I think it’s a positive move that the Securities and Exchange Commission has approved a rule that would require most public companies to regularly reveal the ratio of the chief executive’s pay to that of the average employee.
from Lars Syll
Modern economics has become increasingly irrelevant to the understanding of the real world. In his seminal book Economics and Reality (1997) Tony Lawson traced this irrelevance to the failure of economists to match their deductive-axiomatic methods with their subject.
It is — sad to say — as relevant today as it was eighteen years ago.
It is still a fact that within mainstream economics internal validity is everything and external validity nothing. Why anyone should be interested in that kind of theories and models is beyond my imagination. As long as mainstream economists do not come up with any export-licenses for their theories and models to the real world in which we live, they really should not be surprised if people say that this is not science, but autism!
Studying mathematics and logics is interesting and fun. It sharpens the mind. In pure mathematics and logics we do not have to worry about external validity. But economics is not pure mathematics or logics. It’s about society. The real world. Forgetting that, economics is really in dire straits. Read more…
from Trond Andresen
As a point of departure I refer to this paper, on page 2 in the Real-World Economics Review, issue 71, 28 May 2015. The paper argues for and describes how to possibly implement an electronic parallel currency in Greece.
But the proposal for a parallel currency should now be even more specific, tailored to the current drama and urgency. And the pressure to do something along the lines suggested below is increasing all the time (because the so-called “bailouts” only imply further exponential debt growth in a pyramid game – something that is mostly not recognised in the media and by commentators).
Here are my suggestions: PHASE A Read more…
from Peter Radford
I have a friend who counts bank reform as one of Obama’s signature achievements. Maybe. But what he probably doesn’t realize is that it is only just now getting implemented.
Hidden amongst the weeds of the Dodd-Frank legislation was a provision authorizing the Securities and Exchange Commission to order publicly traded companies to publish the ratio of CEO to median worker pay.
That rule was finally voted on this week. That is five years after the legislation was passed.
The delay in enforcing the rule was caused, at least in part, by the massive push back by big companies. Presumably they were embarrassed by the ludicrous differential that has opened up in that ratio.
One of the major reasons business gave for objecting to the rule was that it is very difficult to calculate how much they pay their employees. Really? It doesn’t seem that way when they announce cost cutting programs aimed at boosting earnings per share. Somehow I think businesses have a pretty good idea of their payrolls. After all they are notorious for being picayune over every little detail that might cost the CEO a part of his or her bonus. Read more…
from Dean Baker
More than five years after the passage of Dodd-Frank the Securities and Exchange Commission (SEC) finally issued rules on disclosure of CEO pay last week. The financial reform law required that corporations make public the ratio of CEO pay to the pay of a typical worker at the company. Corporate lobbyists have spent the last five years complaining that this disclosure would impose an enormous burden. After much delay, the SEC finally decided to carry through with the requirements of the law and issued specific rules for the disclosure.
This is likely to provide useful information for people interested in trends in inequality, but it does not directly address the issue. At most it will serve to provide some degree of embarrassment to the companies where this ratio is most out of line. It’s worth thinking more carefully about why CEO pay got so ridiculous and how it can be reined it. Read more…
from Maria Alejandra Madi and the WEA Pedagogy Blog
The conceptualization of the informal economy focuses on some features of the business dynamics and employment conditions. That is why the definition includes not only enterprises that are not legally regulated, but also employment relations that are unregulated and unprotected, that is to say, employment without any kind of social protection.
In most of the developing countries, the small businesses’ challenges have contributed to the expansion of the informal economy. Small and micro-entrepreneurs are usually subject to complex regulatory barriers. Besides, the access to credit is restricted. As a result, micro and small enterprises reveal poor performance in competitive environments, a lower capacity for innovation and a weak international orientation. Among other obstacles to survival and expansion in the formal economy, the costs of starting up a formal enterprise are outstanding in developing countries. Among these transaction costs, we can highlight: i) the number of procedures that includes all necessary licenses and permits and completion of any notifications, verifications or registrations required by the relevant authorities; and ii) business legislation, specific regulations and fee schedules that are used as sources for start-up cost calculation. read more
from Lars Syll
Re-reading the Lucas & Sargent New Classical manifesto ‘After Keynesian Economics’ (1979) some macroeconomists seem to be überimpressed by its “quality” and “persuasiveness.”
Quality and persuasiveness?
Let’s listen to what James Tobin had to say on the Lucas & Sargent kind of macroeconomic analysis:
They try to explain business cycles solely as problems of information, such as asymmetries and imperfections in the information agents have. Those assumptions are just as arbitrary as the institutional rigidities and inertia they fins objectionable in other theories of business fluctuations … I try to point out how incapable the new equilibrium business cycles models are of explaining the most obvious observed facts of cyclical fluctuations … I don’t think that models so far from realistic description should be taken seriously as a guide to policy … I don’t think that there is a way to write down any model which at one hand respects the possible diversity of agents in taste, circumstances, and so on, and at the other hand also grounds behavior rigorously in utility maximization and which has any substantive content to it.
Edmund S. Phelps, Nobel laurate in economics, stumbles and falls when assessing the dire causes and dire consequences of austerity in Greece
Edmund S. Phelps, 2006 Nobel laureate in economics, makes and understandable but basic and grave statistical mistake when trying to understand recent macro economic events in Greece. This mistake leads him to misunderstand what’s happening in Greece and to downplay the absolutely dire consequences of austerity. Contrary to his ideas, the data show that record Greek austerity did coincide, and prefectly so, with the extreme increase in unemployment and the extreme decrease in employment. It is hard to understand that somebody of his stature can misread the data to the extent he did. And I do not understand why a presigious blog like Project Syndicates publishes such an op-ed, riddled with mistakes which even a freshman in economics should not be allowed to make.
from Lars Syll
Robert Lucas is well-known for condemning everything that isn’t microfounded rational expectations macroeconomics as “ad hoc” theorizing.
But instead of rather unsubstantiated recapitulations, it would be refreshing and helpful if the Chicago übereconomist — for a change — endeavoured to clarify just what he means by “ad hoc.”
The standard meaning — OED — of the term is “for this particular purpose.” But in the hands of New Classical–Real Business Cycles–New Keynesians it seems to be used more to convey the view that modeling with realist and relevant assumptions is somehow equivalent to basing models on “specifics” rather than the “fundamentals” of individual intertemporal optimization and rational expectations.
from Peter Radford
I have finally arrived at the point where I can give
orthodox simple economics its due. It is a triumph. A system of thought well conceived, brilliantly executed, coherent, consistent, and pretty much complete. Bravo. I love it.
As long as we are trying to examine economies consisting of one or two prescient households, a couple of firms of exquisite accounting excellence, one or two products that are easily substituted for one another, as long as there is no uncertainty, no relevant time, and as long as these various actors can calculate everything at warp speed, we know everything we need to know about economics. The game is over.
As I say: well done everyone.
These unbelievably simple little economies, I assume, must exist somewhere. And wherever they do we can explain them easily.
Where they don’t is another matter.
Orthodox economics is simple economics. Simple.
Second: Read more…
Are stressed and stagnating economies like those of fFnland and Greece economic backwaters, doomed to stagnation, ridicule and decline which can only increase productivity by financial manipulations? Of course not. By far the larger part of productivity increases in Eurozone periphery countries has been of the lasting kind and productivity in Greece and Finland is still about 30% (yes, that’s a lot) higher than in 1995, even though the data are also consistent with a certain amount of debt driven productivity exuberance in the years directly before 2008 and part of the decline might be caused by the implosion of a debtdriven bubble, like in Greece between 2007 and 2011 (data: Eurostat). While, again, any bubble effects are dwarfed by the structural increase before 2008 and while part of the post 2008 decrease must also be caused by low levels of production which often tend to depress productivity.The lasting nature of the post 2008 productivity decline and stagnation however indicates that something else might be the matter, too.
Next to home ownership, education is the path to middle class prosperity. It has become so expensive that student loans are now the second largest category of personal debt (over $1 trillion as of 2014, exceeding the volume of credit-card debt). Carrying charges on this debt absorb over 25 percent of the income of many graduates from lower-income families.
Saddling students and new homebuyers with debt has turned their hopes and ambition into a road to insolvency. Something must give way when earnings are unable to cover the stipulated debt service. If banks do not write down their loans, foreclosure time arrives and assets will be forfeited.
The 2005 U.S. bankruptcy code reversed a long trend toward greater protection of debtors. Written largely by bank and credit-card lobbyists, the new law makes it harder to write off personal debts in general, and nearly impossible for student loans to be cleared. The effect is to turn many graduates into indentured servants, obliged to spend much of their working lives paying off the debt taken on to obtain a degree. Many make ends meet by living at home with their parents. Inability to save enough for a home of their own slows the rate of marriages and family formation. Read more…
Within the broad normative political economy perspective . . ., the inter-connections among institutions (and policies) are important to recognize and understand. But not infrequently, however, these may not prove to be so easily tractable or even to understand and interpret, particularly in practice. For social and institutional processes need not always be seen as simple and linear (however attractive and convenient this might often seem to be); . . . certain relevant complexities in processes may often appear, which may thus require important recognition and attention—and these, perhaps, would also often require reconstructive efforts and difficult interpretive devices and competences to assist us in their understanding and with respect to more practical concerns. Moreover, if the outcomes—sometimes moving in opposing direction, and not infrequently showing some degree of ambiguity or fuzziness—are not to be narrowly channeled through some one dimensional accounting (as with the traditional GDP or some such related measure), but are rather to be assessed within a multi- metric, multi-factorial, normative lenses, as we have previously suggested, this would then imply that they may not be amenable to simple accounting (much less an algorithmic one) which would result in one unambiguous measure. These may then often require communicative means, discussions and argumentation in order to figure out whether various institutional processes would constitute some kind of success or failure—or, at any rate, various degrees of progress reckoned with some such multi- metric scales. Related considerations would apply to figuring out the appropriate directions to go in terms of policies and institutional realization and design. Read more…
The answer depends on what we mean by capital accumulation. The common view of this process is deeply utilitarian. Capitalists, we are told, seek to maximize their so-called ‘real wealth’: they try to accumulate as many machines, structures, inventories and in- tellectual property rights as they can. And the reason, supposedly, is straightforward. Capitalists are hedonic creatures. Like every other ‘economic agent’, their ultimate goal is to maximize their utility from consumption. This hedonic quest is best served by eco- nomic growth: more output enables more consumption; the faster the expansion of the economy, the more rapid the accumulation of ‘real’ capital; and the larger the capital stock, the greater the utility from its eventual consumption. Utility-seeking capitalists should therefore love booms and hate crises.
But that is not how real capitalists operate. Read more…
From feudal barons keeping the land’s rent for themselves to modern corporate profits paid to bondholders, creditors have broken free of tax liability. Banks now receive most of the rental value of land as mortgage interest, mobilizing a populist argument against property taxes so as to leave more rent available to pay bankers. The situation is reminiscent of Babylonian lenders obtaining the land’s crop usufruct while leaving the customary holders liable for the labor duties associated with their land tenure.
Now that land ownership has been democratized – on credit – a majority of most populations (two-thirds in the United States, and over four-fifths in Scandinavia) no longer pay rent to landlords. Instead, homeowners and commercial property investors pay the rental value to bankers as mortgage interest. In the United States, bankers obtain about two-thirds of real estate cash flow, largely by reducing property taxes. The more the financial sector can reduce the government’s tax take, the more rent is available for new buyers to pay interest to banks for loans to buy property. This explains why the financial sector backs anti-tax “Tea Party” protests. Read more…
from Lars Syll
Lucas and his school … went even further down the equilibrium rabbit hole, notably with real business cycle theory. And here is where the kind of willful obscurantism Romer is after became the norm. I wrote last year about the remarkable failure of RBC theorists ever to offer an intuitive explanation of how their models work, which I at least hinted was willful:
“But the RBC theorists never seem to go there; it’s right into calibration and statistical moments, with never a break for intuition. And because they never do the simple version, they don’t realize (or at any rate don’t admit to themselves) how fundamentally silly the whole thing sounds, how much it’s at odds with lived experience.”
Yours truly, of course, totally agrees with Paul on Lucas’ rabbit hole freshwater school.
New book from WEA eBooks
The work is very interesting and enlightening and could be used in various courses such as public economics, political economy, development economics, and the theory of institutions.
Willi Semmler, New School for Social Research
This book assesses political economy by considering various ideals, including collective decisions and democracy, freedom, justice, and development. Beginning with the idea that social evaluation using the familiar metric of GDP is extremely limited, this book draws inspiration and incorporates basic insights from the writings of Amartya K. Sen. Within its reconstructive methodology, this book brings in ideas from various major thinkers, including the contemporary philosophers Rawls and Habermas, and the classical thinkers Aristotle, Adam Smith, J.S. Mill, and Marx.
This work will be of interest to students and scholars in social and political philosophy, economic philosophy, the philosophy of law, the philosophy of development, the normative theory of institutions, and political economy.
Elstat has published new population estimates for Greece. And what happened to Portugal, Ireland, Estonia, Spain Latvia, Lithuania, Romania or Bulgaria is happening to Greece, too. People are leaving in droves.and the population is declining as far as I know especially the working age population! Aside: don’t tell to me that international European job markets aren’t flexible. They are. Before 2008, a massive influx of foreign workers enabled Spain to have the second highest job growth in an absolute sense of the entire rich world, only next to the (much larger) US. Housing boom related private demand in Spain was of course fickle – but the supply side of the labour market reacted vigorously. No petrification there.
New Greek bailout increases the odds that Grexit will actually happen, despite Washington’s pressure.
from Mark Weisbrot
It is now clear that the European authorities do not intend to let the Greek economy recover any time in the foreseeable future. The primary surpluses that the government has been forced to agree to—2, 3, and 3.5 percent of GDP for the three years of the deal, 2016 through 2018—will not allow Greece to escape its depression, which is now in its sixth year. Even if they miss these targets, which is likely, just trying to do what they have committed to will keep the economy from recovering.
The Foundation for Economic and Industrial Research in Athens has projected that the Greek economy will not recover in 2016. It is worth noting that since 2010 past projections from official sources, e.g., by the IMF, have almost always projected recovery for the following year – even though it never happened until the tiny, short-lived, recovery of 2014.
One can only speculate on the motives for inflicting this harm on the people of Greece. Clearly it is not about the money – the Financial Times estimated that the primary surpluses will contribute about 4.5 billion euros out of what is now an 86 billion euro package. Punishment is probably part of the motivation for these hateful conditions, as well as a fear on the part of the tormentors that “leniency” could encourage people in other vulnerable eurozone economies to vote for left parties or demand an earlier exit from mass unemployment. Read more…
from Lars Syll
Are macro-economists doomed to always “fight the last war”? Are they doomed to always be explaining the last problem we had, even as a completely different problem is building on the horizon? Well, maybe. But I think the hope is that microfoundations might prevent this. If you can really figure out some timeless rules that describe the behavior of consumers, firms, financial markets, governments, etc., then you might be able to predict problems before they happen. So far, that dream has not been realized. But maybe the current round of “financial friction macro” will produce something more timeless. I hope so.
So there we have it! This is nothing but the age-old machine dream of neoclassical economics — an epistemologically founded cyborg dream that disregards the fundamental ontological fact that economies and societies are open — not closed — systems. If we are going to be able to show that the mechanisms or causes that we isolate and handle in our models are stable in the sense that they do not change when we “export” them to our “target systems,” they do only hold under ceteris paribus conditions and are a fortiori of limited value for understanding, explaining or predicting real economic systems. Or as the always eminently quotable Keynes wrote in Treatise on Probability(1921): Read more…