laws exist.

Their mechanical metaphor sounds authoritative, but it was ill-chosen from the start – a fact that has been widely acknowledged since the astonishing fragility and contagion of global financial markets was exposed by the 2008 crash.

The most pernicious legacy of this fake physics has been to entice generations of economists into a misguided search for economic laws of motion that dictate the path of development. People and money are not as obedient as gravity, so no such laws exist. Yet their false discoveries have been used to justify growth-first policymaking.

Kate Raworth

John Tavener

19 April, 2017 at 19:03 | Posted in Varia | Leave a comment

David Ricardo and comparative advantage — a bicentennial assessment

19 April, 2017 at 13:50 | Posted in Economics | 3 Comments
Two hundred years ago, on 19 April 1817, David Ricardo’s Principles was published. In it he presented a theory that was meant to explain why countries trade and, based on the concept of opportunity cost, how the pattern of export and import is ruled by countries exporting goods in which they have comparative advantage and importing goods in which they have a comparative disadvantage.

Heckscher-Ohlin-HO-Modern-Theory-of-International-TradeAlthough a great accomplishment per se, Ricardo’s theory of comparative advantage, however, didn’t explain why the comparative advantage was the way it was. In the beginning of the 20th century, two Swedish economists — Eli Heckscher and Bertil Ohlin — presented a theory/model/theorem according to which the comparative advantages arose from differences in factor endowments between countries. Countries have a comparative advantages in producing goods that use up production factors that are most abundant in the different countries. Countries would mostly export goods that used the abundant factors of production and import goods that mostly used factors of productions that were scarce.

The Heckscher-Ohlin theorem — as do the elaborations on in it by e.g. Vanek, Stolper and Samuelson — builds on a series of restrictive and unrealistic assumptions. The most critically important — beside the standard market clearing equilibrium assumptions — are

(1) Countries use identical production technologies.

(2) Production takes place with a constant returns to scale technology.

(3) Within countries the factor substitutability is more or less infinite.

(4) Factor-prices are equalised (the Stolper-Samuelson extension of the theorem).

These assumptions are, as almost all empirical testing of the theorem has shown, totally unrealistic. That is, they are empirically false. 

That said, one could indeed wonder why on earth anyone should be interested in applying this theorem to real world situations. As so many other mainstream mathematical models taught to economics students today, this theorem has very little to do  with the real world.

Using false assumptions, mainstream modelers can derive whatever conclusions they want. Wanting to show that ‘free trade is great’ just e.g. assume ‘all economists from Chicago are right’ and ‘all economists from Chicago consider free trade to be great’  The conclusions follows by deduction — but is of course factually totally wrong. Models and theories building on that kind of reasoning is nothing but a pointless waste of time.

What mainstream economics took over from Ricardo was not only the theory of comparative advantage. The whole deductive-axiomatic approach to economics that is still at the core of mainstream methodology was taken over from Ricardo. Nothing has been more detrimental to the development of economics than going down that barren path.

Ricardo shunted the car of economic science on to the wrong track. Mainstream economics is still on that track. It’s high time to get on the right track and make economics a realist and relevant science.

Is having infinitely many models really a sign of progress in economics?

18 April, 2017 at 17:55 | Posted in Economics | 1 Comment
user-guides-5

In Dani Rodrik’s Economics Rules it is argud that ‘the multiplicity of models is economics’ strength,’ and that a science that has a different model for everything is non-problematic, since

economic models are cases that come with explicit user’s guides — teaching notes on how to apply them. That’s because they are transparent about their critical assumptions and behavioral mechanisms.

Hmm …

That is at odds with yours truly’s experience from studying mainstream economic models during four decades.

When — just to take an example — criticizing the basic (DSGE) workhorse macroeconomic model for its inability to explain involuntary unemployment, its defenders maintain that later ‘successive approximations’ and elaborations — especially newer search models — manage to do just that. However, one of the more conspicuous problems with those ‘solutions,’ is that they are as a rule constructed without seriously trying to warrant that the model immanent assumptions and results are applicable in the real world. External validity is more or less a non-existent problematique sacrificed on the altar of model derivations. This is not by chance. These theories and models do not come at all with the transparent and ‘explicit user’s guides.’ And there’s a very obvious reason for that. For how could one even imagine to empirically test assumptions such as ‘wages being determined by Nash bargaining’ or ‘actors maximizing expected utility,’ without coming to the conclusion that this is — in terms of realism and relevance — far from ‘good enough’ or ‘close enough’ to real world situations?

Typical mainstream neoclassical modeling assumptions — with or without due pragmatic considerations — can not in any relevant way be considered anything else but imagined model worlds assumptions that has nothing at all to do with the real world we happen to live in.

Here is no real transparency as to the deeper significance and role of the chosen set of axiomatic assumptions.

Here is no explicit user’s guide or indication of how we should be able to, as Rodrik puts it, ‘discriminate’ between the ‘bewildering array of possibilities’ that flow out of such outlandish and known to be false assumptions.

Theoretical models building on piles of known to be false assumptions are in no way close to being scientific explanations. On the contrary. They are untestable and a fortiori totally worthless from the point of view of scientific relevance.

And — as Noah Smith noticed the other day — it certainly isn’t unproblematic to portray having infinitely many models as something laudable:

One thing I still notice about macro … is the continued proliferation of models. Almost every macro paper has a theory section. Because it takes more than one empirical paper to properly test a theory, this means that theories are being created in macro at a far greater rate than they can be tested.

56238100That seems like a problem to me. If you have an infinite collection of models sitting on the shelves, how does theory inform policy? If policy advisers have an endless list of models to choose from, how do they pick which one to use? It seems like a lot of the time it’ll come down to personal preference, intuition, or even ideology …

It seems to me that if you want to make a field truly empirical, you don’t just need to look at data – you need to use data to toss out models, and model elements like the Euler equation … I also think macro people in general could stand to be more proactive about using new data to critically reexamine canonical assumptions … That seems like it’ll raise the chances that the macro consensus gets the next crisis right before it happens, rather than after.

Nicholas Georgescu-Roegen

17 April, 2017 at 23:48 | Posted in Economics | 2 Comments

C’est vraiment incroyable que l’économie orthodoxe ait toujours négligé The Entropy Law and the Economic Process, un ouvrage fondamental et aussi important dans l’histoire de la pensée économique que General Theory de Keynes.

Cutting wages is no panacea

15 April, 2017 at 12:32 | Posted in Economics | Leave a comment

wagecutsFalling wages might provide a short-term boost to corporate profits, but the reduced purchasing power of working people would soon cause people to buy less. That is disastrous in advanced capitalist countries, where consumer spending generally accounts for anywhere from 60 to 70 percent of gross domestic product …

Falling wages were a reality during the Great Depression, but that didn’t help matters. By 1933 in the United States, manufacturing wages fell 34 percent and unemployment rose to about 25 percent. The Canadian economy contracted by more than 40 percentand unemployment reached 30 percent in 1933. Collapses in wages did not bring better times; only the massive government spending to wage World War II put an end to the Depression.

Moreover, already existing low wages come at a high cost. A 2015 study by the researchers at the University of California Berkeley Center for Labor Research and Education found that public benefits given to people who have jobs but can’t live on their meager wages cost the public more than $150 billion annually in the United States — more than half of total public-assistance spending by federal and state governments. Wal-Mart alone costs taxpayers an estimated $6 billion per year subsidizing the retailer’s low pay and paltry benefits at the same time it pays out similar amounts in dividends, half of which go to the Walton family.

As all of you doing the jobs of two or three people at your place of employment have undoubtedly noticed, more work is not being rewarded with more pay. The average U.S. household earns about $18,000 less than it would had wages kept pace with productivity gains, and the average Canadian household is short at least $10,000 per year because of pay lagging productivity gains. Workers across Europe, including in Britain, Germany and Spain, have also seen pay lag productivity.

Pete Dolack

Learning to think like an economist

14 April, 2017 at 09:01 | Posted in Economics | Leave a comment

thinklikemeIt takes some courage, maturity, and perception for the self-discovery that one is engaged in a fraudulent enterprise … Our teachers never talked about ideologies or the larger issues, and seemed content with discussing arcane mathematics — DELIBERATE deception involves knowing the truth and then using lies to hide it.This does not seem to be the modus operandi. Rather, after the initial discomfort of swallowing certain absurd framing ideas wears off, one learns to believe these lies. Much like the experiments with reversing glasses, those who wear them are disoriented at first because the glasses turn the world upside down. However, after a little while the mind adjusts and re-interprets the world so that the upside down image becomes right side up. Then, if they take the glasses off, the world appears upside down. This is what is meant by “learning to think like an economist.”

Asad Zaman

Next Page »

Read more…

Trump is repeating exactly the same script that has guided neoliberal policy for over three decades.

April 26, 2017 8 comments

from Jim Stanford

However it is explained in economic theory, the fundamentally productive, entrepreneurial role of capitalist investment is essential to the political and social legitimacy of the elites who lead the system – and who own and profit from the bulk of its wealth. Indeed, the thriftiness of the early capitalists, and their willingness to plough their savings back into growth, accumulation, and innovation, is precisely what endeared this dynamic new class to the classical economists. Smith, Ricardo, and their colleagues celebrated the productive leadership of capitalists, and developed policy recommendations which consistently favoured that class accordingly: everything from tariff reduction on imported food (to reduce real wage bills) to the expansive enshrinement of property rights. Anything that granted more money and certainty to productive, ambitious investors would be good for the economy, and the rest of society would benefit accordingly. That core idea (albeit perverted by the analytical twists and inconsistencies of neoclassical theory) lives on in the “trickle-down” policy vision which defined neoliberalism from the outset. Neoliberalism was a response to the deceleration of private accumulation after the long postwar boom. That slowdown was due in part to constraints on business imposed by workers, governments, and liberation movements in the former colonies.   Read more…

After the “Thirty Glorious Years”?

April 25, 2017 4 comments

from David Ruccio

Fig6d

On the eve of their presidential election, the French people and politicians continue to debate how they should respond to the end of “Les Trente Glorieuses,” a period that appears to receding into ancient history.

Except, as it turns out, for those at the very top, for whom the last thirty years have been quite glorious.

According to new research by Bertrand Garbinti, Jonathan Goupille-Lebret, and Thomas Piketty, between 1983 and 2014, average per adult national income rose by 35 percent in real terms in France. However, actual cumulated growth was not the same for all income groups:  Read more…

We cannot understand social theories (like economics) outside the historical context.

April 25, 2017 6 comments

from Assad Zaman

Based on ideas derived from my study of the methodology of Polanyi’s Great Transformation, I have come to the conclusion that history and social theories are entangled — they co-evolve in time. We cannot understand social theories (like economics) outside the historical context, just as we cannot understand history without understanding the social theories in use by different groups to try to interpret events in ways that would lead to policy actions in their favor. It is only in context of the struggle of groups with competing interests to impose favorable interpretations upon historical events that we can understand the emergence of theories like comparative advantage. We cannot understand them from the standard “scientific” point-of-view based on the binary of True/False. This dominant mode of understanding will leave us forever confused as to why theories so dramatically at variance with facts can come to dominate, and be widely taught and believed by people who are, by all appearances, perfectly intelligent.

David Ricardo and comparative advantage — a bicentennial assessment

April 25, 2017 17 comments

from Lars Syll

Two hundred years ago, on 19 April 1817, David Ricardo’s Principles was published. In it he presented a theory that was meant to explain why countries trade and, based on the concept of opportunity cost, how the pattern of export and import is ruled by countries exporting goods in which they have comparative advantage and importing goods in which they have a comparative disadvantage.

Heckscher-Ohlin-HO-Modern-Theory-of-International-TradeAlthough a great accomplishment per se, Ricardo’s theory of comparative advantage, however, didn’t explain why the comparative advantage was the way it was. In the beginning of the 20th century, two Swedish economists — Eli Heckscher and Bertil Ohlin — presented a theory/model/theorem according to which the comparative advantages arose from differences in factor endowments between countries. Countries have a comparative advantages in producing goods that use up production factors that are most abundant in the different countries. Countries would mostly export goods that used the abundant factors of production and import goods that mostly used factors of productions that were scarce.

The Heckscher-Ohlin theorem — as do the elaborations on in it by e.g. Vanek, Stolper and Samuelson — builds on a series of restrictive and unrealistic assumptions. The most critically important — beside the standard market clearing equilibrium assumptions — are  Read more…

Exacerbation of the contradiction between democracy and capitalism

April 24, 2017 25 comments

from Alicia Puyana

While the 2008 crisis called into question the fundamentals of economic theory over which the model of global growth had been sustained for the last three and a half decades, today we witness the crisis of liberal democracy and neo-liberal economics (Bauman, 2016), of the Social Democracy doctrine, the New Labor and waning The Third Way, as well as the fading out of the unrestricted support of globalization (Rodrik, 2017). Some foresee it as the end of the Pax Americana, or US hegemony established since the end of the Second World War and the world order that emerged thereafter (Roubini, 2017). For Trump, the costs of maintaining US imperialism are unacceptable; qualifying NATO as obsolete and its members as free riders and suggesting nuclear proliferation of Japan and Korea while keeping the USA “at the top of the pack” (Trump 2017) would be a sensible strategy, as it would reduce for the US the cost of defending these countries. In reality he is not an isolationist. He aims at controlling word order in his own terms: reinforcing the military power elements of the international security policy and weakening the elements of world peace, that inspired the II WW peace agreements and described in  F.D. Roosevelt 1944  State of  the Union Speech (Roosevelt, 1944), for whom security was not only preventing foreign aggressions but also avoiding any threats to  economic, social and moral security, because a basic element of world peace is  “a decent standard of living for all individual men and women and children in all Nations” (Roosevelt, 1944). Furthermore, for Roosevelt, peace depended on “…freedom from fear which is eternally linked with freedom from want” (Roosevelt, op cit.).   Read more…

Nailed to its perch

April 23, 2017 5 comments

from Peter Radford

I always use some famous Chicago School economist as my representative fool when I am describing mainstream economics to my uninitiated friends. How does one, after all, defend such a ludicrous body of thought? By reference to Monty Python?

Here is Gary Becker explaining why mainstream theory is so ridiculous:

“The combined assumptions of maximizing behavior, market equilibrium, and stable preferences, used relentlessly and consistently, form the heart of the economic approach.”

And thus Becker’s economic approach remains firmly nailed to its perch looking for all the world like a dead bird. A very dead bird. It would be funny, indeed hilarious, were it not for the rather dismal fact that people like Becker win prizes and accolades for believing such tripe. There is, apparently, no satire sufficiently cutting, no mirth sufficiently loud, and no critique sufficiently detailed to stop the farce from continuing.

Economics, especially the Becker sort, is dead. It died at its inception. It is a joke that needs sensitive burial so we can move on and look for a real economics that engages real problems and real economies and not the fetid fantasies of the type inhabiting too many professor’s minds.

I often wonder whether economists realize how funny they sound. Or whether they even care about economies. The evidence isn’t reassuring. They press on teaching rubbish as if it were golden. They press on writing ever longer papers riddled with details and mathematics that describe absolutely nothing. They continue to paint pictures that amount to fog. They are, in short, wasting everyone’s time.  Read more…

Income and wealth—the top and the very top

April 23, 2017 4 comments

from David Ruccio

Skellington is right: in my post on Tuesday, I did not separate out people at the very top from the rest of those at the top. That’s because, in the data I presented, those in the top 0.1 percent were included in the top 1 percent.

Unfortunately, I don’t have the same kind of breakdown in the composition of incomes as I used in those charts. What I do have are data on the shares of income and wealth for the top 0.1 percent versus the remainder of the top 1 percent (so, top 1 percent to but not including the top 0. 1 percent).

Income

Read more…

Is having infinitely many models really a sign of progress in economics?

April 22, 2017 2 comments

from Lars Syll

user-guides-5

In Dani Rodrik’s Economics Rules it is argud that ‘the multiplicity of models is economics’ strength,’ and that a science that has a different model for everything is non-problematic, since

economic models are cases that come with explicit user’s guides — teaching notes on how to apply them. That’s because they are transparent about their critical assumptions and behavioral mechanisms.

Hmm …

That is at odds with yours truly’s experience from studying mainstream economic models during four decades.

When — just to take an example — criticizing the basic (DSGE) workhorse macroeconomic model for its inability to explain involuntary unemployment, its defenders maintain that later ‘successive approximations’ and elaborations — especially newer search models — manage to do just that. However, one of the more conspicuous problems with those ‘solutions,’ is that they are as a rule constructed without seriously trying to warrant that the model immanent assumptions and results are applicable in the real world. External validity is more or less a non-existent problematique sacrificed on the altar of model derivations. This is not by chance. These theories and models do not come at all with the transparent and ‘explicit user’s guides.’ And there’s a very obvious reason for that. For how could one even imagine to empirically test assumptions such as ‘wages being determined by Nash bargaining’ or ‘actors maximizing expected utility,’ without coming to the conclusion that this is — in terms of realism and relevance — far from ‘good enough’ or ‘close enough’ to real world situations?   Read more…

The top and the very top

April 21, 2017 2 comments

from David Ruccio

average

Who’s running away with the surplus, those at the top or those at the very top?   Read more…

Could a leftist bring growth back to France?

April 21, 2017 7 comments

from Mark Weisbrot

If the first round of the French presidential election on Sunday is now too close to call, that’s partly because of Jean-Luc Mélenchon’s last-minute surge in the polls. The media describe him as a populist from the far Left, and as he has risen, attacks on him have intensified.

One common criticism is that his economic proposal to jump-start growth in France while reducing mass unemployment and inequality is pie in the sky.

Is it, though?

Mr. Mélenchon would certainly face significant political hurdles if elected, including the need to build political support for his program in Parliament. But the French economy, despite serious problems, could sustain, as well as benefit from, his proposals.

He wants to reduce unemployment from 10 percent, its current level, to about 6 percent over the next five years, partly by increasing government spending by some 275 billion euros, or about 2.3 percent of GDP. The money would go to major public spending in renewable energy and environmental projects, housing and antipoverty programs, as well as toward lowering the retirement age and increasing wages in the public sector.

Mr. Mélenchon’s critics say that France is already living beyond its means. The French enjoy a level of economic security and living standards that most Americans can only dream about: universal health care, free childcare and public-university education, a 35-hour workweek, higher life expectancy, and lower per capita energy consumption and greenhouse gas emissions. The new government, say people who oppose Mr. Mélenchon’s views, will have to focus on reducing the public debt.

But the numbers do not bear them out.

Read more…