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Economism and abuse of economic theory in American politics

News Neoclassical Pseudo Theories and Crooked and Bought Economists as Fifth Column of Financial Oligarchy Recommended Links Samuelson's bastard Keynesianism John Kenneth Galbraith Hyman Minsky The efficient markets hypothesis
 Invisible Hand Hypothesys: The Theory of Self-regulation of the Markets New Lysenkoists: Useful Idiots from Chicago School of Market Fundamentalism and Milton Friedman The Idea of Dynamic Stochastic General Equlibrium Small government smoke screen Critique of neoclassical economics Rational expectations scam  
Deception as an art form Neoliberalism as a New Form of Corporatism Free vs Fair market The neoliberal myth of human capital Neoliberalism's Myth on Benefits of Free Trade Financial Humor Etc
  Economism is reduction of all social facts to economic dimensions. The term is often used to criticize economics as an ideology, in which supply and demand are the only important factors in decisions, and outstrip or permit ignoring all other factors.

It is believed to be a side effect of neoclassical economics and blind faith in an "invisible hand" or "laissez-faire" means of making decisions, extended far beyond controlled and regulated markets, and used to make political and military decisions.

Conventional ethics would play no role in decisions under pure economism, except insofar as supply would be withheld, demand curtailed, by moral choices of individuals. Thus, critics of economism insist on political and other cultural dimensions in society.

Economism - Wikipedia

Someone needed to write a book about how economic theory has been abused in American politics to promote neoliberalism as an ideology. In this sense,  James Kwak’s “Economism” is a very important and timely book, and anyone who is interested in public affairs should pick up a copy and read it.

He explains how simplistic and wrong supply-and-demand theory fed a free-market ideology that led to a financial crash, a dysfunctional health-care system, spiraling inequality and a threadbare social-safety net. The basic idea is that by getting everyone to think in Econ 101 terms -- perfectly competitive well-functioning markets, rational well-informed consumers and so on -- free-marketers were able to redefine the terms of the national debate to favor their own interests. With Econ 101 as the default lens through which everyone views the world, Kwak argues, government programs and regulations start to seem dangerous and inefficient, while inequality begins to feel like the natural and just order of things.

There is much truth here. When competitive free markets and rational well-informed actors are the baseline assumption, the burden of proof shifts unfairly onto anyone proposing a government policy. For far too many years, free-marketers have gotten away with winning debates by just sitting back and saying “Oh yeah? Show me the market failure!” That deck-stacking has long forced public intellectuals on the left have to work twice as hard as those safely ensconced in think tanks on the free-market right, and given the latter a louder voice in public life than their ideas warrant.

It’s also true that simple theories, especially those we learn in our formative years, can maintain an almost unshakeable grip on our thinking. For example, the basic Econ 101 theory of supply and demand is fine for some products, but it doesn’t work very well for labor markets. It is incapable of simultaneously explaining both the small effect of minimum wage increases and the small impact of low-skilled immigration. Some more complicated, advanced theory is called for. But no matter how much evidence piles up, people keep talking about “the labor supply curve” and “the labor demand curve” as if these are real objects, and to analyze policies -- for example, overtime rules -- using the same old framework. An idea that we believe in despite all evidence to the contrary isn’t a scientific theory -- it’s an infectious meme.

Academic economists are unsure about how to respond to the abuse of simplistic econ theories for political ends. On one hand, it gives them enormous prestige. The popularity of simplistic econ ideas has made economists the toast of America’s intellectual classes. It has sustained enormous demand for the undergraduate econ major, which serves, in the words of writer Michael Lewis, as a “standardized test of general intelligence” for future businesspeople. But as Kwak points out, the simple theories promulgated by politicians and on the Wall Street Journal editorial page often bear little resemblance to the sophisticated theories used by real economists. And when things go wrong -- when the financial system crashes, or millions of workers displaced by Chinese imports fail to find new careers -- it’s academic economists who often get blamed, not the blasé and misleading popularizers.

 Why was economism really so successful at capturing hearts and minds? Kwak chalks it all up to the purposeful influence of business leaders, the wealthy and their enablers. He writes:

A way of seeing the world, such as economism, does not become widespread and influential because it is more accurate or correct than the alternatives. Instead, worldviews become powerful because they reflect the beliefs and serve the purposes of an important interest group.

I don’t really believe this. It seems clear to me that the real-world usefulness of a worldview or ideology really does have an effect. Russia and China have given up communism not because they stopped having working classes, but because it became obvious that their communist systems were keeping them in poverty. And Americans are now starting to question economism because of declining median income, spiraling inequality and a huge financial and economic crisis.

Economism has obviously gone too far. The worldview it promulgates is too simplistic, and it sometimes ends up hurting the many to benefit the few. But as we search for new ideologies and worldviews, I think we shouldn’t forget economism. It should be just one tool in our mental toolbox.


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Old News ;-)

[Sep 17, 2017] GDP was never meant to be a measure of how well-off society is. Only under neoliberalism it has become such a fake indicator with huge propaganda value

Notable quotes:
"... "Here is my two cents: these three researchers may have just put the nail in the coffin of using production-side measures of the free economy-and that is not really all that bad. GDP is a measure of total production. It was ever meant to be a measure of how well-off society has become. ..."
"... While introduction of the concept of GDP and systematic its measurement (with all its warts, especially in calculation of "real GDP") was a great achievement, absolutization of GDP under neoliberalism and, especially, false equivalence between GDP growth and growth of the standard of living of population are dangerous neoliberal myths. ..."
"... We should fight neoliberal cult of GDP. ..."
"... Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what. ..."
Jun 12, 2017 | economistsview.typepad.com

Christopher H. , June 12, 2017 at 03:10 PM

Interesting post at Digitopoly by Shane Greenstein

"Here is my two cents: these three researchers may have just put the nail in the coffin of using production-side measures of the free economy-and that is not really all that bad. GDP is a measure of total production. It was ever meant to be a measure of how well-off society has become.

More to the point, maybe it is time to focus on the demand-side measures of free goods. In other words, you get a lot more for your Internet subscription, but nothing in GDP reflects that. For example, the price index for Internet services should reflect qualitative improvement in user experiences, and needs to improve."

libezkova said in reply to Christopher H.... , June 12, 2017 at 07:44 PM
While introduction of the concept of GDP and systematic its measurement (with all its warts, especially in calculation of "real GDP") was a great achievement, absolutization of GDP under neoliberalism and, especially, false equivalence between GDP growth and growth of the standard of living of population are dangerous neoliberal myths.

We should fight neoliberal cult of GDP.

Simon Kuznets, the economist who developed the first comprehensive set of measures of national income, stated in his first report to the US Congress in 1934, in a section titled "Uses and Abuses of National Income Measurements":

The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification. [...]

All these qualifications upon estimates of national income as an index of productivity are just as important when income measurements are interpreted from the point of view of economic welfare. But in the latter case additional difficulties will be suggested to anyone who wants to penetrate below the surface of total figures and market values. Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.

In 1962, Kuznets stated:

Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.

[Jul 05, 2017] NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false

Notable quotes:
"... NAIRU is a specific claim and estimate about the way the economy works. As you discovered yourself, the Fed literally produces a NAIRU estimate and uses that estimate to determine policy. NAIRU cannot be estimated accurately, and furthermore there is zero evidence of accelerating inflation. So there is literally nothing redeeming about the theory except to say that there is some relationship between supply labor, and inflation. Which is to say, that your support of the thing is wrong, and all of our criticisms that NAIRU is trash are correct. ..."
"... The answer is that there is no unemployment rate that generates accelerating inflation. As inflation is not simply a relationship between unemployment and prices. Inflation is a result of many different types of inputs. ..."
"... There are literally zero examples of low unemployment rates, even below 1% during WWII, that have resulted in accelerating inflation. You and the NAIRU crowd have no legs to stand on. ..."
"... You make the same mistake as all illiterate persons, that is, you cannot read. What I have clearly stated is: "NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false."* The measurement problem is a side issue.** ..."
"... "better to say that there is no necessary or constant relationship between employment and inflation that can be expressed either as a function or a rule," ..."
"... Good line here Tom... they don't have a function... ..."
"... I've closely followed this NAIRU argument here and on other threads. I don't have a dog in this fight, but it seems perfectly obvious from all this that Auburn and Brian have this exactly right. And for the life of me I cannot fathom how anyone can misunderstand their argument: there may be a link between employment and inflation, but the NAIRU doesn't capture it. There may be a link between dogs barking at a full moon, but my theory of a moon made out of green cheese doesn't capture it. ..."
"... Standard labor market theory as it is incorporated in the NAIRU-Phillips curve is not vaguely true, or evolutionary true as David Glasner maintains, but provable false. ..."
Jul 05, 2017 | mikenormaneconomics.blogspot.com

Ralph Musgrave said... February 28, 2017 at 4:06 PM

Brian,

For the second time, you claimed "Nobody says there is no relationship between supply, employment, and inflation." My answer is the same as before: what does Brian Romanchuk mean by saying NAIRU should be "bashed, smashed and trashed". Seems a pretty outright condemnation of the whole idea to me.

Tom,

You say "Probably better to say that there is no necessary or constant relationship…". Quite agree. But whoever said there WAS a constant relationship? Certainly not the Fed. Anyone with a bit brain ought to realise that NAIRU will vary with a whole host of variables: standards of education, recent unemployment levels (hystersis) and so on.

EK-H,

You make the naïve mistake many people make of thinking the because something cannot be measured accurately that therefor it does not have a precise value. The amount of iron in the Moon has a very very precise value indeed. Ask God how much iron there is on and in the Moon and he'd tell you the figure to the nearest 0.00000001%. In contrast, astronomers might not know the quantity to better than plus or minus 10% for all I know. It is therefor perfectly permissible to write equations or get involved in discussions which assume a very very precise value for the amount of iron in the Moon. Same goes for NAIRU.

Much of the stuff I've written makes the latter assumption: it is helpful to make that assumption sometimes.

Auburn Parks said.. February 28, 2017 at 4:39 PM .

No Egmont, its not about scientific idiocy. Its about the nature of the subject. Economics is not different than social psychology in this regard.

Ralph-

NAIRU is a specific claim and estimate about the way the economy works. As you discovered yourself, the Fed literally produces a NAIRU estimate and uses that estimate to determine policy. NAIRU cannot be estimated accurately, and furthermore there is zero evidence of accelerating inflation. So there is literally nothing redeeming about the theory except to say that there is some relationship between supply labor, and inflation. Which is to say, that your support of the thing is wrong, and all of our criticisms that NAIRU is trash are correct.

What is the unemployment rate that would correspond to accelearating inflation right now Ralph?

Auburn Parks said.. February 28, 2017 at 4:42 PM .
The answer is that there is no unemployment rate that generates accelerating inflation. As inflation is not simply a relationship between unemployment and prices. Inflation is a result of many different types of inputs.

There are literally zero examples of low unemployment rates, even below 1% during WWII, that have resulted in accelerating inflation. You and the NAIRU crowd have no legs to stand on.

AXEC / E.K-H said.. February 28, 2017 at 4:43 PM .
Ralph Musgrave

You say: "You make the naïve mistake many people make of thinking the because something cannot be measured accurately that therefore it does not have a precise value."

You make the same mistake as all illiterate persons, that is, you cannot read. What I have clearly stated is: "NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false."* The measurement problem is a side issue.**

Egmont Kakarot-Handtke

* See 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather'
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
** See 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy'
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html

AXEC / E.K-H said.. February 28, 2017 at 5:11 PM .
Auburn Parks

The moronic part of economists, i.e. the vast majority, maintains that economics is a social science. Time to wake up to the fact that economics is a system science.#1

Economics is NOT a science of individual/social/political behavior - this is the social science delusion - but of the behavior of the monetary economy . All Human-Nature issues are the subject matter of other disciplines (psychology, sociology, anthropology, biology/ Darwinism, political science, social philosophy, history, etcetera) and are taken in from these by way of multi-disciplinary cooperation.#2

The economic system is subject to precise and measurable systemic laws.#3

Egmont Kakarot-Handtke

#1 See 'Lawson's fundamental methodological error and the failure of Heterodoxy'
http://axecorg.blogspot.de/2016/03/lawsons-fundamental-methodological.html
#2 See 'Economics and the social science delusion'
http://axecorg.blogspot.de/2016/03/economics-and-social-science-delusion.html
#3 See 'The three fundamental economic laws'
http://axecorg.blogspot.de/2016/03/the-three-fundamental-economic-laws.html

Tom Hickey said.. February 28, 2017 at 6:19 PM .
But whoever said there WAS a constant relationship? Certainly not the Fed.

Not now. They had to learn this by first the NAIRU model that assumed a natural rate and cet. par., and then the difficulty of writing a rule that could be applied across time.

Too many confounding factors involved that are not directly related to employment or the interest rate.

And there are still people calling for a rule.

Noah Way said.. February 28, 2017 at 7:30 PM .
"Economic science" is an oxymoron.
AXEC / E.K-H said.. March 1, 2017 at 5:39 AM .
Noah Way

You say: "'Economic science' is an oxymoron."

It is, first of all, of utmost importance to distinguish between political and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics the scientific standards of material and formal consistency are observed.

Political economics has produced NOTHING of scientific value in the last 200+ years. The four majors approaches - Walrasianism, Keynesianism, Marxianism, Austrianism - are mutually contradictory, axiomatically false, and materially/formally inconsistent.

A closer look at the history of economic thought shows that theoretical economics (= science) had been hijacked from the very beginning by the agenda pushers of political economics. These folks never rose above the level of vacuous econ-waffle. The whole discussion from Samuelson/Solow's unemployment-inflation trade-off to Friedman/Phelps's natural rate to the rational expectation NAIRU is a case in point.

The NAIRU-Phillips curve has zero scientific content. It is a plaything of retarded political economists. Samuelson, Solow, Friedman, Phelps, and the rest of participants in the NAIRU discussion up to Wren-Lewis are fake scientists.*

Egmont Kakarot-Handtke

* See also 'Modern macro moronism'
http://axecorg.blogspot.de/2017/02/modern-macro-moronism.html

Matthew Franko said.. March 1, 2017 at 8:13 AM .
"better to say that there is no necessary or constant relationship between employment and inflation that can be expressed either as a function or a rule,"

Good line here Tom... they don't have a function...

But I would point out that with the employment issue, we have had an unregulated system interface (open borders) for decades which is ofc going to result in chaos..

Ralph Musgrave said.. March 1, 2017 at 10:20 AM .
EK-H,

I see: so you're saying the "underlying employment theory" of NAIRU "is false": i.e. you're saying there is no relationship between inflation and unemployment.

Why then don't you advocate a massive increase in demand. Think of the economic benefits and social problems solved.!!

Reason you don't advocate that is that, like all the other NAIRU deniers, you know perfectly well that THERE IS a relationship between inflation and unemployment.!!

AXEC / E.K-H said.. March 1, 2017 at 1:43 PM .
Ralph Musgrave

It would be fine if you could first learn to read and to think and to do your economics homework.

The point at issue is the labor market theory and the remarkable fact of the matter is that economists have after 200+ years NO valid labor market theory. The proof is in the NAIRU-Phillips curve. So what these failures are in effect doing is giving policy advice without sound theoretical foundation. Scientists don't do this.

What is known since the founding fathers about the separation of politics and science is this: "A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision." (J. S. Mill)

The first point is that economists violate the separation of politics and science on a daily basis.#1 The second point is that their unwarranted advice is utter rubbish because they have NO idea how the economy works. The problem society has with economists is that it would be much better off without these clowns.

You ask me: "Why then don't you advocate a massive increase in demand. Think of the economic benefits and social problems solved.!!"

Answer: The business of the economist is the true theory about how the economic system works and NOT the solution of social problems. This is the proper business of politicians. In addition, an economist who understands how the price and profit mechanism works does not make such a silly proposal, only brain-dead political agenda pushers do.#2

What I am indeed advocating is that retarded econ-wafflers are thrown out of economics and that economics gets finally out of what Feynman aptly called cargo cult science.#3

Economists claim since more that 200 years that they are doing science and this is celebrated each year with the 'Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel'. Time to make this claim come true.

The only thing economist like you can actively do to contribute to the progress of economics is switching on TV and watching 24/365.

Egmont Kakarot-Handtke

#1 See 'Scientific suicide in the revolving door'
http://axecorg.blogspot.de/2016/11/scientific-suicide-in-revolving-door.html
#2 See 'Rethinking deficit spending'
http://axecorg.blogspot.de/2016/12/rethinking-deficit-spending.html
#3 See 'Economists and the destructive power of stupidity'
http://axecorg.blogspot.de/2017/02/economists-and-destructive-power-of.html

Ralph Musgrave said.. March 1, 2017 at 2:14 PM .
EKH,

"The business of the economist is the true theory about how the economic system works and NOT the solution of social problems. This is the proper business of politicians."

"The business of the economist" is not just "true theory": it is also to give the best economic advice they can even where the theory is clearly defective. In the case of the relationship between inflation and unemployment, the EXACT nature of that relationship is not known with much accuracy, but governments just have to take a judgement on what level of unemployment results in too much inflation. Ergo economics have a duty to give the best advice they can in the circumstances.

Re social problems, your above quote also doesn't alter the fact that economists are in a position to solve HUGE social problems if they promote an increase in demand where that is possible. So why are you so reluctant to solve those social problems by advocating a huge increase in demand. It's blindingly obvious.

Like all the other NAIRU deniers, you know perfectly well there is a relationship between inflation and unemployment!!

David Swan said.. March 1, 2017 at 3:23 PM .
To say that there is "a" relationship between inflation and unemployment does not even remotely support the claims inherent in the NAIRU, nor does it justify its use to guide the macroeconomic framework. NAIRU does not claim that there is "a" relationship between inflation and unemployment (that lesser claim is covered adequately by the Phillips Curve). NAIRU claims that low levels of unemployment generate ACCELERATING inflation (i.e. "hyperinflation"), a claim based on pure sophistry and nothing else. If you would like to support the NAIRU's utterly fallacious claim that low unemployment generates ACCELERATING inflation, then please provide data to support that claim.

Furthermore, "a" relationship between unemployment and inflation in no way justifies the central bank intervention of choking off economic growth to prevent "too many jobs". Is the inflation harmful or benign? With the historical perspective available to us from nearly 5 decades of NAIRU, all that is required is to look at the chart of hourly wage growth vs productivity and observe that real wages growth took a sharp right turn at the very time NAIRU was implemented worldwide. There has not been one iota of real wage growth since the 70's (despite low inflation), whereas the real wage grew steadily prior to that (despite moderate inflation). If that is the price of "protecting" us from inflation, then in what way is it beneficial to do so?

Brian Romanchuk said.. March 1, 2017 at 3:38 PM .
I see Ralph Musgrave referred to my article again.

Good Lord, how can I make what I wrote simpler to understand?

The DEFINITION of NAIRU is the level of the unemployment rate at which the price level starts to accelerate. Sure, there's usually another variable in there mucking up the works, but it's going to be a second order effect in the current environment.

AXEC / E.K-H said.. March 1, 2017 at 4:42 PM .
Ralph Musgrave

You say: "Ergo economics have a duty to give the best advice they can in the circumstances."

The only duty of scientifically incompetent economists is to throw themselves under the bus. Economists are a menace to their fellow citizens as Napoleon already knew: "Late in life, moreover, he claimed that he had always believed that if an empire were made of granite the ideas of economists, if listened to, would suffice to reduce it to dust." (Viner)

Economists do NOT solve social problems they ARE a social problem.

You repeat your silly question: "So why are you so reluctant to solve those social problems by advocating a huge increase in demand. It's blindingly obvious."

Yes it is blindingly obvious that deficit spending does NOT solve social problems but CREATES the social problem of an insanely unequal distribution (see the references above).

This follows from the true labor market theory which is given with the systemic employment equation.#1 "The correct theory of the macroeconomic price mechanism tells us that ― for purely SYSTEMIC reasons ― the average wage rate has in the current situation to rise faster than the average price. THIS opens the way out of mass unemployment, deflation, and stagnation and NOT the blather of scientifically incompetent orthodox and heterodox agenda pushers."#2

Right policy depends on true theory: "In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion." (Stigum)

Economists do not have the true theory. They have NOTHING to offer. The NAIRU-Phillips curve is provable false. Because of this ALL economic policy conclusions drawn from it are counterproductive, that is, they WORSEN the situation. So, Samuelson, Solow, Friedman, Phelps and the other NAIRU-Phillips curve proponents bear the responsibility for mass unemployment and the social devastation that comes with it.

From the fact that the NAIRU labor market theory is false follows that economists are incompetent scientists and that ALL their economic policy proposals are scientifically worthless.

Egmont Kakarot-Handtke

#1 See 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather'
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
#2 See 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy'
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html

John said.. March 2, 2017 at 9:53 AM .
I've closely followed this NAIRU argument here and on other threads. I don't have a dog in this fight, but it seems perfectly obvious from all this that Auburn and Brian have this exactly right. And for the life of me I cannot fathom how anyone can misunderstand their argument: there may be a link between employment and inflation, but the NAIRU doesn't capture it. There may be a link between dogs barking at a full moon, but my theory of a moon made out of green cheese doesn't capture it.
AXEC / E.K-H said.. March 5, 2017 at 5:29 AM .
NAIRU and economists' lethal swampiness.

Comment on David Glasner on 'Richard Lipsey and the Phillips Curve Redux'

David Glasner contributes to the NAIRU discussion#1 by reproducing essential content of his 2013 paper. Back then he propagated Lipsey's concept of multiple equilibria or band of unemployment (NAIBU) which is consistent with a stable rate of inflation. The NAIBU concept is a fine example of the tendency of economists to soften, relativize, qualify, and semantically dilute every concept until it is senseless and useless.

It is the very characteristic of economics that there are no well-defined concepts and this begins with the pivotal economic concepts profit and income. The habit of swampification keeps the discourse safely in the no man's land where "nothing is clear and everything is possible" (Keynes) and where anything goes.

Swampification is what Popper called an immunizing strategy. The beauty of vagueness and ambiguity is that it cannot be falsified: "Another thing I must point out is that you cannot prove a vague theory wrong." (Feynman)#2

David Glasner applies the concept of evolution in order to swampify the NAIRU: "The current behavior of economies … is consistent with evolutionary theory in which the economy is constantly evolving in the face of path-dependent, endogenously generated, technological change, and has a wide range of unemployment and GDP over which the inflation rate is stable."

In other words, presumably there is a relationship between unemployment and inflation but nobody knows what it is. While science is known to strive for uniqueness, economics is known to strive for ambiguity and obfuscation. This swampiness is rationalized as realism. After all, reality is messy, isn't it?

To recall, the Phillips curve started as a simple and remarkably stable EMPIRICAL relationship between wage rate changes and the rate of unemployment. The original Phillips curve was reinterpreted and thereby messed up by Samuelson and Solow who introduced the economic policy trade-off between inflation and unemployment which was finally thrown out again with the NAIRU.

A conceptional error/mistake/blunder slipped in with the bastardization of the original Phillips curve that was never rectified but in effect buried under a huge heap of inconclusive economic shop talk. This means that until this very day economics has no valid theory of the labor market.

See part 2

AXEC / E.K-H said.. March 5, 2017 at 5:34 AM .
Part 2

So, the microfounded NAIRU-Phillips curve has first of all to be rectified.#3 The macrofounded SYSTEM-Phillips curve is shown on Wikimedia
https://commons.wikimedia.org/wiki/File:AXEC62.png

From this correct employment equation follows in the MOST ELEMENTARY case that an increase of the macro-ratio rhoF=W/PR leads to higher total employment L. The ratio rhoF embodies the price mechanism. Let the rate of change of productivity R for simplicity be zero, i.e. r=0, then there are three logical cases, that is, THREE types of inflation.
(i) If the rate of change of the wage rate W is equal to the rate of change of the price P, i.e. w=p, then employment does NOT change NO MATTER how big or small the rates of change are. That is, NO amount of inflation or deflation has any effect on employment. Inflation is neutral, there is no trade-off between unemployment and inflation.
(ii) If the rate of change of the wage rate is greater than the rate of change of the price then employment INCREASES. There is a POSITIVE effect of inflation on employment.
(iii) If the rate of change of the wage rate is smaller than the rate of change of the price then employment DECREASES. There is a NEGATIVE effect of inflation on employment.

So, it is the DIFFERENCE in the rates of change of wage rate and price and not the absolute magnitude of change that is decisive. Every PERFECTLY SYNCHRONOUS inflation/deflation is employment-neutral, that is, employment remains indefinitely where it actually is. The neutral inflation can start at ANY point between full and zero employment. The crucial fact to notice is that there is no such thing as "inflation", there are THREE types of inflation.

The systemic employment equation defines the causal relationship of "inflation" on employment. However, there is the inverse causality of employment on "inflation".

Common sense suggests that positive inflation (ii) is more probable the closer actual employment is at full employment and negative inflation (iii) is more probable the farther away actual employment is from full employment. In other words: the market economy is inherently unstable. The feed-back loop between employment and "inflation" is the very antithesis to the idea of equilibrium. To recall, the NAIRU is DEFINED as an equilibrium. Standard economics has built equilibrium right into the premises, i.e. into the axiomatic foundations. All of economics starts with the idea that the market economy is an equilibrium system. It turns out that this premise is false, just the opposite is the case.

Standard labor market theory as it is incorporated in the NAIRU-Phillips curve is not vaguely true, or evolutionary true as David Glasner maintains, but provable false.

Egmont Kakarot-Handtke

#1 See 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather'
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
and 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy'
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html
#2 "By having a vague theory it is possible to get either result. ... It is usually said when this is pointed out, 'When you are dealing with psychological matters things can't be defined so precisely'. Yes, but then you cannot claim to know anything about it."
#3 See 'Keynes' Employment Function and the Gratuitous Phillips Curve Disaster'
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2130421

[Jun 12, 2017] Monopoly power can increase nairu, while suppressing unions can decrease nairu

Jun 12, 2017 | economistsview.typepad.com

djb , June 10, 2017 at 01:42 AM

Fed Needs a Better Inflation Target - Narayana Kocherlakota

yes for a given amount of monopoly power, which the fed does not really control,

the most the fed can do is work on the real interest rates

but if we have less monopoly power that would reduce the part of nairu that is also known as involuntary unemployment, and help real wages, without having so much inflation

in other words closer we get to full a perfectly componetitive market, the less change of accelerating inflation because in a perfectly competitive market , firms are price takers not price makers

in a perfectly competitive market, the unions couldn't drive inflation, without monopoly power there is no accelerating inflation period

the fed cant control that only the legislature and judiciary can control the ext of monopoly power

the point is the can only target inflation and real interest rates

but there are other factors that can get us to full employment, ie eliminate involuntary employment, that affect inflation wages and employment in different ways and different directions

and those factors other than inflation and interest rates that affect involuntary unemployment seem to be ignored when we are having these discussion

pgl - , June 10, 2017 at 01:49 AM
Good point. Thanks for remembering this is an economist blog.
djb - , June 10, 2017 at 07:34 AM
NAIRU is painted as some dyed in the wool equilibrium point that the universe will always tend

you know the "natural level" of unemployment

you know where 'NATURE" wants to go

fact is it is no such thing

monopoly power can increase nairu

suppressing unions can decrease nairu,

both hurt workers

djb - , June 10, 2017 at 07:37 AM
a stronger safety can increase nairu and help wages

[Jun 12, 2017] Digitopoly The Value of Free in GDP

Jun 12, 2017 | www.digitopoly.org
Did the rise of free information technology improve GDP? It is commonly assumed that it did.

After all, the Internet has changed the way we work, play, and shop. Smartphones and free apps are ubiquitous. Many forms of advertising moved online quite a while ago and support gazillions of "free" services. Free apps changed leisure long ago-just ask any teenager or any parent of a teenager. Shouldn't that add up to a lot?

Think again. The creation of the modern system of GDP economic accounting was among the greatest economic inventions of the 20th century. Initially created in the US and Britain, this system has been improved for decades, and, for all intents and purposes, it is the system in every modern government around the world today.

Although this system contains some flexibility, it also has its rigidities, especially when it comes to free services. I expect the answer to sit awkwardly with most readers. Nonetheless, a little disciplined thinking yields a few insights about the modern experience, and that is worth the effort.

... ... ...

This was an obvious problem when commercial television first spread using advertising as its primary revenue source. The consumption is free, and the only revenue comes from advertising. When the TV experience improved- say, as it moved from black and white to color - GDP recorded only the revenue for television sets and advertising, not the user experience.

There was hope that industry specialists would find some underlying proportional relationship between consumption of services and advertising revenue-for example, between the time watching TV and the value of watching commercials. Such proportionality would have been very handy for economic accounting, because it would yield an easy proxy for improvement in the quality of services. Accountants would merely have to examine improvement in advertising revenue.

Alas, no such relationship could be found. Just look at the history of television to understand why. Television has gotten much better over the last few decades, but-for many reasons-total advertising has not grown. The economics is just not that simple.

A similar problem has arisen today. Search engines attract users, and that generates tens of billions of dollars of revenue from advertisers, and that revenue contributes to GDP. However, the services delivered by search contribute no revenue and, by definition, contribute nothing to GDP. With so many free services today, this weakness in GDP accounting seems awkward. It does not matter how amazing the services are, nor how much they have improved over time. Any improvement in the quality of search services is not a contribution in GDP except insofar as it generates more advertising dollars.

Recently, three professional economists- Leonard Nakamura, Jon Samuels, and Rachel Soloveichik-tried to wade into this topic again, and tried something experimental and novel. They wondered how GDP would change if these free services were reconceived as a barter.

Kien says: Jun 10, 2017 at 11:43 pm

Hi, thanks for your wonderful blog.

A good way to try and quantify the value of free goods/services is to estimate (as best as one can) how those goods/services make us healthier and/or live longer active lives. A solution free environment and public parks are good examples of free services that make us healthier. In principle, the social media (e.g., Facebook) and voluntary work could reduce social alienation, and make people healthier.

On the other hand, some goods/services that contribute to the GDP can have negative effects on health & wellbeing – e.g., gambling.

Just a suggestion!

Kien

[May 31, 2017] Nairu does not make sense

Notable quotes:
"... Of course part of the point of 401(k) and similar plans is to "align" workers with the company and companies in general, aside from paying them in stock rather than cash. I suspect it works more so than it doesn't, overall. ..."
"... Sarcasm or satire, yes. I'm not claiming that the narrative is "correct", but that it exists. Surely you must have heard of "alignment" between shareholders and employees. Usually used to justify large stock grants to executives, but also applicable more broadly. ..."
"... And in the case of vesting, (3) employees are supposedly reluctant to "leave money on the table" by quitting before the stock is vested. This must work in aggregate or companies wouldn't do this. ..."
"... Honestly cm, I have not heard about the alignment between shareholders and employees. That doesn't mean it doesn't exist, I realize that. ..."
"... I don't have any stats to cite but I would say that is ridiculous. I would say that almost all people who are characterized as working class make their income through their labor. Not from some stock ownership. ..."
"... It is supposedly common for startups to pay below-market (compared to established companies) to their employees, with the promise of appreciation of stock grants after an IPO/acquisition. Usually that's a bad deal for most employees, as the IPO may not happen, or when it happens, their stock has been heavily diluted. ..."
"... In established companies, stock-based compensation can be more substantial for managerial or professional staff, but not life-changing - e.g. you may get a 5-20% upgrade on your salary depending on how important you are considered, which is nice, but it will not change the fact that you still have to show up for work every day. ..."
Feb 17, 2017 | economistsview.typepad.com

Jerry Brown -> Poison Pen... February 17, 2017 at 02:18 PM

What country (or planet) are you referring to when you say Workers are primarily stock holders? It ain't this country.

cm -> Jerry Brown... February 17, 2017 at 10:44 PM

It is a commentary on a narrative. Of course part of the point of 401(k) and similar plans is to "align" workers with the company and companies in general, aside from paying them in stock rather than cash. I suspect it works more so than it doesn't, overall.

Jerry Brown -> cm... February 17, 2017 at 10:52 PM

Say What?? Are you saying that Poison Pen was being sarcastic? I hope he was. Or are you saying that narrative is correct?

cm -> Jerry Brown... February 18, 2017 at 12:03 AM

Sarcasm or satire, yes. I'm not claiming that the narrative is "correct", but that it exists. Surely you must have heard of "alignment" between shareholders and employees. Usually used to justify large stock grants to executives, but also applicable more broadly.

Companies have several programs: ESPP (employees can buy a limited amount of company stock at a 15% discount), 401(k) retirement accounts that may contain company stock or other investment funds, stock and stock option grants (employees are not buying the stock but get it as part of a regular or retention bonus program, usually with vesting - commonly your grant will vest over 4 years).

The idea behind all programs involving company stock is (1) disbursing stock is usually cheaper to the company than cash, for the same nominal amount - for large programs where administration overhead is amortized, (2) employees are supposedly "incentivized" to act to increase the stock price.

The latter is believable at higher management levels, for lower level employees it is supposed to increase their motivation to put business priorities before their own, how much it works is anybody's guess.

cm -> cm... February 18, 2017 at 12:07 AM

And in the case of vesting, (3) employees are supposedly reluctant to "leave money on the table" by quitting before the stock is vested. This must work in aggregate or companies wouldn't do this.

If somebody absolutely wants to quit because of a bad situation or a sufficiently compelling offer, they will. But it raises the bar. Also I have heard about companies sufficiently interested in hiring somebody with "handcuffs" offering compensation, i.e. effectively buying out your unvested stock (or replacing it with their own extra grant).

Jerry Brown -> cm... February 18, 2017 at 12:50 AM

Honestly cm, I have not heard about the alignment between shareholders and employees. That doesn't mean it doesn't exist, I realize that.

Regardless, I would want to see a bunch of stats that showed that workers were primarily (or "predominately" was the actual word used) stock holders and that they derive a meaningful part of their yearly income through that ownership while they are working.

I don't have any stats to cite but I would say that is ridiculous. I would say that almost all people who are characterized as working class make their income through their labor. Not from some stock ownership.

cm -> Jerry Brown... February 18, 2017 at 02:25 PM

I am not claiming that workers are primarily stockholders. I am claiming that companies have programs to issue, or sell stock at a discount, or match 401(k) contributions up to a limit (in all applicable cases with our without vesting) to their employees. 401(k) and ESPP probably have to be offered to everybody, stock grants are usually selective. (Probably restricted by grade level and job function.)

The primary motivations for companies are that stock is usually cheaper for them than cash, and the retention effect of vesting. Employee alignment with the stock price is also a narrative, but it is not clear to me who believes it.

Are you disputing that companies are interested in pushing narratives of their labor relations that are beyond just "you work here and we pay you", and are in fact doing this?

cm -> Jerry Brown... February 18, 2017 at 02:33 PM

It is supposedly common for startups to pay below-market (compared to established companies) to their employees, with the promise of appreciation of stock grants after an IPO/acquisition. Usually that's a bad deal for most employees, as the IPO may not happen, or when it happens, their stock has been heavily diluted.

In established companies, stock-based compensation can be more substantial for managerial or professional staff, but not life-changing - e.g. you may get a 5-20% upgrade on your salary depending on how important you are considered, which is nice, but it will not change the fact that you still have to show up for work every day.

[May 31, 2017] Defence of NAIRU and Phillips curve is an attempt to defend indefensible

Notable quotes:
"... Almost three and a half years ago, I published a post about Richard Lipsey's paper "The Phillips Curve and the Tyranny of an Assumed Unique Macro Equilibrium. ..."
"... One important early post-WWII debate, which took place particularly in the UK, concerned the demand and inflationary pressures at which it was best to run the economy. The context for this debate was provided by early Keynesian theory with its absence of a unique full-employment equilibrium and its mainly forgotten, but still relevant, microeconomic underpinnings. The original Phillips Curve was highly relevant to this debate. ..."
Mar 03, 2017 | uneasymoney.com

Almost three and a half years ago, I published a post about Richard Lipsey's paper "The Phillips Curve and the Tyranny of an Assumed Unique Macro Equilibrium." The paper originally presented at the 2013 meeting of the History of Econmics Society has just been published in the Journal of the History of Economic Thought , with a slightly revised title " The Phillips Curve and an Assumed Unique Macroeconomic Equilibrium in Historical Context ." The abstract of the revised published version of the paper is different from the earlier abstract included in my 2013 post. Here is the new abstract.

An early post-WWII debate concerned the most desirable demand and inflationary pressures at which to run the economy. Context was provided by Keynesian theory devoid of a full employment equilibrium and containing its mainly forgotten, but still relevant, microeconomic underpinnings. A major input came with the estimates provided by the original Phillips curve. The debate seemed to be rendered obsolete by the curve's expectations-augmented version with its natural rate of unemployment, and associated unique equilibrium GDP, as the only values consistent with stable inflation. The current behavior of economies with the successful inflation targeting is inconsistent with this natural-rate view, but is consistent with evolutionary theory in which economies have a wide range of GDP-compatible stable inflation. Now the early post-WWII debates are seen not to be as misguided as they appeared to be when economists came to accept the assumptions implicit in the expectations-augmented Phillips curve.

Publication of Lipsey's article nicely coincides with Roger Farmer's new book Prosperity for All which I discussed in my previous post . A key point that Roger makes is that the assumption of a unique equilibrium which underlies modern macroeconomics and the vertical long-run Phillips Curve is neither theoretically compelling nor consistent with the empirical evidence. Lipsey's article powerfully reinforces those arguments. Access to Lipsey's article is gated on the JHET website, so in addition to the abstract, I will quote the introduction and a couple of paragraphs from the conclusion.

One important early post-WWII debate, which took place particularly in the UK, concerned the demand and inflationary pressures at which it was best to run the economy. The context for this debate was provided by early Keynesian theory with its absence of a unique full-employment equilibrium and its mainly forgotten, but still relevant, microeconomic underpinnings. The original Phillips Curve was highly relevant to this debate.

All this changed, however, with the introduction of the expectations-augmented version of the curve with its natural rate of unemployment, and associated unique equilibrium GDP, as the only values consistent with a stable inflation rate. This new view of the economy found easy acceptance partly because most economists seem to feel deeply in their guts - and their training predisposes them to do so - that the economy must have a unique equilibrium to which market forces inevitably propel it, even if the approach is sometimes, as some believe, painfully slow.

The current behavior of economies with successful inflation targeting is inconsistent with the existence of a unique non-accelerating-inflation rate of unemployment (NAIRU) but is consistent with evolutionary theory in which the economy is constantly evolving in the face of path-dependent, endogenously generated, technological change, and has a wide range of unemployment and GDP over which the inflation rate is stable. This view explains what otherwise seems mysterious in the recent experience of many economies and makes the early post-WWII debates not seem as silly as they appeared to be when economists came to accept the assumption of a perfectly inelastic, long-run Phillips curve located at the unique equilibrium level of unemployment. One thing that stands in the way of accepting this view, however, the tyranny of the generally accepted assumption of a unique, self-sustaining macroeconomic equilibrium.

This paper covers some of the key events in the theory concerning, and the experience of, the economy's behavior with respect to inflation and unemployment over the post-WWII period. The stage is set by the pressure-of-demand debate in the 1950s and the place that the simple Phillips curve came to play in it. The action begins with the introduction of the expectations-augmented Phillips curve and the acceptance by most Keynesians of its implication of a unique, self-sustaining macro equilibrium. This view seemed not inconsistent with the facts of inflation and unemployment until the mid-1990s, when the successful adoption of inflation targeting made it inconsistent with the facts. An alternative view is proposed, on that is capable of explaining current macro behavior and reinstates the relevance of the early pressure-of-demand debate. (pp. 415-16).

In reviewing the evidence that stable inflation is consistent with a range of unemployment rates, Lipsey generalizes the concept of a unique NAIRU to a non-accelerating-inflation band of unemployment (NAIBU) within which multiple rates of unemployment are consistent with a basically stable expected rate of inflation. In an interesting footnote, Lipsey addresses a possible argument against the relevance of the empirical evidence for policy makers based on the Lucas critique.

Some might raise the Lucas critique here, arguing that one finds the NAIBU in the data because policymakers are credibly concerned only with inflation. As soon as policymakers made use of the NAIBU, the whole unemployment-inflation relation that has been seen since the mid-1990s might change or break. For example, unions, particularly in the European Union, where they are typically more powerful than in North America, might alter their behavior once they became aware that the central bank was actually targeting employment levels directly and appeared to have the power to do so. If so, the Bank would have to establish that its priorities were lexicographically ordered with control of inflation paramount so that any level-of-activity target would be quickly dropped whenever inflation threatened to go outside of the target bands. (pp. 426-27)

I would just mention in this context that in this 2013 post about the Lucas critique, I pointed out that in the paper in which Lucas articulated his critique, he assumed that the only possible source of disequilibrium was a mistake in expected inflation.

If everything else is working well, causing inflation expectations to be incorrect will make things worse. But if there are other sources of disequilibrium, it is not clear that incorrect inflation expectations will make things worse; they could make things better. That is a point that Lipsey and Kelvin Lancaster taught the profession in a classic article "The General Theory of Second Best," 20 years before Lucas published his critique of econometric policy evaluation.

I conclude by quoting Lipsey's penultimate paragraph (the final paragraph being a quote from Lipsey's paper on the Phillips Curve from the Blaug and Lloyd volume Famous Figures and Diagrams in Economics which I quoted in full in my 2013 post.

So we seem to have gone full circle from the early Keynesian view in which there was no unique level of GDP to which the economy was inevitably drawn, through a simple Phillips curve with its implied trade-off, to an expectations-augmented Phillips curve (or any of its more modern equivalents) with its associated unique level of GDP, and finally back to the early Keynesian view in which policymakers had an option as to the average pressure of aggregate demand at which economic activity could be sustained.

However, the modern debated about whether to aim for [the high or low range of stable unemployment rates] is not a debate about inflation versus growth, as it was in the 1950s, but between those who would risk an occasional rise of inflation above the target band as the price of getting unemployment as low as possible and those who would risk letting unemployment fall below that indicated by the lower boundary of the NAIBU as the price of never risking an acceleration of inflation above the target rate. (p. 427)

[May 30, 2017] How Milton Friedmans NAIRU Has Increased Inequality, Damaging Innovation and Growth

Notable quotes:
"... Never underestimate an [neoliberal] economist's ability to ignore reality. ..."
"... In a kleptocracy, looters are not called looters. That might cause the serfs to rebel. So they are called "creators" instead, and their stolen loot becomes the just and righteous reward for their work. Indeed it is the manifestation of natural law without which society and the economy would fall into darkness, etc., etc. ..."
"... NAIRU is not to blame but the looters who espoused it. They are afterall the crafters of the conventional wisdom. There were no mistakes. As looting-enabling propaganda, NAIRU functioned exactly as it was supposed to. ..."
"... NAIRU is the perfect example of purpose-driven science, and Milton Friedman et al and NAIRU rank right up there with the German racial scientists and eugenics and social Darwinism when it comes to justifying pure evil. ..."
"... The idea that there really is no "Gault" in a modern economy is not new. J.K. Galbraith described the inherent interdependence between management and workers in his book The New Industrial State in which he coined the term "technostructure" to describe how modern industry no longer could realistically claim to run by a single person. Instead, the rise of scientific and business specialties made nearly all employees of a business vital. No one, especially the CEO, could really claim to all the profits. ..."
"... Relative wealth is the key to power and concentrated wealth to absolute power, the holy grail. Thus inequality is not an unintended consequence at all; it's the neolibs' actual goal, a feature not a bug. Power is their ultimate narcotic. And their pursuit of it is relentless and violent. ..."
"... I believe this is the elemental nature of our criminal elite that people must understand, first and foremost, before change is remotely possible. Unfortunately it's difficult for sane people to comprehend such madness, and they continue to believe people like Obama have a conscience, that Congress really seeks the greater good, that our warriors really want to avoid war. They can no more relate to people like Jamie Dimon, Lloyd Blankfien, or Benjamin Shalom than they can to a pedophile or a rapist. They have no common reference with the enemies of humanity. ..."
"... Feudalism wasn't concerned with economic growth and performance. Those ideas came with the Enlightenment and the Modern eras, and the end of monarchy. My point was to use "vassal" in the sense of someone who owe allegiance to a master but is not a slave. ..."
"... Mexico, you made the claim that NAIRU was "purpose-driven science". I countered with the point that NAIRU was pseudo-science and that economics is not a science. Neither statement has anything to do with indicting science. ..."
Aug 26, 2013 | www.nakedcapitalism.com
Edward Lambert , August 26, 2013 at 12:57 am

Great article!!! The drum beat continues Productivity is definitely constrained by tight consumer liquidity from weak labor compensation.
Economists are going to learn a big lesson, when they see unemployment get stuck above 6.7%. They will try to explain it by pointing to problems in the economy or government. But the dynamic to limit employment is already established and it is due to low labor share. My calculations say the limit is 7.0% but I am allowing some margin of error.

The next two years should certainly be enlightening for many economists, including Krugman, Delong and Thoma. They do not see the effective demand limit coming.

diptherio , August 26, 2013 at 9:22 am

Never underestimate an [neoliberal] economist's ability to ignore reality.

Impishparrot , August 26, 2013 at 1:08 am

Hello? All talk of policy and regulations have left-out the workers. They make shit and they buy shit. Without them, how would multi-national corporations be able to afford the lawyers, lobbyists, members of Congress – both House and Senate, and it would now appear, members of the US Supreme Court.

Min , August 26, 2013 at 3:21 am

"Higher real wage claims necessarily reduce firms' profitability and hence, if firms want to protect profits (needed for investment and growth), higher wages must lead to higher prices and ultimately run-away inflation. The only way to stop this process is to have an increase in "natural unemployment", which curbs workers' wage claims.

"What is missing from this NAIRU thinking is that wages provide macroeconomic benefits in terms of higher labour productivity growth and more rapid technological progress."

True. But that aside, the original argument is a non-sequitur. Certainly, a fight between labor and capital over how to share the economic pie can lead to inflation, but it does not follow that full employment leads to accelerating inflation instead of converging inflation or fairly constant inflation. The NAIRU argument takes the behavior of capital as given and puts the onus of responsibility on labor. It amounts to special pleading.

BTW, it is not unusual in human systems to have conflicts that threaten to become a runaway feedback cycle. But somehow that rarely happens, for reasons that are not always clear. We still do not understand human systems all that well.

nonclassical , August 26, 2013 at 12:48 pm

..Greenspan's (therefore Rand "goddess") ideological position is based upon equal access and most especially information to markets this "equality" is undone by secrecy, insider trading, HFT, etc, etc.

In other words, it's all ideological-never existed, anywhere, any time, in reality..

Hugh , August 26, 2013 at 4:20 am

In a kleptocracy, looters are not called looters. That might cause the serfs to rebel. So they are called "creators" instead, and their stolen loot becomes the just and righteous reward for their work. Indeed it is the manifestation of natural law without which society and the economy would fall into darkness, etc., etc.

"Greenspan's stance reflected the conventional wisdom , codified in the theory of the non-accelerating-inflation rate of unemployment (NAIRU). It must take the blame for unleashing and at the same time legitimizing a vastly unequal and ultimately unsustainable growth process."

NAIRU is not to blame but the looters who espoused it. They are afterall the crafters of the conventional wisdom. There were no mistakes. As looting-enabling propaganda, NAIRU functioned exactly as it was supposed to.

"firms want to protect profits (needed for investment and growth)"

No. Firms are inanimate. They do not want anything. Nor is it the case that their managements want to protect their profits for the purpose of investment and growth. In a kleptocracy, management wishes not just to keep but increase profits in order to loot them.

The authors of this article, like those they criticize, leave out the social purposes for why we have an economy and why we allow corporations to exist. Both look on the economy as a natural process governed by natural laws (that is what this article is about: which laws best describe the economy), and not the human enterprise it is. The real measure of the economy is whether it is producing the society we want to live in. Classical measures, such as growth and productivity, may be irrelevant or even at odds with this construction.

from Mexico , August 26, 2013 at 7:23 am

Hugh said:

NAIRU is not to blame but the looters who espoused it. They are afterall the crafters of the conventional wisdom. There were no mistakes. As looting-enabling propaganda, NAIRU functioned exactly as it was supposed to.

Exactly!

NAIRU is the perfect example of purpose-driven science, and Milton Friedman et al and NAIRU rank right up there with the German racial scientists and eugenics and social Darwinism when it comes to justifying pure evil.

David Lentini , August 26, 2013 at 10:06 am

I isn't fair to call NAIRU "science", since it, like economics, isn't scientific in any way. Science has enough problems without having to take on charlatans like Friedman.

Friedman's work, as exemplified by NAIRU, is pseudo-science used to justify the demands of the industrtialists and financiers to remove governmental economic regulation. It's an example of what I like to call "Laissez-Faire Lysenkoism ", after the infamous Soviet agronomist who rigged his experiments and data to demonstrate that communism had a biological basis.

I agree very much with the article's analysis and conclusions. But I want to add two things:

1. The idea that there really is no "Gault" in a modern economy is not new. J.K. Galbraith described the inherent interdependence between management and workers in his book The New Industrial State in which he coined the term "technostructure" to describe how modern industry no longer could realistically claim to run by a single person. Instead, the rise of scientific and business specialties made nearly all employees of a business vital. No one, especially the CEO, could really claim to all the profits.

2. I think the question of economic performance is too narrow. The real issue ultimately is power. At some point, wealth will become so concentrated that the rich won't care about economic performance; they'll just make vassals and slaves of the rest of us. At some point money per se will become obsolete, since everything will be owned by a few anyway.

Massinissa , August 26, 2013 at 10:22 am

On number 2, I don't remember Feudalists ever worrying about economic growth, except when it came to how much grain they could extract from their serfs.

It doesn't matter all that much to the ruling classes how much growth there is or not as long as they control all that there is.

If low growth means easier control, then they will prefer that. Though I must say im not sure that low growth does mean easier control.

Doug Terpstra , August 26, 2013 at 4:43 pm

Dave's close, but you got it! Neoliberal economics is not interested in a dynamic economy, in optimum output, or in aggregate wealth-creation, and most certainly not in shared prosperity (egad!). It is only relative wealth that concerns our neoliberal elite.

Relative wealth is the key to power and concentrated wealth to absolute power, the holy grail. Thus inequality is not an unintended consequence at all; it's the neolibs' actual goal, a feature not a bug. Power is their ultimate narcotic. And their pursuit of it is relentless and violent.

I believe this is the elemental nature of our criminal elite that people must understand, first and foremost, before change is remotely possible. Unfortunately it's difficult for sane people to comprehend such madness, and they continue to believe people like Obama have a conscience, that Congress really seeks the greater good, that our warriors really want to avoid war. They can no more relate to people like Jamie Dimon, Lloyd Blankfien, or Benjamin Shalom than they can to a pedophile or a rapist. They have no common reference with the enemies of humanity.

David Lentini , August 26, 2013 at 5:16 pm

Feudalism wasn't concerned with economic growth and performance. Those ideas came with the Enlightenment and the Modern eras, and the end of monarchy. My point was to use "vassal" in the sense of someone who owe allegiance to a master but is not a slave.

As for the other points you made, I was trying make those too: At some point the inequality makes modern economics irrelevant.

from Mexico , August 26, 2013 at 10:37 am

David Lentini says:

I isn't fair to call NAIRU "science", since it, like economics, isn't scientific in any way.

No true Scotsman, hun?

I think the indictment of science is far broader than mere economics.

from Mexico , August 26, 2013 at 10:46 am

And by the way, who gets to decide what is science and what is pseudo-science? How does the layman tell the difference?

David Lentini , August 26, 2013 at 11:28 am

I'll assume that you're not just baiting me. Or are you taking the side of the climate-change deniers? Try starting with the basic definitions:

http://en.wikipedia.org/wiki/Science

You can also take the time to read the classics of Bacon, Descartes, Newton, et al.

A succinct definition of "science" is not that easy. But I argue that scientific statements at the least have to be robust-they have to be capable of reliable confirmation i.e., identical conditions should lead to the same observations, in other words "predictability" (Popper's "falsification" is a useful rule of thumb); a new theory should be able to explain or describe all relevant phenomena described by older theories as well as new phenomena to maintain unified explanation.

As I've argued many times on this 'blog, economics fails both tests. Instead economists offer statements that ape scientific forms, what I call "pseudo-science". They do this out of ignorance and a desire to cow the public (including scientists).

And we're all entitled to review the facts and make our judgment in light of the definitions and uses of the term "science".

I don't see your point in attacking science, which you of course never define. I believe that humanity needs a view of life that is far broader than provided by science alone. But the scientific view is still vital to our lives. The problem is that far too many have become mesmerized by the usefulness of science in addressing certain types of questions, and have been trying to force their own investigations into a scientific mold rather than admitting that the scientific method cannot address all questions equally well.

from Mexico , August 26, 2013 at 3:52 pm

Well for me, the question is still who gets to decide what is science and what is pseudo-science?

The school of hard knocks has taught us that none of the above are trustworthy or reliable. The historian of science Naomi Oreskes gives a great talk about this phenomenon here:

http://www.blogtalkradio.com/virtuallyspeaking/2012/04/12/naomi-oreskes-tom-levenson-virtually-speaking-science-1

This means that one is therefore forced back onto their own lights.

Which brings us back to the question: How does the layperson tell the difference between science and pseudoscience? I don't know many laypersons who have read Bacon, Newton or Descartes.

And what if they've read Hume, Kant or Nietzsche? Then they come away with a very different idea of what science is. For example:

Thus, though metaphysics is an illusion from the point of view of science, science in turn becomes but another state of illusion as far as absolute truth is concerned. In The Birth of Tragedy Nietzche already attacks the scientific optimism of his time under the guise of "Socratism." The "theoretic man" pursues truth in the delusion that reality can be fathomed, and even purged of evil, by rational thought and its applications. But faith in the omnipotence of reason shatters, for the courageously persistent thinker, not only on the fact that science can never complete its work but chiefly on the positive apprehension that reality is irrational. As Nietzsche writes later, "We are illogical and therefore unjust beings from the first, and can know this : that is one of the greatest and most insoluble disharmonies of existence."

–GEORGE A. MORGAN, What Nietzsche Means

David Lentini , August 26, 2013 at 5:24 pm

Mexico, I already answered that question. I really don't care what Naiomi Oreskes thinks; I think for myself. And I don't have much patience for people who won't make the effort to learn enough about science to answer the question for themselves.

There's a world of difference between Oreskes's writings about the abuse of science to further partisan political positions, and the meaning of science itself and deciding what qualifies as science. Just make the effort to learn and stop quoting everyone else.

As for your quote about Nietzsche, all this argument leaves is the usual relativistic confusion. And that just invites abuse. Science and the scientific method can be defined well enough to distinguish reliable claims from charaltanism. If you want absolutes, you might just as well accept what the most powerful tell you to accept.

from Mexico , August 26, 2013 at 8:39 pm

Oh I get it!

You get to decide what science is and what pseudo-science is.

It's like Humpty Dumpty said:

'I don't know what you mean by "glory",' Alice said.

Humpty Dumpty smiled contemptuously. 'Of course you don't - till I tell you. I meant "there's a nice knock-down argument for you!"'

'But "glory" doesn't mean "a nice knock-down argument",' Alice objected.

'When I use a word,' Humpty Dumpty said, in rather a scornful tone, 'it means just what I choose it to mean - neither more nor less.'

'The question is,' said Alice, 'whether you can make words mean so many different things.'

'The question is,' said Humpty Dumpty, 'which is to be master - that's all.'

–LEWIS CARROL, Through the Looking Glass

OldFatGuy , August 27, 2013 at 12:10 pm

Yes, someone does get to decide. Because there ARE universal truths, like it or not.

For example, the world is not flat. Period. All the relativism in the world won't change the fact that the world is NOT flat.

Arguing against fact doesn't make one some sort of relativist intellectual (is that a term??) it makes one WRONG. And the only way humanity can ever transcend chaos is to acknowledge those truths that are universal. We, as a species, are still nowhere near there, and it's like trying to play a baseball game with no foul lines, basees, umpires, or even a ball. Yes, if life were like a baseball game there are entire groups of people today that argue it can be played without a ball. We'll never get beyond this chaos and into a peaceful order until we all get on more or less the same playing field, and the only way to do that is to acknowledge truths (or rules, like foul lines, in baseball).

Science is but one avenue to identify those truths. There are others.

David Lentini , August 26, 2013 at 11:06 am

Mexico, you made the claim that NAIRU was "purpose-driven science". I countered with the point that NAIRU was pseudo-science and that economics is not a science. Neither statement has anything to do with indicting science.

If you argue about flaws in science, whatever that means,n then start a new thread.

Hugh , August 26, 2013 at 2:59 pm

Science is a method, but what that method is applied to and how its results are interpreted are not. Science is also a human activity and so must be viewed through the lens of our humanity, not as objective truth external to us.

allcoppedout , August 26, 2013 at 4:33 am

Lord save us! Humans are biological systems and such systems have all kinds of modularity to protect various sub-systems and the overall system from collapse.

So where is a modular economics?

Growth? What's that? A sensible, scientific notion of it would be a system that raises everyone a lot, curtails rich by-products that capture politics and load the many with economic rents, educates to planet level responsibility, reduces work and squalid energy burning and related wars

We should be seeking stability and incorporating real well-being and a new understanding of growth. Growth as we have it is a Gucci handbag while others live on a squalid jack tuna boat earning almost nothing for your fish, eaten with a fancy T-shirt on proclaiming 'save the dolphins', served with salad picked by migrant workers to keep your figure trim along with the coke you snort.

What growth should be one of the first questions of economics, followed by how we might create a modular financing of what we should be doing. Without such, no subject.

Aussie F , August 26, 2013 at 7:33 am

In reality all the dynamism is in the state sector – from the internet, to superconductors, pharmaceuticals, biotechnology, containerisation. 'The market' just deals with copyright and marketing.

diptherio , August 26, 2013 at 9:30 am

Does this mean it's time to stop wearing my NAIRU jacket?

David Lentini , August 26, 2013 at 11:31 am

Only if it's a NAIRU straight jacket. :-)

[May 30, 2017] With unemployment measures irrevocably corrupted by political pressures, how one can be talk about validity of derivatives such as NAIRU, unless he/she is drunk

Feb 18, 2017 | economistsview.typepad.com
libezkova -> pgl..., February 18, 2017 at 05:34 PM
pgl,

This is all about mathiness and corruption of neoliberal economist, which is a real Fifth Column of financial oligarchy no question about it. With unemployment measures irrevocably corrupted by political pressures, how one can be talk about validity of derivatives based on them, unless he/she is drunk ?

In this sense NAIRU is yet another sophisticated neoliberal fake that help to drive the public policy in the interests of financial oligarchy under mathiness smoke screen and a bunch of corrupt neoliberal economics serving as a propagandist army of financial oligarchy.

It's time to revamp the old quote changing it to " When I hear the term NAURU...I reach for my gun!."

If course it would be too cruel to shoot all neoliberal economists, so reeducation camps should probably be considered.

I think only U6 has some connections to reality. And the discrepancy between official and Gallup value of U6 is 4%

In other words only the first digit is probably valid and the range is 10 to 20%.

== quote ==
For January 2016 the official Current U-6 unemployment rate was 10.1% up from last month's 9.1%. On the other hand the independently produced Gallup equivalent called the "Underemployment Rate" was 14.1% up from 13.7 in December and 13.0% in November. The current differential between Gallup and BLS on supposedly the same data is 4.0%!

marcus nunes : , February 17, 2017 at 12:44 PM
Alternative "NAIRU bashing": https://thefaintofheart.wordpress.com/2015/02/14/why-insist-on-searching-for-the-holy-grail-aka-nairu/
RGC : , February 17, 2017 at 04:11 PM
SWL is becoming aggressively neoliberal. There is no sound theoretical basis for NAIRU and no empirical reinforcement:

Time to Ditch the NAIRU

James K. Galbraith

The Journal of Economic Perspectives, Vol. 11, No. 1. (Winter, 1997), pp. 93-108

http://tek.bke.hu/files/szovegek/galbraith_time_to_ditch_the_nairu.pdf

pgl -> RGC... , February 17, 2017 at 04:37 PM
SWL strikes me as someone who goes well beyond the usual neoliberal laziness. Is that what you mean by "aggressive"?
RGC -> pgl... , February 17, 2017 at 04:45 PM
In reading his blog lately it seemed that he was very defensive about his economics and also angry at the Corbyn wing of Labour.
marcus nunes : , February 17, 2017 at 12:41 PM
"How do we link the real economy to inflation"? NAIRU a waste of time. Try aggregate nominal spending growth

http://ngdp-advisers.com/2017/02/08/fantasy-world-conventional-central-bankers-money-no-role/

libezkova : , February 18, 2017 at 06:17 PM
Sorry Anne, but neoliberal economists are really prostitutes of Financial oligarchy. Well paid, of course.

That's where NAIRU comes from. Phillips curve is a joke and always was. It's king of sad that it still mentioned in in non--humorous context:
https://thefaintofheart.wordpress.com/2012/07/20/seven-years-on-things-still-look-the-same/

The NAIRU essentially presupposes the existence of the wage-price spiral. Which can happen only if wages are either indexed to inflation by law, or there are strong trade unions to defend workers rights. Under neoliberalism both are those factors are suppressed and can be viewed as non-existent.

And the statement that the NAIRU myth belongs to the vocabulary of charlatans does not deviate from the serious character of the discussion. This is just a historical truth.

Hot of the presses: "Debunking the NAIRU myth" January 19, 2017 By Matthew C Klein

https://ftalphaville.ft.com/2017/01/19/2182705/debunking-the-nairu-myth/


== quote ==

First, some history. In 1926, Irving Fisher found a relationship between the level of unemployment and the rate of consumer price inflation in the US. In 1958, AW Phillips studied UK data from 1861-1957 and found a relationship between the jobless rate and the growth of nominal wages, although the relationship seems to have been an artifact of the gold standard given the vertical line he found in the postwar period:

Some people (wrongly) interpreted Phillips's data to mean that there was a straightforward trade-off between the inflation rate and the unemployment rate. Policymakers could just pick any spot on "the Phillips Curve" they want. Among a certain set, the big debates in the 1960s were about whether the government should target an unemployment rate of 3 per cent or 5 per cent.

This worked out poorly, but the reaction took the form of an equally dubious idea: the Non-Accelerating Inflation Rate of Unemployment, or NAIRU. In this view, the change in the inflation rate should be related to the distance between the actual jobless rate and some theoretical level. If the unemployment rate were above this "neutral" level the inflation rate would slow down and potentially turn into outright deflation. If the jobless rate were "too low", however, consumer prices would rise at an accelerating rate.

Suppose you believe NAIRU is a real thing. What would be the argument against pushing the unemployment rate as close to zero as possible? In theory, the cost of the policy would be ever-accelerating inflation, eventually perhaps leading to hyperinflation. But the reason to dislike excessive inflation is that it ultimately makes everyone poorer, which should, among other things, increase unemployment. (Just look at Venezuela, for a recent example.)

According to the wacky world of NAIRU, however, hyperinflation can coexist just fine with hyper-employment. Clearly there must be other mechanisms at work, or else we are leaving money on the table by allowing the jobless rate to ever rise above zero.
== end of quote ==

Some comments are interesting too:

grputland, Jan 22, 2017

To test the NAIRU hypothesis against historical data, shouldn't we plot unemployment vs. change in inflation? -- instead of CHANGE in unemployment vs. change in inflation?
Be that as it may:

If there is such a thing as a NAIRU, it is still a mistake to treat the NAIRU as a "given" rather than a function of policy.

If a certain tax feeds into prices, it leaves less room for wages to feed into prices before (according to NAIRU logic) inflation accelerates. So any tax that feeds into prices will tend to raise the NAIRU. This is especially the case if the tax causes the cost of labor for employers to be higher than workers' take-home pay.

Thus the NAIRU, if it exists, is not a counsel of despair, but rather a counsel to get rid of taxes that feed into prices (especially taxes on labor) and replace them, as far as necessary, with taxes that DON'T feed into prices -- that is, taxes on economic rents.

marcus nunes , Jan 20, 2017

NAIRU - RIP

https://thefaintofheart.wordpress.com/2015/02/14/why-insist-on-searching-for-the-holy-grail-aka-nairu/

Contrapunctus9, Jan 20, 2017

Many variables contribute to the inflation rate, certainly more than just domestic employment (and how it is calculated). The Fed's dual mandate is inflation and employment, so it makes sense that these are a focus of the Fed's communication. But the Fed tends to focus on the result rather than the cause. It is troubling that there is little discussion from most of the FOMC on inflation factors which are now more important than unemployment (currency values, foreign labor, technology, commodity demand and speculation, labor monopsony, underemployment, labor skill demand mismatch, etc).

Producer and consumer prices are increasing, largely due to China driven commodity prices. Managerial compensation and production hourly wages are increasing. But weekly wages are stagnant due to fewer hours. The Fed is ignoring the latter, even though it is what is more important to sustained core inflation.

Observer, Jan 19, 2017

Looking just at the U3 unemployment rate for the NAIRU without considering the still high U6 rate and lower labour participation rate in the US may be the issue. There's still labour market slack even though U3 is at its "full" employment level.

grumpy, Jan 19, 2017

Models have to be used with caution (they are only tools) and interpreted with awareness of the real world - including for example, the varying wage bargaining power of labour, which is different, post globalisation, to what it was in the '70s.

Who do you think wanted globalisation and liberalisation of trade, and why?

Many economists revere their models excessively.

[May 30, 2017] NAIRU worship at FED

Notable quotes:
"... In the 90s, Democrats like Yellen and Blinder were pushing Greenspan to raise rates when he located the trap line at a different location than they did and held off. ..."
"... A story that fits the actions. But I suspect misses the motive. Perhaps Green stain far from wanting to improve job markets i.e. defy the false wage repressing NAIRU taboo zone. He simply wanted the crazy stock bubble to continue to inflate... ..."
"... I assume Greenspan never really bought the NAIRU fairy tale. Anymore then I do. Otherwise he could never have so skillfully repressed bottom half wage rates for more then fifteen years. ..."
"... Kocker buys the general story as much as say larry sommers buys it. They simply, like Greenspan, move the mythic NAIRU up or down to support other motivations ..."
"... To simply deny the NAIRU ppens the pearly gates to a job class FED. Heaven forbid -- ..."
May 30, 2017 | economistsview.typepad.com

Paine, May 30, 2017 at 10:45 AM

The models are just rationalizations of a deeply embedded policy paradigm In place since Greenspan

The motivation: Wage rate regulation

Inflation of product prices by other means then wage costs is ignored. The relation between job market conditions and wage rate change
Is the core focus

If UE can go lower without wage rates accelerating. There is no urgency Ie There is no need to accelerate the present pace of normalizing the policy rate

Hence the informed expert opinion now calling for the FED to play it kool

However the wall street silk hat set takes a more cynical view

" why take a chance "

Christopher H., May 30, 2017 at 11:00 AM
Yes Sanjait and PGL are (willfully?) naive in their pleas for Obama's Fed to behave better.

It's not the models. It's not a bug it's a feature. The Fed has to be pushed by a popular movement which would also enact significant reforms on the fiscal side.

Paine, May 30, 2017 at 11:49 AM
No

Buys the basic wage trap line

"This may seem like a strange objective, given that Congress has charged the Fed with promoting "maximum employment," which sounds like "try to make employment as high as you can." But the Fed knows that if it pushes economic activity above its long-run level in pursuing that goal, it will eventually have to hit the brakes and bring growth below normal to cool the economy and keep inflation under control. The Fed doesn't want to be in that position, so it gets just as worried when unemployment falls below its target as it does when unemployment is too high. 1 As a result, when the economy is close to what the Fed sees as full employment, the central bank takes a decidedly anti-growth policy stance to keep employment in check."

Paine, May 30, 2017 at 11:55 AM
This is NAIRU worship. NK fails to bash this up. For example: How can we glibly conclude that over shoots must be over corrected. Seems on the face of it a convenient asymmetry: The system can run control ably Up. But not Down

The fed can lower UE step by step without some inevitable over shoot. But not back up. The reverse gear causes a destructive excessive jolt. Well maybe so

But we ought to really look this fearsome dynamic assymetric right in the eyes. For a long time. Not just assume its credible because it fits some morality play plot written to please wall street

Christopher H., May 30, 2017 at 11:57 AM
Kocherlakota buys it?

Depends where you locate the "basic wage trap line."

In the 90s, Democrats like Yellen and Blinder were pushing Greenspan to raise rates when he located the trap line at a different location than they did and held off.

Paine, May 30, 2017 at 12:08 PM
A story that fits the actions. But I suspect misses the motive. Perhaps Green stain far from wanting to improve job markets i.e. defy the false wage repressing NAIRU taboo zone. He simply wanted the crazy stock bubble to continue to inflate...
Paine, May 30, 2017 at 12:11 PM
I assume Greenspan never really bought the NAIRU fairy tale. Anymore then I do. Otherwise he could never have so skillfully repressed bottom half wage rates for more then fifteen years.
Paine - , May 30, 2017 at 12:15 PM
Kocker buys the general story as much as say Larry Summers buys it. They simply, like Greenspan, move the mythic NAIRU up or down to support other motivations

To simply deny the NAIRU ppens the pearly gates to a job class FED. Heaven forbid --

[May 30, 2017] The concept of NAIRU is false

Feb 18, 2017 | economistsview.typepad.com
Jerry Brown -> New Deal democrat... , February 17, 2017 at 10:03 PM
You might enjoy this blog
http://www.concertedaction.com/2017/02/17/simon-wren-lewis-nairu-and-tina/

Main points

I agree with both of those statements.

Ed Brown -> Jerry Brown... , February 18, 2017 at 08:58 AM
Jerry, http://tek.bke.hu/files/szovegek/galbraith_time_to_ditch_the_nairu.pdf
JF -> New Deal democrat... , February 18, 2017 at 06:46 AM
New Deal, I thought the hyper inflation of the 70s came about because pricing determinations all aligned in a ratcheting, a sign of a complete breakdown in market-based economics, inviting govt intervention to halt it.

Where was it proven that wages caused these results then?

The notion of wages being related to general pricing trends is clear during deflationary trends. Common sense, hurting and wages follow the downward spiral. If I asked a question about wages I might agree that the downward trend is being caused by the downward trend in general pricing and demand.

But it needs to be proven that there us a correlation and then a cause and effect reality when general prices are rising rapidly, if you are asking if wages are a cause if this rapid rise. The data do not now support this as you know.

The Fed needs to figure out what it can do when general prices begin to ratchet. I wish they would look at wages last, look at other factors and other 'tools' to influence pricing determinations, again, long before they use these false notions to justify attacking employment.

I want better economics and better logic, a different actions. For instance, can the Fed order the credit channels not to ratchet their pricings rapidly, this would have a direct influence on pricing. Can the Fed stop rolling over their book of assets with new purchasing subsidies to the financial asset marketplaces and instead lower the amount of buying and selling so that the markets see that low rates still exist (and so premia built into pricing need not use this as a reason to ratchet). Do something differently than slamming hard on the Volker rate-peddle and tell everyone to take it out on employment.

[May 29, 2017] As GDP includes such things a military production and consumption as well as gambling profits (Wall Street firms profits, stock market gains) how realistic is productivity as a metric?

May 29, 2017 | economistsview.typepad.com

libezkova -> cm... May 27, 2017 at 10:35 PM

I have a question:

Productivity is typically defined as GDP divided by the total number of hours worked by population.

As GDP includes such things a military production and consumption as well as gambling profits (Wall Street firms profits, stock market gains) how realistic is productivity as a metric?

I do not think it is realistic. Like many other neoliberal metrics (and first of all GDP), I think it is a fake -- a pseudoscience, if you wish.

Sandwichman -> libezkova... May 27, 2017 at 09:49 PM
Productivity is only a realistic concept when dealing with stable units. Dividing GDP by labor hours (or private sector labor hours) is not realistic because the monetary units are not actual stable units because the composition of goods and services measured by GDP changes over time.

In other words, even if GDP may be useful for comparing aggregate monetary value of goods and services from period to period. It tells us nothing about physical output and THAT, not monetary value is what the concept of productivity implies.

If the proportions of various goods and services remained constant from quarter to quarter, then GDP/hours would tell us something about productivity. But they don't, so it doesn't.

See "Productivity as a Social Problem: The Uses and Misuses of Social Indicators," Fred Block and Gene A. Burns

https://www.jstor.org/stable/2095366

Sandwichman ... May 28, 2017 at 05:03 AM

https://www.researchgate.net/publication/271685715_Productivity_as_a_Social_Problem_The_Uses_and_Misuses_of_Social_Indicators

December, 1986

Productivity as a Social Problem: The Uses and Misuses of Social Indicators
By Fred Block and Gene A. Burns

The study of social indicators is valuable for understanding the role that the social sciences play in the political arena. One common pattern is for a particular social indicator to become frozen in place once it takes on political significance, and this can result in ironic consequences. This study traces out the case of indicators of aggregate productivity trends in the United States. These measures were initially developed as part of an underconsumptionist argument that was linked to the political left, but there was considerable debate over different measurement schemes. Over time, one particular measure of trends in aggregate productivity became central for wage negotiations and for government policy. This created a context in which the slower rates of growth of this measure of productivity in the 1970s helped to validate the views of those on the political right who saw the need for greater restrictions on wage gains and government civilian spending. The paper raises questions about the value of this particular measure and ends by emphasizing the problems of locking in place an "objective" social indicator when the reality being measured is in continual flux.

Paine, May 28, 2017 at 06:20 AM

Is not really engaged if you stop with the discover it's not all baby. There is bath water --

Yes indeed
But we must proceed to the necessary task

Throw out as much bath water as we can whilst holding tight to the baby


It's too easy and too useless to simply condemn the whole procedure of indexation
Despite its inevitable contradictions

Paine -> Paine ... Sunday, May 28, 2017 at 06:24 AM

Specifically. Retain the sublime LTV. It never lets us down if we use it with careful skill
Like excalibur
Drawn from the stone

anne -> Paine ... May 28, 2017 at 06:36 AM

Retain the sublime LTV

[ At which point there is no reason for me to read further, since I am not capable of understanding such initials. Does a VTL have fur and growl? ]

Paine -> anne... May 28, 2017 at 08:06 AM

We marxians so reverence the notion We dare not spell it out in full LTV -- Labor theory of value

Once. The bourgeois theory of value until ricardoput too sharp a point on it

And it became the intellectual sword of the exploited toilers

All lasting exchange value is created by social labor

The part of the value of social product exchange thru markets
Not reflected in labors compensation is a product of one or other form of class exploitation

Complication

This includes rewards to innovation
Real cost reduction
And improvements of all sorts
as well as arbitrage wind fall and mere rent

anne -> Paine ... May 28, 2017 at 06:27 AM

It's too easy and too useless to simply condemn the whole procedure of indexation. Despite its inevitable contradictions

[ Really important criticism, which is why I am far more interested in accumulating data for current comparative productivity measures. I find current comparative productivity measures revealing and important, and readily available. ]

anne -> Sandwichman ... May 28, 2017 at 06:23 AM

Criticizing measures of productivity is reasonable, but where are the alternate measures and the data to be used in recording these alternates? Current measures are backed by extensive data and used comparatively the measures so far strike me as meaningful and important.

JF -> Sandwichman ..., May 28, 2017 at 06:43 AM

"It tells us nothing about physical output and THAT, not monetary value is what the concept of productivity implies."

Yes, GDP presentations should also report the data removing the Finance and insurance segments from the statistical program and calculations.

Considering that with the age of the computer and advanced telco capabilities it is silly to include these segments in productivity duscussions, so we need a GDP view that matches.

And as we know these segments grew in terms of top line revenue flows remarkably in a very short time, and this should raise questions about its role in the economic system and whether the views of even the 1980s make sense.

Paine -> libezkova..., May 28, 2017 at 07:57 AM

You could use crude oil or electricity or debt or any numbered entity as the denominator. Thy are all formally similar

Why labor hours ?

This is the labor theory of exchange value in modern bourgeois scientific framing

If we posit a simple historical mission for capitalism it might be the minimizing of the social necessary labor time to produce the material requisites of society itself

Liberating humans from the burden of necessary labor

[May 29, 2017] Difficulties of comparing GDP between various countries: exampe of Russia

May 29, 2017 | www.moonofalabama.org
Jen | May 27, 2017 10:02:53 PM | 61
Khalid @ 51:

"... but GDP is a better measure of what is available to each country for domestic use ..."

I've now found where you've got your information about Russia having a smaller economy than South Korea, Canada and Italy. It's at this link:
http://databank.worldbank.org/data/download/GDP.pdf

The same list tells me that Saudi Arabia had a greater GDP than Sweden, Belgium, Norway and Denmark did in 2015. But does this information tell us anything about the health or long-term prospects for the Saudi economy compared to the economies of the other countries I just mentioned? Does the information tell us how well average Saudi citizens live compared to how well the average citizen lives in Sweden? Does the information say anything about what Saudi Arabia produces and/or exports, and about the range of products the KSA makes, compared to what Sweden does?

I'm sure you can do better than come up with a stack of numbers and nothing else that explains or qualifies them.

Oh and BTW, most labour migration between Russia and other countries is made up of Central Asian migrants travelling to Russia to work in construction and other jobs requiring little or no technical skills, or to study in the country's universities, and going back home to visit family on special occasions (like Persian New Year) or help gather in local harvests. Money flows in the form of remittances between Russia and Central Asian countries like Uzbekistan and Tajikistan tend to be out of Russia and into those other countries.

"Tajikistan: Migrant Remittances Now Exceed Half of GDP"
http://www.eurasianet.org/node/68272

"Remittances Inflows to Uzbekistan, Tajikistan and Kyrgyzstan in 2016: Current Trends and Prospects"
http://www.ayu.edu.tr/static/aae_haftalik/aae_bulten_en_80.pdf

The Economist "From Russia with Love"
http://www.economist.com/news/finance-and-economics/21688441-remittances-are-good-thing-except-when-they-stop-russia-love

/div

Khalid | May 28, 2017 1:40:29 AM | 65

@61. So GDP is a measure of what is produced in the country. GNP adds or subtracts from it money that is sent from elsewhere. Russia with a significantly larger GNP compared to GDP is a net recipient of income inflow, the Central Asian migrants not withstanding.

There are two potential problems with higher GNP. Firstly, Taxes on the income being sent have been paid in a different country. So for example the millions of Mexicans who send money from US to Mexico pay their taxes in US. The Mexican government does not see any of that revenue. Secondly the money coming is primarily spent via consumption. While this may help the local economy a little bit there is also demand for more infrastructure to support this added consumption but the government is not getting revenue to address this need for greater infrastructure and is always trying to play catch up.

Most countries with higher GNP (compared to GDP) continue to have weak economies susceptible to the ravages of the World economy. Russia is no exception. A weak economy cannot support a strong military without significantly sacrificing spending for improving it citizens well being. There are a number of countries maintaining large armies (for various reasons) that are disproportionate compared to their economic power. Russia is an extreme case of this. And the Russian citizens suffer because of this.

Jackrabbit | May 28, 2017 3:40:48 AM | 68
Kalid @50:
Russia has an economy that is smaller than that of South Korea, smaller than Canada, smaller than Italy.
On the basis of purchasing power parity (PPP) , Russia has an economy that is more than TWICE that of South Korea or Canada and 61% greater than Italy's.

The Russian economy is about 20% that of USA but the Russian per capita GDP economy grew faster than USA, Canada, or Italy from 1990-2015.

<> <> <> <> <> <> <> <> <> <>

2015 per capita, adjusted for PPP multipled by current population (from Wikipedia):

> USA: 18.244

> RF+Crimea: 3.639

> Italy: 2.258

> South Korea: 1.782

> Canada: 1.556

dh | May 27, 2017 11:49:10 AM | 15

[May 08, 2017] Goods and services in Russia are considerably less expensive than in the West (and this includes the cost of producing fighter jets or rockets), so for such purposes GDP PPP is a better indicator than is nominal GDP

Some interesting notes about difficulty of comparing GDP of various countries, in this case the USA and Russia.
Notable quotes:
"... Russia's overall GDP PPP places it slightly below Germany - 6th place in the world ..."
"... But the US GDP is of an different structure. Compared it is overblown with pure financial sales and "hedonistic adjustments". More is blown by the culture. In the US much more everyday things relies on money. In case of case they are all worth nothing. Furthermore, if it comes to conflicts than the whole US Infrastructure has to be "revalued", and i doubt that it can withheld some stress tests. ..."
"... Over the years, the Pentagon encouraged Congress to move parts of national security spending out of its budget to the extent that almost half is found outside the DOD. The USA really spends over a trillion dollars a year. For example, nuclear weapons research, testing, procurement, and maintenance is found in the Dept of Energy budget. ..."
"... [AKA "SmoothieX12"] ..."
"... No serious analyst takes US GDP as 18 trillion dollars seriously. A huge part of it is a creative bookkeeping and most of it is financial and service sector. ..."
"... In general, overall power of the state (nation) is not only in its "economic" indices. I use Barnett's definition of national power constantly, remarkably Lavrov's recent speech in the General Staff Academy uses virtually identical definition. ..."
Apr 17, 2017 | www.unz.com

Anonymous , April 17, 2017 at 5:31 am GMT

Russia spent almost 5.4% of GDP on military spending. The US last year spent 3.3% and with Trump's proposed increase this number will increase by a few decimal points.

Russia is a middle income country while the US is a rich country, in the top 10 of GDP per capita. If oil prices don't substantially improve and Russia continues to spend the way it does on the military it will simply go broke.

Sources: https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)_per_capita (Russia is between Mexico and Suriname)

https://en.wikipedia.org/wiki/List_of_countries_by_military_expenditures

@AP
Goods and services in Russia are considerably less expensive than in the West (and this includes the cost of producing fighter jets or rockets), so for such purposes GDP PPP is a better indicator than is nominal GDP. In terms of GDP PPP, Russia is of course not on par with the United States but is considerably higher than Mexico. It is in the same neighborhood as places such as Hungary.

Russia's overall GDP PPP places it slightly below Germany - 6th place in the world :

https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)

@Lewl42
Russia is a middle income country while the US is a rich country, in the top 10 of GDP per capita.

But the US GDP is of an different structure. Compared it is overblown with pure financial sales and "hedonistic adjustments". More is blown by the culture. In the US much more everyday things relies on money. In case of case they are all worth nothing. Furthermore, if it comes to conflicts than the whole US Infrastructure has to be "revalued", and i doubt that it can withheld some stress tests.

If oil prices don't substantially improve and Russia continues to spend the way it does on the military it will simply go broke

No country that relies on oil ( Russia do not) has made substantial improvements. Normally they are problem states where the problems made by oil are solved by money.

So from my point of view the opposite is true. Russia has made the big mistake to open itself to the west and was bitten. Now they readjust (with a border to china). Thank's to the US Oligarchs which thrown away that chance for they're primitive Neanderthal tribe thinking.

@Carlton Meyer
Over the years, the Pentagon encouraged Congress to move parts of national security spending out of its budget to the extent that almost half is found outside the DOD. The USA really spends over a trillion dollars a year. For example, nuclear weapons research, testing, procurement, and maintenance is found in the Dept of Energy budget.

http://www.pogo.org/straus/issues/defense-budget/2016/americas-1-trillion-national-security-budget.html

And as others have noted, GDP is a measure of activity, not prosperity. For example, mortgage refinancing creates lots of GDP, but no real wealth. Hurricanes and arson are good for GDP too!

@5371

Stupid beyond belief. Countries can't go broke doing something, if they control the natural and human resources they need to accomplish it. In addition, you apparently did not read Smoothie's explanation of why just comparing the sums spent is silly.
@Joe Wong
"Russia is a middle income country while the US is a rich country, in the top 10 of GDP per capita." this is very funny, how about the 20 trillions of US national debt and it is skyrocketing fast? If you only count asset without counting liability US maybe in the top 10 GDP per capita, but if you count net asset the US is in the negative GDP per capita, a broke nation. Perhaps it is American Exceptionalism logic, claiming credit where credit is not due, living in a world detached from reality.

"If oil prices don't substantially improve and Russia continues to spend the way it does on the military it will simply go broke." this is even funnier, Russian does not use USD in Russia, nor Russian government pay its MIC in USD, meanwhile Russian Central Bank can print Ruble thru the thin air just like the Fed, why does oil price have any relationship with Russian internal spending? Another example of "completely triumphalist and detached from Russia's economic realities" which is defined by meaningless Wall Street economic indices and snakeoil economic theories and rhetoric taught in the western universities.

Andrei Martyanov [AKA "SmoothieX12"] , Website

... ... ...

P.S. No serious analyst takes US GDP as 18 trillion dollars seriously. A huge part of it is a creative bookkeeping and most of it is financial and service sector. Out of very few good things Vitaly Shlykov left after himself was his "The General Staff And Economics", which addressed the issue of actual US military-industrial potential.

Then come strategic, operational and technological dimensions. You want to see operational dimension -- look no further than Mosul which is still, after 6 months, being "liberated". Comparisons to Aleppo are not only warranted but irresistible.

In general, overall power of the state (nation) is not only in its "economic" indices. I use Barnett's definition of national power constantly, remarkably Lavrov's recent speech in the General Staff Academy uses virtually identical definition.

[Apr 20, 2017] You may go here and see for yourself how FIRE overtook manufacturing in US in output. What is output , of course, remains a complete mystery

Notable quotes:
"... Sure, and that is why a company which produces nothing of value "commands" the so called "investments" which are several times larger than those of Boeing who is de facto US national treasure and who, as you stated, has problems with raising "capital". That pretty much says it all. Again, I omit here the trick with stock buybacks. But in the end, you seem to miss completely the point–structure of GDP. ..."
"... In general, we speak here different languages and I may only refer you back to Michael Lind's quote in my text. Judged in a larger, geopolitical framework, one can observe very clearly the process of US literally running out of resources and no amount of "raised capital" can change it. This is not to speak about the whole house of cards of Pax Americana which rested on US military imperial mythology. Once this mythology is debunked (the process which is ongoing as I type it) the house of cards folds. ..."
"... Sure, and that is why a company which produces nothing of value "commands" the so called "investments" which are several times larger than those of Boeing who is de facto US national treasure and who, as you stated, has problems with raising "capital". That pretty much says it all. Again, I omit here the trick with stock buybacks. But in the end, you seem to miss completely the point--structure of GDP. ..."
"... You may go here and see for yourself how FIRE overtook manufacturing in US in output. What is "output", of course, remains a complete mystery, same as many other services, once one considers the "quality" of education in US public schools which reflects in the most profound way on US labor force which increasingly begins to look like a third world one. ..."
www.unz.com
Andrei Martyanov says: • Website Show April 18, 2017 at 2:34 pm GMT
@inertial You just illustrated my point. Facebook vs. Gazprom market caps - all that shows is that Facebook has access to vastly larger amounts of capital than Gazprom. Well, duh.

Market capitalization is determined mostly by institutional investors - mutual funds, pension funds, insurance companies, etc. - who pool private savings and channel them into various investments. There are massive amounts of such savings available in USA; in Russia, not so much.

In Russia, the government is just about the only major saver and investor. This works fine in areas where the government must play a role, such as weapons manufacture. In other areas, enterprises that need capital to develop must either accumulate it themselves over the years (which puts limit on growth,) or get the government to help them out, or borrow abroad at usurious rates. That's not good. Ideally, Russian enterprises should enter Russian stock or fixed income market and raise as much capital as they need.

As for Boeing, yes it's a gem. But it does have some difficulties in raising capital. It's been balancing on the edge of bankruptcy for years and, unlike Facebook, it has huge liabilities. Incidentally, Boeing very much engages in all that "useless" high finance stuff. The buy and sell and issue bonds and short term paper; I don't know if they issue options but they certainly trade them. They don't believe that they are performing "virtual transactions with virtual money;" on the contrary, they consider this and essential part of the business, as important as building engines or whatever. Perhaps they know something you don't?

Finally, a tip. Any "expert" who doesn't treat US (or other) economic data seriously is an idiot.

Market capitalization is determined mostly by institutional investors – mutual funds, pension funds, insurance companies, etc. – who pool private savings and channel them into various investments. There are massive amounts of such savings available in USA; in Russia, not so much.

Sure, and that is why a company which produces nothing of value "commands" the so called "investments" which are several times larger than those of Boeing who is de facto US national treasure and who, as you stated, has problems with raising "capital". That pretty much says it all. Again, I omit here the trick with stock buybacks. But in the end, you seem to miss completely the point–structure of GDP.

You may go here and see for yourself how FIRE overtook manufacturing in US in output. What is "output", of course, remains a complete mystery, same as many other services, once one considers the "quality" of education in US public schools which reflects in the most profound way on US labor force which increasingly begins to look like a third world one.

https://www.bea.gov/iTable/iTable.cfm?ReqID=51&step=1#reqid=51&step=51&isuri=1&5114=a&5102=15

In general, we speak here different languages and I may only refer you back to Michael Lind's quote in my text. Judged in a larger, geopolitical framework, one can observe very clearly the process of US literally running out of resources and no amount of "raised capital" can change it. This is not to speak about the whole house of cards of Pax Americana which rested on US military imperial mythology. Once this mythology is debunked (the process which is ongoing as I type it) the house of cards folds.

Ondrej , April 18, 2017 at 3:20 pm GMT

@Andrei Martyanov
Market capitalization is determined mostly by institutional investors – mutual funds, pension funds, insurance companies, etc. – who pool private savings and channel them into various investments. There are massive amounts of such savings available in USA; in Russia, not so much.
Sure, and that is why a company which produces nothing of value "commands" the so called "investments" which are several times larger than those of Boeing who is de facto US national treasure and who, as you stated, has problems with raising "capital". That pretty much says it all. Again, I omit here the trick with stock buybacks. But in the end, you seem to miss completely the point--structure of GDP.

You may go here and see for yourself how FIRE overtook manufacturing in US in output. What is "output", of course, remains a complete mystery, same as many other services, once one considers the "quality" of education in US public schools which reflects in the most profound way on US labor force which increasingly begins to look like a third world one.

https://www.bea.gov/iTable/iTable.cfm?ReqID=51&step=1#reqid=51&step=51&isuri=1&5114=a&5102=15

In general, we speak here different languages and I may only refer you back to Michael Lind's quote in my text. Judged in a larger, geopolitical framework, one can observe very clearly the process of US literally running out of resources and no amount of "raised capital" can change it. This is not to speak about the whole house of cards of Pax Americana which rested on US military imperial mythology. Once this mythology is debunked (the process which is ongoing as I type it) the house of cards folds. Maybe this would help to someone:-)

„Excluding as we do noncapitalist change, we have to define that word which good economists always try to avoid : capitalism is that form of private property economy in which innovations are carried out by means of borrowed money, which in general, though not by logical necessity, implies credit creation. A society, the economic life of which is characterized by private property and controlled by private initiative, is according to this definition not necessarily capitalist, even if there are, for instance, privately owned factories, salaried workers, and free exchange of goods and services, either kind or through the medium of money. The entrepreneurial function itself is not confined to capitalist society, since such economic leadership as it implies would be present, though in other forms, even in a primitive tribe or in a socialist community." (Schumpeter 1939, 216)

This means that in perfect equilibrium interest would be zero in the sense that it would not be a necessary element of the process of production and distribution, or that pure interest tends to vanish as the system approaches perfect equilibrium. Proof of this proposition is very laborious, because it involves showing why all the theories which lead to a different result are logically unsatisfactory.

Hence, the money market with all that happens in it acquires for us a much deeper significance than can be attributed to it from the standpoint just glanced at. It becomes the heart, although it never becomes the brain, of the capitalist organism (Schumpeter 1939)

http://classiques.uqac.ca/classiques/Schumpeter_joseph/business_cycles/schumpeter_business_cycles.pdf

[Apr 14, 2017] Declining consumption of electricity in the USA might mean that GDP data are fudged

Apr 14, 2017 | economistsview.typepad.com
libezkova , April 13, 2017 at 08:51 AM
Another face of secular stagnation and outsourcing of manufacturing:

The De-Electrification of the U.S. Economy - Bloomberg View
https://www.bloomberg.com/view/articles/2017-04-12/the-de-electrification-of-the-u-s-economy

== quote ==
In much of the world, of course, electricity demand is still growing. In China, per-capita electricity use has more than quadrupled since 1999. Still, most other developed countries have experienced a plateauing or decline in electricity use similar to that in the U.S. over the past decade. And while the phenomenon has been most pronounced in countries such as the U.K. where the economy has been especially weak, it's also apparent in Australia, which hasn't experienced a recession since 1991.
== end of quote ==

From comments:

One interesting data point that should be within that "industrial" number: "U.S. aluminum production has gone from 2.5 million tons in 2005 to 1.6 million in 2015." http://www.seattletimes.com...

Aluminum smelting uses a lot of electricity, and that's a 36% decline. I'm not sure of the total electricity use of the aluminum industry in the U.S. but it's conceivably big enough to make a difference in that last graph.

anne -> libezkova... , April 13, 2017 at 09:16 AM
The essay is surely interesting, but what "might" it mean?
Fred C. Dobbs -> anne... , April 13, 2017 at 11:54 AM
(Bloomberg)
... In an article published in the Electricity Journal in 2015, former Lawrence Berkeley energy researcher Jonathan G. Koomey, now a consultant and a lecturer at Stanford, and Virginia Tech historian of science Richard F. Hirsch offered five hypotheses for why electricity demand had decoupled from economic growth (which I've paraphrased here):

In an article published in the Electricity Journal in 2015, former Lawrence Berkeley energy researcher Jonathan G. Koomey, now a consultant and a lecturer at Stanford, and Virginia Tech historian of science Richard F. Hirsch offered five hypotheses for why electricity demand had decoupled from economic growth (which I've paraphrased here):
1.State and federal efficiency standards for buildings and appliances have enabled us to get by with less electricity.
2.Increased use of information and communications technologies have also allowed people to conduct business and communicate more efficiently.
3.Higher prices for electricity in some areas have depressed its use.
4.Structural changes in the economy have reduced demand.
5.Electricity use is being underestimated because of the lack of reliable data on how much energy is being produced by rooftop solar panels. ...

https://law.stanford.edu/publications/electricity-consumption-and-economic-growth-a-new-relationship-with-significant-consequences/

anne -> Fred C. Dobbs... , April 13, 2017 at 05:18 PM
I appreciate these conjectures or hypotheses, which I had read initially and should have set down as well. The problem is there is no clear defining of the hypotheses, or provision for coming to a tentative conclusion as to the effect of any hypothesis.

The matter is of course important, and I will welcome further consideration.

libezkova -> anne... , April 13, 2017 at 04:28 PM
"what "might" it mean?"

It might mean that GDP data are fudged.

[Apr 12, 2017] How corporate profit-shifting distorts measured productivity - Equitable Growth

Apr 12, 2017 | equitablegrowth.org

pgl said... April 11, 2017 at 01:19 AM Nick Bunker ( How corporate profit-shifting distorts measured productivity - Equitable Growth ) reports on a paper from economists at Penn State that should interest Brad Setser:

'By shifting profits overseas, economic output that should be counted in the United States ends up being registered in other countries.

This shifting appears to have happened in part due to the rise in "intangible assets." To borrow an example from the four economists, think of a simplified version of the profits from an iPhone. Employees at Apple Inc. design the phone, which is then produced abroad at a cost of $250 and sold to a customer in the United States for $750. If we assume the reason people buy iPhones is the branding and design created by Apple, then a good portion of the $500 net profit is a return on "intangible assets" produced in the United States. But if a company sells the rights to these intangible assets to a subsidiary in a low-tax country, then the profits will end up there.

The result? An increase in the Gross Domestic Product of the low-tax country and a decline in the GDP of the United States without any real change in economic activity.'

Transfer pricing abuse! Of course that Ryan DBCFT tax deform would allow this tax avoidance on a permanent basis in a way that is all perfectly legal. Reply Tuesday, pgl said in reply to Peter K.... "hey would still be taxed on their sales."

Seriously? Most of Apple's sales are abroad. Same for Coca Cola, Boeing, Caterpillar, the list goes on.

Reply Tuesday, April 11, 2017 at 07:47 AM djb said in reply to pgl... yes sales tax might happen in the united states but pgl is talking about corporate tax on profit

transfer pricing manipulates the situation to show most of the profits as being earned in the low tax country. So that lets say the true cost of the manufacture of the iphone is 250 dollars,

they might say that the American subsidiary of the same company went to the low tax country and paid 700 dollars for the iphone

at least say that on paper

that's what he is talking about

sales tax doesn't affect the tax on profit

besides, sales tax is paid over and above the 750 dollars Reply Tuesday, April 11, 2017 at 11:00 AM pgl said in reply to djb... "pgl is talking about corporate tax on profit". Yep - you get it.

Reply Tuesday, April 11, 2017 at 11:56 AM J Johannes Y O Highness said in reply to Repeal 2 Replace 1...
Do you see how deflation fulfills the Keynesian Dream?

By inducing Keynesian Stimulation from Keynesian Expectations. Here is how works :

A car dealer has contract to buy from auto factory set amount of cars each month. Contract allows factory to churn out Tesla-s at steady rate thus efficient clip.

Unlike his customers, savvy dealer watches deflation rate carefully. He holds onto inventory when he expects less or no future deflation, but when he expects greater deflation, he deftly dumps inventory before price drops, accelerates M2V. Deflation causes dealers of each product and service to stimulate economic expansion. Here is my impression of Tyler Cohen :

When a government hardens its currency most of that currency is held by the citizens serving that government. Each citizen then has more buying power, more wealth because of her/his shrewd rulers.

As deflation allows full reserve, full reserve makes the predictions of Nouriel Roubini irrelevant. Full reserve eliminates uncertainty that nauseates business ventures that hire folks.
Awareness!

Get
it --
Reply Tuesday, April 11, 2017 at 11:17 AM Justin Cidertrades said in reply to Johannes Y O Highness...
How, Howard? How does ruler harden the currency?

By spending less, but taxing more, taxing foreigners by way of import duties. Is that what communist rulers of China are now doing? Import tariff? To harden currency thus enrage 45th President?

Don't worry nothing!
Don't worry!
Be happy!

45th will soon become aware. First aware; then, "company, attenzione!
forward march
!!
" Reply Tuesday, April 11, 2017 at 11:38 AM point said in reply to pgl... It's a terrific article, especially showing aggregate debt exceeds aggregate assets through use of tax havens.

On calculating GDP, it sure seems the standard labor arbitrage maneuver of transferring the production of intermediate goods to a favorable labor rate jurisdiction for importation should have implications beyond transfer pricing abuse.

If I, a US citizen, own a US located factory producing product with entirely US located inputs, then transfer an intermediate production stage to a low wage rate jurisdiction, where I still own the entire chain, this seems insufficiently foreign to account as exporting and importing.

People sometimes create "look through" earnings to consolidate unconsolidated results of minority subsidiaries to get a better look at a parent's full results. Something similar could be worthwhile here where a company's "insufficiently foreign" production would be consolidated into a look-through US production number.
Reply Tuesday, April 11, 2017 at 06:20 AM pgl said in reply to point... It is an interesting paper. Glad you read it. I see that PeterK did not. Reply Tuesday, April 11, 2017 at 07:48 AM

[Apr 04, 2017] The GDP Is a Flawed But Magical Indicator by Leonid Bershidsky

GDP is a classic junk science, some sort of 'economic Lysenkoism" and "cult of GDP is an immanent feature of neoliberal propaganda designed to substitute arbitrary metric for more scientific measurements of the wellbeing of people. That's a neoliberal lie: "That's why per capita GDP is one of the strongest predictors of happiness measured through people's subjective perceptions of their well-being. "
And it is generally connected strongly only with well being of financial oligarchy, which in the USA is at all time high. Preetty much disconned with well being of ordinary people as declining wages signify in the USA>
Sitting regular neoliberal stooges like Feldstein is just Argument from authority - Wikipedia thanks god he did not cite Mankiw.
Notable quotes:
"... GDP calculation isn't an exact science ..."
"... As Federal Reserve Chair Janet Yellen recently pointed out, GDP is "a pretty noisy indicator" at best. ..."
Apr 03, 2017 | www.bloomberg.com

Economists have long argued that the gross domestic product has many flaws as a measure of well-being and policy success. Yet there's a good reason it's still being used: There's a certain magic to it, despite its science being somewhat iffy.

QuickTake GDP: Measuring Income or Well-Being?

On Monday, the National Bureau of Economic Research published a paper by Harvard economist Martin Feldstein detailing an argument he has been making for years -- that GDP calculations underestimate actual growth and productivity. This optimistic argument is based on the difficulty of measuring changes in the quality of products and services, and therefore of life. Feldstein points out, for example, that official measurements, for the most part, only catch quality improvements if a product or service requires more expensive inputs: "If it doesn't cost more to produce a product or service this year than it did last year, there has been no improvement." That way, for example, leaps in the quality of health care -- when a patient who used to need a week in hospital to recover from a cataract operation is now discharged on the day of the procedure -- are not measured. The way official statistics measure the introduction of new products, too, doesn't account for their actual contribution to consumers' well-being or to the economy as a whole.

According to Feldstein, government messaging should be more optimistic to make sure people understand that their savings will buy more in the future. Goods and services are improving lives more than price increases would indicate.

Nobel laureate Joseph Stiglitz has long held the opposite view -- that the GDP as measured today may overestimate well-being. For example, it counts any increase in government spending as positive, even though these increases may be inefficient or even counterproductive. And as for those improvements in health care quality that form the basis of Feldstein's argument, they, too, can be overestimated in the U.S. because health care spending there is higher than other countries while the outcomes are the same or worse.

Some recent work also argues against the theory, supported by Feldstein, that the recent productivity slowdown is due to a failure of measurement. Last year, Chad Syverson of the University of Chicago pointed out that even the most generous estimates of the value added by the growth in digital technology aren't big enough to bring productivity growth to its pre-2004 trajectory. Another analysis by International Monetary Fund economist Marshall Reinsdorf found that their unmeasured effect on productivity could only be small. Statistics fail to record some of the added value because of the tech sector's use of tax havens, he wrote. But even the "free" internet services provided now are counted through the advertising they attract. And some of the improvements that tech created for consumers don't belong in the GDP calculation in the first place: If they save a user some personal time, that stays in the home and doesn't affect economic activity. (Even if it did, it might be canceled out by the time our digital addictions take out of our productive workday.)

All the back and forth about how GDP is calculated is only possible because, despite all the flaws, the measure somehow ends up feeling right. The distortions often end up canceling themselves out.

In 2013, Nicholas Oulton of the London School of Economics' Center for Economic Performance wrote a paper to disprove the notion that U.K. economic growth had been overestimated because official calculations overstated the contribution of banking to GDP. He showed that "if banking output has been overstated, then the output of some other industry or industries must have been understated."

Earlier this year, a team of IMF economists attempted to figure out how GDP numbers would have changed for a number of developed countries had they used an outdated deflation method, still used by China and India. It turned out that the effects wouldn't have been consistently negative or positive for most countries; for Western European countries, on aggregate, the effects would have been small. The team's recommendation was that more countries adopt the more progressive deflation methods now used by most of the G20 -- but their research made it clear that in some cases the difference in the results would be tiny.

As much as GDP calculation isn't an exact science , the results usually make sense. That's why per capita GDP is one of the strongest predictors of happiness measured through people's subjective perceptions of their well-being.

It's fine to argue for better measures of well-being. These measures, however, add even harder-to-measure indicators, such as levels of social support, freedom and generosity. For many countries, these data are either unavailable or subjectively colored. The choice is between engineering and science: The former will accept an imperfect approximation, while the latter will always strive for perfection. As Federal Reserve Chair Janet Yellen recently pointed out, GDP is "a pretty noisy indicator" at best. Yet it remains extremely useful as a reference.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

[Apr 04, 2017] How Do We Reclaim Control Of Our Lives When the Economy Looms So Grim

Notable quotes:
"... he never lost his aversion for the 'economism' that presumes that matters of public policy, employment, ecology and culture can be interpreted mainly in terms of mathematical abstractions. ..."
"... Lean Logic: A Dictionary for the Future and How to Survive It ..."
"... Tomorrow's World ..."
"... So in an economy like ours, a technological advance that doubles the amount of useful work a person can do in a day becomes a problem rather than a benefit. It tends to put half the workers out of work, turning them into a potential drain on the state. ..."
"... Tomorrow's World ..."
"... Lean Logic ..."
"... Surviving the Future: Culture, Carnival and Capital in the Aftermath of the Market Economy ..."
"... Didn't residents keep on doing whatever they were doing when the Vesuvius erupted ..."
"... As a dispirited milennial myself, it seems that the best option for me is to cut loose, live somewhere cheap and warm, enjoy nature and some friendly neighbors and watch this apocalypse unfold. ..."
"... News from Nowhere ..."
"... Illegitimi non carborundum ..."
"... During my time as a retail worker it struck me how much of effective customer service was really an unpaid use of our spontaneous urge to give aid to other people, to respond to their needs as human beings. ..."
"... We were often in the position of spiking the SOP of the business to get them what they wanted. It hit me then how much the ostensible money economy is a free rider on the world of our human non-economic lives, or is like free clean water used in an industrial process. ..."
"... One Day in the Life of Ivan Denisovitch ..."
Apr 04, 2017 | www.nakedcapitalism.com
As my friend David Fleming once wrote, conventional economics 'puts the grim into reality.'

Something of a radical, back in the 1970s Fleming was involved in the early days of what is now the Green Party of England and Wales. Frustrated by the mainstream's limited engagement with ecological thinking, he urged his peers to learn the language and concepts of economics in order to confound the arguments of their opponents.

By the time I met Fleming in 2006, he had practised what he preached and earned himself a PhD in Economics. But he never lost his aversion for the 'economism' that presumes that matters of public policy, employment, ecology and culture can be interpreted mainly in terms of mathematical abstractions.

Worse, he noted that even the word ' economics' has the power to make these life-defining topics seem impenetrable, none-of-our-business and, of all things, boring . Fleming's work was all about returning them to their rightful owners-those whose lives are shaped by them, meaning all of us.

Fleming was a key influence on the birth of the New Economics Foundation and Transition Towns movement , but it was only in the aftermath of his sudden death in 2010 that I discovered the breadth of the powerfully-different vision of economics that underpinned his life. On his home computer I discovered a manuscript for the book he had been preparing to publish after thirty years' work entitled Lean Logic: A Dictionary for the Future and How to Survive It .

Reminding us that our present growth-based market economy has only been around for a couple of hundred years (and is already hitting the buffers), Fleming's lifework looks to the great majority of human history for insight: "We know what we need to do," he writes , "We need to build the sequel, to draw on inspiration which has lain dormant, like the seed beneath the snow."

What he found was that-in the absence of a perpetually-growing economy- community and culture are key. He quotes, for example, the historian Juliet Schor's view of working life in the Middle Ages:

"The medieval calendar was filled with holidays These were spent both in sober churchgoing and in feasting, drinking and merrymaking All told, holiday leisure time in medieval England took up probably about one third of the year. And the English were apparently working harder than their neighbors. The a ncien régime in France is reported to have guaranteed fifty-two Sundays, ninety rest days, and thirty-eight holidays. In Spain, travelers noted that holidays totaled five months per year."

Reading this took me back to a childhood fed by TV programmes like the BBC's Tomorrow's World , which had informed me that by now robots would be doing all the menial work, leaving humans free to relax and enjoy an abundance of leisure time. So it came as a shock to realise that the good folk of the Middle Ages were enjoying far more of it than we are in our technologically-advanced society. What gives? Fleming explains ,

"In a competitive market economy a large amount of roughly-equally-shared leisure time – say, a three-day working week, or less – is hard to sustain, because any individuals who decide to instead work a full week can produce for a lower price (by working longer hours than the competition they can produce a greater quantity of goods and services, and thus earn the same wage by selling each one more cheaply). These more competitive people would then be fully employed, and would put the more leisurely out of business completely. This is what puts the grim into reality."

So in an economy like ours, a technological advance that doubles the amount of useful work a person can do in a day becomes a problem rather than a benefit. It tends to put half the workers out of work, turning them into a potential drain on the state.

Of course, in theory all the workers could just work half-time and still produce all that is needed, much as Tomorrow's World predicted. But in practice they are often afraid of having their pay cut, or losing their jobs to a stranger who is willing to work longer hours, so they can't take the steps needed to solve their collective economic problems and enjoy more leisurely lives. Instead, people are kept busy partly through what anthropologist David Graeber memorably characterised as " bullshit jobs ."

How, then, can we feed, house and support ourselves without working as relentlessly as we do today? Fleming's work explores the answer, making a rigorous case that we need to get beyond mainstream economists' ideas of minimising 'spare labour' if we are to sustain a post-growth economy. This 'spare labour' is what most of us would call spare time-a welcome part of a life well lived rather than a 'problem of unemployment.'

He highlights that the holidays of former times were far from a product of laziness. Rather they were, in an important sense, what men and women lived for . 'Spare time' spent in feasting, performing, collaborating and merrymaking together formed the basis of community bonding and membership. Those shared cultural ties hold people together, even in the absence of economic growth and full-time employment. When productivity improves, as one of his readers put it , "in our system you have a problem, in Fleming's system you have a party."

Under the current economic paradigm, the only way to keep unemployment from rising to the point where the population can't be supported is through endless economic growth, which thus becomes an obligation. So we are damned if we grow and damned if we don't, since endless growth will eventually cross every conceivable biophysical boundary and destroy the planet's ability to support us. That's why, in practice, we just keep growing and cross our fingers that somehow it will all work out. As Fleming writes :

"The reduction of a society and culture to dependence on mathematical abstraction has infantilised a grown-up civilisation and is well on the way to destroying it. Civilisations self-destruct anyway, but it is reasonable to ask whether they have done so before with such enthusiasm, in obedience to such an acutely absurd superstition, while claiming with such insistence that they were beyond being seduced by the irrational promises of religion."

Technological fixes do not help, as we are all discovering to our cost. We are already working ever harder, and with ever more advanced technologies, yet the hope of a better future dwindles day-by-day. Take heart though, for when the current paradigm transparently provides nothing but a dead end, we can be sure that we are on the cusp of a fundamental shift.

Fleming provides a radical but historically-proven alternative: focusing neither on the growth or de-growth of the market economy, but the huge expansion of the 'informal' or non-monetary economy-the 'core economy' that allows our society to exist, even today. This is the economy of what we love: of the things we naturally do when not otherwise compelled, of music, play, family, volunteering, activism, friendship and home.

At present, this core non-monetary economy is much weakened, pushed out and wounded by the invasion of the market. Fleming's work demonstrates that nurturing it back to health is not just some quaint and obsolete sharing longing but an absolute practical priority.

The key challenge of today, for Fleming, is to repair the atrophied social structures on which most human cultures have been built; to rediscover how to rely on each other rather than on money alone. Then life after the painful yet inevitable end to the growth of the monetary economy will start to seem feasible again, and our technological progress can bring us the fruits it always promised.

Lean Logic finally reached posthumous publication with Chelsea Green Publishing in September 2016, alongside a paperback version edited by me called Surviving the Future: Culture, Carnival and Capital in the Aftermath of the Market Economy . Needless to say, both books are deeply controversial, overthrowing as they do the central paradigm of our economy. As the writer Jonathon Porritt said at a launch event for the books last month , "there is no conventional political party anywhere in the world that doesn't have economic growth as the underpinning foundation, but David Fleming developed unique, astonishing ideas about resilience and good lives for people without growth."

It's increasingly clear that this is the conversation we all need to have, and Fleming's compelling, grounded vision of a post-growth world is rare in its ability to inspire optimism in the creativity and intelligence of human beings to nurse our economy, ecology and culture back to health. I am proud to have played a part in bringing it to the world; in fact, it might just be the best thing I have done.

> habenicht , April 3, 2017 at 7:22 am

Great post.

I think about these themes a lot and this is a helpful way of framing the underlying concepts (and explaining them to others).

fresno dan , April 3, 2017 at 7:52 am

The thing of it is, we have had growth except for recessions every 10 years or so. But somewhere along the line, due to the fact that we can never speak of "DISTRIBUTION" of this growth, we get the completely artificial idea that the lower income can ONLY be helped by higher growth. Economics has a nice scam going – only if the rich get much richer can anything be done for the 90%.

And we're told (by the rich) that this is just "natural" – a law of nature .Yeah, back when the church owned everything the priests told us it was God who wanted it that way. Now the economic priests tell us its nature that wants it this way

https://fred.stlouisfed.org/series/GDPC1

Carla , April 3, 2017 at 8:16 am

Here's an antidote to fred: http://www.steadystate.org

The 15-page list of notables who have endorsed the imperative for a steady state economy includes E.O. Wilson, Jane Goodall, Maude Barlow, Herman Daly, and Wendell Berry (list available for download at http://www.steadystate.org/act/sign-the-position/endorsements-and-signatures/view-notable-signatures ).

Anyone can sign the Steady State Position Statement here:
http://www.steadystate.org/act/sign-the-position/read-the-position-statement/

Left in Wisconsin , April 3, 2017 at 11:02 am

I am increasingly of the view that we conflate two entirely different ideas, or that we don't emphasize enough that there are two fundamentally different critiques, when we challenge economists' reliance on "growth." I'm not opposed to the notion of 'steady-state' economics. But it seems presumptuous TSTL for Americans (famously 5% of the world's population using 25% of the world's resources), really 'first-world'ers in general, to say, "OK, no more growth and time to stay within in our limits, and by the way I'm good with what I've got." So I think there is a lot more work that has to be done to make that concept appropriate in a reality-based sense.

Whereas, even though Marxists have often tended toward productivist notions of economic growth that share many problematic features of capitalist growth, there is a deconstruction of capitalist, and neoclassical depictions of, economic growth that is not by definition anti-community or anti-planet. While the fundamental issues are power and control, they are perhaps most easily understood through measurement – specifically what capitalists and their economists choose to measure as growth and what they choose to ignore or take for granted. Why is paying someone else to take care of your kid considered 'economic activity,' a provider of 'jobs,' a contributor to economic growth, but raising your own kid is not? Actually, working at McDonald's while you pay someone to raise your kid counts as two jobs, while raising your own kid counts as no jobs, even though the second is in virtually all cases a socially superior outcome. (True, someone else might take that job at McD's, so the net might only be one job. But with less demand for that job, perhaps it would have to pay more and be a better job.) If you extend this line of thinking through elder care, and then family- and community-based health care ('health care' in the widest, not specifically industrial sense of the word), one could imagine substantially more healthy (in the widest sense) families, communities, and societies with substantially lower carbon footprints than our current predicament.

One question is, if one took current measures of paid 'care work' as a baseline for what counts as 'work,' and then provided similar levels of compensation to those currently performing similar unpaid work (and I would advocate for higher pay for carers with a closer social bond to those they care for, because in knowing the 'patient' better they are more 'skilled'), what implications would that have for 'the economy' and the society in general?

(Similarly, as many others have noted, we need new economic categories that allow us to identify negative economic activity (much finance, deforestation, pollution, waste, de-humanization, etc.) that subtracts from standard measures of well-being rather than being included in them.)

There are many different ways to think about this, not all positive. Commodification vs. de-commodification is a long-running discussion in Marxist circles, and one could imagine arguments in favor of extending the latter to many more spheres of society. I think many supporters of BIG are de-commifiers at heart. Even in our current context, massively improving and extending paid leave is a nod in this direction. OTOH, one could also easily imagine to make kids the one paying their parents to raise them, and going even deeper into debt, on the same logic of paying for college – your parents are working to improve your social capital and earning potential and so you should pay them out of your future earnings.

Relatedly, I am not opposed to alternative measures of social well-being, such as 'happiness indexes.' But until we are able to directly challenge capitalist and neoclassical hegemony over what counts as paid work (i.e. 'useful economic activity') and directly address the economic cost of social 'bads,' there will be no taking the foot off the accelerator of economic growth, even as we plunge Thelma-and-Louise-style over the cliff.

Carla , April 3, 2017 at 12:07 pm

Brilliant comment, LiW.

And I believe that at least several, if not all, of the "notable signers" listed in my comment above have actually done some of that challenging of capitalist and neoclassical hegemony for which you are calling.

I absolutely agree that "there is a lot more work that has to be done to make that [steady state economy] concept appropriate in a reality-based sense."

But we have to start somewhere, so I'm trying to spread the word about http://www.steadystate.org

OpenThePodBayDoorsHAL , April 3, 2017 at 3:58 pm

I think we can continue with "growth" maybe not indefinitely but certainly for a very long time to come. Just remove the giant parasitic vampire squid that drains away all of the blood, 8 guys holding 50% of the world's wealth, I mean gimme a break you don't have to be a dreaded pinko Commie to think that is just hideously wrong. The more we talk about that and the less we talk about how great it is for us all to cut back and move into Mom's basement the better. It's US versus THEM and there are very very few of THEM.

redleg , April 3, 2017 at 8:18 pm

Fantastic comment.

Piling on:
All of the artists that I personally know, and I know many, make their living doing something other than their art. Even the professional musicians get paid playing someone else's music so they can make their own.
So the thing that gives an artist's life meaning- creating art- and contributes to or even defines a local or regional culture doesn't count as work, but the day job does. The cost of making the art not only doesn't count as a job, it counts as a drain of resources in terms of both time and treasure.

HBE , April 3, 2017 at 7:55 am

I had never heard of the author or the book, I will definitely be ordering it. It's helpful to have a reminder now and again, that our society, and whole way of living and being is a historical aberration and there are many better options.

It also made me smile while reading to think about someone like Krugman reading this book and twisting themselves into pretzels to dispute it (reality).

I imagine it would be one very complex pretzel but if anything could manage it, it would be a serious of krugfacts.

Moneta , April 3, 2017 at 8:17 am

Didn't residents keep on doing whatever they were doing when the Vesuvius erupted?

Humans need a good dose of delusion to be mentally healthy. Perma-optimism is humanity's biggest challenge.

optimader , April 3, 2017 at 3:30 pm

Didn't residents keep on doing whatever they were doing when the Vesuvius erupted
Briefly

Steve H. , April 3, 2017 at 9:36 am

: What he found was that-in the absence of a perpetually-growing economy-community and culture are key.

There is a distinct difference from an ordinary pastoral in 'As You Like It' – the shepherds do not own their sheep, and specific reference is made to the rural displaced, set to walk and die on the roads. The policy was simply industrialized post-WWII, with tracts of suburbs in company towns, separated from the competing allegiances of extended family and culture.

The problem is an old one. The successful solutions are not well publicized. The equivocations of economicysts are now being revealed, and needs be drawn and quartered for the metastases they encourage.

jerry , April 3, 2017 at 10:21 am

Soo.. we're working more now than the middle ages. Great! Good job america!

As a dispirited milennial myself, it seems that the best option for me is to cut loose, live somewhere cheap and warm, enjoy nature and some friendly neighbors and watch this apocalypse unfold. I sure as hell am not grinding my life away in the corporate trenches for ever-diminishing purchasing power, give me a job at the grocer! What's that they've all been automated? Oh, damnit.

optimader , April 3, 2017 at 3:30 pm

As a dispirited milennial myself, it seems that the best option for me is to cut loose, live somewhere cheap and warm, enjoy nature and some friendly neighbors and watch this apocalypse unfold.

Also the case for a reasonably affluent babyboomer

james brown , April 3, 2017 at 4:46 pm

I actually did that. At 55, seven years ago now, I got disgusted and bailed out. I closed my business (I actually gave it to my last two employees who wanted to keep going), sold my couple of real estate holding in the city (my house and my business property) and moved out to the sticks to brood and live cheaply. Turns out the living is cheap but there's been no brooding. Although I had a ball in business, until the last two years, I've never had this much fun and contentment with life. I'm a two bit hobby farmer or homesteader, if you will. You say that flippantly, as I did, but bailing out and disconnecting from a Madison Ave determined lifestyle can actually be quite rewarding. It's not for everyone but it's been a very fulfilling experience for me. Good luck.

casino implosion , April 3, 2017 at 10:32 am

Here's a good blog that might appeal:

https://therealmovement.wordpress.com/2017/03/31/why-reducing-the-work-week-is-better-than-basic-income/

Susan the other , April 3, 2017 at 10:46 am

I had a weird dream about capitalism in reverse. Where we came to understand money as just another form of energy and distributed it to people regularly so nobody needed to sell their labor and the economy didn't need to grow to make profits. Instead of selling products/labor, everyone used their money to make things we need and then paid again to give their product to someone: "I'll give you the cost of making this naturally cured ham if you will please take it and enjoy it." And we gave our money back to the environment the same way: here, please take all of our energy and help to repair yourself. Or, we've spent our energy making these sustainable homes, and we can offer your family $20K to take one and live in it. Sounds so nutty. I guess it would still work to form a partnership, pool our money, and build a state of the art drug research lab. And pay people to use these excellent drugs. Never mind.

cocomaan , April 3, 2017 at 11:47 am

This is awesome. Please have more dreams like this.

Mel , April 3, 2017 at 12:26 pm

William Morris, News from Nowhere . Pleasant overview, not big on infrastructure, well-handled dream sequence. To clarify: I approve, but don't expect this book to give assembly instructions.

optimader , April 3, 2017 at 3:27 pm

How does that work for Hookers?

DolleyMadison , April 3, 2017 at 4:18 pm

Ich bin ein hookers now

OpenThePodBayDoorsHAL , April 3, 2017 at 4:03 pm

Hi Susan, related to your dream, see below. The guy concludes "Bitcoin" but it's very well worth a read anyway:
https://extranewsfeed.com/energy-money-and-the-destruction-of-equilibrium-da96f8a225d6

Anna Zimmerman , April 3, 2017 at 11:44 am

Thanks for this great post, more like it please! It's no good endlessly criticising the status quo we all need to spend more time discussing the alternatives and moving ourselves forward.

diptherio , April 3, 2017 at 12:40 pm

See here for much more like this:

http://www.geo.coop

Enquiring Mind , April 3, 2017 at 1:14 pm

Illegitimi non carborundum , one of my favorite Latinesque quotes.

See also for some Dog Latin diversion.

Cat Burglar , April 3, 2017 at 2:00 pm

During my time as a retail worker it struck me how much of effective customer service was really an unpaid use of our spontaneous urge to give aid to other people, to respond to their needs as human beings.

We were often in the position of spiking the SOP of the business to get them what they wanted. It hit me then how much the ostensible money economy is a free rider on the world of our human non-economic lives, or is like free clean water used in an industrial process.

My co-workers and I sometimes became bitter about the low wages, and stopped paying attention to people, but we couldn't keep it up for long, because you couldn't feel good for long about taking it out on innocent people, and eventually even the bitterest co-workers would encounter someone they just had to respond to as another person. We all figured out, sooner or later, that the connection was the enduring value in the job.

This book, Lean Logic has twigged to this reality underlying the economy.

Mel , April 3, 2017 at 2:08 pm

Hmmm. Resonates strongly with the bricklaying scene in Solzhenitsyn's One Day in the Life of Ivan Denisovitch (about working in a prison camp.) I've got to see tomorrow if the bookstore can get Lean Logic .

Anon , April 3, 2017 at 2:03 pm

Something about this discussion reminds me of Stewart Brand and the "Whole Earth Catalog".

Tim , April 3, 2017 at 3:15 pm

In an Utopian world the hardest least desirable jobs pay the most. CEOs make minimum wage while the burger flippers being whipped by managers to hurry up are raking it in but do we have enough unambitious intelligent people to keep the world turning

Socialism will always have to be balanced by the carrot and stick to minimize the mis-allocation of resources.

Michael C. , April 3, 2017 at 4:36 pm

Thus we can see reasons behind the high priority capitalistic societies put on individualism, privatization, the self, the breaking down of "the commons," and fearing other groups, such as Hispanics, Jews, or Muslims, at one time Catholics too as in the US. The whole mode of social "we're all in this together" thinking is antithetical to it's reason for being. We need to think "bigly" with a whole new paradigm (or is it an ancient paradigm) on how we view the world, and we better do so quickly.

[Mar 26, 2017] There is no such thing as a natural rate of interest

Mar 26, 2017 | economistsview.typepad.com
RGC, March 26, 2017 at 07:06 AM
In short, there is no such thing as a "natural rate of interest".

........................

What then? It is difficult to say, exactly, whether the prevalent confusions are the result of sloppy thinking, an incoherent textbook pedagogy, or a deliberate desire to cover for the Federal Reserve and to obstruct potential criticism of the independent central bank. As a next step, let us ask: is there a better theory of interest rates out there, somewhere in the great work of the economists?

In the CEA paper, as in most of this so-called literature, the 20th century British economist John Maynard Keynes is not cited. Yet it is a fact that Keynes did write an influential book with the word "Interest" in the title. It was called The General Theory of Employment Interest and Money, published in 1936. In which Keynes states, of the classical theory of interest – that theory of loanable funds overlying a natural rate – that his own analysis "will have made it plain that this account of the matter must be erroneous" (p. 177). Perhaps it is worthwhile to seek Keynes's counsel at this point?

Keynes's theory of interest does not rest on the capital stock. And in Keynes as in the real world, there is no "capital market" that equates household saving with business investment.

Instead, Keynes's theory of interest is about the market for money – a market that definitely does exist in the real world. He wrote: "The rate of interest is not the 'price' which brings into equilibrium the demand for resources to invest with the readiness to abstain from consumption. It is the 'price' which equilibrates the desire to hold wealth in the form of cash with the available quantity of cash" (p. 167). In other words, interest rates are a portfolio issue. They are determined in the money markets, by how – in what form – people with wealth choose, at any given time, to hold that wealth. You pay interest, in order to get people to hold their wealth in less-liquid forms, such as bonds – and this is what provides firms with a secure source of financing, which then permits them to invest.

Keynes's theory of interest is the pure common sense of how financial markets work. So why is it treated, by our leading liberal economists, as though it didn't exist? Why all this confusing folderol about natural and neutral rates? The apparent answer is damning. In the theories our economists like, a technical theory of interest creates a technical theory of income distribution, since interest rates govern the incomes of creditors against debtors, of the rich against the poor, of profits against wages. Thomas Piketty's recent book is a nice instance of this point, with its argument that the great inequalities of capitalism are due to interest rates higher than the rate of economic growth. If interest somehow reflects the physical productivity of the capital stock, then the consequences may be unfortunate – but they are inevitable and not something of which it is proper to complain.

http://www.paecon.net/PAEReview/issue78/Galbraith78.pdf

RGC -> RGC... , March 26, 2017 at 07:39 AM
"Why all this confusing folderol about natural and neutral rates? The apparent answer is damning. In the theories our economists like, a technical theory of interest creates a technical theory of income distribution, since interest rates govern the incomes of creditors against debtors, of the rich against the poor, of profits against wages..........If interest somehow reflects the physical productivity of the capital stock, then the consequences may be unfortunate – but they are inevitable and not something of which it is proper to complain."

[Is that clear enough?......Galbraith is accusing mainstream economists of acting as apologists for rentiers.]

[Mar 25, 2017] Is productivity metric as problematic as GDP?

Mar 24, 2017 | cepr.net

anne: March 24, 2017 at 05:21 AM

Marketplace Radio Has Not Heard About the Productivity Slowdown

Marketplace radio had a peculiar piece * asking what the world would have looked like if the North American Free Trade Agreement never had been signed. The piece is odd because it dismisses job concerns associated with NAFTA by telling readers that automation (i.e. productivity growth) has been far more important in costing jobs.

"As in, ATMs replacing bankers, robots displacing welders. Automation is a very old story that goes back 250 years, but it has really picked up in the last couple decades.

"'We economic developers have an old joke,' said Charles Hayes of the Research Triangle Regional Partnership in an interview with Marketplace in 2010. 'The manufacturing facility of the future will employ two people: one will be a man, and one will be a dog. And the man will be there to feed the dog. And the dog will be there to make sure the man doesn't touch the equipment.'

"Ouch. But it turns out technology replaced workers in the course of reporting this very story."

Actually, the Bureau of Labor Statistics tells us the opposite. Productivity growth did pick up from 1995 to 2005, rising back to its 1947 to 1973 Golden Age pace (a period of low unemployment and rapidly rising wages), but has slowed sharply in the last dozen years.

[Graph]

While more rapid productivity growth would allow for faster wage and overall economic growth, no one has a very clear path for raising the rate of productivity growth. It is strange that Marketplace thinks our problem is a too rapid pace of productivity growth.

The piece is right in saying that the jobs impact of NAFTA was relatively limited. Certainly trade with China displaced many more workers. NAFTA may nonetheless have had a negative impact on the wages of many manufacturing workers. It made the threat to move operations to Mexico far more credible and many employers took advantage of this opportunity ** to discourage workers from joining unions and to make wage concessions. It's surprising that the piece did not discuss this effect of NAFTA.

* https://www.marketplace.org/2017/03/23/economy/what-if-nafta-were-never-born

** http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1018&context=cbpubs

-- Dean Baker

anne said in reply to anne...

https://fred.stlouisfed.org/graph/?g=d6jh

November 1, 2014

Total Factor Productivity for United States, 1952-2014

(Percent Change)


https://fred.stlouisfed.org/graph/?g=d7LU

November 1, 2014

Total Factor Productivity for United States, 1952-2014

(Indexed to 1952)

pgl said in reply to anne... March 24, 2017 at 06:01 AM

Thanks for the data. It confirms what Dean wrote here:

"the Bureau of Labor Statistics tells us the opposite. Productivity growth did pick up from 1995 to 2005, rising back to its 1947 to 1973 Golden Age pace (a period of low unemployment and rapidly rising wages), but has slowed sharply in the last dozen years.

anne said in reply to pgl... March 24, 2017 at 06:10 AM

Looking internationally, I consider the evidence conclusive that productivity growth has slowed significantly since 2005 in countries that have had limited infrastructure development, regardless of the emphasis in those countries on information technology advance and application.

libezkova -> anne... March 25, 2017 at 09:33 AM

And what is productivity ?

== quote ==

The OECD defines it as "the ratio of a volume measure of output to a volume measure of input".] Volume measures of output are normally gross domestic product (GDP) or gross value added (GVA), expressed at constant prices i.e. adjusted for inflation.

== end of quote ==

If you use GDP the result is suspect for the reasons GDP is suspect. If not, then it is sector/industry based metric.

In this sense growth of GDP in 1990th is not only the result of technological changes (Internet, PCs, cell phones) but also looting of the xUSSR economies

And as looting slowed down after 2000 growth of productivity also allowed down.

libezkova -> libezkova... March 25, 2017 at 10:32 AM

Steve Keen pointed out that all production is driven by energy (mostly oil and electricity). And the energy comes ultimately from the sun.

Either it is turned into production via feeding workers, or by fueling machinery (by burning hydrocarbons or indirectly via electricity supply).

That means that growth of productivity is inversely correlated with the price of oil. As the period of cheap hydrocarbons ended (remember $.99 per gallon of gas in 90th) the period of rapid productivity growth ended as well.

One of the aspects od the idea of "secular stagnation" is that high oil prices hit neoliberal economies like a hammer and the period of high oil prices started to undermine neoliberal globalization by making shipping more expensive.

That also means that without continuation of low oil prices the next debt crisis (aka Minsky moment) is eminent for the USA economy.

BTW none of US shale companies is profitable. They are all up to the neck in debt, and their method of extracting oil includes generating a flow of junk bonds. If financing stops most of them will be bankrupt in one year period.

Obama clever game with Iran helped to produce "Obama recovery" due to the period of "normal" oil prices which started in mid 2015.

It probably can be extended for another year or two. What happens next is completely unknown territory. It is clear that the US shale is a card that was already played. It can't be played again as output probably can be substantially raised (say 2 Mbd/day) only with high or very high oil prices (as in above $70 or higher).

After "Obama recovery" (which depends on continuing low oil prices created by clever political maneuvering in Arab world -- Hail Mary pass that worked) we might well face the period of "elevated oil prices" and increased stagnation of the US economy with noticeably higher level of unemployment.

Much depends on Trump playing his trump card of "détente" with Russia which theoretically could extend this period (Russia has the same level of oil production as Saudis and more reserves), but there were to much sand thrown by neocons and DemoRats for this scenario to work. I thing Russia now is no longer interested in partnership with the USA on the basis of maintaining low oil prices -- like KSA today, and might cut output further to get higher oil prices which are vital for their economy. Of course Russia has strong neoliberal fifth column (including pro-western directors of oil companies and oligarchs who have their wealth transferred to Western banks) but even they are pissed off by the USA now.

DemoRats wiped up Anti-Russian hysteria to the level when even contact with Russian official can be a "career limiting move" in the USA.

This hysteria now has its own self-propagating dynamics and is difficult to stop. It might last for the same period of time as McCarthyism hysteria (roughly from 1947 to 1956).

"... "The principal problem for Democrats is that so many media figures and online charlatans are personally benefiting from feeding the base increasingly unhinged, fact-free conspiracies - just as right-wing media polemicists did after both Bill Clinton and Obama were elected - that there are now millions of partisan soldiers absolutely convinced of a Trump/Russia conspiracy for which, at least as of now, there is no evidence. ..."

It put the Democrats and Republicans in sync as two equally warmongering parties, but what good that would bring for the American people and the world is hard to fathom.

The USA lost the possibility of switching personal car fleet to more economical hybrid models by adopting some drastic measures and now is less prepared for a new period of high oil prices. People are still buying SUV which became the most popular type of personal transportation in the USA, and small tracks.

On the electricity front there are some problems too. The looting of Russia and the flow of cheap uranium stopped. Building of high voltage East -West line necessary for substantial wind and solar production is still on the drawing board.

[Mar 25, 2017] Like most integral metrics (and, especially, like GDP) productivity growth is very suspect. Its importance was artificially amplified under neoliberalism to the sacred cow status

Notable quotes:
"... The long term absence of convergence in productivity growth between developed and developing countries should be of considerable concern, but seems overlooked even in settings such as trade negotiations in which such concerns especially need to be addressed. ..."
"... You need to understand that like most "integral" metrics (and, especially, like GDP) productivity growth is very suspect. Its importance was artificially amplified under neoliberalism to the "sacred cow" status. ..."
"... While the strong earnings growth of US-based corporations might, at least partially, be real and not all accounting tricks, the question arise what part of those gains are coming from improvements in domestic productivity and what part from offshoring. ..."
"... Productivity growth is an important part of the system of neoliberal myths (along with "cult of GDP" ) and this mythology is directed at deceiving the public that it is indirectly benefitting from the neoliberal transformation of the society, while in reality we observe impoverishment of the majority of population. As in " The USA is the country with fastest productivity grown." Rejoice. ..."
Mar 25, 2017 | economistsview.typepad.com

anne -> anne... March 25, 2017 at 10:31 AM

The long term absence of convergence in productivity growth between developed and developing countries should be of considerable concern, but seems overlooked even in settings such as trade negotiations in which such concerns especially need to be addressed.

libezkova -> anne..., March 25, 2017 at 04:42 PM

Anne,

You need to understand that like most "integral" metrics (and, especially, like GDP) productivity growth is very suspect. Its importance was artificially amplified under neoliberalism to the "sacred cow" status.

Government bureaucrats also are afraid to tell the truth. Richard Benson , a well-known critic of government labor statistics, who wrote several insightful papers on the subject, noted "The BLS is mindful of how politically sensitive any reported job data is to the White House, so there is a strong bias for the government bureaucrats to publish a favorable jobs report."

One hidden fact is that it is offshoring that is the driver of corporate profits and it distorts "productivity" statistics.

While the strong earnings growth of US-based corporations might, at least partially, be real and not all accounting tricks, the question arise what part of those gains are coming from improvements in domestic productivity and what part from offshoring.

Rising stratification of the society also affects this metric (via the ratio of "have more" vs "have not")

Productivity growth is an important part of the system of neoliberal myths (along with "cult of GDP" ) and this mythology is directed at deceiving the public that it is indirectly benefitting from the neoliberal transformation of the society, while in reality we observe impoverishment of the majority of population. As in " The USA is the country with fastest productivity grown." Rejoice.

It is also simplifies the adoption of pro financial oligarchy policies masked with technocratic jargon -- policies that destroyed New Deal and hurt the majority of the population ("rising labor costs" is one such usage).

Adopting technocratic posture (economics like Boeing there by using certain controls you can change flight course) serves like anesthetic. Rephrasing Marx we can say "neoliberal economics is the opium for the people". And it is by design. which confirms the iron law of oligarchy in a very interesting, unexpected way.

That's why jargon use by priests of neo-classical economics is almost in-penetrable for an ordinary person. The well known neoliberal stooge Greenspan was a real master of it.

So the importance assigned to such measures as GDP and productivity is, to a certain extent, politically motivated.

For example, in the denominator we have all those hedge funds managers and other members of financial oligarchy bonuses, and top managers exorbitant remuneration within all kinds of firms (which definitely drives productivity growth down ;-)

In the numerator are military expenses and income of financial sector (and now another somewhat parasitic sector close to banking -- medical insurance industry).

Both are essentially money stolen from people and, to a certain extent, from "real" economy.

Of cause, not all money are wasted as military spending in addition to war for neoliberal empire expansion (and related loot) also employs a lot of people and fund fundamental research; the myth about innovation of Silicon Valley is partially a myth; in reality in many cases this is a direct transfer of technology from the military sector.

Among the examples are integrated circuits, laser, wireless, Internet, multiprocessing, etc; even some algorithmic languages :-).

So when you have such fuzzy numerator and denominator, the result is also fuzzy and all conclusions based on them might be not worth electrons with which they are depicted on our screens.

As I mentioned before, productivity should be somewhat inversely correlated with the oil price, as "amount of energy per worker" is what defines at the end worker's productivity (via the level of automation, mechanization of his work). That's were the USA strong (or week, if you wish) point is -- it has the largest consumption of energy per capita in the world. If we normalize productivity via per capita energy consumption we will get a more interesting picture.

[Mar 25, 2017] Is productivity metric as problemtic as GDP?

Notable quotes:
"... The OECD defines it as "the ratio of a volume measure of output to a volume measure of input".] Volume measures of output are normally gross domestic product (GDP) or gross value added (GVA), expressed at constant prices i.e. adjusted for inflation. ..."
"... If you use GDP the result is suspect for the reasons GDP is suspect. If not, then it is sector/industry based metric. ..."
"... In this sense growth of GDP in 1990th is not only the result of technological changes (Internet, PCs, cell phones) but also looting of the xUSSR economies ..."
"... And as looting slowed down after 2000 growth of productivity also allowed down. ..."
"... One of the aspects of the idea of "secular stagnation" is that high oil prices hit neoliberal economies like a hammer and the period of high oil prices started to undermine neoliberal globalization by making shipping more expensive. ..."
"... BTW none of US shale companies is profitable. They are all up to the neck in debt, and their method of extracting oil includes generating a flow of junk bonds. If financing stops most of them will be bankrupt in one year period. ..."
Mar 24, 2017 | cepr.net

anne: March 24, 2017 at 05:21 AM

Marketplace Radio Has Not Heard About the Productivity Slowdown

Marketplace radio had a peculiar piece * asking what the world would have looked like if the North American Free Trade Agreement never had been signed. The piece is odd because it dismisses job concerns associated with NAFTA by telling readers that automation (i.e. productivity growth) has been far more important in costing jobs.

"As in, ATMs replacing bankers, robots displacing welders. Automation is a very old story that goes back 250 years, but it has really picked up in the last couple decades.

"'We economic developers have an old joke,' said Charles Hayes of the Research Triangle Regional Partnership in an interview with Marketplace in 2010. 'The manufacturing facility of the future will employ two people: one will be a man, and one will be a dog. And the man will be there to feed the dog. And the dog will be there to make sure the man doesn't touch the equipment.'

"Ouch. But it turns out technology replaced workers in the course of reporting this very story."

Actually, the Bureau of Labor Statistics tells us the opposite. Productivity growth did pick up from 1995 to 2005, rising back to its 1947 to 1973 Golden Age pace (a period of low unemployment and rapidly rising wages), but has slowed sharply in the last dozen years.

[Graph]

While more rapid productivity growth would allow for faster wage and overall economic growth, no one has a very clear path for raising the rate of productivity growth. It is strange that Marketplace thinks our problem is a too rapid pace of productivity growth.

The piece is right in saying that the jobs impact of NAFTA was relatively limited. Certainly trade with China displaced many more workers. NAFTA may nonetheless have had a negative impact on the wages of many manufacturing workers. It made the threat to move operations to Mexico far more credible and many employers took advantage of this opportunity ** to discourage workers from joining unions and to make wage concessions. It's surprising that the piece did not discuss this effect of NAFTA.

* https://www.marketplace.org/2017/03/23/economy/what-if-nafta-were-never-born

** http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1018&context=cbpubs

-- Dean Baker

anne said in reply to anne...

https://fred.stlouisfed.org/graph/?g=d6jh

November 1, 2014

Total Factor Productivity for United States, 1952-2014

(Percent Change)


https://fred.stlouisfed.org/graph/?g=d7LU

November 1, 2014

Total Factor Productivity for United States, 1952-2014

(Indexed to 1952)

pgl said in reply to anne... March 24, 2017 at 06:01 AM

Thanks for the data. It confirms what Dean wrote here:

"the Bureau of Labor Statistics tells us the opposite. Productivity growth did pick up from 1995 to 2005, rising back to its 1947 to 1973 Golden Age pace (a period of low unemployment and rapidly rising wages), but has slowed sharply in the last dozen years.

anne said in reply to pgl... March 24, 2017 at 06:10 AM

Looking internationally, I consider the evidence conclusive that productivity growth has slowed significantly since 2005 in countries that have had limited infrastructure development, regardless of the emphasis in those countries on information technology advance and application.

libezkova -> anne... March 25, 2017 at 09:33 AM

And what is productivity ?

== quote ==

The OECD defines it as "the ratio of a volume measure of output to a volume measure of input".] Volume measures of output are normally gross domestic product (GDP) or gross value added (GVA), expressed at constant prices i.e. adjusted for inflation.

== end of quote ==

If you use GDP the result is suspect for the reasons GDP is suspect. If not, then it is sector/industry based metric.

In this sense growth of GDP in 1990th is not only the result of technological changes (Internet, PCs, cell phones) but also looting of the xUSSR economies

And as looting slowed down after 2000 growth of productivity also allowed down.

libezkova -> libezkova... March 25, 2017 at 10:32 AM

Steve Keen pointed out that all production is driven by energy (mostly oil and electricity). And the energy comes ultimately from the sun.

Either it is turned into production via feeding workers, or by fueling machinery (by burning hydrocarbons or indirectly via electricity supply).

That means that growth of productivity is inversely correlated with the price of oil. As the period of cheap hydrocarbons ended (remember $.99 per gallon of gas in 90th) the period of rapid productivity growth ended as well.

One of the aspects of the idea of "secular stagnation" is that high oil prices hit neoliberal economies like a hammer and the period of high oil prices started to undermine neoliberal globalization by making shipping more expensive.

That also means that without continuation of low oil prices the next debt crisis (aka Minsky moment) is eminent for the USA economy.

BTW none of US shale companies is profitable. They are all up to the neck in debt, and their method of extracting oil includes generating a flow of junk bonds. If financing stops most of them will be bankrupt in one year period.

Obama clever game with Iran helped to produce "Obama recovery" due to the period of "normal" oil prices which started in mid 2015.

It probably can be extended for another year or two. What happens next is completely unknown territory. It is clear that the US shale is a card that was already played. It can't be played again as output probably can be substantially raised (say 2 Mbd/day) only with high or very high oil prices (as in above $70 or higher).

After "Obama recovery" (which depends on continuing low oil prices created by clever political maneuvering in Arab world -- Hail Mary pass that worked) we might well face the period of "elevated oil prices" and increased stagnation of the US economy with noticeably higher level of unemployment.

Much depends on Trump playing his trump card of "détente" with Russia which theoretically could extend this period (Russia has the same level of oil production as Saudis and more reserves), but there were to much sand thrown by neocons and DemoRats for this scenario to work. I thing Russia now is no longer interested in partnership with the USA on the basis of maintaining low oil prices -- like KSA today, and might cut output further to get higher oil prices which are vital for their economy. Of course Russia has strong neoliberal fifth column (including pro-western directors of oil companies and oligarchs who have their wealth transferred to Western banks) but even they are pissed off by the USA now.

DemoRats wiped up Anti-Russian hysteria to the level when even contact with Russian official can be a "career limiting move" in the USA.

This hysteria now has its own self-propagating dynamics and is difficult to stop. It might last for the same period of time as McCarthyism hysteria (roughly from 1947 to 1956).

"... "The principal problem for Democrats is that so many media figures and online charlatans are personally benefiting from feeding the base increasingly unhinged, fact-free conspiracies - just as right-wing media polemicists did after both Bill Clinton and Obama were elected - that there are now millions of partisan soldiers absolutely convinced of a Trump/Russia conspiracy for which, at least as of now, there is no evidence. ..."

It put the Democrats and Republicans in sync as two equally warmongering parties, but what good that would bring for the American people and the world is hard to fathom.

The USA lost the possibility of switching personal car fleet to more economical hybrid models by adopting some drastic measures and now is less prepared for a new period of high oil prices. People are still buying SUV which became the most popular type of personal transportation in the USA, and small tracks.

On the electricity front there are some problems too. The looting of Russia and the flow of cheap uranium stopped. Building of high voltage East -West line necessary for substantial wind and solar production is still on the drawing board.

[Mar 25, 2017] What is Economism and why it is so damaging

Notable quotes:
"... Ugh what an awful display of pop economism. Globalization and technology are "impersonal forces." No mention of the rise of inequality or the SecStags. No mention of monetary policy fail in Europe. The biggest lies of economism are the lies of omission. ..."
"... Looks like this concept of "Economism" introduced by James Kwak in his book Economism is very important conceptual tool for understanding the tremendous effectiveness of neoliberal propaganda. ..."
"... When competitive free markets and rational well-informed actors are the baseline assumption, the burden of proof shifts unfairly onto anyone proposing a government policy. ..."
"... For example, the basic Econ 101 theory of supply and demand is fine for some products, but it doesn't work very well for labor markets. It is incapable of simultaneously explaining both the small effect of minimum wage increases and the small impact of low-skilled immigration. Some more complicated, advanced theory is called for. ..."
"... But no matter how much evidence piles up, people keep talking about "the labor supply curve" and "the labor demand curve" as if these are real objects, and to analyze policies -- for example, overtime rules -- using the same old framework. ..."
"... An idea that we believe in despite all evidence to the contrary isn't a scientific theory -- it's an infectious meme. ..."
"... Academic economists are unsure about how to respond to the abuse of simplistic econ theories for political ends. On one hand, it gives them enormous prestige. The popularity of simplistic econ ideas has made economists the toast of America's intellectual classes. ..."
"... It has sustained enormous demand for the undergraduate econ major, which serves, in the words of writer Michael Lewis, as a "standardized test of general intelligence" for future businesspeople. But as Kwak points out, the simple theories promulgated by politicians and on the Wall Street Journal editorial page often bear little resemblance to the sophisticated theories used by real economists. ..."
"... And when things go wrong -- when the financial system crashes, or millions of workers displaced by Chinese imports fail to find new careers -- it's academic economists who often get blamed, not the blasé and misleading popularizers. ..."
Jan 20, 2017 | economistsview.typepad.com

Peter K. : January 20, 2017 at 04:35 AM

Noah Smith: The Ways That Pop Economics Hurt America - Noah Smith

"So I wonder if economism was really as unrealistic and useless as Kwak seems to imply. Did countries that resisted economism -- Japan, for example, or France [Germany?] -- do better for their poor and middle classes than the U.S.? Wages have stagnated in those countries, and inequality has increased, even as those countries remain poorer than the U.S. Did the U.S.'s problems really all come from economism, or did forces such as globalization and technological change play a part? Cross-country comparisons suggest that the deregulation and tax cuts of the 1980s and 1990s, although ultimately excessive, probably increased economic output somewhat."

Ugh what an awful display of pop economism. Globalization and technology are "impersonal forces." No mention of the rise of inequality or the SecStags. No mention of monetary policy fail in Europe. The biggest lies of economism are the lies of omission.

libezkova -> Peter K.... , -1
Thank you --

Looks like this concept of "Economism" introduced by James Kwak in his book Economism is very important conceptual tool for understanding the tremendous effectiveness of neoliberal propaganda.

I think it is proper to view Economism as a flavor of Lysenkoism. As such it is not very effective in acquiring the dominant position and suppressing of dissent, but it also can be very damaging.

https://www.bloomberg.com/view/articles/2017-01-19/the-ways-that-pop-economics-hurt-america

== quote ==

...When competitive free markets and rational well-informed actors are the baseline assumption, the burden of proof shifts unfairly onto anyone proposing a government policy. For far too many years, free-marketers have gotten away with winning debates by just sitting back and saying "Oh yeah? Show me the market failure!" That deck-stacking has long forced public intellectuals on the left have to work twice as hard as those safely ensconced in think tanks on the free-market right, and given the latter a louder voice in public life than their ideas warrant.

It's also true that simple theories, especially those we learn in our formative years, can maintain an almost unshakeable grip on our thinking.

For example, the basic Econ 101 theory of supply and demand is fine for some products, but it doesn't work very well for labor markets. It is incapable of simultaneously explaining both the small effect of minimum wage increases and the small impact of low-skilled immigration. Some more complicated, advanced theory is called for.

But no matter how much evidence piles up, people keep talking about "the labor supply curve" and "the labor demand curve" as if these are real objects, and to analyze policies -- for example, overtime rules -- using the same old framework.

An idea that we believe in despite all evidence to the contrary isn't a scientific theory -- it's an infectious meme.

Academic economists are unsure about how to respond to the abuse of simplistic econ theories for political ends. On one hand, it gives them enormous prestige. The popularity of simplistic econ ideas has made economists the toast of America's intellectual classes.

It has sustained enormous demand for the undergraduate econ major, which serves, in the words of writer Michael Lewis, as a "standardized test of general intelligence" for future businesspeople. But as Kwak points out, the simple theories promulgated by politicians and on the Wall Street Journal editorial page often bear little resemblance to the sophisticated theories used by real economists.

And when things go wrong -- when the financial system crashes, or millions of workers displaced by Chinese imports fail to find new careers -- it's academic economists who often get blamed, not the blasé and misleading popularizers.

... ... ...

Russia and China have given up communism not because they stopped having working classes, but because it became obvious that their communist systems were keeping them in poverty. And Americans are now starting to question economism because of declining median income, spiraling inequality and a huge financial and economic crisis.

[Mar 25, 2017] Review of Economism: Bad Economics and the Rise of Inequality by James Kwak by Peter Dorman

Notable quotes:
"... Neoliberalism, which is essentially simplified pseudo-economics in action, is finally beginning to break down, but rather than yielding to a more rational politics it is giving us Brexit, Trump and similar delusionary movements. Required to choose between the stale cant of economism and authoritarian fairytales of denial, the public is opting for the second door. Unless economism is disposed of quickly, there won't be an opening for a more enlightened third option. ..."
"... The critical deconstructive move follows, in which Kwak surveys the empirical literature, showing that, in real economics, the conventional assumptions are either flat out wrong or at least seriously qualified. He then concludes by explaining the policy implications of a more informed approach. It gets to be a bit formulaic, but it is effective and easy to follow. ..."
"... I can imagine using a book like this in an introductory microeconomics class. (Except for a bit of macro here and there, the book's focus is micro.) It's exactly the right antidote for the tendency of introductory textbooks to oversell markets and undersupply critical thinking. I hope lots of faculty teaching Econ 101 adopt it. ..."
"... He would do well to distinguish between the normative and positive aspects of economism. In a policy context, both are usually entailed: the positive view that this is how the world works is given political salience by the normative view that demand curves represent "benefits" to society and the supply curve "costs". It's important to recognize that economism can fail on either account: either empirical work can show that this is not how the world works, or the assumptions about how markets represent social interests can be challenged, or both. ..."
"... the full-dress neoclassical trade model (Heckscher-Ohlin-Samuelson, although he doesn't identify it as such) recognizes losers as well as winners from trade liberalization and makes this the conceptual linchpin of his critique of economism in this area. ..."
"... the impacts of trade liberalization on employment may be worse than this, since the proposition that the trade balance is unaffected by changes in the degree of openness requires adjustments in exchange rates that, at the very least, are empirically unreliable. ..."
"... In practice it's entirely possible, likely even, that a major liberalization event like the US opening to trade with China at the time of its WTO accession has an effect on the aggregate trade balance and not just the composition of industries on each side of the ledger. I shouldn't make a big deal of this, because Kwak is no doubt eager to avoid criticism that he is unknowledgeable about economics, and most economists would regard my criticism as falling under that shadow-but I don't think I'm wrong about this. ..."
"... Economism is wrong about how labor markets work, how health care works, how international trade works and so on, not because money doesn't buy you love, but because its analysis is wrong . If we're looking for a common message that applies to all these topics and pokes a hole in the economistic world view, wouldn't we look for common elements in the arguments we've already made? ..."
"... At its best, Economism is feisty. It challenges sloppy thinking about how the economic system works and makes the case for progressive policies that would result in greater income equality and access to economic goods. Excellent! ..."
"... The unifying progressive message is not that economics doesn't matter so much; it's that the economics of knee-jerk libertarianism is doctrinaire, false and self-serving. Our message is that we reject the ideology of universal unlimited acquisitiveness as a reasonable way of organizing human affairs, and that the evidence is on our side. I'd love to see a hard-hitting conclusion replace the flabby one that's currently there. ..."
Mar 25, 2017 | econospeak.blogspot.com
There's economics, a field that has been renewing itself, shaking off theoretical rigidities through more attention to behavior and institutions and shifting its center of gravity toward empirical observation and testing. And then there's economics as it exists in standard political discourse, seeing the whole world as refracted through supply and demand diagrams where markets are always efficient and outcomes always socially optimal. This second, dumbed down, knee-jerk libertarian creed is the object of James Kwak's new book, Economism .

If ever a book arrived to fill a need, this one has. Neoliberalism, which is essentially simplified pseudo-economics in action, is finally beginning to break down, but rather than yielding to a more rational politics it is giving us Brexit, Trump and similar delusionary movements. Required to choose between the stale cant of economism and authoritarian fairytales of denial, the public is opting for the second door. Unless economism is disposed of quickly, there won't be an opening for a more enlightened third option.

In many ways, Kwak is an ideal person to take on the job. He's very, very smart. He generally knows his economics, but he's not in thrall to the profession. (He's actually a law professor.) He writes clearly and explains economic concepts with a minimum of lecture-itis. His book is short and to the point.

Most chapters follow the same general template. Kwak begins by laying out an area of policy and briefly explaining why it's important; topics include income distribution, taxes, health care, finance and trade. He then goes into a thorough exposition of the standard economistic analysis, usually based on casual assumptions concerning rational choice, competition, and the market as a cost-benefit device. His next step is to show this conceptual framework in action, as mouthed by politicians and journalists. The critical deconstructive move follows, in which Kwak surveys the empirical literature, showing that, in real economics, the conventional assumptions are either flat out wrong or at least seriously qualified. He then concludes by explaining the policy implications of a more informed approach. It gets to be a bit formulaic, but it is effective and easy to follow.

I can imagine using a book like this in an introductory microeconomics class. (Except for a bit of macro here and there, the book's focus is micro.) It's exactly the right antidote for the tendency of introductory textbooks to oversell markets and undersupply critical thinking. I hope lots of faculty teaching Econ 101 adopt it.

That said, I think it could have been even better than it is. In a future second edition-and I expect there will be one-Kwak should consider these improvements:

1. His adoption of the voice of economism is very extended. He will go on for several pages presenting the economistic worldview as if it were his. Yes, I know, academics like Kwak, myself and perhaps you are trained to cope with this. It's nothing for us to read a book in which the author takes on the personna of someone with a differnt point of view for many pages at a time. Most general readers are not familiar with this, however. I can say from personal experience that something like half my students would come away thinking that Kwak himself espouses economism and is contradicting himself when he criticizes it. What to do about this? Of course, it's important for Kwak to present economism in a neutral, even sympathetic voice, and to do so at the length it requires. Perhaps he considered adding, every paragraph or so, a qualifier like "from this point of view", but decided it was too clunky. In that case, an altered typeface, like italics, could have been used to set off his temporarily assumed voice as expositor of economism. One way or the other, markers are needed for readers unused to academic protocols.

2. He would do well to distinguish between the normative and positive aspects of economism. In a policy context, both are usually entailed: the positive view that this is how the world works is given political salience by the normative view that demand curves represent "benefits" to society and the supply curve "costs". It's important to recognize that economism can fail on either account: either empirical work can show that this is not how the world works, or the assumptions about how markets represent social interests can be challenged, or both. In practice, Kwak relies more on the first critique, and the book usefully draws together key empirical findings on topics like minimum wages, health costs, etc. But the market failure framework could have been given more of a workout than it received; in practice these arguments are effective.

3. The chapter on international trade is timid. Kwak points out that the full-dress neoclassical trade model (Heckscher-Ohlin-Samuelson, although he doesn't identify it as such) recognizes losers as well as winners from trade liberalization and makes this the conceptual linchpin of his critique of economism in this area. In this he has a lot of company; H-O-S with lots of friction has become the standard progressive position. However, the impacts of trade liberalization on employment may be worse than this, since the proposition that the trade balance is unaffected by changes in the degree of openness requires adjustments in exchange rates that, at the very least, are empirically unreliable. ( All exchange rate adjustments in response to anything are empirically unreliable.) In practice it's entirely possible, likely even, that a major liberalization event like the US opening to trade with China at the time of its WTO accession has an effect on the aggregate trade balance and not just the composition of industries on each side of the ledger. I shouldn't make a big deal of this, because Kwak is no doubt eager to avoid criticism that he is unknowledgeable about economics, and most economists would regard my criticism as falling under that shadow-but I don't think I'm wrong about this.

4. The very end of the book-the final four pages-are simply weak. To wrap up, Kwak points out that, whatever its faults, economism delivers by having a simple, all-purpose, easy-to-grasp message and then asks, "What's our message?" His answer is that wealthy economies don't need economic growth or even economic efficiency as they used to, and we should all turn away from economic concerns and embrace happiness instead. Huh? Now, before I launch into a critique of this view, I should make it clear that I agree with a lot of it on matters of substance: economic values, like income, are not the same as human values. One can live well on less money, and the pursuit of wealth should not be the primary goal either for individuals or societies. Yes, of course. But that doesn't mean that "downplay money" is the logical message to set against economism.

One obvious reason is that the difference between wealth and happiness played no role whatsoever in the chapters that led up to his conclusion. Economism is wrong about how labor markets work, how health care works, how international trade works and so on, not because money doesn't buy you love, but because its analysis is wrong . If we're looking for a common message that applies to all these topics and pokes a hole in the economistic world view, wouldn't we look for common elements in the arguments we've already made? It's always a mistake in a piece of writing to go off in a new direction at the point where we should be summing up; this should have occurred to Kwak or been pointed out to him by his reviewers.

The other reason is that downplaying economics-saying that income and other economic measures don't mean so much-violates the spirit of the book. At its best, Economism is feisty. It challenges sloppy thinking about how the economic system works and makes the case for progressive policies that would result in greater income equality and access to economic goods. Excellent! Why at the end turn around and say, in effect, OK, we'll give the conservatives economics, and we'll take happiness instead? No! Don't give them that! They don't deserve it! The unifying progressive message is not that economics doesn't matter so much; it's that the economics of knee-jerk libertarianism is doctrinaire, false and self-serving. Our message is that we reject the ideology of universal unlimited acquisitiveness as a reasonable way of organizing human affairs, and that the evidence is on our side. I'd love to see a hard-hitting conclusion replace the flabby one that's currently there.

It's in the nature of a review like this to dwell on the negative, but I don't want you to be dissuaded from buying and reading this book. Economism is an important work of popular education that needed to be written. Kwak has the skills to do it well-even better than he has this time out.

Posted by Peter Dorman at 5 comments: Links to this post

Bruce Wilder said...
I have not read Kwak's book, though I have read the chapter on minimum wage policy republished in the Atlantic in January. My comment reflects on your review and that Atlantic article.

Kwak is trying to do a very difficult thing in attacking "economism", the glib libertarian ideology derived from neoclassical economics, and he does not seem to grasp just how difficult or why it is so difficult. The Amazon page explains, " Economism: an ideology that distorts the valid principles and tools of introductory college economics, propagated by self-styled experts, zealous lobbyists, clueless politicians, and ignorant pundits." This is the basic rhetorical stance of the book: that the economics of Econ 101 has validity and economism is some distorted, illegitimate simplification. This rhetorical template will get reiterated as the notion that the actual economy is messy and complicated and economism is wrong because it is oversimplified (to serve interests).

On the minimum wage, Kwak concedes "The supply-and-demand diagram is a good conceptual starting point for thinking about the minimum wage. But on its own, it has limited predictive value in the much more complex real world." and then presents sophisticated economics as "it's complicated". "In short, whether the minimum wage should be increased (or eliminated) is a complicated question. The economic research is difficult to parse, and arguments often turn on sophisticated econometric details. Any change in the minimum wage would have different effects on different groups of people, and should also be compared with other policies . . . "

This is a hopelessly weak rhetorical position, because it depends on conceding -- indeed, confirming -- the validity of neoclassical economics, which still outlines introductory college economics textbooks. Economism is a fair distillation of neoclassical economics and, like it or not, mainstream economics nurtures neoclassical economics and demands commitment to the neoclassical framework. Even if the mainstream permits many other ideas to float around academia, neoclassical economics is the framework of indoctrination.

I do not think it is possible to win the argument against economism, if you are not willing to reject neoclassical economics wholesale. Neoclassical economics is the father and mother of economism, and neoclassical economics is wrong, fundamentally wrong, in a scientific (aka epistemological) sense. The world is not essentially or fundamentally as neoclassical economics says, which is provable logically and empirically; you can only sustain neoclassical economics as an academic doctrine by suppressing critical thinking (which economics pedagogy insists upon). We do not live in an economic system organized primarily by markets tending toward general equilibrium; the actual economy is organized primarily by bureaucracy and driven by disequilibrium dynamics. Most prices are not formed by competitive bidding; prices are administratively determined and managed. And so on.

March 18, 2017 at 4:42 PM
Bruce Wilder said...
The supply-and-demand diagram is NOT a good conceptual starting point for thinking about the minimum wage, and Kwak should never have conceded as much. There's no labor market. Most employers offer low-wage workers take-it-leave-it terms, constrained only by the rules and bureaucracy of state and Federal labor regulations, one of which, of course, is the statutory minimum wage. (Millions work for less than the minimum wage by the way -- as the Bureau of Labor Statistics regularly attests.) And, when people go to work, they are managed and supervised in systems that determine how productive they are; if they are paid their "marginal product" in some abstract sense, it is because their managers make it so. They work in bureaucracies controlling production and distribution processes by administrative and technological means, and the terms of their employment reflects this role as controller and controlled: they are paid a more or less fixed wage, subject to being fired. The threat of being fired is key to the willingness of employees to follow managerial direction.

Neoclassical economics does not admit economic hierarchy as central to the organization of the economy. But, when you reject neoclassical economics, you do not exclude all that might be relevant from mainstream economics. Indeed, economists have had many useful insights into "efficiency wages" and the relation of principals to their agents.

Useful and sophisticated ideas are still available after rejecting neoclassical economics, but I am not sure reputable economists are. I do not think Kwak would find his book jacket blurbed by quite such luminary figures, if he had rejected neoclassical economics as one big lie (which it is). He would have been in a stronger logical and rhetorical position to reject economism, but he might have lacked reputable allies. That's what makes the rejection of economism so difficult.

Economism is the ideology of right neoliberalism, but the neoliberal right is locked into a symbiotic relationship with left neoliberalism. Paul Krugman, Brad DeLong, John Quiggin, Noah Smith, Jared Bernstein -- these people seem to be opposed to economism, but they depend upon the legitimacy of neoclassical economics and the mainstream economics establishment too much to allow a winning argument premised on a rejection of the mother lode of economism, neoclassical economics.

It is an old story of "with friends like these who needs enemies". Economics is a thoroughly corrupt profession and all neoclassical economists are some mix of fraud and fool. We might like the fools better, but they are not that much help against the frauds. As Peter Dorman says, "Kwak is no doubt eager to avoid criticism that he is unknowledgeable about economics", but I suspect his eagerness to avoid such criticism is focused more on the sociological factor that mainstream economics nurtures neoclassical economics than on actual knowledge of economics qua knowledge of the economy. And, that's the core problem.

March 18, 2017 at 4:51 PM
Sandwichman said...
"the neoliberal right is locked into a symbiotic relationship with left neoliberalism"

I would have phrased it the other way round. It seems to me the neoliberal right would be content without the left but the neoliberal left desperately needs the neoliberal right for legitimization in its relentless crusade against the heterodox infidels -- the right is what makes Krugman, DeLong et al. "the lefter of two neoliberalisms."

March 18, 2017 at 7:41 PM
George H. Blackford said...
With regard to:

"In practice it's entirely possible, likely even, that a major liberalization event like the US opening to trade with China at the time of its WTO accession has an effect on the aggregate trade balance and not just the composition of industries on each side of the ledger. I shouldn't make a big deal of this, because Kwak is no doubt eager to avoid criticism that he is unknowledgeable about economics, and most economists would regard my criticism as falling under that shadow-but I don't think I'm wrong about this."

Hobson made a very big deal about this when it comes to China more than 100 years ago:

"It is here enough to repeat that Free Trade can nowise guarantee the maintenance of industry, or of an industrial population upon any particular country, and there is no consideration, theoretic or practical, to prevent British capital from transferring itself to China, provided it can find there a cheaper or more efficient supply of labour, or even to prevent Chinese capital with Chinese labour from ousting British produce in neutral markets of the world. What applies to Great Britain applies equally to the other industrial nations which have driven their economic suckers into China. It is at least conceivable that China might so turn the tables upon the Western industrial nations, and, either by adopting their capital and organisers or, as is more probable, by substituting her own, might flood their markets with her cheaper manufactures, and refusing their imports in exchange might TAKE HER PAYMENTS IN LIENS UPON THEIR CAPITAL, REVERSING THE EARLIER PROCESS OF INVESTMENT UNTIL SHE GRADUALLY OBTAINED FINANCIAL CONTROL OVER HER QUONDAM PATRONS AND CIVILISERS. This is no idle speculation. If China in very truth possesses those industrial and business capacities with which she is commonly accredited, and the Western Powers are able to have their will in developing her upon Western lines, it seems extremely likely that this reaction will result." John Atkinson Hobson, Imperialism, A Study, 1902."

March 19, 2017 at 12:19 PM
AXEC / E.K-H said...
Bad economics, futile critique, and illusive new thinking
Comment on Peter Dorman on 'Review of Economism: Bad Economics and the Rise of Inequality by James Kwak'

Economics claims since Adam Smith/Karl Marx to be a science. Yet, everybody who looks closer into the matter comes to the conclusion that economics is a failed science. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got the pivotal concept of the subject matter, i.e. profit, wrong.

In this hopeless situation, critique is futile: "There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean." (Ingrao et al., 1990)

James Kwak, too, has not the slightest idea what a paradigm shift means: "To wrap up, Kwak points out that, whatever its faults, economism delivers by having a simple, all-purpose, easy-to-grasp message and then asks, 'What's our message?' His answer is that wealthy economies don't need economic growth or even economic efficiency as they used to, and we should all turn away from economic concerns and embrace happiness instead."*

Instead of coming up with a 'completely new research program and conceptual approach' as replacement for the standard approach, which is known to be false on all methodological counts, Kwak dishes out cheap advice from the self-help workshop: don't worry, be happy. To top it all, this abortive pseudo-critical exercise is advertised as new economic thinking.

Egmont Kakarot-Handtke

* See also 'The economist's pick: liar, moron or what?'
http://axecorg.blogspot.de/2016/12/the-economists-pick-liar-moron-or-what.html

March 20, 2017 at 4:27 PM

[Mar 24, 2017] Economism vs neoliberalism

Notable quotes:
"... Facts are always presented via lens of some underling theory and if the theory is wrong, facts can lie, even when the figures are more or less correct, or within the margin of error. ..."
"... Technocratic neoliberal economists well represented here actually serve as a fifth column of financial oligarchy, and always were. ..."
"... Simplistic and wrong supply-and-demand theory fed a market fundamentalism ideology. As a result we have a financial crash, a dysfunctional health-care system, spiraling inequality and a deficient, inadequate for a modern society social-safety net. ..."
"... When competitive free markets and rational well-informed actors are the baseline assumption, the burden of proof shifts unfairly onto anyone proposing a government policy. Government programs and regulations start to seem dangerous and inefficient, while inequality begins to feel like the natural and just order of things. ..."
"... The Amazon page to Kwak book explains, "Economism: an ideology that distorts the valid principles and tools of introductory college economics, propagated by self-styled experts, zealous lobbyists, clueless politicians, and ignorant pundits." ..."
"... Economism is reduction of all social facts to economic dimensions. The term is often used to criticize economics as an ideology, in which supply and demand are the only important factors in decisions, and outstrip or permit ignoring all other factors. ..."
"... It is believed to be a side effect of neoclassical economics and blind faith in an "invisible hand" or "laissez-faire" means of making decisions, extended far beyond controlled and regulated markets, and used to make political and military decisions. ..."
"... Conventional ethics would play no role in decisions under pure economism, except insofar as supply would be withheld, demand curtailed, by moral choices of individuals. Thus, critics of economism insist on political and other cultural dimensions in society. ..."
Mar 24, 2017 | economistsview.typepad.com

libezkova : Friday, March 24, 2017 at 08:38 AM

Re: Facts or EconoFacts? - Noahpinion

Facts are always presented via lens of some underling theory and if the theory is wrong, facts can lie, even when the figures are more or less correct, or within the margin of error.

Technocratic neoliberal economists well represented here actually serve as a fifth column of financial oligarchy, and always were.

Rehashing Noah Smith thoughts we can say:

  1. Simplistic and wrong supply-and-demand theory fed a market fundamentalism ideology. As a result we have a financial crash, a dysfunctional health-care system, spiraling inequality and a deficient, inadequate for a modern society social-safety net.
  2. So when people like Krugman are now expressing their rage about Trump social policies they should understand that they created Trump.
  3. When competitive free markets and rational well-informed actors are the baseline assumption, the burden of proof shifts unfairly onto anyone proposing a government policy. Government programs and regulations start to seem dangerous and inefficient, while inequality begins to feel like the natural and just order of things.
  4. Neoliberalism with its set of myth, sold as economic theory maintains an almost unshakeable grip on thinking of most people in the USA. It is the USA civil religion, national ideology that displaced Christianity. So they now somebody claims the this is one nation under God, they factually incorrect if we mean Jesus ;-) It is a newly-born nation which rejected Christianity, adopted neoliberalism instead and now prays to the altar of "free market".
  5. Because those myths when shared by most people, they obtained its own dynamics. In this sense too we can say that most people in the USA are totally and possibly irrevocably "neoliberally-brainwashed". That means that neoliberalism has huge staying power and it is unclear when and how and into what it collapses.
  6. That might well mean that like Bolsheviks who used to hold the same ideological grip on the people of the USSR people of the USA will march toward the cliff without much thinking.
  7. The abuse of simplistic econ theories for political ends gives neoliberal economists enormous prestige. It also sustains the enormous demand for the undergraduate econ major and corresponding courses and textbooks (look at Mankiw ;-). Passing economic courses with high grade now serves like SAT for those who want to go into business or management. The mark of indoctrination. Look at disdain with which "economists" here treat the people who does not know or does not want to know all this neoclassic nonsense.
  8. The worldview neoliberalism promulgates is too simplistic, and inevitably ends up hurting the many to benefit the few.

There one additional notion that is more general then neoliberalism and that is applicable here. It is called "economism" (please read Kwak book, it is really worth reading).

This is the reduction of all social facts to economic dimensions which is at the core of mental model that most "economists" here use. Unlike mathiness, it is a very old term which was use since late 19th century.

The Amazon page to Kwak book explains, "Economism: an ideology that distorts the valid principles and tools of introductory college economics, propagated by self-styled experts, zealous lobbyists, clueless politicians, and ignorant pundits."

Here is a relevant quote from Wikipedia

== quote ==

Economism is reduction of all social facts to economic dimensions. The term is often used to criticize economics as an ideology, in which supply and demand are the only important factors in decisions, and outstrip or permit ignoring all other factors.

It is believed to be a side effect of neoclassical economics and blind faith in an "invisible hand" or "laissez-faire" means of making decisions, extended far beyond controlled and regulated markets, and used to make political and military decisions.

Conventional ethics would play no role in decisions under pure economism, except insofar as supply would be withheld, demand curtailed, by moral choices of individuals. Thus, critics of economism insist on political and other cultural dimensions in society.

Old Right social critic Albert Jay Nock used the term more broadly, denoting a moral and social philosophy "which interprets the whole sum of human life in terms of the production, acquisition, and distribution of wealth". He went on to say "I have sometimes thought that here may be the rock on which Western civilization will finally shatter itself. Economism can build a society which is rich, prosperous, powerful, even one which has a reasonably wide diffusion of material well-being.

It can not build one which is lovely, one which has savor and depth, and which exercises the irresistible power of attraction that loveliness wields.

Perhaps by the time economism has run its course the society it has built may be tired of itself, bored of its own hideousness, and may despairingly consent to annihilation, aware that it is too ugly to be let live any longer."[1]

libezkova -> libezkova... , -1
"It is a newly-born nation which rejected Christianity, adopted neoliberalism instead and now prays to the altar of "free market"."

Neoliberalism explicitly rejects the key ideas of Christianity -- the idea of ultimate justice for all sinners. Like Marxism this is an atheistic philosophy which asserts that "each individual is his or her own god and there is no room for any other God. "

Here is Pope Francis thought of the subject (Evangelii Gaudium, Apostolic Exhortation of Pope Francis, 2013):

... Such an [neoliberal] economy kills. How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points? This is a case of exclusion. Can we continue to stand by when food is thrown away while people are starving? This is a case of inequality. Today everything comes under the laws of competition and the survival of the fittest, where the powerful feed upon the powerless. As a consequence, masses of people find themselves excluded and marginalized: without work, without possibilities, without any means of escape.

Human beings are themselves considered consumer goods to be used and then discarded. We have created a "disposable" culture which is now spreading. It is no longer simply about exploitation and oppression, but something new. Exclusion ultimately has to do with what it means to be a part of the society in which we live; those excluded are no longer society's underside or its fringes or its disenfranchised – they are no longer even a part of it. The excluded are not the "exploited" but the outcast, the "leftovers".

54. In this context, some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system. Meanwhile, the excluded are still waiting. To sustain a lifestyle which excludes others, or to sustain enthusiasm for that selfish ideal, a globalization of indifference has developed.

Almost without being aware of it, we end up being incapable of feeling compassion at the outcry of the poor, weeping for other people's pain, and feeling a need to help them, as though all this were someone else's responsibility and not our own. The culture of prosperity deadens us; we are thrilled if the market offers us something new to purchase; and in the meantime all those lives stunted for lack of opportunity seem a mere spectacle; they fail to move us.

No to the new idolatry of money

55. One cause of this situation is found in our relationship with money, since we calmly accept its dominion over ourselves and our societies. The current financial crisis can make us overlook the fact that it originated in a profound human crisis: the denial of the primacy of the human person! We have created new idols. The worship of the ancient golden calf (cf. Ex 32:1-35) has returned in a new and ruthless guise in the idolatry of money and the dictatorship of an impersonal economy lacking a truly human purpose. The worldwide crisis affecting finance and the economy lays bare their imbalances and, above all, their lack of real concern for human beings; man is reduced to one of his needs alone: consumption.

56. While the earnings of a minority are growing exponentially, so too is the gap separating the majority from the prosperity enjoyed by those happy few. This imbalance is the result of ideologies which defend the absolute autonomy of the marketplace and financial speculation. Consequently, they reject the right of states, charged with vigilance for the common good, to exercise any form of control. A new tyranny is thus born, invisible and often virtual, which unilaterally and relentlessly imposes its own laws and rules. Debt and the accumulation of interest also make it difficult for countries to realize the potential of their own economies and keep citizens from enjoying their real purchasing power. To all this we can add widespread corruption and self-serving tax evasion, which have taken on worldwide dimensions. The thirst for power and possessions knows no limits. In this system, which tends to devour everything which stands in the way of increased profits, whatever is fragile, like the environment, is defenseless before the interests of a deified market, which become the only rule.

No to a financial system which rules rather than serves

57. Behind this attitude lurks a rejection of ethics and a rejection of God. Ethics has come to be viewed with a certain scornful derision. It is seen as counterproductive, too human, because it makes money and power relative. It is felt to be a threat, since it condemns the manipulation and debasement of the person. In effect, ethics leads to a God who calls for a committed response which is outside of the categories of the marketplace. When these latter are absolutized, God can only be seen as uncontrollable, unmanageable, even dangerous, since he calls human beings to their full realization and to freedom from all forms of enslavement. Ethics – a non-ideological ethics – would make it possible to bring about balance and a more humane social order. With this in mind, I encourage financial experts and political leaders to ponder the words of one of the sages of antiquity: "Not to share one's wealth with the poor is to steal from them and to take away their livelihood. It is not our own goods which we hold, but theirs".[55]

58. A financial reform open to such ethical considerations would require a vigorous change of approach on the part of political leaders. I urge them to face this challenge with determination and an eye to the future, while not ignoring, of course, the specifics of each case. Money must serve, not rule! The Pope loves everyone, rich and poor alike, but he is obliged in the name of Christ to remind all that the rich must help, respect and promote the poor. I exhort you to generous solidarity and a return of economics and finance to an ethical approach which favours human beings.

No to the inequality which spawns violence

59. Today in many places we hear a call for greater security. But until exclusion and inequality in society and between peoples is reversed, it will be impossible to eliminate violence. The poor and the poorer peoples are accused of violence, yet without equal opportunities the different forms of aggression and conflict will find a fertile terrain for growth and eventually explode. When a society – whether local, national or global – is willing to leave a part of itself on the fringes, no political programmes or resources spent on law enforcement or surveillance systems can indefinitely guarantee tranquility. This is not the case simply because inequality provokes a violent reaction from those excluded from the system, but because the socioeconomic system is unjust at its root. Just as goodness tends to spread, the toleration of evil, which is injustice, tends to expand its baneful influence and quietly to undermine any political and social system, no matter how solid it may appear. If every action has its consequences, an evil embedded in the structures of a society has a constant potential for disintegration and death.

It is evil crystallized in unjust social structures, which cannot be the basis of hope for a better future. We are far from the so-called "end of history", since the conditions for a sustainable and peaceful development have not yet been adequately articulated and realized.

60. Today's economic mechanisms promote inordinate consumption, yet it is evident that unbridled consumerism combined with inequality proves doubly damaging to the social fabric. Inequality eventually engenders a violence which recourse to arms cannot and never will be able to resolve. This serves only to offer false hopes to those clamouring for heightened security, even though nowadays we know that weapons and violence, rather than providing solutions, create new and more serious conflicts. Some simply content themselves with blaming the poor and the poorer countries themselves for their troubles; indulging in unwarranted generalizations, they claim that the solution is an "education" that would tranquilize them, making them tame and harmless.

All this becomes even more exasperating for the marginalized in the light of the widespread and deeply rooted corruption found in many countries – in their governments, businesses and institutions – whatever the political ideology of their leaders.

RC AKA Darryl, Ron -> libezkova... March 24, 2017 at 11:34 AM
An excellent set of comment posts. THANKS!
RGC -> libezkova... March 24, 2017 at 11:47 AM
"It is a newly-born nation which rejected Christianity, adopted neoliberalism instead and now prays to the altar of "free market"."

How about "Mammon"

Mammon /ˈmæmən/ in the New Testament of the Bible is commonly thought to mean money, material wealth, or any entity that promises wealth, and is associated with the greedy pursuit of gain. "You cannot serve both God and mammon."

https://en.wikipedia.org/wiki/Mammon

[Mar 24, 2017] The Mechanical Turn in Economics and Its Consequences

Notable quotes:
"... In the same way, neoliberals are no different. They aren't bad people – they just see their policies as right and just because those policies are working well for them and the people in their class, and I don't think they really understand why it doesn't work for others – maybe, like Adam Smith, they think that is the "natural state" .. ..."
"... Read the first sentence of the Theory of Moral Sentiments – it makes an assumption which is the foundation of all of Adam Smith. He asserted that all men are moral. Morality in economics is the invisible hand creating order like gravity in astronomy. Unfortunately, Adam Smith's assumption is false or at least not true enough to form a sound foundation for useful economic theory. ..."
"... But "morality" means different things to different people. Smith only saw the morality of his own class. For example, I am sure a wealthy man would consider it very moral to accumulate as much money as he could so that he would be seen by his peers as a good and worthy man who cares for his future generations and the well being of his class – he doesn't see this accumulation as amoral – whilst a poor man may think that kind of accumulation is amoral because he thinks that money could be better used provide for those without the basic needs to survive ..."
"... "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." ..."
"... Another I remember from Smith was something like, "The law exists to protect those who have much from those who have little." Sounds about right. ..."
"... One of Steve Keen's favourite analogies is astronomy. Neoclassical economics is like Ptolemy's epicycles; assume the Earth is at the centre, and that the planets orbit in circles and simply by adding little circles-epicycles-you can accurately describe the observed motion of the planets. The right epicycles in the right places can describe any motion. But they can't explain anything, they add nothing to understanding, they subtract from it, because they are false but give the illusion of knowledge. Drop the assumptions and you can begin to get somewhere. ..."
"... Steve Keen seems to have latched onto this in the last year or so, pointing out that all production is driven by energy. And the energy comes ultimately from the sun. Either it is turned into production via feeding workers, or by fueling machinery (by burning hydrocarbons extracted from plant and animal remains). ..."
"... I have a question about a similar thing. Simon Kuznetz is credited as someone who has invented modern concept of GDP and he revolutionized the field of economics with statistical method (econometrics). However, Kuznets , in the same report in which he presented modern concept of GDP to US congress, wrote following(from wikipedia): ..."
"... "The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification. ..."
"... All these qualifications upon estimates of national income as an index of productivity are just as important when income measurements are interpreted from the point of view of economic welfare. But in the latter case additional difficulties will be suggested to anyone who wants to penetrate below the surface of total figures and market values. Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above. Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what." ..."
"... "So , my question is why economists keep treating GDP as some scared metric when its creator himself deems it not reliable? Why all qualifications about GDP by Kuznetz is ignored by most of the economists nowadays?"@Vedant ..."
"... That is your explanation right there. Large abstract numbers such as GDP obscure social issues such as "the personal distribution of income." and the effort that goes into creating that income. Large abstract numbers obscure the moral dimension that must be a part of all economic discussion and are obscured by statistics and sciencism. As the genius of Mark Twain put it, "There are lies, damned lies and statistics." Beware the credentialed classes! ..."
"... Interesting. There is a great book by John Dupré called 'Human Nature and the Limits of Science (2001)", which tackles this subject in a general way: the facts that taking a mechanistic model as a paradigm for diverse areas of science is problematic and leads to myopia. ..."
"... He describes it as a form of 'scientific imperialism', stretching the use of concepts from one area of science to other areas and leading to bad results (because there are, you know, relevant differences). As a prime example, he mentions economics. (When reading EConned;s chapter of the science ( 'science') of economics, I was struck by the similar argument.) ..."
"... Soddy was a scientist. He should have written as a scientist with definitions, logic and rigour, but he wrote like a philosopher, full of waffle and unsubstantiated assertions like other economists. It is unscientific to apply universal laws discovered in physics and chemistry to economics without proving by observations that those laws also apply to economics. ..."
"... I get irritated by radical free-marketeers who when presented with a social problem tend to dogmatically assert that "The free market wills it," as if that ended all discussion. It is as if the free market was their God who must always be obeyed. Unlike Abraham, we do not need to obey if we feel that the answer is unjust. ..."
"... Gibbon's Decline and Fall of the Roman Empire ..."
"... The moralistic explanations for the disintegration of the (Western) Roman Empire were long ago discarded by all serious analysis of late antiquity. More practical explanations, especially the loss of the North African bread basket to the Vandals, are presented in the scholarly work these days. ..."
"... That book of Gibbon's is an incredible achievement. If it is not read by historians today, it is their loss. Its moral explanations, out of fashion today, are actually quite compelling. They become more so when read with de Tocqueville's views of the moral foundations of American township democracy and their transmission into the behavior, and assumptions, of New Englanders, whose views formed the basis of the federal republican constitution. ..."
"... The loss of the breadbasket was problematical, too. And it may be that no civilization, however young and virile, could withstand the migrations forever, as they withstood or absorbed them, with a few exceptions, for eight hundred years. But the progressive losses to the migratory tribes may have been a symptom of the real, "moral," cause of the decline. ..."
"... From 536-539AD the entire planet suffered a staggering holocaust. Krakatoa blew up - ejecting so much dust that it triggered a 'nuclear winter' that lasted through those years. ..."
"... It was this period that ended agriculture in North Africa. ( Algeria-Tunisia ) The drought blew all of the top soil into the Med. It was an irreversible tragedy. ..."
"... Economics is not science, simply because economics does not take facts seriously enough to modify flawed theories. ..."
"... In college I couldn't help but notice the similarities between modern economic theory and the control theory taught in engineering. Not such a great fit though, society is not a mechanical governor. ..."
"... " ..."
Mar 21, 2017 | www.nakedcapitalism.com
Yves here. This post takes what I see as an inconsistent, indeed, inaccurate stance on Adam Smith, since it depicts him as advocating laissez faire and also not being concerned about "emotions, sentiment, human relations and community." Smith was fiercely opposed to monopolies as well as businessmen colluding to lower the wages paid to workers. He also saw The Theory of Moral Sentiments as his most important work and wanted it inscribed on his gravestone.

Nor is it true that Smith advocated government not intervening in business. From Mark Thoma , quoting Gavin Kennedy :

Jacob Viner addressed the laissez-faire attribution to Adam Smith in 1928 ..Here is a list extracted from Wealth Of Nations:

"Viner concluded, unsurprisingly, that 'Adam Smith was not a doctrinaire advocate of laissez-faire'.

By Douglass Carmichael, perviously a Professor at University of California at Santa Cruz and a Washington DC based consultant, which clients including Hewlett-Packard, World Bank, Bell laboratories, The White House and the State Department. For the last ten years he has focused on the broad social science issues relevant to rethinking humanity's relationship to nature. Cross posted from the Institute for New Economic Thinking website

With Adam Smith, and hints before in Ricardo and others, economics took the path of treating the economy as a natural object that should not be interfered with by the state. This fit the Newtonian ethos of the age: science was great, science was mathematics; science was true, right and good.

But along the way the discussion in, for example, Montaigne and Machiavelli - about the powers of imagination, myth, emotions, sentiment, human relations and community - was abandoned by the economists. (Adam Smith had written his Theory of Moral Sentiments 20 years earlier and sort of left it behind, though the Wealth of Nations is still concerned with human well-being.) Gibbon's Decline and Fall of the Roman Empire was published in 1776, the same year as Smith's Wealth , but hardly read today by most economists.

In philosophy and the arts (romanticism among others) there was great engagement in these issues economics was trying to avoid. But that philosophy and art criticism have not been widely read for many years.

The effect of ignoring the human side of lives was to undermine the social perspective of the "political," by merging it with the individually focused "interest." So, instead of exploring the inner structure of interest (or later utility or preference), or community feeling and the impact of culture, these were assumed to be irrelevant to the mechanics of the market. Politics, having to do with interest groups and power arrangements, is more vague and harder to model than economic activity.

Those who wanted economics to be a science were motivated by the perception that "being scientific" was appreciated by the society of the time, and was the path to rock-solid truth. But the move towards economics as a science also happened to align with a view of the landed and the wealthy that the economy was working for them, so don't touch it. We get the equation, embracing science = conservative. This is still with us because of the implication that the market is made by god or nature rather than being socially constructed. Since economics is the attempt at a description of the economy, it was more or less locked in to the naturalist approach, which ignores things like class and ownership and treated capital as part of economic flow rather than as a possession that was useable for social and political power.

Even now, economics still continues as if it were part of the age of Descartes and avoids most social, historical and philosophical thought about the nature of man and society. Names like Shaftesbury and Puffendorf, very much read in their time, are far less known now than Hobbes, Descartes, Ricardo, Mill and Keynes. Karl Polanyi is much less well known than Hayek. We do not learn of the social history such as the complex interplay in Viennese society among those who were classmates and colleagues such as Hayek, Gombrich, Popper and Drucker. The impact of Viennese culture is not known to many economists.

The result is an economics that supports an economy that is out of control because the feedback loops through society and its impact of the quality of life - and resentment - are not recognized in a dehumanized economics, and so can't have a feedback correcting effect.

The solution, however, is not to look for simplicity, but to embrace a kind of complexity that honors nature, humans, politics, and the way they are dealt with in philosophy, arts, investigative reporting, anthropology and history. Because the way forward cannot be a simple projection of the past. We are in more danger than that.

Anthony Pagden, in Why the Enlightenment is Still Important , writes that before the enlightenment, late feudalism and the Renaissance, "The scholastics had made their version of the natural law the basis for a universal moral and political code that demanded that all human beings be regarded in the same way, no matter what their culture or their beliefs. It also demanded that human beings respect each other because they share a common urge to 'come together,' and it required them to offer to each other, even to total strangers, help in times of need, to recognize 'that amity among men is part of the natural law.' Finally, while Hobbes and Grotius had accepted the existence of only one natural right - the right to self-preservation - the scholastics had allowed for a wide range of them." -

Pagen also writes, "The Enlightenment, and in particular that portion with which I am concerned, was in part, as we shall now see, an attempt to recover something of this vision of a unified and essentially benign humanity, of a potentially cosmopolitan world, without also being obliged to accept the theologians' claim that this could only make sense as part of the larger plan of a well-meaning, if deeply inscrutable, deity."

But as Pagen shows, that effort was overcome by market, technical and financial interests.

The reason this is so important is that the simple and ethical view in Smith (and many other classical economists if we were to read them) that it was wrong to let the poor starve because of manipulated grain prices, was replaced by a more mechanical view of society that denied human intelligence except as calculators of self interest. This is a return to the Hobbesian world leading to a destructive society: climate, inequality, corruption. Today, the poor are hemmed in by so many regulations and procedures (real estate, education, police) that people are now starved. Not having no food, but having bad food, which along with all the new forms of privation add up to a seriously starved life, is not perceived by a blinded society to be suffering. Economics in its current form - most economics papers and college courses - do not touch the third rail of class, or such pain.

HeadShaker , March 21, 2017 at 11:13 am

Interesting. I've been reading (thanks to an intro from NC) Mark Blyth's "Austerity" and, thus far, seems to imply, if not outright state, that Adam Smith was quite suspicious of government intervention in the economy. The "can't live with it, can't live without it, don't want to pay for it" perspective. The bullet points you've listed above seem to refute that notion.

justanotherprogressive , March 21, 2017 at 11:39 am

Adam Smith tried to make a moral science out of what his class wanted to hear. If he had actually gone into those factories of his time, he might have had a different opinion of what labour was and how there was no "natural state" for wages, but only what was imposed on people who couldn't fight back. If he had gotten out of his ivory tower for a while, he might have had a different opinion of what those owners of stock were doing. He also might have had different views on trade if he could have seen what was happening to the labourers in the textile industries in France. And I could go on. But instead he created a fantasy that has been the basis for all economic thinking since.

In the same way, neoliberals are no different. They aren't bad people – they just see their policies as right and just because those policies are working well for them and the people in their class, and I don't think they really understand why it doesn't work for others – maybe, like Adam Smith, they think that is the "natural state" ..

Sorry, but there needs to be a Copernican Revolution in Economics just as there was in science. We have to realize that maybe Adam Smith was wrong – and I know that will be hard – just as it was hard for people to realize that the Earth wasn't the center of the universe.

Since I am retired, maybe I will go back to school, hold my nose and cover my lying eyes long enough to finish that Economics degree, so that I can get good access to all the other windows in Economics. I can't really believe I am the only person thinking this way – there must be some bright people out there who have come to similar conclusions and I would dearly love to know who they are.

Lyonwiss , March 21, 2017 at 2:49 pm

Read the first sentence of the Theory of Moral Sentiments – it makes an assumption which is the foundation of all of Adam Smith. He asserted that all men are moral. Morality in economics is the invisible hand creating order like gravity in astronomy. Unfortunately, Adam Smith's assumption is false or at least not true enough to form a sound foundation for useful economic theory.

justanotherprogressive , March 21, 2017 at 3:18 pm

But "morality" means different things to different people. Smith only saw the morality of his own class. For example, I am sure a wealthy man would consider it very moral to accumulate as much money as he could so that he would be seen by his peers as a good and worthy man who cares for his future generations and the well being of his class – he doesn't see this accumulation as amoral – whilst a poor man may think that kind of accumulation is amoral because he thinks that money could be better used provide for those without the basic needs to survive

Lyonwiss , March 22, 2017 at 2:29 am

You have not read the first sentence of the book, where he stated what he meant – to me, it is his general statement of universal morality.

lyman alpha blob , March 21, 2017 at 3:03 pm

I've read a fair amount of Wealth of Nations although far from all of it and my take was that Smith was describing the economic system of his time as it was , not necessarily as it should or must be. Smith gets a bad rap from the left due to many people over the last 200+ years hearing what they wanted to hear from him to justify their own actions rather than what he actually said.

I'm cherry picking a bit here since I don't have the time to go through several hundred pages, but I think Smith might actually agree with you about the plight of labor and he was well aware of what the ownership class was up to –

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

Adam Smith – Wealth of Nations

diptherio , March 21, 2017 at 7:00 pm

Yup, wish I would have had that one handy in my intro to micro course

Another I remember from Smith was something like, "The law exists to protect those who have much from those who have little." Sounds about right.

Grebo , March 21, 2017 at 4:58 pm

there needs to be a Copernican Revolution in Economics

One of Steve Keen's favourite analogies is astronomy. Neoclassical economics is like Ptolemy's epicycles; assume the Earth is at the centre, and that the planets orbit in circles and simply by adding little circles-epicycles-you can accurately describe the observed motion of the planets. The right epicycles in the right places can describe any motion. But they can't explain anything, they add nothing to understanding, they subtract from it, because they are false but give the illusion of knowledge. Drop the assumptions and you can begin to get somewhere.

digi_owl , March 22, 2017 at 1:36 pm

And that is exactly what Marx did, but then got himself sidetracked by trying to find (or create) support for his labor theory of value.

Actually most of what he writes in Capital basically refutes said theory, instead hinting at energy being the core source of value (how much food/fuel is needed to produce one unit, basically).

Steve Keen seems to have latched onto this in the last year or so, pointing out that all production is driven by energy. And the energy comes ultimately from the sun. Either it is turned into production via feeding workers, or by fueling machinery (by burning hydrocarbons extracted from plant and animal remains).

mejimenez , March 21, 2017 at 1:41 pm

Since words have somewhat flexible boundaries, it's hard to tell from what perspective this response is looking at the history of science. Characterizing cybernetics as mechanistic would require an unusually broad definition of "mechanistic". Even a superficial reading of Norbert Wiener, Warren McCulloch, W. Ross Ashby, or any of the other early contributors to the discipline will make one aware that they were explicitly trying to address the limitations of simplistic mechanistic thinking.

In the related discipline, General Systems Theory, von Bertalanffy expressly argued that we should take our cues from the organic living world to understand complex systems. With the introduction of Second Order Cybernetics by Heinz von Foerster, Margaret Mead, Gregory Bateson and others, the role of a sentient observer in describing the system in which he/she is embedded becomes the focus of attention. Bateson was an original participant with many of the people mentioned above in the Macy conferences where cybernetics was first introduced. The bulk of his work was a direct attack on the mechanistic view of the natural world.

Of course, many writers treat cybernetics, General Systems Theory, and their related disciplines as pseudoscientific. But those are typically people who are firmly committed to mechanistic explanations.

Vedant , March 21, 2017 at 1:02 pm

Yves,

I have a question about a similar thing. Simon Kuznetz is credited as someone who has invented modern concept of GDP and he revolutionized the field of economics with statistical method (econometrics). However, Kuznets , in the same report in which he presented modern concept of GDP to US congress, wrote following(from wikipedia):-

"The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification.

All these qualifications upon estimates of national income as an index of productivity are just as important when income measurements are interpreted from the point of view of economic welfare. But in the latter case additional difficulties will be suggested to anyone who wants to penetrate below the surface of total figures and market values. Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.
Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what."

So , my question is why economists keep treating GDP as some scared metric when its creator himself deems it not reliable? Why all qualifications about GDP by Kuznetz is ignored by most of the economists nowadays?

Allegorio , March 21, 2017 at 2:48 pm

"So , my question is why economists keep treating GDP as some scared metric when its creator himself deems it not reliable? Why all qualifications about GDP by Kuznetz is ignored by most of the economists nowadays?"@Vedant

" Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income."

That is your explanation right there. Large abstract numbers such as GDP obscure social issues such as "the personal distribution of income." and the effort that goes into creating that income. Large abstract numbers obscure the moral dimension that must be a part of all economic discussion and are obscured by statistics and sciencism. As the genius of Mark Twain put it, "There are lies, damned lies and statistics." Beware the credentialed classes!

Mucho , March 21, 2017 at 1:20 pm

Interesting. There is a great book by John Dupré called 'Human Nature and the Limits of Science (2001)", which tackles this subject in a general way: the facts that taking a mechanistic model as a paradigm for diverse areas of science is problematic and leads to myopia.

He describes it as a form of 'scientific imperialism', stretching the use of concepts from one area of science to other areas and leading to bad results (because there are, you know, relevant differences). As a prime example, he mentions economics. (When reading EConned;s chapter of the science ( 'science') of economics, I was struck by the similar argument.)

Lyonwiss , March 21, 2017 at 2:31 pm

Science does not imply only mechanistic models, which may be appropriate for physics, but not economics. Science is a method of obtaining sound knowledge by iterative interaction between facts and theory.

http://www.asepp.com/what-is-science/

UserFriendly , March 22, 2017 at 1:37 am

Just because equilibrium is shitty mechanistic model to try and stamp onto economics doesn't mean that all scientific modeling of economics futile. Soddy just about derived MMT from the conservation of energy in 1921.

http://habitat.aq.upm.es/boletin/n37/afsod.en.html?iframe=true&width=100%&height=100%

And refined it in a book in 1923.

http://dspace.gipe.ac.in/xmlui/bitstream/handle/10973/21274/GIPE-009596.pdf?sequence=3&isAllowed=y

UserFriendly , March 22, 2017 at 2:00 am

excellent job with the prepositions there. sigh. WAKE UP!

Lyonwiss , March 23, 2017 at 2:50 am

Soddy was a scientist. He should have written as a scientist with definitions, logic and rigour, but he wrote like a philosopher, full of waffle and unsubstantiated assertions like other economists. It is unscientific to apply universal laws discovered in physics and chemistry to economics without proving by observations that those laws also apply to economics.

Soddy needed to have developed a scientific methodology for economics first, before stating his opinions which are scientifically unproven like most economic propositions.

http://www.asepp.com/methodology/

Jim A. , March 21, 2017 at 1:36 pm

I get irritated by radical free-marketeers who when presented with a social problem tend to dogmatically assert that "The free market wills it," as if that ended all discussion. It is as if the free market was their God who must always be obeyed. Unlike Abraham, we do not need to obey if we feel that the answer is unjust.

PKMKII , March 21, 2017 at 1:57 pm

Gibbon's Decline and Fall of the Roman Empire was published in 1776, the same year as Smith's Wealth, but hardly read today by most economists.

Other than as a reflection of the sentiments of the time Gibbon was writing in, historians don't spend much time reading it either. The moralistic explanations for the disintegration of the (Western) Roman Empire were long ago discarded by all serious analysis of late antiquity. More practical explanations, especially the loss of the North African bread basket to the Vandals, are presented in the scholarly work these days.

PhilM , March 21, 2017 at 5:07 pm

That book of Gibbon's is an incredible achievement. If it is not read by historians today, it is their loss. Its moral explanations, out of fashion today, are actually quite compelling. They become more so when read with de Tocqueville's views of the moral foundations of American township democracy and their transmission into the behavior, and assumptions, of New Englanders, whose views formed the basis of the federal republican constitution.

The loss of the breadbasket was problematical, too. And it may be that no civilization, however young and virile, could withstand the migrations forever, as they withstood or absorbed them, with a few exceptions, for eight hundred years. But the progressive losses to the migratory tribes may have been a symptom of the real, "moral," cause of the decline.

After all, the Romans did not always have that breadbasket; indeed, they had to conquer it to get it, along with the rest of the mighty and ancient civilizations of the Mediterranean and beyond, using the strengths derived from the mores of their martial republic. The story of the Punic Wars is a morality play in history, as much as anything else. But the main problem was the dilution of the Roman republican mores into a provincial stew.

And after that nice detached remark, about which historians can surely natter on in the abstract, I'll toss in this completely anti-historicist piece of nonsense: I think it's actually much the same problem the Americans are having today, as the mores of the founders have dissolved into the idea that the nation is about national government, centralized administration, world leadership, global domination through military might, and imperialist capitalism. That is not a national ethic that leads to lasting nobility of purpose and moral strength-as George Washington and Ike Eisenhower both pointed out.

blert , March 21, 2017 at 6:48 pm

Dendrochronology ( tree ring dating & organic history ) has established a wholly new rationale for the termination of the Roman Empire the re-boot of the Chinese and Japanese cultures and the death of a slew of Meso-American cultures.

From 536-539AD the entire planet suffered a staggering holocaust. Krakatoa blew up - ejecting so much dust that it triggered a 'nuclear winter' that lasted through those years.

The Orientals actually heard the blasts recognized that they emminated from the Indonesian islands. ( Well, at least to the south. ) The erruption and the weather was duly recorded by Court scribes.

Roman accounts assert that 90% of the population of Constantinople died or fled. ( mostly died ) The Emperor and his wife were at the dockside ready to flee - when she talked him back off the boat. Her reasoning was sound: it's Hell everywhere. He won't have any authority once he leaves his imperial guard.

It was this period that ended agriculture in North Africa. ( Algeria-Tunisia ) The drought blew all of the top soil into the Med. It was an irreversible tragedy.

This super drought triggered the events in Beowulf - and the exodus of the Petrans from Petra. They marched off to Mecca and Medina both locations long known to have mountain springs with deep water. The entire Arabian population congregated there.

This was the founding population amongst which Mohammed was raised many years later.

The true reason that Islam swept through Araby and North Africa was that both lands were still largely de-populated. The die-off was so staggering that one can't wrap ones mind around it.

Period art is so bleak that modern historians discounted it until the tree ring record established that this trauma happened on a global scale.

Lyonwiss , March 21, 2017 at 2:21 pm

Economics is not science, simply because economics does not take facts seriously enough to modify flawed theories.

http://www.asepp.com/facts-and-economic-science/

justanotherprogressive , March 21, 2017 at 3:00 pm

Or throw them out! I remember the very first thing I was taught in Economics 101 about supply and demand and how they would balance at an equilibrium price. It didn't take much thinking to realize that there is no equilibrium price and that an equilibrium price was exactly the last thing suppliers or demanders wanted, and that the price of a good depended on who had the most power to set the price. Yet, we had to accept the "supply and demand theory" as coming directly from God. It's as if we were taught in Chemistry that the only acceptable theory of bonding possible was the hydrogen-oxygen bond and even though we could see with our own eyes that hydrogen also bonds to carbon, we should throw that out because it is an aberration from "acceptable theory" ..

PhilM , March 21, 2017 at 4:44 pm

Yes, coming from God; Platonic, like a Form. Economics is written in Forms, like "homo economicus" and "the efficient market." But we live in the Cave, where the markets that humans actually make are sad imitations of the Forms in the textbooks.

There's a lot good in the post, I think; noting the important philosophical underpinnings and challenges to Economics, and particularly in making it a moral, and therefore political and "social" science. But it's great to see where people's use of "incantatory names from the past" is called out by the curator. It's a pet peeve.

digi_owl , March 22, 2017 at 1:45 pm

Economics is the last "science" to hold onto the notion of equilibrium. The rest has moved on to complex systems/chaos theory, first demonstrated in meteorology. Trying to apply complex systems to economics have been the goal of Steve Keen's work for several decades now.

Rosario , March 21, 2017 at 2:38 pm

In college I couldn't help but notice the similarities between modern economic theory and the control theory taught in engineering. Not such a great fit though, society is not a mechanical governor.

craazyboy , March 22, 2017 at 7:20 am

Ha. That's the same thing that got economists so excited. Things is, an engineering student attempting to model a simple system with two moving parts cares a great deal about whether the moving parts are connected by a spring, or ball screw, or shock absorber, or lever, or even invisible stuff like a temperature gradient when coming up with the system math model. Economists seem to think wtf is the difference?

Next, if the math gets a bit unwieldy as the number of moving parts increase, which it does in a hurry, they decide to simplify the math. Next, assume they have perfect sensors for everything and system lag can assumed to be zero for talking purposes, and in research papers too. Next, hysteresis effects due to bent parts, leaky valves and stretched springs are assumed not to exist. Congress has the "Highway Bill" thingy to address that.

Next, the guy with the control knob will do the "right thing". Or better yet, a "market" is doing the control knob. There could be "intermediaries", but these are modeled as zero loss pieces of golden wire and gold plated connectors.

Finally, money comes from batteries and there is no such thing in the real world like "shorts", "open circuits", or "semiconductors" with their quantum tunneling properties.

Other than that, it's all good!

knowbuddhau , March 21, 2017 at 5:23 pm

Thanks for this, and especially the heads up about the author's take on Smith. This is exactly what I'm on about. Not only are there more ways of knowing than the infamous mechanical, it itself should've died long ago.

I learned that from this Chomsky lecture I found last year: Noam Chomsky: The machine, the ghost and the limits of understanding; Newton´s contribution to the study of mind" . (Quotes are from Science, Mind, and Limits of Understanding , an essay that seems to me to be the basis of the lecture.) Pretty sure I mentioned it in comments somewhere.

The author stresses economics is stuck in the age of Descartes. The history of Newton's refutation of Descartes's mechanical philosophy is very interesting. Yes, refutation. Descartes's mechanical philosophy is as dead as a dodo. So why does it still plague us? Obviously, because thinking of and acting on nature as if it were all just one great big machine works at getting you paid, much better than that wishy-washy humanism crap. /f (facetious).

I used to go on and on against reducing everything to mechanisms, and I largely blamed Newton. I was wrong.

I've spent an hour trying to boil this down. Ain't happenin. Apologies for the length.

The background is the so-called "mechanical philosophy" – mechanical science in modern terminology. This doctrine, originating with Galileo and his contemporaries, held that the world is a machine, operating by mechanical principles, much like the remarkable devices that were being constructed by skilled artisans of the day and that stimulated the scientific imagination much as computers do today; devices with gears, levers, and other mechanical components, interacting through direct contact with no mysterious forces relating them. The doctrine held that the entire world is similar: it could in principle be constructed by a skilled artisan, and was in fact created by a super-skilled artisan. The doctrine was intended to replace the resort to "occult properties" on the part of the neoscholastics: their appeal to mysterious sympathies and antipathies, to forms flitting through the air as the means of perception, the idea that rocks fall and steam rises because they are moving to their natural place, and similar notions that were mocked by the new science.

The mechanical philosophy provided the very criterion for intelligibility in the sciences. Galileo insisted that theories are intelligible, in his words, only if we can "duplicate [their posits] by means of appropriate artificial devices." The same conception, which became the reigning orthodoxy, was maintained and developed by the other leading figures of the scientific revolution: Descartes, Leibniz, Huygens, Newton, and others.

Today Descartes is remembered mainly for his philosophical reflections, but he was primarily a working scientist and presumably thought of himself that way, as his contemporaries did. His great achievement, he believed, was to have firmly established the mechanical philosophy, to have shown that the world is indeed a machine, that the phenomena of nature could be accounted for in mechanical terms in the sense of the science of the day. But he discovered phenomena that appeared to escape the reach of mechanical science. Primary among them, for Descartes, was the creative aspect of language use, a capacity unique to humans that cannot be duplicated by machines and does not exist among animals, which in fact were a variety of machines, in his conception.

As a serious and honest scientist, Descartes therefore invoked a new principle to accommodate these non-mechanical phenomena, a kind of creative principle. In the substance philosophy of the day, this was a new substance, res cogitans, which stood alongside of res extensa. This dichotomy constitutes the mind-body theory in its scientific version. Then followed further tasks: to explain how the two substances interact and to devise experimental tests to determine whether some other creature has a mind like ours. These tasks were undertaken by Descartes and his followers, notably Géraud de Cordemoy; and in the domain of language, by the logician-grammarians of Port Royal and the tradition of rational and philosophical grammar that succeeded them, not strictly Cartesian but influenced by Cartesian ideas.

All of this is normal science, and like much normal science, it was soon shown to be incorrect. Newton demonstrated that one of the two substances does not exist: res extensa. The properties of matter, Newton showed, escape the bounds of the mechanical philosophy. To account for them it is necessary to resort to interaction without contact. Not surprisingly, Newton was condemned by the great physicists of the day for invoking the despised occult properties of the neo-scholastics. Newton largely agreed. He regarded action at a distance, in his words, as "so great an Absurdity, that I believe no Man who has in philosophical matters a competent Faculty of thinking, can ever fall into it." Newton however argued that these ideas, though absurd, were not "occult" in the traditional despised sense. Nevertheless, by invoking this absurdity, we concede that we do not understand the phenomena of the material world. To quote one standard scholarly source, "By `understand' Newton still meant what his critics meant: `understand in mechanical terms of contact action'."

It is commonly believed that Newton showed that the world is a machine, following mechanical principles, and that we can therefore dismiss "the ghost in the machine," the mind, with appropriate ridicule. The facts are the opposite: Newton exorcised the machine, leaving the ghost intact. The mind-body problem in its scientific form did indeed vanish as unformulable, because one of its terms, body, does not exist in any intelligible form. Newton knew this very well, and so did his great contemporaries.

And later:

Similar conclusions are commonplace in the history of science. In the mid-twentieth century, Alexander Koyré observed that Newton demonstrated that "a purely materialistic pattern of nature is utterly impossible (and a purely materialistic or mechanistic physics, such as that of Lucretius or of Descartes, is utterly impossible, too)"; his mathematical physics required the "admission into the body of science of incomprehensible and inexplicable `facts' imposed up on us by empiricism," by what is observed and our conclusions from these observations.

So the wrong guy was declared the winner of Descartes vs. Newton, and we've been living with the resultant Frankenstein's monster of an economy running rampant all this time. And the mad "scientists" who keep it alive, who think themselves so "realistic" and "pragmatic" in fact are atavists ignorant of the last few centuries of science. But they do get paid, whereas I (relatively) don't.

Vatch , March 21, 2017 at 5:40 pm

Alexander Koyré observed that Newton demonstrated that "a purely materialistic pattern of nature is utterly impossible (and a purely materialistic or mechanistic physics, such as that of Lucretius or of Descartes, is utterly impossible, too)"

I think that Newton considered phenomena like gravity, magnetism, and optics to be non-material, perhaps even spiritual, and separate from matter. Modern physicists would disagree, and would consider gravity and electro-magnetism to be purely material phenomena. Newton didn't prove that the world is non-mechanical; he showed that objects do not need to touch for them to have influence on each other.

It is still quite possible that there are non-material phenomena, but those would be separate from gravity and electro-magnetism, which Newton considered non-material.

diptherio , March 21, 2017 at 7:10 pm

It is still quite possible that there are non-material phenomena

Like love, courage, hope, fear, greed and compassion?

Vatch , March 21, 2017 at 7:37 pm

Sure! The existence of souls is another possibility (even for Buddhists, although I suppose they would have to be pudgalavadins to believe in this).

Plenue , March 22, 2017 at 1:54 pm

Are all products of the brain. I don't see how the results of the interaction of electrical impulses and chemicals are non-material. Magic is not an explanation for anything.

M Quinlan , March 21, 2017 at 7:50 pm

So Newton formulated his theories because of his belief in Alchemy and not, as I had thought, despite it. Discussions like this are what make this site so great.

blert , March 21, 2017 at 7:08 pm

All modern economic thought ( 1900+ ) has been corrupted by the arrogance of Taylor's Time & Motion Studies. The essence of which is that bean counters can revolutionize economic output by statistics and basic accounting.

AKA Taylorism.

Big Government is Taylorism as practiced.

At bottom, it arrogantly assumes that if you can count it, you can optimise it.

The fact is that 'things' are too complicated.

Taylor's principles only work in a micro environment. His work started in machine shops, and at that level of simplicity, still applies.

Its abstractions and assumptions break down elsewhere.

MOST economic models in use today are the grandsons of Taylorism.

They are also the analytic engines that have driven the global economy to the edge of the cliff.

RBHoughton , March 21, 2017 at 7:24 pm

For my penny's worth the sentence "Today, the poor are hemmed in by so many regulations and procedures (real estate, education, police) that people are now starved" reveals the main problem.

Too many of the most lucrative parts of every national economy have been closed off by politicians and reserved for their friends.

Peter L. , March 23, 2017 at 9:55 pm

The introductory remarks on Adam Smith reminded me of a funny exchange between David Barsamian and Noam Chomsky. Barsamian complements Chomsky on his research on Adam Smith :

DAVID BARSAMIAN: One of the heroes of the current right-wing revival is Adam Smith. You've done some pretty impressive research on Smith that has excavated a lot of information that's not coming out. You've often quoted him describing the "vile maxim of the masters of mankind: all for ourselves and nothing for other people."

NOAM CHOMSKY: I didn't do any research at all on Smith. I just read him. There's no research. Just read it. He's pre-capitalist, a figure of the Enlightenment. What we would call capitalism he despised.

People read snippets of Adam Smith, the few phrases they teach in school. Everybody reads the first paragraph of The Wealth of Nations where he talks about how wonderful the division of labor is. But not many people get to the point hundreds of pages later, where he says that division of labor will destroy human beings and turn people into creatures as stupid and ignorant as it is possible for a human being to be.

And therefore in any civilized society the government is going to have to take some measures to prevent division of labor from proceeding to its limits.

And here is a link to Adam Smith's poignant denunciation of division of labour:

http://www.econlib.org/library/Smith/smWN20.html#V.1.178

This mention of division of labor is, as Chomsky points out, left out of the index of the University of Chicago scholarly edition! Of George Stigler's introduction Chomsky claims, "It's likely he never opened The Wealth of Nations. Just about everything he said about the book was completely false."

I recommend reading the entire paragraph at the link above. Smith writes:

"The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it. "

Technocratic Solutions and Moral Dilemmas

The beauty and underappreciated (by non-economists) strength of economics is that we appreciate, understand, and can offer technocratic solutions to problems that have moral dimensions. Our weakness is that we don't always appreciate that economics is, in fact, a morality play whether we like it or not.
Maxine Udall (girl economist)
Steve Randy Waldman at Interfluidity has taken to batting at what I regard as the hornet's nest that is the boundary between positive and normative economics. I guess I'll take a few swings, too. Let me start with something that was said a few weeks ago in a gathering of economists:

"Well, if you make a normative judgement then you are not a real economist."

I know what you're thinking (if you're not an economist). You're thinking this is just some outlier economist taking an extreme stance. Or you're thinking, "Gosh darn, when I read Wealth of Nations, it seemed like Adam Smith made the occasional normative judgment. In fact, doesn't the very concept of national wealth seem to embody a normative judgement that it is a Good Thing, else why waste time inquiring into its nature and causes?" Or you're thinking, "Didn't Maynard Keynes occasionally opine normatively on certain aspects of what we now call macroeconomics?" I could go on and on, but you get the idea.

No. Not an outlier, I fear. It was said with conviction by someone whose work I greatly admire and who has a national reputation in his particular corner of economics. It reflects the mainstream of economics as we know it today.

It caused me to reflect.

There is a real beauty in math and the hard science that we have tried to make economics. It stirs me in much the same way that poetry stirs me. At the same time, it satisfies some part of me that really doesn't like to haggle much over solutions to technical problems. The part of me that prefers hard technical problems to soft, squishy human problems. Math has the added advantage that you can often say in 5 equations or a graph or two what would otherwise take you 5 pages to say in words.

I remember the first time I contemplated an Edgeworth box. I took such comfort from it. Me, a child of the merchant class. There it was, this beautiful system where everyone traded to the point where no one could be made better off without making someone worse off, resources were used in the right relative (efficient) proportions to produce the right (efficient) mix and amount of output. It made me happy that I had grown up in the core of this marvelous, poetic construct, scion of the class that reduces friction and makes it work. It seemed to solve all the economic problems that could trouble a generous and benevolent soul.

Or so I thought, young innocent that I was.

After I had lived in the world a bit, questions began to occur to me. What if one person has waaaayyyyy more than the other in our two person, two good, two input world? Under what circumstances might that be fair (or unfair)? What if the person with more of the resources produces children and grandchildren who are, say, lazy, yet over time they retain the resources that could, in the hands of the other person, produce more output? What if the budget constraint that the less advantaged person faces is wholly exogenous in the sense that no amount of industry, frugality, or investment in human capital will yield an outward or upward shift in it because of discrimination by the other person in this little economy? What if the person with more resources is able to control and set prices, thereby relegating the other to permanent resource deprivation? What if the advantaged person obtained his advantage by enslaving or killing the ancestors of the disadvantaged person?

You begin to see why there might be strong preferences to avoid normative questions and their answers, yes?

Fortunately, in grad school I discovered Francis Bator's The Simple Analytics of Welfare Maximization. It helped me to see that that I was not alone in recognizing the beauty of the technical aspects of the problem, nor was I alone in recognizing the ethical limitations of the framework. A few years later, I discovered Amartya Sen, who had this sensible, normative thing to say about Pareto efficiency:

"Being in the core [of the economy], however, is not as such a momentous achievement from the point of view of social welfare. A person who starts off ill-endowed may stay poor and deprived even after the [market] transactions, and if being in the core is all that competition offers, the propertyless person may be forgiven for not regarding this achievement as a 'big deal.'"

The beauty and underappreciated (by non-economists) strength of economics is that we appreciate, understand, and can offer technocratic solutions to problems that have moral dimensions. Our weakness is that we don't always appreciate that economics is, in fact, a morality play whether we like it or not. My take on Waldman's critique of technocrats was not that he was faulting technocrats for being technocrats or for the technical solutions they were offering. He was making the point that a technically sound solution, no matter how brilliant, is doomed if it doesn't engage voters, taxpayers, lawmakers on moral grounds. (He has posted an follow up here, that I think is consisent with this. If I'm wrong and misrepresenting him, I apologize in advance).

Whether we like it or not, our technical solutions are competing in a morality play scripted by interest groups and mama grizzlies who in 25 words or less conflate small government and something they imagine to be "free markets" with individual liberty, a key justice principle. Most sound techocratic solutions are difficult to convey, must less motivate, in 25 words or less (and the motivation is often moral as well as technical: more for most, more for less, prices as reliable signals of marginal social cost, reducing unemployment, increasing inflation to discourage saving and stimulate spending ... you get the idea). But the larger problem, I think, is that allegedly "amoral" economists view the moral sequelae of sound economic policy, such as banksters' gains (at taxpayer expense), as "side issues" that are irrelevant to restoring the economy, while some of "we the people" view it as one of the most important issues. We end up with....the Tea Party (or, at least, with a large portion of the population who are extremely resentful and angry at being unemployed and underwater while the economy romps upward at least for those whom we bailed out).

Robert Frost once wrote that "something there is that does not love a wall." I think it is also true that something there is that does not love injustice or unfairness. That same "something" is why economics is very much a morality play. We ignore this at our peril. Like Frost's neighbor who could not see the circumstances that rendered a fence unnecessary, I wonder if we in economics aren't sometimes deaf and blind to the changing cirumstances that necessitate recognition that the "fence" we like to imagine between our "amoral" technical solutions and their moral context and sequelae is not only no longer needed, it is harmful in formulating sound policy.

He moves in darkness as it seems to me~
Not of woods only and the shade of trees.
He will not go behind his father's saying,
And he likes having thought of it so well
He says again, "Good fences make good neighbors."

It has been drilled into us from the first day that we set our feet on the path to "economist" that "real economists" do not make normative judgments. The greats who went before us (at least some of them) did not and, so, nor should we. Yet who would be better than we with our technical knowledge to understand and communicate the normative ramifications of it?

This "fence" is not making us good neighbors. Maybe it's time to let the wall between technocratic economics and moral discourse crumble. It seems already to be weakening. I think we would become a better science if we acknowledged at least some of the moral aspects of our technocratic solutions with the same scholarly attention we devote to the technical aspects. An additional unintended benefit of such a change might be that undergrads and non-economists would become more interested in the causes of economic downturns and in reading the Financial Times because we will have helped them to see that both have moral, as well as economic, significance.

Posted at 08:22 AM in Economics, Ethics, Film, Finance | Permalink

Thx, I was hoping you would pick up on Wladman's work. It still amazes me how many bright people, educated at the same institutions, can look at the same data and reach totally different conclusions. Is there any other realistic way to explain this other than people making normative judgments?

Steve

Some ramblings triggered by your essay, which I enjoyed immensely.

Regarding the Science of Economics - I would suggest that Econ lies at the intersection of Anthropology and Psychology and is "scientific" only in the sense that Descriptive Biology is scientific – i.e. it benefits from careful observation.

You may recall in The Ugly American how Eugene Burdick describes giving advice to a developing country. "Raise the price of rice and the production of rice will go up." They raised the price of rice and production went down. When interviewed farmers explained "I used to need to raise more rice to support my family. Now that it sells for more, I can raise less."

Thus Economics is a way of describing the functioning of a set of institutions and cultural values. Institutions and cultural values change from time to time and differ from location to location. In Finance – somewhat related to Econ - you can calculate the probability that a stock will change in value by 10%, but you must first assume that the mind set of today's investing public is the same as the mind set from which your data sample set is drawn. And guess what – mind sets change. Same deal with macro economic models.

While one can assume that people act to maximize their interest, in my experience people act out of emotion without too much real focus on their interest cf. "What's the matter with Kansas?"

While the trajectory from Earth to Moon is knowable and can be calculated, the trajectory from depression to good times is not. If you tried to promote a computer program that would tell you the outcome of an election you would be seen as a knave. Elections and economics are not computable. Oh those pesky Animal Spirits – you just can't compute when a baby deer will spook and run away.

Of course, equations that restate the idea that the whole is equal to the sum of the parts are valid, but they are not predictive. If we have a surplus here it must be that we have a deficit there. Ho hum.

And I am not trying to be a fatalist – good judgment is still good judgment, but there are no guarantees and no mathematical solutions.

Disclaimer – my education is in one of the "physical sciences"., but I am reasonably fluent in the math used in Finance and Economics.

For an extended time I had a computer programming company. I have done my share of economics calculations. Salesmen take the results of computer calculations and use them to create an aura of authenticity to the things they want to promote – and unsophisticated people apparently think that if you take an idea and wrap it in mystery, somehow the idea becomes valid.

Regarding normative – my mother (b 1899) used to complain that economics had gotten off track. According to her, when she studied econ (she had an MS from Smith) it was taught as having 2 components – (1) how to maximize production; and (2) how to determine the fair and proper way to divide the results. She complained that part 2 had been lost somewhere. She may have been biased being the daughter of a clergyman.

She and many others have trouble seeing Pareto optimality as being the answer to question 2, for the reasons advance by Amartya Sen and also for reasons advanced by religious figures who would like to believe that we have some interest in helping one another.

As an aside – I just saw "My name is Khan" - it should be required viewing for all US citizens curious to see how a part of the world sees the white population of the US.

And yes, there is a sub-field for non-normative. Just as doctors know what constitutes poison, and leave it to judges to decide where it should be used, it is ok to have some specialized sub-field of economic study that ignores values, and attempts to understand how changing x modifies y given our current set of values and institutions.

As regards "Well, if you make a normative judgment then you are not a real economist." - apparently he identifies the whole field with what I consider to be a sub-field.

[Mar 03, 2017] Debunking the NAIRU myth by Matthew C Klein

Notable quotes:
"... If there is such a thing as a NAIRU, it is still a mistake to treat the NAIRU as a "given" rather than a function of policy. ..."
Feb 19, 2017 | ftalphaville.ft.com

By: Matthew C Klein

It's important to try to estimate the unemployment rate that is equivalent to maximum employment because persistently operating below it pushes inflation higher, which brings me to our price stability mandate. –Janet Yellen, January 18, 2017

A little more than half the income generated in America is paid to workers and most of the money spent in America goes to personal consumption. So it's reasonable to think there is some relationship between the health of the job market and other important macro variables.

And, in fact, there is a robust connection between the change in the unemployment rate and the change in the real value of money spent on employee compensation per working-age American since the mid-1980s:

Real COE vs unemployment

That chart shows the link between two real variables that have a logical connection to each other. The question for NAIRU believers is: why should a purely real variable (unemployment) have any bearing on a purely nominal one (inflation)?

In particular, is it reasonable to think there is an unemployment rate below which inflation necessarily gets faster and above which the pace of consumer price increases slows down? And even if there were such an unemployment rate at any point in time, would it be stable enough to be useful for policymakers concerned with smoothing the business cycle?

Many, including Federal Reserve boss Janet Yellen, seem to think the answer is "yes", but the evidence points the other way, particularly since the mid-1980s.

First, some history. In 1926, Irving Fisher found a relationship between the level of unemployment and the rate of consumer price inflation in the US. In 1958, AW Phillips studied UK data from 1861-1957 and found a relationship between the jobless rate and the growth of nominal wages, although the relationship seems to have been an artifact of the gold standard given the vertical line he found in the postwar period:

Phillips Curve 1948-1957 original

Some people (wrongly) interpreted Phillips's data to mean that there was a straightforward trade-off between the inflation rate and the unemployment rate. Policymakers could just pick any spot on "the Phillips Curve" they want. Among a certain set, the big debates in the 1960s were about whether the government should target an unemployment rate of 3 per cent or 5 per cent.

This worked out poorly, but the reaction took the form of an equally dubious idea: the Non-Accelerating Inflation Rate of Unemployment, or NAIRU. In this view, the change in the inflation rate should be related to the distance between the actual jobless rate and some theoretical level. If the unemployment rate were above this "neutral" level the inflation rate would slow down and potentially turn into outright deflation . If the jobless rate were "too low", however, consumer prices would rise at an accelerating rate.

Suppose you believe NAIRU is a real thing. What would be the argument against pushing the unemployment rate as close to zero as possible? In theory, the cost of the policy would be ever-accelerating inflation, eventually perhaps leading to hyperinflation. But the reason to dislike excessive inflation is that it ultimately makes everyone poorer, which should, among other things, increase unemployment. (Just look at Venezuela, for a recent example.)

According to the wacky world of NAIRU, however, hyperinflation can coexist just fine with hyper-employment. Clearly there must be other mechanisms at work, or else we are leaving money on the table by allowing the jobless rate to ever rise above zero.

In case this argument seems strange, consider the following exchange the Fed had on this very topic back in July 1994 (emphasis added):

MR. LINDSEY. If we ran the model out, do we believe that if we applied some social rate of discount, the losses in output later on would be more than, less than, or equal to the gains in output in the short run [from letting inflation accelerate]?

MR. KOHN. The model itself doesn't have, I don't believe, losses in output from higher inflation rates.

MR. LINDSEY. Ever? We never have a net loss in output resulting from a choice to go for inflation?

MR. PRELL. It does not take, in terms of a normal simple cost of capital calculation, a very big inflation differential to get you a net loss in the present value in the long run.

CHAIRMAN GREENSPAN. The argument as to why we get a net loss is "the Federal Reserve will react–do something." But the question is, we are the Federal Reserve and why should we react if that's true?

MR. LINDSEY. If we don't believe that the present value of output in this economy will be lower by letting inflation alone, then we should let inflation go up. It's as simple as that Do we believe that printing money will increase the present value of output?

MR. BLINDER. Yes, I think we would. I believe that printing money will give the economy a temporary high that will not last and therefore in the integral sense that you said, yes, you get a larger integral of output over an historical period, if you never decided to end it–if you never said, when you got to 10 percent inflation, whoops, that wasn't very good, and you went back to lower inflation.

CHAIRMAN GREENSPAN. Yes, but why would you conclude that at that point when, because as Ed Boehne says, 11 percent is still better?

MR. BLINDER. If 11 percent is better than 10 percent, if there's no cost to inflation–I am a little bit surprised at the tenor of this conversation around here! [Laughter] There is some academic content that is–

CHAIRMAN GREENSPAN. In all seriousness, the question really gets to the models. Why would you believe that there is a cost of increased inflation from the models?

Greenspan never got a straight answer to his question but the consensus was that models based on NAIRU are basically wrong. Tellingly, it was none other than Janet Yellen who wrongly worried the unemployment rate was "too low" in the mid-to-late 1990s and would cause inflation to accelerate.

As it happens, the data don't support the idea of NAIRU either, at least not since the mid-1980s. The test would be to compare changes in the unemployment rate against changes in the inflation rate. If NAIRU made sense, there should be a strong inverse relationship between the changes in the two series. And yet:

NAIRU core pce vs unemployment since 1985

Regressing changes in core inflation against changes in the jobless rate gets you an r-squared of 0.11, which is basically meaningless. Moreover, that result is purely a product of the data points in the blue circle, which all occurred during the teeth of the financial crisis and could be blamed on the co-movement of employment and commodity prices. Take those out, and you end up with two perfectly unrelated series:

NAIRU core pce vs unemployment since 1985 excluding GFC

You get similar results if you use headline inflation rather than core inflation.

The intellectual confusion over the relationship between unemployment and inflation was especially salient during the Fed's own policy debates in the aftermath of the crisis. The unemployment rate rose by 5 percentage points between mid-1979 and late 1982. It also rose by 5 percentage points between early 2008 and late 2009. Moreover, the jobless rate stayed above 9 per cent through first nine months of 2011. The Fed staff expected this would produce massive disinflation, or even deflation, yet it never happened.

By the January 2011 FOMC meeting , it should have been clear the old models weren't sufficient. Instead of ditching the NAIRU concept, however, the Fed's staff and many of the regional presidents tried to rehabilitate it by arguing the NAIRU had changed. (There were lots of reasons provided, including the extension of unemployment insurance benefits and skill mismatches.)

With the admirable exception of Richard Fisher at the Federal Reserve Bank of Dallas, the overwhelming consensus was that the crisis had raised the "non-accelerating inflation rate of unemployment" by about 1.5 percentage points :

FOMC 2011 Jan NAIRU estimates table

Moreover, everyone except Fisher and the New York Fed's Bill Dudley thought the crisis produced such long-lasting damage that the NAIRU would still be higher by 2015 (!) than it was before 2007. In reality, of course, the Fed has been forced to steadily revise its NAIRU estimates lower as the unemployment rate gradually normalises and inflation remains quiescent. The net effect was this rather ridiculous chart:

NAIRU fomc midpoint

NAIRU isn't just a useless concept, it's a counterproductive one that encourages policymakers to focus on the jobless rate as a means to an end (price stability) even though there is zero connection between the two variables. The sooner NAIRU is buried and forgotten, the better.

Policy Tensor, 17 hours ago

Matthew, there's strong evidence that what drives US inflation (and more generally DE inflation) is not domestic slack but global slack. See https://policytensor.com/2016/12/17/global-slack-us-inflation-and-the-feds-policy-error/

grputland, Jan 22, 2017

To test the NAIRU hypothesis against historical data, shouldn't we plot unemployment vs. change in inflation? -- instead of CHANGE in unemployment vs. change in inflation?

Be that as it may:

If there is such a thing as a NAIRU, it is still a mistake to treat the NAIRU as a "given" rather than a function of policy. If a certain tax feeds into prices, it leaves less room for wages to feed into prices before (according to NAIRU logic) inflation accelerates. So any tax that feeds into prices will tend to raise the NAIRU. This is especially the case if the tax causes the cost of labor for employers to be higher than workers' take-home pay.

Thus the NAIRU, if it exists, is not a counsel of despair, but rather a counsel to get rid of taxes that feed into prices (especially taxes on labor) and replace them, as far as necessary, with taxes that DON'T feed into prices -- that is, taxes on economic rents.

Drago Jan 21, 2017

@ Ralph Musgrave So according to Galileo Galilei the earth is a perfect sphere. Great news. So presumably he believes there's some magical force of nature that keeps us all from falling into space, and apparently one can travel in a straight line and end up exactly where he departed.

Never read such twaddle.

Ralph Musgrave, Jan 21, 2017

@ Drago @ Ralph Musgrave Totally daft response to my points - but what I'd expect from the anti-NAIRU brigade. But for the benefit of the latter cerebrally challenged brigade, I'll spell out what I mean in more detail. I'd honestly appreciate a detailed and intelligent answer.

NAIRU is the idea that there is a relationship between inflation and unemployment: specifically, when demand rises and unemployment falls, inflation will at some point also rise (assuming the rise in demand continues).

Klein & Co claim that NAIRU relationship does not exist. That means, unless I've missed something, that if unemployment falls and continues to fall, inflation WILL NOT RISE, (because, to repeat, according to Klein & Co there is no relationship between inflation and unemployment).

Ergo it should be possible to implement a very large rise in demand plus a very large fall in unemployment, and according to Klein & Co there will be no automatic rise in inflation. Now what have I missed?

Drago Jan 21, 2017 ;

@ Ralph Musgrave @ Drago MCK perhaps went too far in saying that there is zero connection between inflation and unemployment, but the rest of his points stand.

And regarding my previous reply, I was merely alluding to the fact that what is intuitive is not always what is true.

NeilW@MMT Jan 22, 2017

@ Ralph Musgrave "So presumably he favors bumping up demand to the point where unemployment almost vanishes"

There won't if you hold the level of competition high and using buying power to stop price rises taking hold. The key is for a significant purchaser to refuse to trade at any suggested higher prices which then starves the system of aggregate demand forcing either innovation or failure. And you do that directly rather than trying to do it indirectly by trying, and failing, to price loans higher.

In a tight labour market the capital/labour ratio gets better which forces replacement of jobs with machinery and improved methods. If you can't get the staff you have to get cleverer with the ones you have.

Inflation is people trying higher prices and having them confirmed by market purchases. So you set up the system so it refuses to confirm them which forces time serialisation on the market at a lower price.

Everybody knows that the labour market pricing is controlled by trying to keep a pool of people out of work and not producing. It is a very sick design that impoverishes many, many people. And the policy concept on which it is based is a belief system, not even science. You can't see them. You can't measure them. You just have a bunch of 'Very Clever People' who make them up based upon what they feel and what they believe.

Far better to have a pool of people employed outside the private sector at a fixed living wage which the private sector has to bid against to get any labour. Then the labour market is always 'tight' against the living wage and excess bids of labour wages fall back to the living wage when the businesses fail. Both of which allow you to keep business competition white hot intense - which is what controls prices and drives productivity.

marcus nunes Jan 20, 2017

NAIRU - RIP

https://thefaintofheart.wordpress.com/2015/02/14/why-insist-on-searching-for-the-holy-grail-aka-nairu/

Contrapunctus9 Jan 20, 2017

Many variables contribute to the inflation rate, certainly more than just domestic employment (and how it is calculated). The Fed's dual mandate is inflation and employment, so it makes sense that these are a focus of the Fed's communication. But the Fed tends to focus on the result rather than the cause. It is troubling that there is little discussion from most of the FOMC on inflation factors which are now more important than unemployment (currency values, foreign labor, technology, commodity demand and speculation, labor monopsony, underemployment, labor skill demand mismatch, etc).

Producer and consumer prices are increasing, largely due to China driven commodity prices. Managerial compensation and production hourly wages are increasing. But weekly wages are stagnant due to fewer hours. The Fed is ignoring the latter, even though it is what is more important to sustained core inflation.

JustSmith Jan 20, 2017

Mr Klein, your work is usually excellent, but this, I am afraid, is very poor. Your regression analysis does not test for labour market slack (unemployment minus NAIRU); you do not discuss how the unemployment rate can be an imperfect measure of labour market slack if the structure of the labour market changes; no one has ever assumed the NAIRU is constant and policymakers are well aware of the pitfalls of using an unobservable quality; the Philips curve can shift and indeed monetary policy making is in no small part about trying to judge under what conditions it may shift.

Drago Jan 20, 2017

@ JustSmith Trying and failing....

Observer Jan 19, 2017

Looking just at the U3 unemployment rate for the NAIRU without considering the still high U6 rate and lower labour participation rate in the US may be the issue. There's still labour market slack even though U3 is at its "full" employment level.
Brito , Jan 19, 2017

" The test would be to compare changes in the unemployment rate against changes in the inflation rate."

Wait what? That doesn't test for NAIRU, that simply tests the Philips Curve, but the NAIRU and the Philips Curve is not the same concept.


"zero connection between the two variables."

What? How can there be zero connection? If the labour market becomes very tight, firms have to raise wages to attract workers. Are you saying wages cannot impact prices? That would be a bizarre claim. Wage price spirals are an observable phenomena. And what about simple supply & demand? At some point you're not going to be able to employ enough additional people to supply the rising demand for your product, this increased scarcity is likely to result in higher prices.

NeilW@MMT Jan 22, 2017

@ Brito "If the labour market becomes very tight, firms have to raise wages to attract workers. Are you saying wages cannot impact prices?"

Or do without the person, or invest in capital to replace the labour - because the capital/labour ratio just changed. Both of which drive productivity. Which is what we want.

Tight labour markets drive innovation, and if you keep the level of competition active at the front end then prices remain stable.

grumpy Jan 19, 2017

Models have to be used with caution (they are only tools) and interpreted with awareness of the real world - including for example, the varying wage bargaining power of labour, which is different, post globalisation, to what it was in the '70s.

Who do you think wanted globalisation and liberalisation of trade, and why?

Many economists revere their models excessively.

marcus nunes Jan 19, 2017

Yellen in the 90s and today

https://thefaintofheart.wordpress.com/2015/11/09/yellens-unchanging-beliefs/

marcus nunes Jan 19, 2017

For laughs:

https://thefaintofheart.wordpress.com/2012/07/20/seven-years-on-things-still-look-the-same/

user8347 Jan 19, 2017
What a silly piece. NAIRU, like many economic concepts, requires a ceteris paribus clause. Your unconditional evaluation of hypothesis is naive at best. If you're having a surge in productivity due to, say, tech, or globalization, all else is not equal.
Drago Jan 19, 2017
@ user8347 Regardless, even if such a thing as NAIRU exists, its value can only be estimated post factum, which makes it completely useless for policy purposes.
Ralph Musgrave Jan 23, 2017

@ Drago @ user8347

There's a whole string of other relationships in economics which cannot be estimated with any sort of accuracy. For example it is widely accepted that devaluation will sooner or later improve a country's balance of payments, but no one really claims to know by how much and by when. So what do we do: abandon currency re-alignments as a method of rectifying external surpluses or deficits?

And again, it is widely accepted that interest rate hikes curb demand, but no knows with any great accuracy exactly by how much. What do you suggest: abandon interest rate adjustments?

Postkey Jan 24, 2017

@ Ralph Musgrave @ Drago @ user8347

"What do you suggest: abandon interest rate adjustments?"

Maybe?

"The funny thing is: they haven't. In fact, among the more than 10,000 research articles produced by the major central banks in the two decades prior to the 2008 crisis, none explored the correlation or causation between nominal interest rates and nominal GDP growth. Fortunately, this task is not very demanding, and once we conduct such an examination, we conclude that, in actual fact, there is no evidence to back these assertions whatsoever. To the contrary, empirical evidence shows that the central banking narrative on interest rates is diametrically opposed to the observable facts in two dimensions: instead of the proclaimed negative correlation, interest rates and economic growth are positively correlated. Secondly, the timing shows that interest rates do not move ahead of growth, but instead are either coincidental or even follow it."

https://professorwerner.org/shifting-from-central-planning-to-a-decentralised-economy-do-we-need-central-banks/

yellowbrickroad Jan 26, 2017

@ Ralph Musgrave This is gold standard thinking Ralph. There is no balancing payment of gold to send to China any more.

Instead China's pounds are sitting in an account in London, right alongside yours and mine. What difference does it make to anything if for instance China were to buy something for you and now those Pounds sit in your account rather than China's??

What do you think that changes..?

Your neighbours bought Chinese TV's and now China is sitting on a bunch of Pounds it can't easily spend - except on property, and educating the children of the wealthy. The incorrect thinking that 'we need to get those Pounds back' just means that we're more likely to sell vital infrastructure to China.

How is that a good response? We're NEVER going to export as much to China as China exports to us, and selling them our vital infrastructure is the result the flawed logic of thinking that moving numbers from one account to another account in London is something we 'need' to do in order to balance things up.

What if you could erase your old misassumptions Ralph? Rather than falling back on automatic mistakes.

Viewed correctly, the Pound IS the export, and the trade already balances. It's just that we don't happen to measure it this way.. yet..

Ralph Musgrave Jan 26, 2017
@ yellowbrickroad @ Ralph Musgrave Your comment is totally an completely unrelated to the above article and to my comments. Never mind being right or wrong: you haven't the faintest idea what this debate is about.
Drago Jan 26, 2017
@ Ralph Musgrave @ Drago @ user8347 It's not a binary choice...
doodle Jan 19, 2017
Isn't the point that the NAIRU theory is based on the concept of a wage-price spiral which is only sustainable in a situation where wages are either indexed or there are strong trade unions? With the rise of the precariously employed, in the services sector, even if there are many other minimum wage jobs in town, the threat to leave is not going to result in meaningful pay increases.
Ralph Musgrave Jan 23, 2017
@ doodle

I suggest there is a NAIRU type relationship even absent trade unions: i.e. trade unions just boost or amplify the relationship. In other words, even given no trade unions and no employment protection, if there was a ridiculously large increase in demand (e.g. a ridiculously large helicopter drop), demand for labour would sky-rocket, and you'd get bumper wage increases and inflation as every employer scrambled to get labour to meet demand.

[Feb 25, 2017] NAIRU: Dangerous Dogma at the Fed

This is not a dogma. This is a convenient pretext for suppressing wages, which is part of FED agenda
Notable quotes:
"... When I wrote my piece on NAIRU bashing, I mainly had in mind a few newspaper articles I had read which said we cannot reliably estimate it so why not junk the concept. ..."
"... It conjures up lots of bad associations. ..."
"... Last month, Matthew C Klein wrote an article for Financial Times' blog Alphaville arguing against the concept of NAIRU. ..."
"... Instead of their statutory mandate, these central bankers sought guidance from the so-called non-accelerating inflation rate of unemployment, or NAIRU. Proponents of the NAIRU doctrine claim that some fixed level of unemployment exists that will yield a stable rate of inflation. If the actual unemployment rate surpasses this level, they say, the inflation rate will decline. If unemployment drops below this level, inflation will increase. Most economic research over the last two decades placed the NAIRU between 5.8 and 6.6 percent. ..."
Feb 25, 2017 | economistsview.typepad.com
RGC : , February 25, 2017 at 08:43 AM
Re: The NAIRU: a response to critics - mainly macro

[Simon is catching a lot of heat and is getting a little irritated.]
....................
The NAIRU: a response to critics

When I wrote my piece on NAIRU bashing, I mainly had in mind a few newspaper articles I had read which said we cannot reliably estimate it so why not junk the concept. What I had forgotten, however, is that for heterodox economists of a certain hue, the NAIRU is a trigger word, a bit like methodology is for mainstream economists. It conjures up lots of bad associations.

As a result, I got comments on my blog that were almost unbelievable. The most colourful was "NAIRU is the economic equivalent of "Muslim ban"". At least two wanted to hold me directly responsible for any unemployment at the NAIRU. For example: "So according to you a fraction of the workforce needs to be kept unemployed." Which is a bit like saying to doctors: "So according to you some people have to be allowed to die as a result of cancer."
...........
[PostKeynesians fire back]:
........
Simon Wren-Lewis, NAIRU And TINA

Last month, Matthew C Klein wrote an article for Financial Times' blog Alphaville arguing against the concept of NAIRU. Today, Simon Wren-Lewis published a reply to Klein on his blog defending NAIRU. SWL's argument is essentially that there is no alternative (TINA):

http://www.concertedaction.com/2017/02/17/simon-wren-lewis-nairu-and-tina/

RGC -> RGC... , February 25, 2017 at 08:54 AM
[By coincidence I posted this comment by Dean Baker yesterday]:

NAIRU: Dangerous Dogma at the Fed

BY DEAN BAKER

The Full Employment and Balanced Growth Act of 1978 established two goals to guide the
Federal Reserve's conduct of monetary policy: price stability and full employment, defined by
the Act as four percent unemployment. While the central bank has diligently pursued the first
goal, it has often given the second part of its mission short shrift. Indeed, past Fed policy
makers have publicly labeled four percent unemployment unobtainable for practical purposes.
..............
The experience of the last six years has unambiguously repudiated the NAIRU - at least insofar as an economic theory may ever be disproved with evidence.

Die-hard adherents simply proclaim the NAIRU a moving target that has shifted. But none of these advocates has explained convincingly why previous consensus estimates of the NAIRU went so far awry.

http://cepr.net/documents/publications/fmsno00.pdf

anne -> RGC... , February 25, 2017 at 08:57 AM
http://cepr.net/documents/publications/fmsno00.pdf

December, 2000

NAIRU: Dangerous Dogma at the Fed
By DEAN BAKER

The Full Employment and Balanced Growth Act of 1978 established two goals to guide the Federal Reserve's conduct of monetary policy: price stability and full employment, defined by the Act as four percent unemployment. While the central bank has diligently pursued the first goal, it has often given the second part of its mission short shrift. Indeed, past Fed policymakers have publicly labeled four percent unemployment unobtainable for practical purposes.

Instead of their statutory mandate, these central bankers sought guidance from the so-called non-accelerating inflation rate of unemployment, or NAIRU. Proponents of the NAIRU doctrine claim that some fixed level of unemployment exists that will yield a stable rate of inflation. If the actual unemployment rate surpasses this level, they say, the inflation rate will decline. If unemployment drops below this level, inflation will increase. Most economic research over the last two decades placed the NAIRU between 5.8 and 6.6 percent.

The operating differences between a legal target of four percent unemployment and a NAIRU target matter tremendously for the economy and the public....

[Feb 19, 2017] EconoSpeak Krugman, the Gang of Four and the NAIRU Straitjacket

Notable quotes:
"... Second, the empirical evidence for a vertical Phillips curve and the associated hypothesis that lowering unemployment past the NAIRU leads to unacceptable acceleration of inflation is weak, and has become much weaker in the past decade. Third, viewed collectively, attempts to estimate the location of the NAIRU have become a professional embarrassment; disagreements remain on too many basic issues. Fourth, adherence to the concept as a guide to policy has major costs and negligible benefits. Conversely, the risks of dropping the natural rate hypothesis are minor, while the benefits from a sustained pursuit of full employment could be substantial. ..."
Feb 19, 2017 | econospeak.blogspot.com
First is Dean Baker's post about the latest Economic Report of the President's "insight into the question of how fast the economy can grow, and more importantly how low the unemployment rate can go."
Economists have long held the view that lower rates of unemployment would be associated with rising rates of inflation and vice versa. When the Federal Reserve Board decides to raise interest rates to slow the economy it is based on the belief that unemployment is falling to a level that would be associated with a rising rate of inflation.
Most economists now put the unemployment rate at which inflation starts to rise somewhere near the current 4.9 percent rate. (This is called the non-accelerating inflation rate of unemployment or NAIRU.) So does the ERP. But its analysis suggests a somewhat different story.
Second is Jamie Galbraith's 1997 -- that's almost 20 years ago -- Journal of Economic Perspectives article, " Time to ditch the NAIRU "
First, the theoretical case for the natural rate is not compelling. Second, the empirical evidence for a vertical Phillips curve and the associated hypothesis that lowering unemployment past the NAIRU leads to unacceptable acceleration of inflation is weak, and has become much weaker in the past decade. Third, viewed collectively, attempts to estimate the location of the NAIRU have become a professional embarrassment; disagreements remain on too many basic issues. Fourth, adherence to the concept as a guide to policy has major costs and negligible benefits. Conversely, the risks of dropping the natural rate hypothesis are minor, while the benefits from a sustained pursuit of full employment could be substantial.
G. Friedman's projections may well be wrong. But the argument that they are "implausible" is based on uncompelling theory, weak empirical evidence, embarrassing estimates and "a guide to policy [that] has major costs and negligible benefits."

But, hey, you can't criticize the top wonks if the they don't come right out and say it.

UPDATE: John T. Harvey writes, at Forbes:

In the words of Christina Romer, former chair of the Council of Economic Advisors under Barack Obama:
"Just as there is no regularity in the timing of business cycles, there is no reason why cycles have to occur at all. The prevailing view among economists is that there is a level of economic activity, often referred to as full employment*, at which the economy could stay forever."
*Often referred to as full employment? War is Peace. Freedom is Slavery. Ignorance is Strength. NAIRU is full employment.