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Dec 30, 2015 | Economist's View
Sandwichman, December 30, 2015 at 10:06 AM"Graduate students of economics learn, early in their careers, that markets allocations are Pareto Optimal."What they don't learn is that
1. the ideal markets that would produce Pareto Optimal allocations don't actually exist and
2. moving from actually existing non-ideal markets to ideal markets WOULD NOT BE Pareto Optimal even if it was possible to do so, which it isn't.
In short, Pareto Optimality is a just so story that has absolutely no bearing on the real world other than as an ideological justification for tons of bullshit.
The next step in graduate students' indoctrination is to teach them that although Pareto Optimal reallocations are implausible, you can get around that with a "principle of compensation." The principle, too is based on a same yardstick fallacy. But never mind the Pareto Optimality smokescreen and the compensation smokescreen have constrained economists to think in terms of doing what is best for the wealthiest. Funny how that happens.
anne said in reply to Sandwichman
Pareto Optimality is a just so story that has absolutely no bearing on the real world other than as an ideological justification for tons of bull----.[ Agreed completely and I think this an important conclusion. ]
Paine said in reply to anne
YesSandy gets the guts of it
Though
The compensation principle is precisely what Pareto rule is all about
Yes we can scramble the goods all we want so long as in the end everyone is at least as well off as before the scramble
In a pure exchange model this is less exciting then in a one period production model
Going on to an inter temporal model with an infinite horizon gets into real juicy Wonderlands
The academy makes it's living as much by distracting fine minds as training them
anne said in reply to Sandwichman
The next step in graduate students' indoctrination is to teach them that although Pareto Optimal reallocations are implausible, you can get around that with a "principle of compensation." The principle, too is based on a same yardstick fallacy. But never mind the Pareto Optimality smokescreen and the compensation smokescreen have constrained economists to think in terms of doing what is best for the wealthiest....anne said in reply to Sandwichman...December 29, 2015
Richest in U.S. Shape Private Tax System to Save Billions
By NOAM SCHEIBER and PATRICIA COHENThe very wealthiest families are able to quietly shape tax policy that will allow them to shield millions, if not billions, of their income using maneuvers available only to several thousand Americans.
Supposing I understand the essay, Roger Farmer is just writing the logical justification to Herbert Spencer's (never Charles Darwin's) "survival of the fittest" rationale that Spencer made wildly popular after Darwin published "On the Origin of Species."
Spencer was the successful ultimate justifier of British "sun-never-setting-on-the-Empire" capitalism. Spencer sold a biological justification, Farmer is selling a logical justification of Empire.
Sandwichman said in reply to anne
No, I think Farmer is dissing Pareto Optimality and using "sunspots" as sarcasm. He seems to do it in a way that opens up space for countless side arguments that leave Pareto Optimality unscathed.The bottom line is that NO ONE would have ever paid any attention to the not just "weak" but nonsensical concept if it didn't serve the function of justifying and ultimately glorifying great inequalities of wealth and income.
;anne said in reply to Sandwichman
I understand the argument and I am entirely right:Roger Farmer is just writing the logical justification to Herbert Spencer's (never Charles Darwin's) "survival of the fittest" rationale that Spencer made wildly popular after Darwin published "On the Origin of Species."
Spencer was the successful ultimate justifier of British "sun-never-setting-on-the-Empire" capitalism. Spencer sold a biological justification, Farmer is selling a logical justification of Empire capitalism.
anne said in reply to Sandwichman
I needed to be sure the argument was as empty morally as I supposed initially, but I supposed correctly. The Roger Farmer essay is an amoral logical justification of imperial capitalism. Plato's "Republic" conceived amorally. ;anne said in reply to Sandwichman
A mean little essay, carefully subtle and mean.Paine said in reply to anne
But Anne as sandy points out Roger blows up the use of Pareto by his future generations argumentThose unable to establish their preferences are unaccounted for in the scrum
He uses this to draw a bold distinction between securities markets and fish catch of the day markets
Paine said in reply to Paine
It's not the way I'd make his pointBut his distinction is important
Some are impacted that are not participating
Third party effects that can not be resolved even with repeated " games "
Because the players are not yet presentanne said in reply to Sandwichman
Farmer is dissing Pareto Optimality and using "sunspots" as sarcasm. He seems to do it in a way that opens up space for countless side arguments that leave Pareto Optimality unscathed.The bottom line is that NO ONE would have ever paid any attention to the not just "weak" but nonsensical concept if it didn't serve the function of justifying and ultimately glorifying great inequalities of wealth and income.
[ Agreed completely, but this argument runs with mine. ]
anne said in reply to Sandwichman
Farmer is dissing Pareto Optimality and using "sunspots" as sarcasm. He seems to do it in a way that opens up space for countless side arguments that leave Pareto Optimality unscathed....[ The issue is that Roger Farmer leaves Pareto Optimality unscathed, and this is an essential point. The essay is beyond the morality of now, but there is no beyond. ]
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Dec 30, 2015 | Economist's View
Sandwichman, December 30, 2015 at 10:06 AM"Graduate students of economics learn, early in their careers, that markets allocations are Pareto Optimal."What they don't learn is that
1. the ideal markets that would produce Pareto Optimal allocations don't actually exist and
2. moving from actually existing non-ideal markets to ideal markets WOULD NOT BE Pareto Optimal even if it was possible to do so, which it isn't.
In short, Pareto Optimality is a just so story that has absolutely no bearing on the real world other than as an ideological justification for tons of bullshit.
The next step in graduate students' indoctrination is to teach them that although Pareto Optimal reallocations are implausible, you can get around that with a "principle of compensation." The principle, too is based on a same yardstick fallacy. But never mind the Pareto Optimality smokescreen and the compensation smokescreen have constrained economists to think in terms of doing what is best for the wealthiest. Funny how that happens.
anne said in reply to Sandwichman
Pareto Optimality is a just so story that has absolutely no bearing on the real world other than as an ideological justification for tons of bull----.[ Agreed completely and I think this an important conclusion. ]
Paine said in reply to anne
YesSandy gets the guts of it
Though
The compensation principle is precisely what Pareto rule is all about
Yes we can scramble the goods all we want so long as in the end everyone is at least as well off as before the scramble
In a pure exchange model this is less exciting then in a one period production model
Going on to an inter temporal model with an infinite horizon gets into real juicy Wonderlands
The academy makes it's living as much by distracting fine minds as training them
anne said in reply to Sandwichman
The next step in graduate students' indoctrination is to teach them that although Pareto Optimal reallocations are implausible, you can get around that with a "principle of compensation." The principle, too is based on a same yardstick fallacy. But never mind the Pareto Optimality smokescreen and the compensation smokescreen have constrained economists to think in terms of doing what is best for the wealthiest....anne said in reply to Sandwichman...December 29, 2015
Richest in U.S. Shape Private Tax System to Save Billions
By NOAM SCHEIBER and PATRICIA COHENThe very wealthiest families are able to quietly shape tax policy that will allow them to shield millions, if not billions, of their income using maneuvers available only to several thousand Americans.
Supposing I understand the essay, Roger Farmer is just writing the logical justification to Herbert Spencer's (never Charles Darwin's) "survival of the fittest" rationale that Spencer made wildly popular after Darwin published "On the Origin of Species."
Spencer was the successful ultimate justifier of British "sun-never-setting-on-the-Empire" capitalism. Spencer sold a biological justification, Farmer is selling a logical justification of Empire.
Sandwichman said in reply to anne
No, I think Farmer is dissing Pareto Optimality and using "sunspots" as sarcasm. He seems to do it in a way that opens up space for countless side arguments that leave Pareto Optimality unscathed.The bottom line is that NO ONE would have ever paid any attention to the not just "weak" but nonsensical concept if it didn't serve the function of justifying and ultimately glorifying great inequalities of wealth and income.
;anne said in reply to Sandwichman
I understand the argument and I am entirely right:Roger Farmer is just writing the logical justification to Herbert Spencer's (never Charles Darwin's) "survival of the fittest" rationale that Spencer made wildly popular after Darwin published "On the Origin of Species."
Spencer was the successful ultimate justifier of British "sun-never-setting-on-the-Empire" capitalism. Spencer sold a biological justification, Farmer is selling a logical justification of Empire capitalism.
anne said in reply to Sandwichman
I needed to be sure the argument was as empty morally as I supposed initially, but I supposed correctly. The Roger Farmer essay is an amoral logical justification of imperial capitalism. Plato's "Republic" conceived amorally. ;anne said in reply to Sandwichman
A mean little essay, carefully subtle and mean.Paine said in reply to anne
But Anne as sandy points out Roger blows up the use of Pareto by his future generations argumentThose unable to establish their preferences are unaccounted for in the scrum
He uses this to draw a bold distinction between securities markets and fish catch of the day markets
Paine said in reply to Paine
It's not the way I'd make his pointBut his distinction is important
Some are impacted that are not participating
Third party effects that can not be resolved even with repeated " games "
Because the players are not yet presentanne said in reply to Sandwichman
Farmer is dissing Pareto Optimality and using "sunspots" as sarcasm. He seems to do it in a way that opens up space for countless side arguments that leave Pareto Optimality unscathed.The bottom line is that NO ONE would have ever paid any attention to the not just "weak" but nonsensical concept if it didn't serve the function of justifying and ultimately glorifying great inequalities of wealth and income.
[ Agreed completely, but this argument runs with mine. ]
anne said in reply to Sandwichman
Farmer is dissing Pareto Optimality and using "sunspots" as sarcasm. He seems to do it in a way that opens up space for countless side arguments that leave Pareto Optimality unscathed....[ The issue is that Roger Farmer leaves Pareto Optimality unscathed, and this is an essential point. The essay is beyond the morality of now, but there is no beyond. ]
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economistsview.typepad.com
Peter K. said in reply to pgl... December 16, 2015 at 10:07 AM"It seems to me looking at a year when the stock market has gone down a bit, credit spreads have widened substantially and the dollar has been very strong it is hard to say that now is the time to fire a shot across the bow of financial euphoria. Looking especially at emerging markets I would judge that under-confidence and excessive risk aversion are a greater threat over the next several years than some kind of financial euphoria."Summers is right that bubbles are usually accompanied by some kind of financial euphoria.
... ... ...
Peter K. said in reply to Benedict@Large...
I disagree with your assessment. People (elite?) are talking about unusual solutions because fiscal policy is being blocked politically.MMT doesn't seem that different from Keynesianism, except proponents have very big chips on their shoulders for some reason.
Right now the Keynesians are arguing that the Fed shouldn't raise rates. Are the MMTers arguing any differently? Or are they merely giving us the blue prints for utopia. Blue prints don't help much if the politics are against you.
Syaloch said in reply to Peter K....
Great question.Dan Kervick said in reply to Syaloch...If I have two black boxes that always produce exactly the same outputs, does it matter whether their internal mechanisms are different?
Dan Kervick said in reply to pgl..."Or maybe they would be effective because people believe they ought to be effective."Possibly. I think back in the 80's when monetarism was the super-sexy new view, there were a lot of people who thought inflation was mainly a function of the monetary base, so if the Fed made a big public stink about pumping up the monetary base, that could be counted on the boost inflation expectations, at least in some quarters, and the high expectations would in turn help to boost actual inflation. That doesn't seem to be the case any longer.
The heyday of monetarism was the late 70's and early 80's. That's when Friedman's monetary theory of inflation caught the public imagination, and it's the only time the Fed ever attempted (briefly) to target the money supply.Dan Kervick said in reply to pgl...Conservative spear-carrier Niall Ferguson knows how important monetarism was to the neoliberal movement, and how big a deal it was during the Thatcher-Reagan era.
Other references to the heyday of monetarism abound:
http://www.voxeu.org/article/nominal-gdp-targeting-developing-nations
The heyday of monetarism was the late 70's and early 80's. That's when Friedman's monetary theory of inflation caught the public imagination, and it's the only time the Fed ever attempted (briefly) to target the money supply.bakho said... December 16, 2015 at 05:45 AMConservative spear-carrier Niall Ferguson knows how important monetarism was to the neoliberal movement, and how big a deal it was during the Thatcher-Reagan era.
Other references to the heyday of monetarism abound:
http://www.voxeu.org/article/nominal-gdp-targeting-developing-nations
Kevin Hoover, The emperor has no clothes!"Given what we know about representative-agent models…there is not the slightest reason for us to think that the conditions under which they should work are fulfilled. The claim that representative-agent models provide microfundations succeeds only when we steadfastly avoid the fact that representative-agent models are just as aggregative as old-fashioned Keynesian macroeconometric models. They do not solve the problem of aggregation; rather they assume that it can be ignored."
This the reason Macro needs to move into more data driven empirics.
There will be massive pushback because so many have wasted many years and resources building mathematically elegant but fatally flawed models that do not make accurate predictions on even represent the fundamentals of any economy.
Syaloch said... December 16, 2015 at 05:50 AM
The Advantages of Higher Inflation - The New York TimesFrom the article:
"A critical problem with aiming for higher inflation is how to get from here to there. The Fed has spent enormous effort anchoring people's expectations to 2 percent. Even economists sympathetic to a higher target are wary of what such a shift might do to its credibility.
"'A perfect world, where you could commit to 4 percent and everybody believed it, would be great,' Mr. Mishkin told me. 'We are not in a perfect world. Moving much higher than 2 percent raises the risk that expectations become unanchored.'
"So here is an alternative proposal. If the Fed is too cautious to risk unhinging inflationary expectations, how about just delivering what it has promised? Among economists and investors, the problem with the Fed's 2 percent target is that just about everybody believes it is really a ceiling. That makes it even harder for inflation to rise to that level. The market expects the Fed to act pre-emptively to ensure it never goes over that line - which is what it seems to be doing now.
"If the Fed is not going to aim for higher inflation, the least it could do is re-anchor expectations to the goal it established, allowing inflation to fluctuate above and below a 2 percent average. That alone might help deal with the next economic crisis.
"'We haven't fully tested whether we can deal with this kind of crisis with a 2 percent inflation target,' said David H. Romer of the University of California, Berkeley. 'Central banks have lots of tools. If they say they are willing to keep using them until they get where they want, they can eventually do it.'"
This highlights a confusing aspect of inflation targets. If the Fed simply announces a higher inflation target without taking any other action, have they really done anything? What's more, they not only need to announce the new target, they need to convince markets that they are willing to do whatever it takes to hit that target -- it's all about credibility and re-anchoring expectations. And while engaging in QE to push down longer-term rates might help make that statement more convincing, it doesn't seem to be strictly necessary for the new target to be effective.
Thus inflation targets seem in at least some cases to operate purely through psychological manipulation, as a sort of placebo effect: inflation rises not because the Fed has injected money into the economy today or changed the cost of lending today, but rather because the Fed is able to "trick" markets into believing it will rise in the future.
Peter K. said in reply to Syaloch...
And the reverse is true. The markets are skeptical that the Fed will hit its 2 percent ceiling target any time soon.Dan Kervick said in reply to Peter K....Inflation expectations are becoming un-anchored on the downside but nobody cares because .... oil.
I guess we'll all have to wait for Yellen's future memoirs to know the thinking that was going on inside the Fed during 2015. But it's interesting that both Yellen and Stanley Fischer, both formerly held in gigantic respect by the more prominent liberal economists, are now the targets of ire for apparently not seeing eye-to-eye with their opinionated friends on the outside. Despite the fact that BoG members have access to mountains of internal research and policy input that people on the outside can only guess at, the default position of the outsiders is that the insiders have been corrupted by power and fast-talking bankers or something.Here's my conjecture about what the Fed's thinking is: The Fed recognizes that keeping policy interest rates down at an unprecedentedly low basement level for years on end sends this message to the global economy: the US economy is a sick basket case. It needs the permanent life support of extraordinary monetary policy intervention to be kept from flat-lining.
I think the people who actually work inside the Fed think that is total bunk, and that as they gradually wean the financial sector off of the monetary ventilator, nothing bad is going to happen at all. The patient is going to get up, walk around and breathe normally. And when that happens, it will say, "Wow, maybe I should have tried that earlier!" Business confidence will spurt; people will think, "Hey, I guess we're not in that gloomy post-2008 depression any more!", and the country will get on with its business more cheerfully.
The Fed has had a devil of a time getting back to normal, because despite its best intentions it has inadvertently re-defined a condition of zero rates and excess reserves bleeding from bankers's ears as the new normal, and created an out-of-control public fixation on monetary policy intervention. Fed communications strategies aimed at guiding the market have turned back on them in a reflexive and self-defeating cycle. They got themselves into a terrible pattern for a while where every time there was good economic news, the markets would respond negatively because they interpreted the good news as evidence that the Fed would "taper" - which they regarded as bad news! And if there was bad news, the markets would respond favorably because they saw the bad news as evidence that the fed would "remain aggressive" - which is good news! Obviously that's a pretty pathological cycle to be in: it's a mechanism fro economic self-stultification. Indicating a move toward normalization too suddenly in 2013 caused the irrational "taper tantrum", so they have had to go more slowly this time around with the hand-holding and by building a longer "guidance" runway.
Their chief need now is to push back against the monetary maniacs and hyperventilators who keep trying to convince impressionable business people and consumers that the Fed has somehow been "keeping the economy" afloat, and that when interest rates go up - from 1/4 to 1/2 of a percent! - we're all going to drown. If you have enough ambulance chasers convincing people they are sick and damaged, they will act sick and damaged.
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Dec 15, 2015 | www.vox.com
Max Planck - the Nobel Prize–winning physicist who pioneered quantum theory - once said the following about scientific progress:
"A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it."
Shorter: Science is not immune to interpersonal bullshit. Scientists can be stubborn. They can use their gravitas to steamroll new ideas. Which means those new ideas often only prevail when older scientists die.
Recently, researchers at the National Bureau of Economic Research (NBER) released a working paper - titled, "Does Science Advance One Funeral at a Time?" - that puts Planck's principle to the test.
Sifting through citations in the PubMed database, they found evidence that when a prominent researcher suddenly dies in an academic subfield, a period of new ideas and innovation follow.
The NBER team identified 12,935 "elite" scientists - based on the amount of funding they receive, how many times they've published, how many patents they invented, or whether they were members of the National Academies of Sciences or the Institute of Medicine. Searching through obituaries, they found 452 of these elite researchers died before retirement. Because science leaves a dense paper trail of citations, publish dates, and author bylines, it's (relatively) easy to track changes in publishing patterns after a prominent death.
Here's the pattern: After the unexpected death of a rock-star scientist, their frequent collaborators - the junior researchers who authored papers with them - suddenly see a drop in publication. At the same time, there is a marked increase in published work by other newcomers to the field:
Unlike the collaborators, presumably, these newcomers are less beholden to the dead luminaries. They were "less likely to cite the deceased star's work at all," the report states. And they seemed to be making novel advances in science:
The new articles represent substantial contributions, at least as measured by long-run citation impact. Together, these results paint a picture of scientific fields as scholarly guilds to which elite scientists can regulate access, providing them with outsized opportunities to shape the direction of scientific advance in that space.
All this suggest there's a "goliath's shadow" effect. People are either prevented from or afraid of challenging a leading thinker in a field. That or scientific subfields are like grown-up versions of high school cafeteria tables. New people just can't sit there until the queen bee dies.
What's interesting is that the deaths seemed to hurt the careers of the luminaries' junior collaborators, the ones who frequently co-authored papers with them but not in a senior role. "The death of an elite scientist has a negative and seemingly permanent impact on the productivity of their coauthors," the study reports. They published less, while outsiders flooded the void.
(The authors caution that gatekeeping by elite researchers isn't always a bad thing. "Gatekeeping activities could have beneficial properties when [a] field is in its inception," granting scientists more room to take risks.)
All of this is another example of how progress in science is confounded by human behavior. We see this in so many ways. Scientists lie about results. Or they discount insights derived from failures. Science is so obsessed with the rewards of solving complicated problems that it forgets about the simple ones. The field overwhelmingly is biased toward males (experiments have shown "John" gets more accolades than "Jennifer" with the identical résumé).
It's worth remembering: Science may be a noble discipline based on cold logic and rational observation; but humans are animals fueled by emotion and bias. As the NBER researchers conclude: "[T]he idiosyncratic stances of individual scientists can do much to alter, or at least delay, the course of scientific advance."
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noahpinionblog.blogspot.com
Paul Romer complains of "mathiness" in macroeconomics. Paul Pfleiderer talks about "chameleon" models. Ricardo Caballero says macroeconomists encourage the "pretense of knowledge". Everywhere, people complain about economists' fetish for pointless model-making.
And of course, some folks accuse the economics profession of being a front for laissez-faire ideology.
...A commenter points out that, as usual, Feynman did this snark way before I did.Jammer812 10:00 PM
Does it really matter if its obscurantism or tendentious cant that a certain type of of economist engages in (cough, neo Fisherism, cough), and then declare victory, when another prominent economist spend 70 pages to find out that if everyone can do algebra in their heads, it might, just might possibly be true. So lets assume a can opener.. sorry I mean that people can, when experience teaches us that most people can't calculate a 20% tip.
Or on the other side, we have the economist who knows that because they are now accounting for the financial sector their DSGE model is just going to nail it.
Or how about a Noble committee that gives a prize to one economist, whose work is disproved by another economist who shared the prize.
Or an entire field, which labored mightily to understand why they missed the second worse crisis in 80 years, only to discover it was for the same reason they missed the worst crisis 80 years ago.
The difference between critical urban theory, or litcrit, or pomo philosophy or popomo art theory and economics isn't that it is easier for people to make fun . It is that economics matter and the nonsense that dominates the discourse, and therefore policy, affects everyone's life.
So console yourself that as bad of writers most economist are, their obscurantism is couched in equations so it's harder for the unschooled to ridicule heir papers.
Anonymous 1:56 PM
Presumably, no one here would expect a humanities PhD to determine whether an economic theory paper is accurate or useful. Why should the reverse be true?
There may well be advantages to this "obscure" language, in the same way that Bourbaki-esque notation and abstraction is useful in economics. This is communication between experts; the notion that you should be able to understand it most likely reflects a disrespect for the given field itself.
I don't envy any theorist whose primary tool of communication is verbal, but if I were put in that position, you may well expect a complex vocabulary to accompany complex ideas (or even simple ideas, rigorously stated). There may well be problems in the humanities, but we're not qualified to recognize them.
Graham Peterson 4:52 PM
Agree about cartels, but I don't think they're that schematic or conspiratorial. Professors across disciplines really do believe they are contributing to something beyond themselves, to knowledge or truth, and grabbing territory and raising salaries is just a means toward those altruistic ends.
Raising (or guaranteeing) salaries looks to me like an unintended consequence of what is proudly and loudly intended by economists and professors of humanities -- increasing the rigor of analysis. There is just about nobody who disagrees that increasing the rigor of analysis is a bad thing. But how do we do that? By opening up intellectual competition among disciplines, political ideologies, etc., or by constructing evermore elaborate apprentice programs designed to hone already-existing intellectual traditions *within* disciplines, ideologies, etc.?
I can't really see any qualitative difference between increasing the complexity of grammar using any symbolic system, bourbakian notation in mathematics or latinate phrases in English. What's most dangerous for economics is its disregard for empirical observation outside of econometrics. Econometrics, just like theory itself, becomes a theoretical exercise and is subject to all of the same self referential signaling games as high theory is.
Admiring each other's screw drivers isn't any more empirical than admiring each other's theories of how screws secure materials. The point is to turn some screws.
Yamaneko 11:37 PM
A cynical advantage to the increased use or mathematics and mathiness is that the economics field gets to use university math departments to thin the herd just like the engineering field does. Better still, the filter imposed by requiring calculus, statistics and differential equations is not always anticipated: while prospective engineers take AP Calculus and end up in a class where they already know half the material, prospective economists enter Calculus I and flunk out.
... ... ...
Øystein 6:07 PM
You might be interested to learn that the philosopher Jon Elster has drawn an analogy between "hard and soft obscurantism" (econ and critical theory).
Anonymous 9:38 AM
He devotes the last chapter of his book Explaining Social Behavior to this distinction. The whole book is very much worth a read: http://www.amazon.com/Explaining-Social-Behavior-Bolts-Sciences/dp/0521777445
Kain 7:12 PM
I generally agree with your point, except the part where you don't think of Economics as ideologically driven.
http://blog.supplysideliberal.com/post/128894764282/what-is-indoctrination-and-how-is-it-different
"What is indoctrination and how is it different from regular instruction? Indoctrination, suggests Christina Hoff Summers, is characterized by three features, the major conclusions are assumed beforehand, rather than being open to question in the classroom; the conclusions are presented as part of a "unified set of beliefs" that form a comprehensive worldview; and the system is "closed," committed to interpreting all new data in the light of the theory being affirmed.
Whether this account gives us sufficient conditions for indoctrination, and whether, so defined, all indoctrination is bad college pedagogy, may certainly be debated. According to these criteria, for example, all but the most philosophical and adventurous courses in neoclassical economics will count as indoctrination, since undergraduate students certainly are taught the major conclusions of that field as established truths which they are not to criticize from the perspective of any other theory or worldview; they are taught that these truths form a unitary way of seeing the world; and, especially where microeconomics is concerned, the data of human behavior are presented as seen through the lens of that theory. It is probably good that these conditions obtain at the undergraduate level, where one cannot simultaneously learn the ropes and criticize them–although one might hope that the undergraduate will pick up in other courses, for example courses in moral philosophy, the theoretical apparatus needed to raise critical questions about these foundations."General Equilibrium, Rational Expectations, Microfoundations, The parculiar definitions of "Rationality" and "Efficiency", Utility Optimization, etc. are all very ideologically driven, and if you do not conform to these standards, you are not accepted within the discipline. I've been told just how completely unreadable Econ papers are, not even talking about the math component, thanks to all of the Jargon.
Might be less politically-motivated, but it doesn't necessarily require a particular political viewpoint to be ideologically-motivated.
Dulimbai 7:48 PM
Yo do understand that this is exactly the point? Thomas Kuhn, which knew something about science, basically said that science requires barriers to entry to get amateurs out.
A good explanation can be found here http://lesswrong.com/lw/lr/evaporative_cooling_of_group_beliefs/
Ghyl Tarvoke 8:29 PM
I think here you are giving too much importance to the gatekeeping/economic aspect of the most vacuous outpourings of Critical Theory. My experience as a history MA is that such academics give so little thought to economics and their economic situation that such thoughts rarely enter their minds. However, it probably has had the effect of reducing the intellectual diversity of many subjects, which in the humanities at least is a major shame and a problem.
My theory is more straightforward and it's simple. Don't underestimate people's, even academics (perhaps especially academics), intellectual laziness and the desire to dress up their priors in language that looks 'intellectual' thus making your priors look smart and those who don't share your priors not so smart. In short the popularity of most of Critical Theory is due to the lazy man's guide to enlightenment, making something look intellectually difficult while not really challenging people at all. After all, it is not as if many of the core beliefs of large parts of critical theory once you remove the verbiage are not widespread among certain elements of society. And those elements are massively over represented among people liking to do a BA in literature or anthropology. Why are such beliefs so popular? Well, that's a different and difficult question.
However, I do feel liking pointing out, as others have already alluded to, critical theory and postmodernism have had their day. It peaked in the 90s and belongs to the era of Seinfeld, Grunge, and Triangulation. Now there is a trend towards another ideology, bland progressivism and the fear of giving anything that looks like a controversial opinion. This, at least, is notable in History (I can't speak for literature, in Anthropology pomo is more prevalent but is certainly declining). Some have justified this as 'empiricism', and perhaps it is a needed reaction to what went before, but it is frequently driven by the same intellectual forces I've described above. The difference between Generation Y and the Boomers perhaps. Either way, the gatekeeping aspect is barely part of it.
Tom Warner 2:00 PM
Seems to me anon you are agreeing with the complaint about academic obscurantism: it's the use of an artificial dialect, which only practitioners would invest in learning how to read, to create a false impression of sophistication. The only oddity is you seem inexplicably proud of your fluency in said dialect.
Anonymous 7:55 PM
"Mathematical theory, of the type economists do, is hard to do..."
Such barriers to entry should be erected so as to keep out the math and physics nerds that have destroyed economics.
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peakoilbarrel.com
VK, 12/04/2015 at 2:57 pmBeware Economics 101. The peer review mechanism has horribly failed.Dennis Coyne, 12/04/2015 at 6:11 pmWhen you read Krugman, this is what he and our central bankers believe.
"The problem for early would - be neoclassical macroeconomists was that, strictly speaking, there was no microeconomic model of macroeconomics when they began their campaign. So they developed a neoclassical macro model from the foundation of the neoclassical growth model developed by Nobel laureate Robert Solow (Solow 1956) and Trevor Swan (Swan 2002). They interpreted the equilibrium growth path of the economy as being determined by the consumption and leisure preferences of a representative consumer, and explained deviations from equilibrium – which the rest of us know as the business cycle – by unpredictable 'shocks' to technology and consumer preferences.
This resulted in a model of the macroeconomy as consisting of a single consumer, who lives for ever, consuming the output of the economy. Which is a single good produced in a single firm, which he owns and in which he is the only employee, which pays him both profits equivalent to the marginal product of capital and a wage equivalent to the marginal product of labor. To which he decides how much labor to supply by solving a utility function that maximizes his utility over an infinite time horizon, which he rationally expects and therefore correctly predicts.
The economy would always be in equilibrium except for the impact of unexpected 'technology shocks' that change the firm's productive capabilities (or his consumption preferences) and thus temporarily cause the single capitalist/worker/consumer to alter his working hours.
Any reduction in working hours is a voluntary act, so the representative agent is never involuntarily unemployed, he's just taking more leisure. And there are no banks, no debt, and indeed no money in this model."
Prof. Steve Keen, Debunking Economics.
Hi VK,VK, 12/05/2015 at 1:41 amNo this is not what Krugman believes at all. There are some economists that think in these terms, in the US it is primarily in the interior of the country, the economists on the east and west coast, (this includes Krugman and many others) would not think in these terms at all.
Have you ever read anything by Krugman?
Read Krugman for years. The basic neoclassical models are founded on the representative agent model with the above assumptions as core. Look up the PhD text book on economics – http://www.amazon.com/Microeconomic-Theory-Andreu-Mas-Colell/dp/0195073401VK, 12/04/2015 at 3:04 pmKrugman gives assessments based on the representative agent models, with its no money, no debt, no banks assumptions. Very linear models, no dynamic modeling.
Economic theory and modeling is stuck in the 19th century. Rest of the hard sciences, physics, chemistry, atmospherics moved on with Poincare and later Lorenz to dynamic simulations.
To Dennis Coyne, debt levels matter because "loans create deposits" and not vice versa. Bank of England published a paper last year on modern money creation http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdfDennis Coyne, 12/04/2015 at 6:24 pmThe fractional reserve banking model taught in economics is absolutely empirically wrong. Because banks have the power to create credit money, they can issue in excess.
Under the empirically correct credit money creation model, there can be an excessive build up of debt. Hence the more than 250 sovereign and domestic govt debt crises since 1850.
Hi VK,VK, 12/05/2015 at 1:56 amRune Likvern posted the link and I read the paper. US textbooks through 1990 covered this exactly as in that paper, so it was a good refresher, but not different from what I had learned in the past.
There can be excessive debt and banks can fail due to poor lending practices combined with a severe recession. Nations can also default. The question is how much debt is too much debt. In economics there are different opinions on this question. When I was studying economics the focus was on public debt crowding out private debt when an economy was close to full employment.
Now there seems to be more focus on private debt, which nobody in economics used to worry about.
It may be that the lack of banking regulation and the rise of shadow banking has made this more of a problem, I am out of date on the latest research.
http://www.economist.com/blogs/freeexchange/2015/06/public-debt
The article at the link above suggests up to about a 150% debt to GDP ratio is a safe level for public debt.
U.S. Textbooks don't cover this at all. The assumption that Paul Samuelson used in his seminal undergraduate textbook that millions have studied was the fractional reserve lending model which is empirically false.Jef, 12/05/2015 at 9:12 amThe whole of economics is empirically false, it would be a laughing stock if people looked under the hood with its assumptions that are meant to preserve straight line thinking rather than dealing with reality, which is highly non-linear and dynamic.
Private debt wasn't a concern in economics because they assumed away the role of banks to preserve the equilibrium models. Once you incorporate reality into the models, which is what a true science would do, you find that private debt levels matter.
What economists think: Saver lends to borrower. Saver loses purchasing power, borrower gains purchasing power. Purchasing power hasn't changed in the economy. Just a shift
What really happens: Saver puts money in a bank, has access to his money anytime. Borrower wants money, bank issues a credit and writes loan amount as asset. Purchasing power as a whole increases across the economy as both saver and borrower now have money to buy goods and services with.
That's how the economy grows – bank issuance of credit. And it can easily be in excess.https://unlearningeconomics.wordpress.com/2012/04/03/the-keenkrugman-debate-a-summary/
Thanks for hanging in there VK.Glenn Stehle, 12/05/2015 at 9:34 amI tried to explain this to my father in law who is an attorney specializing in finance and accounting. He simply could not accept it or even wrap his head around it even after reading the Bank of England piece.
It is fraud plain and simple and the cost to humanity in both financial terms and lives lost is huge.
Paul Krugman is a quintessential neoclassical economist. Neoclassical economists threw the notion that economics should deal with empirical or factual reality overboard quite some time ago.Glenn Stehle, 12/05/2015 at 9:55 amPerhaps no one was more explicit in articulating this notion that science should discard factual reality than Milton Friedman.
Any number of critics have pointed this out. For instance,
Economists often invoke a strange argument by Milton Friedman that states that models do not have to have realistic assumptions to be acceptable - giving them license to produce severely defective mathematical representations of reality.
–NASSIM NICHOLAS TALEB, The Black Swan
and
Economists as a rule do not deny that their assumptions about human nature are highly unrealistic, but instead claim, following Friedman (1962, 1982), that the absence of realism does not diminish the value of their theory because it "works," in the sense that it generates valid predictions….
Most important, philosophers of science have almost universally rejected Friedman's position (Boland, 1979). It is very widely agreed that the purpose of a theory is to explain. Otherwise, [predictions] are unable to foretell under what conditions they will continue to hold or fail.
AMITAI ETZIONI, The Moral Dimension
With the advent of the Great Financial Crisis, which began in 2007 and continues to this day, the neoclassical models did fail. And they failed in the most spectacular way.
Nevertheless, for those like Krugman who are in love with orthodox economic theory, when facts don't conform to theory, so much worse for the facts.
It should be added that not everyone who rejects the orthodox, neoclassical theory of exogenous money creation and its "available funds" theory of banking, as Keen calls it, believes that debt matters.Dennis Coyne, 12/05/2015 at 12:38 pmA very good example of this is the MMT school, which even though it rejects the orthodox theory of money creation, nevertheless discounts the importance of debt, or at least public debt.
The distinction between private debt and public debt, however, is not a clear one. We all saw, for instance, the ease with which private debt was converted into public debt in the cases of Ireland and Spain in the wake of the GFC.
Hi Glenn,Glenn Stehle, 12/05/2015 at 1:57 pmKrugman does hold relatively mainstream views, but there are significant differences of opinion within economics. Many economists reject Keynesian theory, Krugman does not. The piece that VK posted by Keen was essentially a rejection of the macroeconomic theory that was formulated to replace Keynesian theory. Krugman would make many of the exact same criticisms.
The "debt doesn't matter" theme is carried a little too far, nobody really argues this. The argument is that when the economy is doing poorly due to low aggregate demand (during a severe recession) and monetary policy is not effective because interest rates are near zero (so that the federal funds rate cannot be lowered any further), cutting fiscal deficits is poor public policy.
Perhaps you disagree?
Dennis,Dennis Coyne, 12/05/2015 at 12:15 pmAre you unaware of the famous debate between Krugman and Keen, and what it is all about?
Perhaps this article by Ann Pettifor will help:
The debate between these two economists on the role of banking and specifically the creation of credit is of fundamental importance in understanding the shortcomings of orthodox economic thinking – and why it was so ill-equipped to handle, let alone predict, the crash of 2008.
Many rightly applaud Paul Krugman for using his platform at the New York Times to defend further fiscal stimulus in the US–against a hostile political crowd, not to mention the downright opposition of neo-liberal economists –- and we commend him for that.
However, because he has such an important platform, it matters more to many monetary economists (including the editor of this series) that he appears to lack a proper understanding of the nature of credit, and the role of banks in the economy.
https://www.opendemocracy.net/ourkingdom/steve-keen/keen-krugman-debate
I very much recommend reading the entire article, and much more can be found by Googling "Keen vs Krugman debate."
Hi Vk,Dennis Coyne, 12/05/2015 at 1:41 pmThere are many of us who have studied beyond the introductory level. In my introductory courses, I believe we were taught this correctly, but that was long ago, I know when I instructed the introductory students as a grad student what I was teaching was essentially what I read in the paper you cited. Perhaps the "textbooks" have improved over time, I haven't read an economics textbook for many years.
Have you read any economics papers lately, perhaps there has been more progress than you think. A fundamental problem with economics is that how we understand the workings of the economy can affect the way people behave. People will always try to game the system and this then effects the system. It is a difficult modelling problem not faced by chemists and physicists.
If you solve it you should publish a paper.
Hi VK,Rune Likvern, 12/05/2015 at 1:43 pmYou said:
What economists think: Saver lends to borrower. Saver loses purchasing power, borrower gains purchasing power. Purchasing power hasn't changed in the economy. Just a shift
Economists don't think this way at all. These kinds of lessons are often presented in introductory economics courses to show how economists once thought things worked in 1803 when Say introduced "Say's Law".
Then the economics professor goes on to explain how a modern economy actually works (which we don't understand all that well.)
Generally speaking economic growth is considered a good thing, and banks lending to borrowers that are likely to be able to repay the loan (not true leading up to the financial crisis due to poor regulation and lending practices), is not a problem in a well regulated banking sector (in the US this went away in the 1980s).
So yes debt is a big problem with a poorly regulated banking industry (financial industry really because of shadow banking).
Debt is like a lot of things in life, too much or too little can be a bad thing.
The central bank can certainly influence the amount of lending by raising interest rates, as long as inflation is moderate, there is not much reason to do so.
"US textbooks through 1990 covered this exactly as in that paper, so it was a good refresher, but not different from what I had learned in the past."And what is the title of those textbooks?
"Now there seems to be more focus on private debt, which nobody in economics used to worry about."
Was it US public or private debt that started the GFC in 2007/2008?
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RGC, December 02, 2015 at 06:09 AM
Larry Summers and the Subversion of EconomicsBy Charles Ferguson October 03, 2010
The Obama administration recently announced that Larry Summers is resigning as director of the National Economic Council and will return to Harvard early next year. His imminent departure raises several questions: Who will replace him? What will he do next? But more important, it's a chance to consider the hugely damaging conflicts of interest of the senior academic economists who move among universities, government, and banking.
Summers is unquestionably brilliant, as all who have dealt with him, including myself, quickly realize. And yet rarely has one individual embodied so much of what is wrong with economics, with academe, and indeed with the American economy. For the past two years, I have immersed myself in those worlds in order to make a film, Inside Job, that takes a sweeping look at the financial crisis. And I found Summers everywhere I turned.
Consider: As a rising economist at Harvard and at the World Bank, Summers argued for privatization and deregulation in many domains, including finance. Later, as deputy secretary of the treasury and then treasury secretary in the Clinton administration, he implemented those policies. Summers oversaw passage of the Gramm-Leach-Bliley Act, which repealed Glass-Steagall, permitted the previously illegal merger that created Citigroup, and allowed further consolidation in the financial sector. He also successfully fought attempts by Brooksley Born, chair of the Commodity Futures Trading Commission in the Clinton administration, to regulate the financial derivatives that would cause so much damage in the housing bubble and the 2008 economic crisis. He then oversaw passage of the Commodity Futures Modernization Act, which banned all regulation of derivatives, including exempting them from state antigambling laws.
After Summers left the Clinton administration, his candidacy for president of Harvard was championed by his mentor Robert Rubin, a former CEO of Goldman Sachs, who was his boss and predecessor as treasury secretary. Rubin, after leaving the Treasury Department-where he championed the law that made Citigroup's creation legal-became both vice chairman of Citigroup and a powerful member of Harvard's governing board.
Over the past decade, Summers continued to advocate financial deregulation, both as president of Harvard and as a University Professor after being forced out of the presidency. During this time, Summers became wealthy through consulting and speaking engagements with financial firms. Between 2001 and his entry into the Obama administration, he made more than $20-million from the financial-services industry. (His 2009 federal financial-disclosure form listed his net worth as $17-million to $39-million.)
Summers remained close to Rubin and to Alan Greenspan, a former chairman of the Federal Reserve. When other economists began warning of abuses and systemic risk in the financial system deriving from the environment that Summers, Greenspan, and Rubin had created, Summers mocked and dismissed those warnings. In 2005, at the annual Jackson Hole, Wyo., conference of the world's leading central bankers, the chief economist of the International Monetary Fund, Raghuram Rajan, presented a brilliant paper that constituted the first prominent warning of the coming crisis. Rajan pointed out that the structure of financial-sector compensation, in combination with complex financial products, gave bankers huge cash incentives to take risks with other people's money, while imposing no penalties for any subsequent losses. Rajan warned that this bonus culture rewarded bankers for actions that could destroy their own institutions, or even the entire system, and that this could generate a "full-blown financial crisis" and a "catastrophic meltdown."
When Rajan finished speaking, Summers rose up from the audience and attacked him, calling him a "Luddite," dismissing his concerns, and warning that increased regulation would reduce the productivity of the financial sector. (Ben Bernanke, Tim Geithner, and Alan Greenspan were also in the audience.)
Soon after that, Summers lost his job as president of Harvard after suggesting that women might be innately inferior to men at scientific work. In another part of the same speech, he had used laissez-faire economic theory to argue that discrimination was unlikely to be a major cause of women's underrepresentation in either science or business. After all, he argued, if discrimination existed, then others, seeking a competitive advantage, would have access to a superior work force, causing those who discriminate to fail in the marketplace. It appeared that Summers had denied even the possibility of decades, indeed centuries, of racial, gender, and other discrimination in America and other societies. After the resulting outcry forced him to resign, Summers remained at Harvard as a faculty member, and he accelerated his financial-sector activities, receiving $135,000 for one speech at Goldman Sachs.
Then, after the 2008 financial crisis and its consequent recession, Summers was placed in charge of coordinating U.S. economic policy, deftly marginalizing others who challenged him. Under the stewardship of Summers, Geithner, and Bernanke, the Obama administration adopted policies as favorable toward the financial sector as those of the Clinton and Bush administrations-quite a feat. Never once has Summers publicly apologized or admitted any responsibility for causing the crisis. And now Harvard is welcoming him back.
Summers is unique but not alone. By now we are all familiar with the role of lobbying and campaign contributions, and with the revolving door between industry and government. What few Americans realize is that the revolving door is now a three-way intersection. Summers's career is the result of an extraordinary and underappreciated scandal in American society: the convergence of academic economics, Wall Street, and political power.
Starting in the 1980s, and heavily influenced by laissez-faire economics, the United States began deregulating financial services. Shortly thereafter, America began to experience financial crises for the first time since the Great Depression. The first one arose from the savings-and-loan and junk-bond scandals of the 1980s; then came the dot-com bubble of the late 1990s, the Asian financial crisis; the collapse of Long Term Capital Management, in 1998; Enron; and then the housing bubble, which led to the global financial crisis. Yet through the entire period, the U.S. financial sector grew larger, more powerful, and enormously more profitable. By 2006, financial services accounted for 40 percent of total American corporate profits. In large part, this was because the financial sector was corrupting the political system. But it was also subverting economics.
Over the past 30 years, the economics profession-in economics departments, and in business, public policy, and law schools-has become so compromised by conflicts of interest that it now functions almost as a support group for financial services and other industries whose profits depend heavily on government policy. The route to the 2008 financial crisis, and the economic problems that still plague us, runs straight through the economics discipline. And it's due not just to ideology; it's also about straightforward, old-fashioned money.
Prominent academic economists (and sometimes also professors of law and public policy) are paid by companies and interest groups to testify before Congress, to write papers, to give speeches, to participate in conferences, to serve on boards of directors, to write briefs in regulatory proceedings, to defend companies in antitrust cases, and, of course, to lobby. This is now, literally, a billion-dollar industry. The Law and Economics Consulting Group, started 22 years ago by professors at the University of California at Berkeley (David Teece in the business school, Thomas Jorde in the law school, and the economists Richard Gilbert and Gordon Rausser), is now a $300-million publicly held company. Others specializing in the sale (or rental) of academic expertise include Competition Policy (now Compass Lexecon), started by Richard Gilbert and Daniel Rubinfeld, both of whom served as chief economist of the Justice Department's Antitrust Division in the Clinton administration; the Analysis Group; and Charles River Associates.
In my film you will see many famous economists looking very uncomfortable when confronted with their financial-sector activities; others appear only on archival video, because they declined to be interviewed. You'll hear from:
- Martin Feldstein, a Harvard professor, a major architect of deregulation in the Reagan administration, president for 30 years of the National Bureau of Economic Research, and for 20 years on the boards of directors of both AIG, which paid him more than $6-million, and AIG Financial Products, whose derivatives deals destroyed the company. Feldstein has written several hundred papers, on many subjects; none of them address the dangers of unregulated financial derivatives or financial-industry compensation.
- Glenn Hubbard, chairman of the Council of Economic Advisers in the first George W. Bush administration, dean of Columbia Business School, adviser to many financial firms, on the board of Metropolitan Life ($250,000 per year), and formerly on the board of Capmark, a major commercial mortgage lender, from which he resigned shortly before its bankruptcy, in 2009. In 2004, Hubbard wrote a paper with William C. Dudley, then chief economist of Goldman Sachs, praising securitization and derivatives as improving the stability of both financial markets and the wider economy.
- Frederic Mishkin, a professor at the Columbia Business School, and a member of the Federal Reserve Board from 2006 to 2008. He was paid $124,000 by the Icelandic Chamber of Commerce to write a paper praising its regulatory and banking systems, two years before the Icelandic banks' Ponzi scheme collapsed, causing $100-billion in losses. His 2006 federal financial-disclosure form listed his net worth as $6-million to $17-million.
- Laura Tyson, a professor at Berkeley, director of the National Economic Council in the Clinton administration, and also on the Board of Directors of Morgan Stanley, which pays her $350,000 per year.
- Richard Portes, a professor at London Business School and founding director of the British Centre for Economic Policy Research, paid by the Icelandic Chamber of Commerce to write a report praising Iceland's financial system in 2007, only one year before it collapsed.
- And John Campbell, chairman of Harvard's economics department, who finds it very difficult to explain why conflicts of interest in economics should not concern us.
But could he be right? Are these professors simply being paid to say what they would otherwise say anyway? Unlikely. Mishkin and Portes showed no interest whatever in Iceland until they were paid to do so, and they got it totally wrong. Nor do all these professors seem to make policy statements contrary to the financial interests of their clients. Even more telling, they uniformly oppose disclosure of their financial relationships.
The universities avert their eyes and deliberately don't require faculty members either to disclose their conflicts of interest or to report their outside income. As you can imagine, when Larry Summers was president of Harvard, he didn't work too hard to change this.
Now, however, as the national recovery is faltering, Summers is being eased out while Harvard is welcoming him back. How will the academic world receive him? The simple answer: Better than he deserves.
While making my film, we wrote to the presidents and provosts of Harvard, Columbia, and other universities with detailed questions about their conflict-of-interest policies, requesting interviews about the subject. None of them replied, except to refer us to their Web sites.
Academe, heal thyself.
EMichael said in reply to RGC...Yeah, after an economist has had one job in the government; one job in the banking system; and one teaching job he should be required to stop working as an economist.RGC said in reply to EMichael...I think it is interesting that Summers led the financial deregulation efforts of the Clinton administration and then made a bundle on Wall Street. I think that should be taken into account when evaluating his discussions of economics.EMichael said in reply to RGC...Of course it should.At the same time this is not taking anything into account, this is about "subverting" economics.
Can you make a case that the only reason Summers made a "bundle" working on Wall Street is because of the financial deregulation efforts he made? Last time I looked he did not have a vote on the legislation.
RGC said in reply to EMichael...I think this is especially troubling for the economics profession:"Over the past 30 years, the economics profession-in economics departments, and in business, public policy, and law schools-has become so compromised by conflicts of interest that it now functions almost as a support group for financial services and other industries whose profits depend heavily on government policy. The route to the 2008 financial crisis, and the economic problems that still plague us, runs straight through the economics discipline. And it's due not just to ideology; it's also about straightforward, old-fashioned money."
EMichael said in reply to RGC...Cause no economists actually believed in any of the policies that caused all of those things nor did any economist fail to vote for the policies adopted.RGC said in reply to EMichael...Upton Sinclair:"It is difficult to get a man to understand something when his salary depends upon his not understanding it."
Tom aka Rusty said in reply to RGC...
As Hemingway and F. SCott Fitzgerald exchanged in their writings (the reputed face-to-face conversation may not have happened):The rich are different.
Yes, they have more money.
Combine elite and rich and you get a toxic combination.
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Economist's View
reason: December 01, 2015 at 07:27 AMEMichael said in reply to reason... December 01, 2015 at 07:34 AMSanjait
I think it is perfectly clear that a secular policy of increasing private indebtedness is not indefinitely extendable. Sure, if we had printed money in the past and kept monetary policy relatively tight (or otherwise managed the international financial system so that large persistent balance of payments deficits were not tolerated) we wouldn't have got in the mess we are in. But once we are there just trying to get over-indebted people to take on more debt doesn't seem like a winning strategy.
reason: December 01, 2015 at 07:36 AMI see no real increase in private indebtedness.
The problem with the financial system is what lies behind lending.
reason:Avraam Jack Dectis
Not bad.
But1. asset taxes are tricky things to run (many assets aren't traded and the prices of other assets are very volatile). And there is the problem of offshore ownership and offshore assets, so it requires international co-operation.
2. This takes a very closed economy view of things - the trade deficit might end up affecting the trade balance and hence the flow of assets into and out of the country, and eventually also the terms of trade. You should think through how such a policy would work in say - Luxembourg.
EMichael
You see no increase in private indebtedness - when do you mean? If you mean now - then yes - that is exactly why the economy is so sluggish. Where is the increase in demand going to come from if the country is running a trade deficit, is not increasing its borrowing and is committed to reducing its government deficit?
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Nov 30, 2015 | Economist's View
Dan Kervick, November 30, 2015 at 11:12 AM
likbez ->Dan Kervick...Just as was the case with his work on financial instability, Hyman Minsky's analysis of the problems of poverty and inequality in a capitalist economy, as well as his understanding of the political dysfunctions that would result from treating these problems in the wrong way, were prophetic. See this piece by Minksy's student L. Randall Wray, especially Section 2:
http://www.levyinstitute.org/pubs/wp_515.pdf
The centerpiece of Minsky's preferred approach was based on a government commitment to "tight full employment". He believed that neither human capital investment, economic growth, nor redistribution would be sufficient on their own to address the problem.
As part of the critique of the human capital approach, Minsky argued that:
"it is unjust to tell the poor that they must change before they will be entitled to work-whether it is their skills set or their character that is the barrier to work... Minsky always argued that it is preferable to "take workers as they are," providing jobs tailored to the characteristics of workers, rather than trying to tailor workers to the jobs available before they are allowed to work (Minsky 1965, 1968, 1973)."
Minsky accurately foresaw the way in which a welfare approach to poverty, as opposed to a full employment approach, would politically divide working people among themselves:
"Further, NIT (and other welfare programs) would create a dependent class, which is not conducive to social cohesion (Minsky 1968). Most importantly, Minsky argued that any antipoverty program must be consistent with the underlying behavioral rules of a capitalist economy (Minsky no date, 1968, 1975a). One of those rules is that earned income is in some sense deserved."
"With the perspective of the 1980s and 1990s now behind us, it is hard to deny Minsky's arguments-President Reagan successfully turned most Americans against welfare programs and President Clinton finally "eliminated welfare as we know it." According to Minsky, a successful antipoverty program will need to provide visible benefits to the average taxpayer."
We can note that this political problem has only gotten worse, as can be seen from the deepening ugliness of our domestic politics, and the poll results that MacGillis cites.
Minsky also understood the unhealthy political and economic dynamics of an undirected aggregate demand approach to poverty, and promoted, following ideas of Keynes, a measure of socialized investment and direct job creation:
"Minsky feared that using demand stimulus to reduce poverty would necessarily lead to "stop-go" policy. Expansion would fuel inflation, causing policy makers to reverse course to slow growth in order to fight inflation (Minsky 1965, 1968). Because wages (and prices) in leading sectors would rise in expansion, but could resist deflationary pressures in recession, there would be an upward bias to rising wages in those sectors. However, in the lagging sectors, wage increases would come slowly-only with adequate tightening of labor markets-and could be reversed in recession. Hence, Minsky argued that a directed demand policy would be required-to raise demand in the lagging sectors and for low wage and unemployed workers. For this reason, he concluded
that a direct job creation program would be required."All this adds up to a more activist role for the government sector.
My impression is that "human capital" is one of the most fundamental neoliberal myths. See, for example What Exactly Is Neoliberalism by Wendy Brown https://www.dissentmagazine.org/blog/booked-3-what-exactly-is-neoliberalism-wendy-brown-undoing-the-demos
As for people betraying their own economic interests, this phenomenon was aptly described in "What's the matter with Kansas" which can actually be reformulated as "What's the matter with the USA?". And the answer he gave is that neoliberalism converted the USA into a bizarre high demand cult. There are several characteristics of a high demand cult that are applicable. Among them:
- "The group is preoccupied with making money."
- "Questioning, doubt, and dissent are discouraged or even punished."
- "Mind-numbing techniques (for example: meditation, chanting, speaking in tongues, debilitating work routines) are used to suppress doubts about the group or its leader(s)." Entertainment and, especially sport events in the US society serves the same role.
- "The group's leadership dictates – sometimes in great detail – how members should think, act, and feel." Looks like this part of brainwashing is outsourced to economy departments ;-)
- "The group is elitist, claiming a special, exalted status for itself, its leader(s), and members (for example the group and/or the leader has a special mission to save humanity)."
- "The group has a polarized, "we-they" mentality that causes conflict with the wider society."
- "The group's leader is not accountable to any authorities (as are, for example, clergy with mainstream denominations)."
- "The group teaches or implies that its supposedly exalted ends justify means (for example: collecting money for bogus charities) that members would have considered unethical before joining."
- "The group's leadership induces guilt feelings in lower members for the lack of achievement in order to control them."
- "Members are expected to devote inordinate amounts of time to the group."
- "Members are encouraged or required to live and/or socialize only with other group members."
It is very difficult to get rid of this neoliberal sect mentality like is the case with other high demand cults.
kthomas,
"...it's driven be resentment..."
No, its driven by racism. White trash will take with one hand, then walk right into a voting both and screw themselves because they think they sticking it to blacks, mexicans, gays, etc.
Syaloch -> kthomas...
Racism is certainly part of it, but it's really more fundamental than that.
"This disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments. That wealth and greatness are often regarded with the respect and admiration which are due only to wisdom and virtue; and that the contempt, of which vice and folly are the only proper objects, is often most unjustly bestowed upon poverty and weakness, has been the complaint of moralists in all ages."
Adam Smith, The Theory of Moral Sentiments
bakho
This misreads the politics. People who are disconnected from the job market very easily get disconnected from the political process. They don't vote. The people who do have jobs and are worried about keeping them and being paid too little are voting against the "losers" who they see as parasites. Never mind that the Malefactors of Great Wealth are the true parasites. Elections in the US are won or lost on voter turnout.
Syaloch
Mark: "If the distribution of income is determined by something other than productivity, as it appears to be -- if income that was not earned through higher productivity flows to those at the top of firms due to unequal bargaining power or other forces -- then returning that income to those who did earn it is not taking something unjustly..., instead it is restoring justice. The trick is to get people to understand that."
That's what Reich is attempting to do in Saving Capitalism. I like his coinage of "predistribution" and his focus on changing the allocation of market income so that it truly reflects what is "earned" rather than settling for redistribution after the fact, which allows the simple-minded to argue that you're taking what's "mine" and giving it to anonymous others who it's easy to cast as undeserving.
From Krugman's review:
"These [predistribution] changes would include fairly standard liberal ideas like raising the minimum wage, reversing the anti-union bias of labor law and its enforcement, and changing contract law to empower workers to take action against employers and debtors to assert their interests against creditors. Reich would also, in a less orthodox move, seek legislative and other changes that might move corporations back toward what they were a half-century ago: organizations that saw themselves as answering not just to stockholders but to a broader set of 'stakeholders,' including workers and customers."
While I fully support all of the above I think we need to go further. For one thing I would like to see more benefits without means testing; ideally this would amount to a guaranteed minimum income, since I think that's what we're going to need anyway to cope with increasing automation.
I also think the direct job creation approach described by Dan above is worth considering. The challenge there is that for an increasing percentage of jobs it is no longer possible to "take workers as they are" given the specialized skills required. Subsidized retraining and re-credentialing can help to some degree, but there will always be some portion of the population incapable of acquiring the needed skills.
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Political Economist, 11/13/2015 at 3:55 pmHi Dennis, I wrote a long reply to your question on labor theory of value. But somehow after I posted it, it appears to have disappeared. I am trying to re-post it hereMinqi Li, 11/13/2015 at 4:02 pmDennis:
Hi Dennis, thanks for bringing this up. This is definitely not about energy. But since you mentioned this here, let me give you some of my thought.
First, regarding neoclassical economics, the debate between two Cambridges pretty much destroyed the logical foundation of neoclassical economics. Because neoclassical economics cannot establish the definition/measurement of "capital" without first knowing marginal productivity of capital; but they cannot establish the definition/measurement of marginal productivity of capital without first establishing "capital".
So neoclassical economics is involved in circular reasoning, and without a meaningful concept of capital, the rest of the system collapses.
The above is mostly theoretical. It does not necessarily undermine one's faith in the efficiency of a market economy (ironically, it is conceivable that the entire neoclassical case for invisible hand can be reconstructed based on labor theory of value; after all, Ricardo did that)
But since then there has been lots of development among the more enlightened mainstream economists that have basically established that market failures are both devastating and universal. This is serious, because this means, in fact, in their heart, they know the invisible hand argument is invalid. Stiglitz came close to admit it in some interviews.
Why does it matter? Consider the current environmental crisis. It is conceivable that we will fail to stop climate change and the emerging climate catastrophes will bring down human civilization. From the neoclassical perspective, this is because the market prices for fossil fuels are wrong. Can this be corrected by government intervention? From the neoclassical perspective, to do this, the government needs to know the correct prices and even if the government does know the correct prices, there is still the implementation problem (principal-agent problem, people will find ways to outmaneuver government, etc). If the government does not know the correct prices or cannot implement, then we cannot correct market failures. If, on the other hand, the government does know the correct prices and can implement, why not have socialist planning?
Compare this to socialism. Of course one needs to be reminded of the Soviet environmental disasters. But the Soviet environmental failures were almost nothing compared to the contemporary Chinese environmental crisis (and I need to remind people that China's current environmental crisis has happened after China's capitalist transition). Whatever is/was their internal system, both the Soviet Union and China are a part of the capitalist world system and therefore both of them are obligated to pursue economic growth.
Although this has not happened in history, but it is definitely conceivable that a socialist economy can be structured to be based on zero or negative growth. But this cannot be said of capitalism.
In fact the strongest economic argument against socialism is that the socialist economies did not grow rapidly enough (even though Cuba succeeded in delivering higher life expectancy than the United States and for some years Cuba was considered the only country that met the principle of sustainable development by the living planet report). Therefore, the question is, if it turns out that capitalism cannot provide sustainability for human civilization, what social system can deliver sustainability while meeting population's basic needs?
Now, about labor theory of value. There are two different questions here. One has to do with the labor theory of value as a theory to explain the long-term equilibrium prices in a competitive market economy and the other has to do with what Marx called the theory of surplus value.
About the theory of surplus value, it needs to be reminded that Marx's theory of surplus value or exploitation is not moralistic but based on observed economic facts (although it could be used for moralistic purposes). All it says is no more than this: in a capitalist economy, a workers has to work longer than the social labor time embodied in the commodities consumed by the worker himself (or the worker's family) and in this sense, the capitalist profit (surplus value) derives from the worker's surplus labor. This is factually true.
Of course, as you said, a similar quantitative relationship can be established for other production inputs. Say, the total energy consumed in a society will have to be greater than the energy input used for energy production (people here are of course familiar with EROEI, which has to be greater than 1 for society to function). Based on this, one could argue that not only the workers are exploited but energy is also "exploited".
But if one really wants to extend the concept of "exploitation" here (which I don't think makes sense), what is being "exploited" is energy BUT NOT energy owners (even less the owners of capital goods consuming energy).
In any case, the concept of "exploitation" or surplus value has to be used in a context of social relations. It makes sense that the workers can take over the means of production and appropriate their own surplus value (or products of their surplus labor). But it is obviously nonsense to say that the energy input can somehow appropriate the "surplus energy" consumed in other energy consumption processes.
Finally, about the long-term equilibrium prices. It can be easily established that in "simple commodity production" (pre-capitalist market economy, where the producers own their means of production), market prices tend to fluctuate around ratios that are in proportion to the total labor embodied in commodities (including both direct labor and indirect labor embodied in means of production).
The problem has to do with "prices of production" or the equilibrium prices in capitalism (you are probably aware that this is known as the "transformation problem" in the Marxist literature). All the difficulty comes from the fact that in capitalism, the direct labor time ("live labor") is further divided into necessary labor (the labor time it takes for the worker to replace his value of labor power) and surplus labor. In fact, knowing the production coefficients, a unique set of equilibrium prices and the equilibrium profit rate can be solved from a set of past labor (indirect labor), necessary labor, and surplus labor for each commodity. Thus, a definite set of mathematical relations can be established between the prices and the labor variables (although it's no longer simple proportionality; but I think it does not matter)
Of course the Neo-Sraffians would like to emphasize that you can take any other important input (say, energy) and establish a similar set of relationship between prices and say, past energy, necessary energy, and surplus energy. But, as I said, energy cannot be a player in social relations.
In any case, labor theory of value plays an insignificant role in modern Marxist economics (I personally still think labor theory of value is valid but it no longer provides important insights).
You will not find labor theory of value in my book. But I hope you will still find it intellectually interesting (and a little provocative).
Hi Ron, I prepared a long reply to Dennis's question. But each time when I posted it, it was marked as SPAM.Fred Magyar, 11/13/2015 at 5:24 pmI saved the response to Dennis here:
http://redchinacn.net/portal.php?mod=view&aid=28599#comment
Can you help me to post it? Thank you
Hi Minqi Li,Political Economist, 11/13/2015 at 8:07 pm
I read your reply to Dennis and found it cogent, however I do have a problem with the standard neoclassical economic viewpoint and as I have stated many times I find the standard capitalist and communist economic models to be less than useful systems with which to address our current global dilemmas. I am of the school of thought that we have to invent completely new ways of thinking and acting. There are some people who have embarked on this journey. I think this group best embodies my current thinking about what kinds of systems we need to develop. Some of these ideas are already taking hold in China too.循环经济
http://www.ellenmacarthurfoundation.org/
Cheers!
Fred, thanks for commenting.Petro, 11/14/2015 at 1:15 amThe concept of 循环经济 or recycling economy is actually what China borrowed from the West. Chinese economists started talking about it in the 1990s. The practice is not as radical as it sounds. The primary intention has not been so much about saving the environment as accelerating capital accumulation by saving costs.
Although in some cases it has had some beneficial "side effects"
I agree that we need completely new thinking and practice that go beyond the 20th century. I am of the school that zero (if not negative) economic growth is necessary for sustainability. The question is what kind of economic system can deliver it.
Political Economist, 11/14/2015 at 2:56 am"…I am of the school that zero (if not negative) economic growth is necessary for sustainability. The question is what kind of economic system can deliver it…."What you are saying/suggesting presents a profound misunderstanding of open, dissipative complex systems/structures – which we (our society, our economy – indeed our entire world ) are.
Such systems cannot be in a permanent thermodynamic equilibrium – controlled plateau, or "sustainability" if we will (which you seem to be wishing/suggesting).
They are utterly and totally dependent on ever-expanding energy/resource "consumption" and they ALWAYS and without exception collapse (hint: A.Bartlet)!
Indeed, if physics and mathematics is to be trusted, they must collapse!-So, when you say:
"…The question is what kind of economic system can deliver it…", you are looking for the wrong, non-existing thing.Consider that before your book is published…
Be well,
Petro
Unfortuantely, the book is already published.Petro, 11/14/2015 at 9:17 pmKeynes said: "In the long run, we are all dead"
"Unfortunately, the book is already published"Javier, 11/14/2015 at 10:36 amUnfortunately indeed!
Be well.
Petro
Hi Petro,Petro, 11/14/2015 at 9:24 pmI agree in principle, but it is clear that societies can be built that are stable for hundreds to thousands of years until conditions diverge too much from those that allowed their formation. Hunter-gatherer societies were economically and socially stable in many parts of the world for most of the Holocene, so in principle it is theoretically possible to build a stable society that takes from the environment not much more than what can be renewed or recycled or last for a very long time. Animals and plants do it all the time, but of course their numbers are checked by the environment. And of course it would have little to do with current industrial civilization that is completely unsustainable.
Hunter-Gatherers were stable ONLY for nature kept a "big stick" over their head every time they multiplied more than they should have…but as Ron has said multiple times: we are clever and have bypassed that (or so we think…).Fred Magyar, 11/14/2015 at 4:23 amTheoretically- as you say- yes!
Practically: NO!"…We will kill them all…"
~ Ron Patterson-And lastly, all this is mute for we ALREADY have passed the tipping point, or the point of no return- if you will.
Be well,
Petro
I agree with the idea that trying to achieve a zero growth economy is the only path towards sustainability.Ron Patterson, 11/14/2015 at 5:57 amTwo points:
First the concept of the 'Circular Economy' goes far beyond simple recycling.
It incorporates systems and design thinking at a fundamental level in all aspects of the economy, government,and social systems. It thinks of the economy as an ecosystem. It borrows heavily from how nature builds sustainable systems. It is also very important to understand that it is not just a greenwashing. It is about a deep and fundamental process change.
Second: At our current juncture 'Perfect' is the enemy of good enough!
We need to move forward with all aspects of the 'Circular Economy' We don't have time to design and build a perfect system, We are in a situation where we know that our current ways of doing things are not sustainable so we have to push ahead with imperfect solutions and learn as we go.Best Hopes!
BTW, Petro is only technically correct here:
-What you are saying/suggesting presents a profound misunderstanding of open, dissipative complex systems/structures – which we (our society, our economy – indeed our entire world ) are.
Without throwing the baby of ecosystem thermodynamics 101 out with the bath water, I repeat my point 'Perfect' is the enemy of good enough. Ecosystems are relatively speaking stable and have been for long periods of time. Nature has been tweaking them for 3.8 billion years. We on the other hand have managed to really screw things up in just a few thousand years.
We need to go back and learn how nature does design
https://goo.gl/tu3kPjWe need to go back and learn how nature does designFred Magyar, 11/14/2015 at 7:30 amIf we went back to when nature was in balance, to the point to where we were no longer destroying the ecosystem, then we would be back to only a few million Homo sapiens on earth.
While it is true that humans are a part of nature, it is also true that cancer is a part of nature.
We need to go back and learn how nature does designRon Patterson, 11/14/2015 at 8:00 amIf we went back to when nature was in balance,
Ron, that totally misses the point!
Yes, the ultimate goal would be to have sustainable systems in place. However, we are not in a position to go back to anything. We need to go forward. The point I was making is that we can learn from the way nature creates sustainable ecosystems and apply those lessons to our own systems. This is why I wanted to make crystal clear that I'm not talking about greenwashing or anything 'Green' in the old hippie commune model.
Basically nature uses multiple interconnected circular systems simultaneously on various scales from the microscopic to gigantic. Think of the multiple ecosystems on a single tree in a rainforest. The mosses and lichens fungi living on the bark of the tree. All the insect communities, ants, beetles, arachnids, etc, that depend on that. The tree itself using sunlight through photosynthesis, breathing, producing O2,transporting water and recycling nutrients, the carbon and nitrogen cycles and so on. The top of the tree is colonized with with completely different specialized ecosystems covered with epiphytes. Tree frogs and lizards living in the water filled pools created in the base of bromeliads. The birds and snakes living in the canopy. The large and small mammals living in various niches within all those ecosystems, the detrivores and bacteria and fungi that recycle all the nutrients from the organisms that die, etc… etc… and we are talking just one tree in a forest. This is the kind of integrated systems design that we need to emulate in our cities and businesses.
We humans, on the other hand, have built linear consumptive nonintegrated systems. These systems are extremely wasteful. Linear systems only work when resources limits are nonexistent. We no longer have the luxury of continuing with such systems. We need to learn how nature practically eliminates waste by emulating a model where waste streams are resource inputs and everything is reused there is practically no waste in a functioning stable ecosystem.
We need to learn how nature practically eliminates waste by emulating a model where waste streams are resource inputs and everything is reused there is practically no waste in a functioning stable ecosystem.I totally understand your point Fred, but you are simply missing the big picture. When you say "we" just who are you talking about? Obviously if you are talking about fixing the terrible mess we find ourselves in, then "we" has to mean "we humans", all of us. And when you do that you are talking absolute nonsense.
Individuals can change but human nature cannot change. "We" will go on behaving in the future exactly as we have behaved in the past. The mass of humanity is consuming the natural resources like a drunken sailor going through his rich uncle's inheritance. And I don't mean just fossil resources, I mean all resources, all nature's bounty. And we are taking it from all the other creatures who are less clever than we are.
And "we" will continue to do so until it is gone, and all the other creatures are gone also.
wimbi, 11/13/2015 at 10:50 pm
A simple engineer's suggestion for basis of new economics, based on conversation with wiser ones elsewhere.
Proper economic structure is that which maximizes the number of options available for future choices.
Same as, minimize irreversibility; same as second law of thermo. Or, don't mess things up for the next guy.
Examples of violations of basic rule- kill the coral, next guy has less fish ; burn the oil, next guy has a smaller hunk of planet at bearable temps.
Example of application of basic rule – go to solar for energy, and stick within bounds of activity thereby set.
NB- another fundamental flaw of capitalism– like stars growing in a dust cloud where more massive ones grab mass faster than littler ones, ending up with big one gobbling it all. Bigger capitalists grab more resources faster than smaller ones, ending up with big ones getting it all.
And, very serious consequence – gross maldistribution of resource relative to individual ability to use resource wisely.Above observations not to be attributed to me.
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Bloomberg View
Harvard's Greg Mankiw, author of the most popular college introductory economics textbook, is often regarded as America's econ teacher. He famously refers to his "Principles of Economics" as "my favorite textbook," and I must admit that it's also my favorite. It's written in a clear, explanatory style and covers the basics of most important theories in modern economics.
But Mankiw's book, like every introductory econ textbook I know of, has a big problem. Most of what's in it is probably wrong.
In the last three decades, the economics profession has undergone a profound shift. The rise of information technology and new statistical methods has dramatically increased the importance of data and empirics. This means that many professional economists are no longer, as empirical pioneer David Card put it, "mathematical philosophers." Instead, they are more like scientists, digging through mountains of evidence to find precious grains of truth.
And what they have found has often been revolutionary. The simple theories we teach in Econ 101 classes work once in a while, but in many important cases they fail.
For example, Econ 101 theory tells us that minimum wage policies should have a harmful impact on employment. Basic supply and demand analysis says that in a free market, wages adjust so that everyone who wants a job has a job -- supply matches demand. Less productive workers earn less, but they are still employed. If you set a price floor -- a lower limit on what employers are allowed to pay -- then it will suddenly become un-economical for companies to retain all the workers whose productivity is lower than that price floor. In other words, minimum wage hikes should quickly put a bunch of low-wage workers out of a job.
That's theory. Reality, it turns out, is very different. In the last two decades, empirical economists have looked at a large number of minimum wage hikes, and concluded that in most cases, the immediate effect on employment is very small. It's only in the long run that minimum wages might start to make a big difference.
That doesn't mean the theory is wrong, of course. It probably only describes a small piece of what is really going on in the labor market. In reality, employment probably depends on a lot more than just today's wage level -- it depends on predictions of future wages, on long-standing employment relationships and on a host of other things too complicated to fit into the tidy little world of Econ 101.
For academic economists, that's no problem. If existing theories explain only a sliver of reality, they simply roll up their sleeves and get to work. Many labor economists are now working on complex theories that model the process of employees looking for work and employers looking for people to hire. For professional theorists, empirical failures simply mean more work to do.
But for Econ 101 classes, explaining only a small slice of reality isn't good enough. If economics majors leave their classes thinking that the theories they learned are mostly correct, they will make bad decisions in both business and politics. We shouldn't train tomorrow's business elite to have faith in theories that have only a small amount of empirical success.
Another example is welfare. Econ 101 theory tells us that welfare gives people an incentive not to work. If you subsidize leisure, simple theory says you will get more of it.
But recent empirical studies have shown that such effects are usually very small. Occasionally, welfare programs even make people work more. For example, a study in Uganda found that grants for poor people looking to improve their skills resulted in people working much more than before.
This has big political implications. If we train tomorrow's business elites to think that welfare encourages laziness, they may block support for policies that really improve the lives of the poor -- and the economic productivity of the whole nation. But this is precisely what Econ 101 is now doing.
So what's the solution? Complex theories sometimes do a better job of explaining reality than simple ones, but these theories are way beyond the mathematical skill of most undergrad econ majors. A better alternative is to start teaching empirics in 101.
Current textbooks, including Mankiw's, almost all play down the role of data and evidence. They sometimes refer to the results of empirical studies, but they don't give students an in-depth understanding of how those studies worked. Yet this wouldn't be very hard to do. The kind of empirical analysis now taking over the econ profession -- often called the "quasi-experimental" approach -- isn't that hard to understand. Simple examples could even be done in the classroom, or as homework assignments.
In other words, the economics profession has gotten real, and it's time for Econ 101 to do the same. We now have an academic economics profession focused on examining evidence and an Econ 101 curriculum that focuses on telling pleasant but often useless fables. Econ education needs to get with the times.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the author of this story:
Noah Smith at [email protected]
Selected Skeptical Comments (Economist View, November 25, 2015)
Anonymous said... Wednesday, November 25, 2015 at 05:34 AM
"Most of What You Learned in Econ 101 Is Wrong"
To this crowd, it should be - Most of what we taught you in Econ 101 is Wrong.
djb -> Peter K....
from the smith article"For example, Econ 101 theory tells us that minimum wage policies should have a harmful impact on employment. Basic supply and demand analysis says that in a free market, wages adjust so that everyone who wants a job has a job -- supply matches demand."
if this is what they are teaching in econ 101 then of course it is wrong and I would not be surprised if mankiws book is teaching this
as Keynes showed 80 years ago
so basically all the supply siders and libertarians and the like are preaching the same sort of economics theories that were taught prior to Keynes
Say's law, invisible hand, always at full employment, no such thing as involuntary unemployment, no possibility of inadequate aggregate demand
amazing
Peter K. -> djb...
Agreed. I would divide the world into the Keynesians and supply siders. Mankiw is a strange hack in that he gets the "new Keynesian" view but often puts out propaganda on behalf of the supply siders.
Anonymous, Kervick and their ilk argue that some Keynesians are just as bad as the supply siders.
But they have no grounds.
pgl -> Peter K....
It is more than the macroeconomic debates. The minimum wage debate comes down to whether all markets are perfectly competitive. Any economist worth his salt realizes that they are not.
Dan Kervick -> Peter K:
Not sure what that means exactly - since I don't know what kinds of supply siders you are talking about. But since Mankiw is one of the leading figures of New Keynesianism, and is pretty bad, then yeah .. I guess it follows that some Keynesians are as bad as supply siders.
Keynes suggested a social philosophy that followed from his economic analysis. The social philosophy was based on the idea that the lack of full employment and arbitrary and inequitable distributions of income were "faults" of our economic society - bad things. But if someone doesn't think those are bad things, then I suppose they could completely accept Keynes's analysis of how the economy works, but not go in for the Keynesian social philosophy and the policy choices it leads to.
anne said in reply to Dan Kervick...
Keynes suggested a social philosophy that followed from his economic analysis. The social philosophy was based on the idea that the lack of full employment and arbitrary and inequitable distributions of income were "faults" of our economic society...
[ Nice passage. ]
William said in reply to djb...
Imagine if other courses were taught like econ.
History would start with reading Herodotus as fact, flat earth, giant ants and all.
Psychology 101 would teach you only the ideas of Freud. Sure none of his ideas are taken seriously anymore, but he is easy to understand and the foundation of modern, complex theories, so it's all good right?
djb said in reply to William...
yea maybe we should call the supply siders the flat earthers
pgl said in reply to William...
Not every economic class is taught using Mankiw. Thankfully.pgl said in reply to djb...
Noah really wrote this? "That doesn't mean the theory is wrong, of course. It probably only describes a small piece of what is really going on in the labor market. "
Noah needs to take a time out from blogging until he reads Dani Rodrik's Economist Rules. Dani notes we have lots of theories but the real trick is to figure out which one to use for a particular situation.
I have not looked at a Mankiw text for a long time (overpriced from an arrogant Harvard Republican homeboy) so I don't know if he only presents the perfectly competitive model of employment. If he does - no wonder his book is so clueless on the minimum wage debate.
When I took undergraduate principles, I read Paul Samuelson's excellent book and it did talk about things like monopsony power. Put a wage floor on a monopsonist and employment rises.
So the real issue is are we presenting students with the full array of models and then having them read Dani's excellent book.
djb said in reply to pgl...
Denis Drew, November 25, 2015 at 07:14 AMone issue regarding minimum wages issues. The classical school says if only the person would work for less we would have full employment
(Keynes proved this false)
but there is also the issue of whether in reality the employee could survive on the given wage if the pay does not allow the worker to survive, then him/her agreeing to work for the less than living wage doesn't help
It is not a viable situation. The workers will not be able to perform their duties. It will not work anyway. We didn't treat horses this way, as if their cost could approach zero without consequences, why do we treat people as if they could survive on less and less resources with no limit.
Then if they don't accept that impossible situation and ask for help from the government or form unions, then they are the ones "causing all the problems"
but seriously, that is what the theoretical idea that workers should take less and less and less with no limit gives us in reality
PPaine said in reply to PPaine ...Re: Most of What You Learned in Econ 101 Is Wrong - Noah Smith
How about this? A $15 minimum raise hike is more likely to close down jobs in the mid wage category than in the low wage. A hike probably means income will come from the mid overall to the low overall because low wage produced goods were relatively under priced (not marked to market because of prior monopsony).
Consumers tend to purchase more of goods produced by employees at their own wage level. Ergo, when income flows overall from the mid to the low -- the low may spend that new money disproportionately among themselves. While some mid wage producers will lose out on business gone south and be forced to lay off workers.
Easy way to make this loss from mid to low painless as possible: hybrid redistribution via tax hikes for the (really) top with matching tax cuts for the mids.
I am thinking (just to throw something out) 90% taxes on all income over $2 million dollars. Maybe 50% over $650,000 (the entry to the top 1%?).
Under the theory that people will enthusiastically work for $200 a week if that is the best their economic place and time can do -- but the same people will not work for $400 a week if their era could and should be paying $800.
I'm thinking grossly underpaid Chicago retail clerk ($800 a week by collective bargaining marked to market) and Chicago gangs which now have 100,000 out of my guesstimate 200,000 gang-age, minority males. I'm also thinking old American born taxi drivers like myself who wont work 60 grueling hours for $500 a week (I did for $750). I'm thinking family raising adults who no longer show up for two-tier (thanks to Walmart) contract supermarket work.
Today's time and US place CEOs, professional athletes (who basically just retain feral animal skills), TV news anchors and movie stars earn 20 times what their 50s and 60s predecessors did -- they can certainly pay similarly high tax rates (though not from as low a starting point -- double per capita income in this era). They will work just as hard once they get used to the new (hybrid) redistribution regime representing the most anybody can squeeze out of their era.
Peter K. said in reply to PPaine ...Brad Delong is the iconic merit elite culprit. Why? Larry S and Stan fish cake are handsomely rewarded. Plutonian über hacks . Brad is flying solely on merit fumes
If DeLong has been listened to the recovery would have been much better.
Both he and Summers argue policymakers have squandered one year's worth of GDP. That's a damning statement. They're on the job class side more than not. Same with Krugman and Thoma.
"As well they should. U.S. output is now about 10 percent below a trend estimated through 2007. If one attributes even half of this figure to the effects of recession and assumes no catch up on this component until 2030, the cost of the financial crisis in the U.S. is about one year's gross domestic product. And matters are worse in the rest of the industrial world.
As macroeconomics was transformed in response to the Depression of the 1930s and the inflation of the 1970s, another 40 years later it should again be transformed in response to stagnation in the industrial world.
Maybe we can call it the Keynesian New Economics."
They're not like Varoufakis and Zizek but so what there will be a broad coalition.
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November 22, 2015 | Economist's View '
Harold Pollack (the beginning of the post talks about a recent column in the NY Times noting that "The people who most rely on the safety-net programs secured by Democrats are, by and large, not voting against their own interests by electing Republicans. Rather, they are not voting, period," and how that has turned blues states red):
What's the matter with Kentucky?: ...Viewed from afar, one might think that categories such as "deserving poor" or "disabled" are reasonably clear-cut. Viewed up-close, things seem much more fuzzy. Many people who rely on public aid straddle the boundaries between deserving and undeserving, disabled and able-bodied. Many of us know people who receive various public benefits, and who might not need to rely on these programs if they made better choices, if they learned how to not talk back at work, if they had a better handle on various self-destructive behaviors, if they were more willing to take that crappy job and forego disability benefits, etc.It's easy, even viewing our own friends and relatives, to confuse cause and effect regarding more intimate barriers. A sad reality of psychiatric disorders is that the very symptoms which inflict mental pain on the sufferer can make themselves felt to others in ways that undermine empathy and personal relationships.
Across the Thanksgiving dinner table, you see these human frailties and failures more intensely and with greater granularity than the labor economist could possibly see running cold data at the Census Bureau. But operating at high altitude, the labor economist sees structural issues you can't see from eye level.
There have always been vulnerable people, whose troubles arise from an impossible-to-untangle mixture of bad luck, destructive behaviors, and difficult personal circumstance. That economist can't see why your imperfect cousin can't seem to get it together to hold a basic job. She can see that your cousin is being squeezed out by an unforgiving musical-chairs economy. Every year, in the backwaters of America, that economy seems to put out fewer and fewer chairs.
Posted by Mark Thoma on Sunday, November 22, 2015 at 12:10 PM in Economics | Permalink Comments (26)
pgl said...
"Supporters of expanded social provision must find better ways to engage poor people, to get out their votes."cm -> pgl...Of course Republicans are doing everything they can to keep poor people from voting.
Also in the US, elections seem to always (?) take place on work days, whereas e.g. in Germany the happen on Sundays as a rule. Of course one can vote by mail, but that requires a pretty stable and reliable mailing address ...pgl -> cm...
In the South the Republicans loathe the idea that voting might occur on Sundays. Seems they fear those black mega churches turning out the vote.cm -> pgl...I was thinking more of people being unable to (or "preferring" not to) miss work, and not being able to show up for work as well as vote on the same day.Do you think that people don't have enough willpower to sustain their decision to vote from Sunday to Tuesday? Or that they would vote only under the social pressure from the church group?
pgl -> cm...
I'm just saying let them vote when they can. As in your first sentence here.Number 6 said...
The US is a militarist-imperialist, rentier-socialist, friendly fascist (for now) corporate-state for the top 0.001-1% to ~10% (the best gov't the money of the top 0.001-1% can buy) and a moronocracy for the rest of us, i.e., "no representation without taxation".What is needed is 'Merikans for Moronocracy (or Morons for a New 'Merika) for us morons in red AND blue states to write in our own names for CEO of the fascist corporate-state. Imagine tens of millions of us unaffiliated morons writing in Joe Moron for POTUS and Jane Moron for Veep (or switch for your gender-specific or non-specific preference, or not).
Surely, none of us could do any worse for the bottom 90%+ than the Establishmet top 0.001%'s "choices" over the past 30-40+ years, or the current lot of Dame Hilbillary, The Donald, Crazy Carson, et al. (Of course, Bernie Sanders speaks to the values and objectives of the vast majority of 'Merikans who are actually democratic socialists but have been propagandized for at least a century or more not to know it.)
Morons of the world unite!!!
anne said...
http://krugman.blogs.nytimes.com/2015/11/22/thinking-about-the-trumpthinkable/gunste -> anne...November 22, 2015
Thinking About the Trumpthinkable
By Paul KrugmanAlan Abramowitz * reads the latest Washington Post poll and emails:
"Read these results ** and tell me how Trump doesn't win the Republican nomination? I've been very skeptical about this all along, but I'm starting to change my mind. I think there's at least a pretty decent chance that Trump will be the nominee.
"Here's why I think Trump could very well end up as the nominee:
"1. He's way ahead of every other candidate now and has been in the lead or tied for the lead for a long time.
"2. The only one even giving him any competition right now is Carson who is even less plausible and whose support is heavily concentrated among one (large) segment of the base-evangelicals.
"3. Rubio, the great establishment hope now, is deep in third place, barely in double digits and nowhere close to Trump or Carson.
"4. By far the most important thing GOP voters are looking for in a candidate is someone to 'bring needed change to Washington.'
"5. He is favored on almost every major issue by Republican voters including immigration and terrorism by wide margins. The current terrorism scare only helps him with Republicans. They want someone who will "bomb the shit" out of the Muslim terrorists.
"6. There is clearly strong support among Republicans for deporting 11 million illegal immigrants. They don't provide party breakdown here, but support for this is at about 40 percent among all voters so it's got to be a lot higher than that, maybe 60 percent, among Republicans.
"7. If none of the totally crazy things he's said up until now have hurt him among Republican voters, why would any crazy things he says in the next few months hurt him?
"8. He's very strong in several of the early states right now including NH, NV and SC. And he could do very well on 'Super Tuesday' with all those southern states voting. I can't see anyone but Trump or Carson winning in Georgia right now, for example, most likely Trump.
"9. And as for the idea of the GOP establishment ganging up on him and/or uniting behind another candidate like Rubio, that's at least as likely to backfire as to work. And even if it works, what's to stop Trump from then running as an independent?"
Indeed. You have a party whose domestic policy agenda consists of shouting "death panels!," whose foreign policy agenda consists of shouting "Benghazi!," and which now expects its base to realize that Trump isn't serious. Or to put it a bit differently, the definition of a GOP establishment candidate these days is someone who is in on the con, and knows that his colleagues have been talking nonsense. Primary voters are expected to respect that?
* http://polisci.emory.edu/home/people/faculty/abramowitz-alan.html
** http://apps.washingtonpost.com/g/page/politics/washington-post-abc-news-poll-nov-15-19-2015/1880/
The reason may well be that there is a vast group of voters who consistently vote against their better interests, because their mindset is conservative, though they are actually middle class or lower. - Kansas appears to be a great example. These people do not think things through but vote on their gut (conservative they think) instincts. Education has a great deal to do with that voting decision. Thus we seem to see a blue collar worker with a median income take positions similar to that of the 1%. Curious but educational level is the likely answer. Such voters are also much more susceptible to propaganda based on tainted or false information which is circulated freely by many of the talking heads on radio and TV. Note that the Republicans work assiduously to discourage and restrict voting by gerrymandering, rules, voting days and sometimes requiting ID. - Democracy in America is a theoretical concept now.cm said...The Musical Chairs happens not only in the backwaters. It happens in and around the major job centers too. Nor is it only a matter of no job vs. some job, also how well the job is paid, working conditions, full time vs. part time, predictable work hours or on call (and only on-premises hours paid), etc.Dan Kervick -> Peter K....It also doesn't just affect people with various "problems". There is the meme that when you are good you will always find a job, but that only works when employers are actually hiring. And the unstated part is that the job will be at your level of skill/ability. In "tech", and probably most "high skilled" fields, employers have a rather strong preference for an unbroken career in the field, you are basically defined by the "lowest" work you have done recently.
Syaloc -> Dan Kervick..."Kervick on the other hand tells us everyday that Krugman and DeLong are trying to pull the wool over our eyes on behalf of an evil neoliberal consensus."Not pull the wool over our eyes. But they both do defend and rely on a mainstream neoliberal, New Keynesian models of the economy which I think paint a very inadequate picture of the way our economy actually functions and is woefully inadequate as a guide for policy action - especially of the kinds that are urgently needed in 2015.
I don't think Krugman and DeLong are the forces of evil. I just think the United States is in much worse shape then they seem prepared to come to grips with, and is in need of much more radical social and economic change then they seem willing to propose or entertain. They are stuck in the past and weighed down by defunct orthodoxies and theoretical abstractions.
Maybe in their hearts they really do grasp the magnitude of the problems, but just think the political environment is not hospitable to an honest airing of the alternatives. Maybe they are scared like everyone else.
But until prominent, established intellectuals with high profiles begin to come forward with bolder alternatives to late 20th century thinking, the America that is being crushed underfoot by an out-of-control capitalist leviathan is going to have to face a lot of unwelcome headwinds in their drive for liberating progressive change.
So basically you're calling for a return to a more institutional form of economics led by figures like John Kenneth Galbraith?Dan Kervick -> Syaloc...Yes, a more concrete, detailed, institution-based picture of the economic world, with more attention to history, other branches of social science, moral philosophy, cultural criticism, etc. - as well as just a bit more street smarts. Macroeconomists seem to have siloed themselves in self-contained theoretical world, where engagement with the human sciences of power and control, and the moral implications of those fields of study, are ignored.djb said...Most of my general criticisms of economists, by the way, are aimed at macroeconomists. I listened to a lecture by Robert Schiller the other day about his new book, and thought it sounded like great stuff. I think there is lot's of great empirical work going on based on nuanced and up-to-date theories of human behavior. The macro guys often claim - on the basis of some kind of anti-reductionist credo - that their grand uniform economic theories of everything can float free of any foundation in theories of the actual behavior of actual human beings. But the theories are in practice based on analogies from individual or firm behavior to macro behavior, and the behavioral models on which they are based are extremely crude.
But basically, I think my main axe to grind is that these economists are just not sufficiently appalled by the moral horrors of the social world we live in. There is a general lack of zeal.
a lot of it , I am sure, has to do with the "there is no difference between democrats and republicans" constant brainwashingDrDick -> djb...which helps the republicans big time
Sadly, it is also the case that the Democrats have backed way off economic issues since the late 1970s. At the time they suffered a massive fundraising disadvantage and wanted to attract big money donors (still Hillary's position).djb -> DrDick...still republicans are way worse especially nowDrDick said in reply to djb...
Avraam Jack Dectis said...True, but for the poor, it is quite obvious that no one really gives a damn about them. Why should they vote when all they get is bailouts for banksters and the TPP? Right now, Sanders is the only one talking about programs that would really help them and he is a long shot (and I am a Sanders supporter).
.cm -> Avraam Jack Dectis...
A good economy compensates for much social dysfunction.A bad economy moves people toward the margins, afflicts those near the margins and kills those at the margins.
This is what policy makers should consider as they pursue policies that do not put the citizen above all else.
"A good economy compensates for much social dysfunction."More than that, it prevents the worst of behaviors that are considered an expression of dysfunction from occurring, as people across all social strata have other things to worry about or keep them busy. Happy people don't bear grudges, or at least they are not on top of their consciousness as long as things are going well.
This could be seen time and again in societies with deep and sometimes violent divisions between ethnic groups where in times of relative prosperity (or at least a broadly shared vision for a better future) the conflicts are not removed but put on a backburner, or there is even "finally" reconciliation, and then when the economy turns south, the old grudges and conflicts come back (often not on their own, but fanned by groups who stand to gain from the divisions, or as a way of scapegoating).
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November 16, 2015 | naked capitalism
Hillary Clinton Appeal to 9-11 to Defend Wall Street Donations Was Bad, But This Was Worse
Jerry Denim, November 16, 2015 at 11:46 am
I couldn't believe my eyes and ears during the debate when Sanders impugned Clinton's integrity for taking Wall Street super PAC money and she seemed to successfully deflect the accusation by going full-bore star-spangled sparkle eagle. She played the vagina card then quickly blurted out "9/11 New York" for applause while attempting conflate aiding and abetting Wall Street with the 9/11 attacks and patriotism. I couldn't believe people were clapping and I couldn't believe Clinton had the audacity to pull such a illogical and juvenile stunt on live television, but yet CBS reported her highest approval scores of the debate were registered during her confusing but emotionally rousing (for some people apparently) "vagina, 9/11" defense.
I loved that Bernie Sanders was willing to drop the "F-bomb" (fraud) on Wall Street but he needs to swing much harder at Clinton. Clinton was quick to zing O'Malley as a hypocrite by noting he appointed a former hedge-fund manager to some state regulatory position when given the chance, but yet neither Sanders or O'Malley hit back with the fact that her only child and Clinton Foundation board member, Chelsea Clinton, worked for the hedge fund of a Clinton family pal and mega-donor in 2006. Neither candidate mentioned that her son-in-law and the father of her grandchild who she is so fond of mentioning, just so happens to be an extremely rich hedge fund manager who benefits handsomely from the Clinton's political connections and prestige. This isn't mud, this is extremely germane, factual material already on the public record. It gets to the core of who Hillary is and where her loyalties lie. Hillary herself chose to identify unregulated derivatives and the repeal of Glass-Steagall as the primary causes of the financial crisis. She either claimed directly or insinuated that she would address these issues as President, but surprisingly no one pointed out that it was her husband's administration that blocked Brooksley Born from regulating derivatives in the 1990's and it was her husband's administration that effectively repealed Glass-Steagal with the signing of Gramm-Leach-Billey act in 1999. It's not a stretch to say the Clinton's deregulation of Wall Street paved the way for the crisis of 2008 and the extreme income inequality of today. Wall Street is deeply unpopular and Bernie Sanders has built a candidacy on two main issues: attacking Wall Street and addressing income inequality. These are punches he can't afford not to throw at his rival when she holds a commanding lead in the polls plus the support of the DNC and media establishment. Clinton is deeply corrupt and beholden to Wall Street. She needs to be beaten with this stick hard and often. Attempting to deflect this very accurate, very damaging criticism by wrapping herself in the flag and invoking feminism is a cheap stunt that will only work so many times before people notice what she is doing. Bernie needs to swing harder and keep at it, he already has the right message and Clinton is highly vulnerable on his pet topics.
I thought O'Malley had one of the best lines of the night when he said "I think it may be time for us to quit taking advice from economists" but it seemed to go mostly unnoticed and unappreciated. I would have loved a frontal assault on the validity and integrity of economists when the bespectacled lady in blue attempted to nail down Sanders with a 'gotcha' question implying raising the minimum wage would be catastrophic for the economy because "such-and-such economist" said so. There is so much disdain for science and academic credentials in the heartland right now, it seems crazy not to harness this anti-academic populist energy and redirect it to a deserving target like neo-liberal economists instead of climate scientists. " How's that Laffer curve working out for ya Iowa? Are you feeling the prosperity 'trickle down' yet?" Sanders did a relatively good job of deflecting and not getting zinged by the 'gotcha' question but a full-frontal assault would have been much better. Stronger, more Presidential and with the added bonus of giving neo-liberal economists under the pay of plutocrats a black eye. Another missed opportunity. The questioner set it up perfectly for him. I would have loved to see the expression on her corn-fed face when Bernie turned her 'gotcha' question that she had spent so much time and thought crafting into the home-run answer of the evening. Perhaps it could happen in a debate in the near future.
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Nov 17, 2015 | Economist's View
David Leonhardt reviews 'Chicagonomics' and 'Economics Rules':
'Chicagonomics' and 'Economics Rules': He believed that government had a crucial role to play in a well-functioning economy. It should finance and run good schools, as well as build roads, bridges and parks, he argued. It should tax alcohol, sugar and tobacco, all of which impose costs on society. It should regulate businesses to protect workers. And it should tax the rich - who suffer from "indolence and vanity" - to help the poor.
Which leftist economist was this? None other than Adam Smith, the inventor of the "invisible hand" and the icon of laissez-faire economics today. Smith's modern reputation is a caricature. ...
pgllikbez -> pgl..."Dani Rodrik, a Harvard economics professor, has written a much less political book than Ebenstein has, titled "Economics Rules," in which he sets out to explain the discipline to outsiders (and does a nice job). Yet in surveying the larger "rights and wrongs" of economics, to quote his subtitle, Rodrik has diagnosed the central mistake that contemporary libertarians have made: They have conflated ideas that often make sense with those that always make sense."Dani is often under looked in these discussions which is a shame. His writings on how different societies have dealt with their local issues is some of the most informed economics out there.
I think we need to distinguish between Friedman the academic economist before writing Capitalism and Freedom (1962) and Friedman the public intellectual after.
"After" Friedman was a dismal intellectual prostitute that promoted neoliberalism for money paid by financial oligarchy. The level of dishonesty and intellectual degradation that he displays in his public appearances that now are available in YouTube videos is simply astonishing.
Actually Professor Wendy Brown touched the mechanics of this slick propaganda campaign in her book "Undoing the Demos". From Amazon:
=== Start of quote ===
Neoliberal rationality -- ubiquitous today in statecraft and the workplace, in jurisprudence, education, and culture -- remakes everything and everyone in the image of homo oeconomicus. What happens when this rationality transposes the constituent elements of democracy into an economic register? In Undoing the Demos, Wendy Brown explains how democracy itself is imperiled. The demos disintegrates into bits of human capital; concerns with justice bow to the mandates of growth rates, credit ratings, and investment climates; liberty submits to the imperative of human capital appreciation; equality dissolves into market competition; and popular sovereignty grows incoherent. Liberal democratic practices may not survive these transformations. Radical democratic dreams may not either.In an original and compelling argument, Brown explains how and why neoliberal reason undoes the political form and political imaginary it falsely promises to secure and reinvigorate. Through meticulous analyses of neoliberalized law, political practices, governance, and education, she charts the new common sense. Undoing the Demos makes clear that for democracy to have a future, it must become an object of struggle and rethinking.
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Economist's View
Part of an interview of Dani Rodrik:
Q. You give a couple of examples in the book of the way theoretical errors can lead to policy errors. The first example you give concerns the "efficient markets hypothesis". What role did an overestimation of the scope and explanatory power of that hypothesis play in the run-up to the global financial crisis of 2007-08?A. If we take as our central model one under which the efficient markets hypothesis is correct-and that's a model where there are a number of critical assumptions: one is rationality (we rule out behavioral aspects like bandwagons, excessive optimism and so on); second, we rule out externalities and agency problems-there's a natural tendency in the policy world to liberalize as many markets as possible and to make regulation as light as possible. In the run-up to the financial crisis, if you'd looked at the steady increase in house prices or the growth of the shadow banking system from the perspective of the efficient markets hypothesis, they wouldn't have bothered you at all. You'd tell a story about how wonderful financial liberalization and innovation are-so many people, who didn't have access before to mortgages, were now able to afford houses; here was a supreme example of free markets providing social benefits.
But if you took the same [set of] facts, and applied the kind of models that people who had been looking at sovereign debt crises in emerging markets had been developing-boom and bust cycles, behavioral biases, agency problems, externalities, too-big-to-fail problems-if you applied those tools to the same facts, you'd get a very different kind of story. I wish we'd put greater weight on stories of the second kind rather than the first. We'd have been better off if we'd done so.
djb said...
"efficient markets hypothesis": magical thinkingJerry Brown said...
I can't get that link to open. Dani Rodrik says "there is a natural tendency in the policy world to liberalise as many markets as possible and to make regulation as light as possible". Is that in general? Or is that a part of the efficient market hypothesis?
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Nov 13, 2015 | Prospect Magazine
The economist Dani Rodrik, a professor at Harvard, recently spent a couple of years at Princeton's Institute for Advanced Study. In his new book, "Economics Rules: Why Economics Works, When it Fails, and How to Tell the Difference," he recalls just what a "mind-stretching experience" that sojourn was. He found that many of the visitors to the Institute's School of Social Sciences, prominent academics from other disciplines, harboured a deep "suspicion toward economists." Those visitors seemed to believe, he writes, that "economists either stated the obvious or greatly overreached by applying simple frameworks to complex social phenomena." It felt, Rodrik says, as if economists were being cast as the "idiots savants of social science: good with math and statistics, but not much use otherwise."Part of the problem, Rodrik thinks, is "misinformation" about what it is economists do, exactly. "Economics Rules" is in part, therefore, an attempt to set the record straight-and to rebut some fairly widespread criticisms of economics in the process. But it's also aimed at his colleagues in the economics profession, who he thinks have made a sorry fist of "presenting their science to the world." When I spoke to him on the phone from the United States this week, I asked about that assumption he'd encountered at Princeton-that economists are "good with math and statistics" and not much else.
DR: Often we take it [mathematics] too far. There's a certain fetishism that comes along with the use of math. And that shows up in two ways: one is that arguments which are relatively straightforward, that can be put in a directly literary form, we feel we have mathematise them. Sometimes, there's undue mathematisation or formalisation. We get so enamoured of the math that the mathematical structure of models becomes an object of analysis. And that's one of the problems with economic theory-that it often becomes applied mathematics, where the point is the mathematical properties of the models. And so it becomes more and more peripheral to what economics should be about, which is to look at social phenomena. But there's a much better appreciation today of the role and also the limits of math in economics than there was 30 years ago.
JD: Right. You say in the book that one of the most significant developments in economics over the past three decades or so has been the increasingly widespread use of empirical methods.
Yes, that has definitely been a [sign of] great progress and has forced us to be much more grounded. And it has squeezed out the space for mindless, abstract theorising or modelling for the sake of modelling. But there's a tendency in parts of the profession [today] to believe that if you're just doing empirical work, then you can do away with theory or with thinking about the models that lie behind the particular empirical application. The point that is important to realise-and I'm not sure if I make this sufficiently strongly in the book itself-is that it's impossible to interpret any empirical evidence without either an implicit or, better still, an explicit model behind it. So every time we make a causal assertion about the real world using data we are implicitly using a model.
The idea of the economic model is one of the central concepts in the book. Where does the explanatory power of economic models come from?
Models are stylised abstractions that lay bare the relationship between cause and effect. I liken [models] to lab experiments. When you conduct an experiment in a lab, you're trying to isolate the thing you're looking at.
You draw an interesting comparison between models and fables. You say that models, like fables, leave out or abstract from certain aspects of the world as it is. And that, in your view, is a strength, a feature, as you put it, rather than a bug.
As long as we don't forget that [the model we're using] is a model, not the model. An immediate implication of what I just said, of the way I defined the usefulness of the model, is that the model captures only one of many different causal effects. And it's going to be most useful when we apply it to a real world setting where, in some sense, that causal effect is the dominant one. But [we should not] forget that there will be other settings where other causal effects or other models are more relevant.
A charge often made against economics, and which you try to rebut in the book, is that many of its assumptions, particularly about the rationality of economic actors, are unrealistic. To what extent does behavioural economics, which injects the insights of psychology into formal economic modelling, take that kind of criticism for granted? Or, to put it another way, does behavioural economics overturn or invalidate what you call the "garden-variety perfectly competitive market model"?
Yes, but it's only the latest a stream of models that have all had the effect of overturning the central implication of the perfectly competitive model. We've known since the 19th century that a market with a few firms would not produce the efficiency consequences of the perfectly competitive model. Then, of course, in the 1970s there was the imperfect competition revolution, where it turns out that, in the presence of asymmetric information, all kinds of consequences follow. So the behavioural revolution isn't new in the sense of generating results that overturn the basic implications of the perfectly competitive model. It's new in that it directly removes an assumption that had been at the core of neoclassical theorising-the notion of individual rationality.
There's a tendency now to interpret the behavioural models as implying that we can now forget about "rational man," that we can forget about all these optimising frameworks. And again I think that's wrong. There are going to be settings in which the behavioural model provides important insights. But it would be wrong to discard models in which rational behaviour plays an important role. The trick is to know when to apply a behavioural approach and when to apply a rational approach.
You have a chapter entitled "When Economists Go Wrong" in which you argue that economists' biggest mistake concerns the claims they often make for the general validity of certain assumptions and models. The danger, in other words, is that of confusing a model with the model.
Right. In policy, that's where we fall on our faces repeatedly. When we are called on for policy advice our biggest mistake is not drawing the links between the critical assumptions of a model and the real world context with the same kind of rigour and systematic thinking that we exercise when we're operating within a model.
You give a couple of examples in the book of the way theoretical errors can lead to policy errors. The first example you give concerns the "efficient markets hypothesis". What role did an overestimation of the scope and explanatory power of that hypothesis play in the run-up to the global financial crisis of 2007-08?
If we take as our central model one under which the efficient markets hypothesis is correct-and that's a model where there are a number of critical assumptions: one is rationality (we rule out behavioural aspects like bandwagons, excessive optimism and so on); second, we rule out externalities and agency problems-there's a natural tendency in the policy world to liberalise as many markets as possible and to make regulation as light as possible. In the run-up to the financial crisis, if you'd looked at the steady increase in house prices or the growth of the shadow banking system from the perspective of the efficient markets hypothesis, they wouldn't have bothered you at all. You'd tell a story about how wonderful financial liberalisation and innovation are-so many people, who didn't have access before to mortgages, were now able to afford houses; here was a supreme example of free markets providing social benefits.
But if you took the same [set of] facts, and applied the kind of models that people who had been looking at sovereign debt crises in emerging markets had been developing-boom and bust cycles, behavioural biases, agency problems, externalities, too-big-to-fail problems-if you applied those tools to the same facts, you'd get a very different kind of story. I wish we'd put greater weight on stories of the second kind rather than the first. We'd have been better off if we'd done so.
You also have a chapter on "Economics and Its Critics". To what extent does your point about economists' tendency to overestimate the scope and power of their models neutralise some fairly common criticisms of the discipline made by non-economists? Your point being, as I understand it, that the problem is not so much with the models themselves as with economists' expectations of what those models will yield.
What I'm claiming is that if economists were actually truer to their discipline and were to project their discipline to the rest of the world as a collection of models, to a large extent it would help neutralise the criticism that economists are [wedded to] one model in particular. You don't get a reputation as a successful researcher by demonstrating that Adam Smith was right! You get a reputation by showing that there are very circumstances in which he might have been wrong. But this richness, this willingness to countenance non-free-market outcomes, is somehow rarely revealed to the outside world.
Dani Rodrik's "Economics Rules: Why Economics Works, When It Fails, And How to Tell the Difference" is published by Oxford University Press (£16.99)
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Economist's View
JohnH said in reply to djb...
Bud Meyers said...Tim Canova on trickle down monetary policy:
"Ben Bernanke, the Federal Reserve chairman when the QE programs were first launched, claimed that asset purchases would have a "wealth effect": by the Fed purchasing bonds in such large amounts, bond prices would rise, yields would fall, and investors would shift into riskier securities, driving up the price of corporate shares and stock markets. Everyone would feel richer, businesses would invest and consumers would spend more. This seems much like the theory of "trickle-down" fiscal policy: that tax cuts for those with high incomes would be invested, thereby leading to the hiring of additional workers and spreading the benefits to the rest of the economy. But like the Bush administration's tax cuts, the Fed's monetary trickle-down has not worked so well. The Fed's lending and asset purchase programs have effectively propped up Wall Street interests -- big banks and financial markets -- but they have also neglected the needs of Main Street, including the small community banks, small and moderate sized and family-owned businesses, unemployed and underemployed workers, and state and local governments."
https://www.dissentmagazine.org/article/who-runs-federal-reserve-2008-crashCanova is one of the nationally renowned economists who advised Bernie Sanders on the Fed, and actually got the Fed audited, exposing apparent conflicts of interest with Wall Street.
http://www.sanders.senate.gov/newsroom/press-releases/top-economists-to-advise-sanders-on-fed-reformWhat's amazing: 'liberals' can see trickle down when it comes to tax cuts but not in monetary policy. They march in lock step with Wall Street when it comes to monetary policy...which has barely trickled down at all after seven years.
Bloomberg (November 2015)
STUDY: "During the past three years, members of the Standard & Poor's 500 Index have spent more than $1.5 trillion buying back stock ... US companies issued stock equal to $1.2 trillion last year. All told the new issues in 2014 exceeded share buybacks ... The conclusion is that what looks like buybacks are actually thinly veiled management-compensation plans."
http://www.bloombergview.com/articles/2015-11-11/why-corporate-management-loves-share-buybacks
Bernie! Bernie! Bernie!
https://www.youtube.com/watch?v=6_L5e0fIkQ8sanjait said...
It's apparently impossible for most to understand this ... but the most accurate way to describe the first order distributional impact of looser monetary policy would be to say:
Looser monetary policy increases the value of existing assets but reduces the return on assets. So the impact it has on inequality is to increase it in the short run, but in the long run the first order* impact is zero.
*Of course, second order impacts are important here. But if we're counting those, we should probably keep in mind the dynamics of the given situation, and the fact that workers in no way benefit from letting the economy slide into depression.
Peter K. said...
WSJ:
"It's also notable that nearly all of the GOP candidates identify the Federal Reserve's post-crisis monetary policy as a source of rising inequality "
I find it hard to believe that the Wall Street Journal or the GOP candidates actually think rising inequality is a bad thing.
gordon said...
I doubt that "trickle down, starve the beast, supply-side, sound money fantasies" are really economics at all. They look now more like the supportive myths of a new, much more hierarchical social order. As such, they should be seen as modern equivalents of the Divine Right royal myth of the Ancien Regime, or even the claim of Dark Age warlords to be descendants of Woden.
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Nov 03, 2015 | Economist's View
My latest column:
Do Economists Promote Ideology as Science?: Which is more important in determining the policy positions of economists, ideology or evidence? Is economics, as some assert, little more than a means of dressing up ideological arguments in scientific clothing?This certainly happens, especially among economists connected to politically driven think tanks – places like the Heritage Foundation come to mind. Economists who work for businesses also have a tendency to present evidence more like a lawyer advocating a particular position than a scientist trying to find out how the economy really works.But what about academic economists who are supposed to be searching for the truth no matter the political implications? Can we detect the same degree of bias in their research and policy positions? ...
rayward said...
RogerFox said...Thoma's assessment seems fair enough. I'd make the point that, for some academic economists, no amount of evidence is sufficient to overcome their bias. "Where's the proof" is the refrain one hears often. And then there's the question: what is evidence? The availability of lots of data is often used to "prove" this or that theory, even when the "proof" is contrary to the historical evidence one can see with her own eyes. Data used as obfuscation rather than clarification. I appreciate that one historical event following another historical event does not prove causation, but what's better proof than history.
DeDude said..."Shouldn't theory be a guide when the empirical evidence is unconvincing one way or the other?"
No - we don't allow MDs to prescribe or treat on the basis of theory alone. It's unethical for any professional practitioner to give advice that is not supported by compelling evidence demonstrating that the advise is both safe and effective - 'First, do no harm.'
To a man, professional economists shill for the view that they are morally free to treat real economies and real people as their personal lab rats. As a group, economists are an ethically challenged bunch in this respect, and probably in other respects too.
RGC said...Economics as a science is mainly hurt by two things.
- The rich plutocrats have a major stake in advocating very specific narratives, so they will throw large sums behind those narratives (and the fight against anything conflicting with them).
- Economics does not have anything resembling the double blind placebo controlled trials that help medicine fight off the narratives of those with money and power.
pete said...What sort of opinions are economists allowed to have if they want tenure, want to be published in the major journals or want to make a living?
Keynes concluded that government direction was necessary for a viable economy. Keynes' "interpreters" in the US buried that idea, and thus became very important economists - guys like Paul Samuelson. The first ( and only) US book to faithfully represent Keynes' ideas faded away soon after publication: http://news.stanford.edu/pr/93/931011Arc3112.html
Syaloch said...I did not know there was a debate. Krugman summed it all up in Peddling Prosperity. Folks know who pays the rent, and opine accordingly.
Sandwichman said...I think problems arise when economists are called upon by politicians or the media to give expert advice.
Within the sciences, "We don't know the answer to that" is a perfectly acceptable response, and in scientific fields where the stakes are low that response is generally accepted by the public as well. "What is dark matter made of?" "We don't know yet, but we're working on it." But in politics, where the stakes are higher, not having a definitive answer is viewed as a sign of weakness. How often do you hear a politician responding to a "gotcha" question admit that they don't know the answer rather than trying to BS their way through?
Given the timeliness of news coverage the media prefer to consult experts who offer definitive answers, especially given their preference for pro/con type interviews which require experts on both sides of an issue. Economists who are put on the spot this way feel pressured to ditch the error bars and give unambiguous answers, even answers based purely on theory with little to no empirical backing, and the more often they do this the more often they're invited back.
It is impossible to talk about economics without making essentially ideological distinctions. Private property and wage labor are not "natural" categories. Their adequacy as human practices therefore needs to be either defended or criticized. To simply take them "as given" is an ideological waffle that begs THE question.
Economists thus SHOULD have, acknowledge and fully disclose their ideological biases. When evaluating evidence they should make every effort to set aside and overcome their biases. And they need to stay humble about how Sisyphean, incongruous and incomplete their attempts at objectivity are.
Let's not forget that "The End of Ideology" was a polemical tract aimed at designating the ideology of the managers and symbol manipulators "above" and beyond ideology. Similarly, Marx's brilliant critique of ideology degenerated into polemic as its practitioners adopted the mantle of "science."
anne said in reply to Sandwichman...
Really excellent, and why I am immediately wary of self-described "technocrats."anne said in reply to Sandwichman...
https://en.wikipedia.org/wiki/The_End_of_IdeologyThe End of Ideology: On the Exhaustion of Political Ideas in the Fifties is a collection of essays published in 1960 by Daniel Bell, who described himself as a "socialist in economics, a liberal in politics, and a conservative in culture". He suggests that the older, grand-humanistic ideologies derived from the nineteenth and early twentieth centuries had been exhausted, and that new, more parochial ideologies would soon arise. He argues that political ideology has become irrelevant among "sensible" people, and that the polity of the future would be driven by piecemeal technological adjustments of the extant system.
anne said in reply to Sandwichman...
What precisely is "Marx's critique of ideology ?"Sandwichman said in reply to anne...
A very big question! Like "what is the meaning of life?" At least a semester-long upper division seminar course. ;-)In a nutshell (to put it crudely), Marx labelled as ideologists a cohort of German followers of Hegel's philosophy who envisioned historical progress as the result of the progressive refinement of intellectual ideas. Marx argued instead that historical change resulted from struggle between social classes over the material conditions of life, fundamental to which was the transformation of nature through human intervention into means of subsistence.
anne said in reply to Sandwichman...
Marx labelled as ideologists a cohort of German followers of Hegel's philosophy who envisioned historical progress as the result of the progressive refinement of intellectual ideas. Marx argued instead that historical change resulted from struggle between social classes over the material conditions of life, fundamental to which was the transformation of nature through human intervention into means of subsistence.[ What a superb introductory or summary explanation. I could not be more impressed or grateful. ]
DrDick said in reply to Sandwichman...
Well said. I would add "markets" to that list of relatively recent cultural constructs that needs greater scrutiny.Chuck said...
"And so - though we proceed slowly because of our ideologies, we might not proceed at all without them." - Joseph Schumpeter, "Science and Ideology," The American Economic Review 39:2 (March 1949), at 359
http://www.jstor.org/stable/1812737Sandwichman said in reply to Chuck...
Indeed.Ignacio said...
Many guys are not driven by ideology, rather than evidence. The problem with this article is that we cannot compare with other professions and say "economists are more/less prone to promote ideology than the average".DrDick said in reply to Ignacio...
All human endeavors are shaped by "ideology" in many different ways. What is important is to be aware of and explicit about their influences on our thought and action.RC AKA Darryl, Ron said in reply to RC AKA Darryl, Ron...
If there are two sides to an argument that radically disagree then it is possible that both sides may be ideology, but both sides cannot be science. Only the correct argument can be science. Of course ideology is a bit too kind of a word since the incorrect argument is actually just a con game by people out to lay claim on greater unearned wealth.ken melvin said...
Economists seem content with trying to figure out how to make 'it' work. Far better, I think, to try and figure out how it should be.It was philosophers such as Hume, Locke, Marx, Smith, Rawls, ... who asked the right questions. Laws and economics come down to us according to how we think about such things; they change when we change the way we think. Seems we're in a bit of a philosophical dry patch, here. Someday, we will have to develop a better economic system, might be now. Likewise, there are laws rooted in antiquity that were wrong then and are wrong still.
RC AKA Darryl, Ron said in reply to ken melvin...
Exactly! They all know what they are doing. Some of them are just trying to do the wrong thing.Arne said...
"Ideology certainly influences which questions academic researchers believe are the most important, but there is nothing wrong with that."No "experiment" in economics comes with the degree of control that experiments in physical sciences take for granted, so there is tremendous room for ideology to come into the discussion of whether a data set really represents the conditions the model is supposed to consider. Since reviewing another economist's study entails asking questions those questions...
DrDick said in reply to Arne...
Please describe the "experimentation" which takes place in astronomy and geology. Ideologies also play important roles in experimental sciences, such as biology (for which we have a lot of evidence.
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economistsview.typepad.com
Luigi Zingales:Is Money Corrupting Research?: The integrity of research and expert opinions in Washington came into question last week, prompting the resignation of Robert Litan ... from his position as a nonresident fellow at the Brookings Institution.Senator Elizabeth Warren raised the issue of a conflict of interest in Mr. Litan's testimony before a Senate committee... Senator Warren was herself criticized by economists and pundits, on the left and right. ... But at stake is the integrity of the research process and the trust the nation puts in experts, who advise governments and testify in Congress. Our opinions shape government policy and judicial decisions. Even when we are paid to testify..., integrity is expected from us. ...
Yet it is disingenuous for anybody (especially an economist) to believe that reputational incentives do not matter. Had the conclusions not pleased the Capital Group, it would probably have found a more compliant expert. And the reputation of not being "cooperative" would have haunted Mr. Litan's career as a consultant. ...
Reputational ... concerns do not work as well with sealed expert-witness testimony or paid-for policy papers that circulate only in small policy groups. ... A scarier possibility is that reputational incentives do not work because the practice of bending an opinion for money is so widespread as to be the norm. ...
He goes on to suggest some steps to strengthen the reputational incentive.
pgl said in reply to Larry...
anne said in reply to Larry..."Businesses sometimes finance policy research much as advocacy groups or other interests do," the economists wrote. "A reader can question the source of the financing on all sides, but ultimately the quality of the work and the integrity of the author are paramount." They praised Litan's quality and integrity as having been "impeccable over a career of four decades."
The fact of the matter is that funding comes from all sorts of places. One should always disclose the sourcing of funding and then let one's writings stand scrutiny.
Of course, the Cato Institute, Heritage, and Team Republican economists are proud that their "opinions" are bought and paid for.
http://www.reuters.com/article/2015/09/30/us-brookings-warren-resignation-idUSKCN0RU00B20150930mulp said in reply to Larry...September 29, 2015
Brookings fellow resigns after Senator Warren accuses him of conflicts
By SARAH N. LYNCH - ReutersWASHINGTON
A prominent Brookings Institution fellow resigned on Tuesday, after Massachusetts Senator Elizabeth Warren accused him of failing to fully disclose industry funding tied to a study that criticized the U.S. Labor Department's plan to regulate brokerages.
The resignation of Robert Litan came just one day after Warren, a Democrat, sent Brookings' president a letter demanding to know more about the think tank's policies on financial conflicts and details about the communications between Litan and Capital Group, an investment firm that funded his research paper.
"He has acknowledged that he made a mistake in not following Brookings regulations designed to uphold the independence of the institution," Brookings President Strobe Talbott said in a statement provided to Reuters.
Warren's concerns center a study that Litan and researcher Hal Singer jointly conducted which examined a controversial plan by the Labor Department to try and rein in conflicts posed by brokers who offer retirement advice.
The proposal has garnered fierce opposition from Wall Street, and Litan's study concluded that the plan could harm consumers.
Litan testified about the study's findings in a July hearing before a U.S. Senate panel, in which he represented himself as a fellow at Brookings.
The study was conducted by Litan and Singer in their capacity as staffers for Economists, Inc., a consulting firm.
Although his testimony and his study did disclose that Capital Group provided funding, Warren said that she later learned this was not the full story.
In a series of follow-up questions Warren sent to Litan after the hearing, she said he disclosed that Capital Group also provided feedback and editorial comments on a draft.
This, she said, ran counter to his claim at the hearing that he and Singer were "solely responsible" for the study's conclusions.
In addition, he disclosed that Capital Group had paid Economists Inc $85,000 for the study, and his share was $38,800.
In her letter to Brookings, Warren said the lack of disclosure raises "significant questions about the impartiality of the study and its conclusions."
Litan, a former top official in the Clinton administration, did not respond to an email seeking comment.
He is a well-known economics expert in Washington who has authored or co-authored over 25 books.
"We greatly appreciate all the good work Bob has done for Brookings over the 40-plus years he has been connected to this institution," Talbott said.
What did Brookings do to Litan???Second Best said...According to Reuters, he failed to disclose his relationships when presenting his report and when testifying, and seems to have lied:
"Although his testimony and his study did disclose that Capital Group provided funding, Warren said that she later learned this was not the full story.
"In a series of follow-up questions Warren sent to Litan after the hearing, she said he disclosed that Capital Group also provided feedback and editorial comments on a draft.
"This, she said, ran counter to his claim at the hearing that he and Singer were "solely responsible" for the study's conclusions."
Can I edit anything you write and claim as solely your own work? I want to have my point of view endorsed by a much larger group of writers, and the best way is for me to fix their writings.
It was not Litan being paid that was the problem, but the fact he claimed the words written for him were his own as an "independent" authority.
Money corrupts research as sure as the Pope is Catholic...greg said in reply to anne...Rumors of Thomas Malthus' irrelevance to humanity's future are greatly exaggerated.Consider instead: "Human and nature dynamics (HANDY): Modeling inequality and use of resources in the collapse or sustainability of societies"
http://www.sciencedirect.com/science/article/pii/S0921800914000615Authors: Safa Motesharreia, Jorge Rivasb, Eugenia Kalnayc
This is the actual paper of the model, but do not be afraid. Here are the highlights:
" HANDY is a 4-variable thought-experiment model for interaction of humans and nature.
The focus is on predicting long-term behavior rather than short-term forecasting.
Carrying Capacity is developed as a practical measure for forecasting collapses.
A sustainable steady state is shown to be possible in different types of societies.
But over-exploitation of either Labor or Nature results in a societal collapse."There are equations. And graphs. The concluding paragraph of the abstract:
"The measure "Carrying Capacity" is developed and its estimation is shown to be a practical means for early detection of a collapse. Mechanisms leading to two types of collapses are discussed. The new dynamics of this model can also reproduce the irreversible collapses found in history. Collapse can be avoided, and population can reach a steady state at maximum carrying capacity if the rate of depletion of nature is reduced to a sustainable level and if resources are distributed equitably."
This made the press about a year and a half ago, was commented on, but has since been ignored. Google "Handy Model" for popular presentations and critiques.
You decide whether it should continue to be ignored, given the remarkable progress the world has made towards remedying inequality, conserving resources, and controlling population growth. (That's sarcasm.)
reason said...
There is another solution to this issue. Financing should never be direct to the researcher. That way there is a funding body (say a university) that decides who researches what, and the funding is channeled through them (through a public application process). If a firm is really interested in disinterested research, no problem.
If it wants to control the research, they have a problem. Of course the whole funding body could be corrupted but if there is a public review process that can be minimised.
cm said in reply to reason...
It is more subtle than asking for or implying a preference for specific results. Regardless how the funding is distributed, except perhaps by lottery, there is the issue of "repeat business" or expert shopping (cherry-picking research organizations that are known to fall in a particular camp).
Then there is the issue of fads - even in relatively apolitical tech science, funding and research flocks to certain hot topics, as people hunt for funding by trying to tie their proposal to the current hot topics. But then this is perhaps more a consequence of an already corrupted funding process that only supports R&D that conforms to current preconceived notions and business interests.
bakho said...Money supports bias.
RC AKA Darryl, Ron said...
Money is power. Power corrupts.
mrrunangun said...
Most (all?) academic types are keenly aware of the importance of grantsmanship as a basic skill. Knowing the appropriate funding sources and, in some cases, the interests and biases of funding sources, is stock in trade. Scientific research has become so capital intensive that large grants from government and large foundations are necessary to carry it out. For the most part, the biases of the granting institutions are known and discounted.
Even in science, when research into a controversial area has been ambiguous enough for sustained disagreement, it is common to find that a given research shop's work consistently comes down on one side of the controversy and another shop's work consistently on the opposing side of the controversy. In such cases, only people who follow the research in the area closely are likely to be aware of this. Usually time and technical improvements in measuring equipment puts controversies to rest, but the time is often measured in years. In these cases, the biases come from the leaders of the research shops rather than the grantors.
There are politics among granting institutions as well. These are less often political biases and more often they are of a personal nature, and since the people on a granting committee are necessarily expert in the field that the grantee will be working in, they will often be personally acquainted with the grant applicants. Not uncommonly, former students of the members of the committee.
Economics and long range climate science are necessarily model-based. Their short-term predictions are often proven wrong which casts doubt on the reliability of their long-term predictions. As a result, there may be legitimate differences of opinion as to the applicability of a particular model to a particular situation.
In the case of Mr Litan, the fact that he acknowledged that his study was funded by Capital and that he was testifying on behalf of the industry announce his bias.
GeorgeK said...
Tainted research is the norm in most industries, research dollar come from corporations that expect their interest to be served. Currently Monsanto emails show how heavy handed this pay for research problem has become. ...""Professors/researchers/scientists have a big white hat in this debate and support in their states, from politicians to producers," Bill Mashek, a vice president at Ketchum, a public relations firm hired by the biotechnology industry, said in an email to a University of Florida professor. "Keep it up!"...
DeDude said...
The antidote to this kind of crap is the public funded University with tenured professors and sufficient resources (endowed Chairs) to conduct research without need to go out and get external funding for a study. As the public funding is reduced in order to give tax cuts to the rich plutocrats such truly independent research become more rare -and the plutocrats increasingly manage to own the facts.
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economistsview.typepad.com
A few excerpts from a much longer interview of Alan Kirman (it was in yesterday's links)
Everything You Need to Know about Laissez-Faire Economics: ... DSW: I'm so happy to talk with you about the concept of laissez faire, all the way back to its origin, which as I understand it is during the Enlightenment. ...e abrams said...AK: I think the basic story that really interests us is that with the Enlightenment and with people like Adam Smith and David Hume, people had this idea that somehow intrinsically people should be left to their own devices and this would lead society to a state that was satisfactory in some sense for everybody, with some limits of course–law and order and so on. That's the idea that is underlying our whole social and philosophical position ever since. ... I think what happened was on the one hand people became obsessed with proving there was some sort of socially satisfactory situation that corresponded to markets in equilibrium, and on the other hand, there was a lot of effort made, right up to the 1950's, to try to show that a market or an economy would converge on that. But we gave up on that in the 70's when there were results that showed that essentially we couldn't prove it. So the theoreticians gave up but the underlying economic content and all of the ideology behind it has just kept going. We are in a strange situation where on the one hand we say we should leave markets to themselves because if they operate correctly and we get to an equilibrium this will be a socially satisfactory state. On the other hand, since we can't show that it gets there, we talk about economies that are in equilibrium but that's a contradiction because the invisible hand suggests that there is a mechanism that gets us there. And that's what we're lacking–a mechanism. ...
DSW: ...This has been a wonderful conversation, by the way. Nowadays, you hear all the time about how neoliberal ideology and thought is invading European countries and is undoing forms of governance that are actually working quite well. I work a lot in Norway and Scandinavia and there you hear all the time that Nordic model works and at the same time it is being corrupted by the neoliberal ideology, which is being spread in some sort of cancerous fashion. Please comment on that-Current neoliberalism. What justifies it? Is it spreading? Is that a good thing or a bad thing? Anything you would like to say on that topic.
AK: I think that one obsession that economists have is with efficiency. We're always, always, worrying about efficiency. People like to say that this is efficient or not efficient. The argument is, we know that if you free up markets you get a more efficient allocation of resources. That obsession with efficiency has led us to say that we must remove some of these restraints and restrictions and this sort of social aid that is built into the Scandinavian model. I think that's without thinking carefully about the consequences. ...
I think what has happened is, because of this mythology about totally free markets being efficient, we push for that all the time and in so doing, we started to do things like-for example, we hear all the time that we have to reform labor markets in Europe. Why do we want to reform them? Because then they'll be more competitive. You can reduce unit labor costs, which usually means reducing wages. But that has all sorts of consequences, which are not perceived. In model that is more complex, that sort of arrangement wouldn't necessarily be one that in your terms would be selected for. When you do that, you make many people temporary workers. You have complete ease in hiring and firing so that people are shifting jobs all the time. When they do that, we know that employers then invest nothing in their human capital. ... We're reducing the overall human capital in society by having an arrangement like that. ... Again, the idea that people who are out of work have chosen to be out of work and by giving them a social cushion you induce them to be out of work-that simply doesn't fit with the facts. I think that all the ramification of these measures-the side effects and external effects-all of that gets left out and we have this very simple framework that says "to be competitive, you just have to free everything up." That's what undermining the European system. European and Scandinavian systems work pretty well. ... The last remark I would make is that to say "you've got to get rid of all those rules and regulations you have"-in general, those rules and regulations are there for a reason. Again, to use an evolutionary argument, they didn't just appear, they got selected for. We put them in place because there was some problem, so just to remove them without thinking about why they are there doesn't make a lot of sense. ...
DSW: There's no invisible hand to save the day.
AK: (laughs). Joe Stiglitz used to say that we also need a visible hand. The visible hand is sometimes pretty useful. For example in the financial sector I think you really need a visible hand and not an invisible hand. ...
The idea that anything even close to laissez faire ever exisited is silly
at all stages, the gov't actively intervened in the economy; eg, look at the rules for labor unions....
Laissez faire has never existed; it is code for when the gov't allows the rich to trample the poor, and the gov't actively sides with the rich
bakho said...
I enjoyed the interview with Kirman. Thanks for posting.
Too often, efficiency is modeled too simply, failing to capture important benefits. You may make widgets with fewer workers and more unemployed but at the loss of workforce training, most of which is on the job. This is important:
You can reduce unit labor costs, which usually means reducing wages. But that has all sorts of consequences, which are not perceived. In model that is more complex, that sort of arrangement wouldn't necessarily be one that in your terms would be selected for. When ... you make many people temporary workers.... so that people are shifting jobs all the time. ..employers then invest nothing in their human capital. ... We're reducing the overall human capital in society .. If you're working for ... all your lifetime, they probably invest quite a lot in you. ... it is a much more stable arrangement. .. the ramification of these measures-the side effects and external effects... gets left out and we have this very simple framework that says "to be competitive, you just have to free everything up."
If industry is freed by reducing their investment in human capital, replacement investment in human capital must come from elsewhere in higher taxes on business to pay for training that may be less effective. Else workforce quality declines and becomes a drag on overall economic efficiency.
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evonomics.com
What you always wanted to know about the "let it be" philosophy
I'll bet money that Alan Kirman is the only economist with animated ants running around his email signature. Highly regarded by mainstream economists, he is also a critic of equilibrium theory and proponent of new economic thinking that takes complex systems theory into account. It was my privilege to work with Alan and Germany's Ernst Strungmann Forum to organize a conference titled "Complexity and Evolution: A New Synthesis for Economics" that was held in February 2015 and will result in a volume published by the MIT press in 2016.After the conference was over, I sought Alan out to help me understand the complex history of laissez faire, the "let it be" philosophy that underlies mainstream economic theory and public policy.
DSW: I'm so happy to talk with you about the concept of laissez faire, all the way back to its origin, which as I understand it is during the Enlightenment. Then we can bring it up to date with some of its formalized versions in economic theory. Tell me what you know about the early history of laissez faire.
AK: I think the basic story that really interests us is that with the Enlightenment and with people like Adam Smith and David Hume, people had this idea that somehow intrinsically people should be left to their own devices and this would lead society to a state that was satisfactory in some sense for everybody, with some limits of course–law and order and so on. That's the idea that is underlying our whole social and philosophical position ever since. Economics is trying to run along side that. Initially the idea was to let everybody do what they want and this would somehow self-organize. But nobody said what the mechanism was that would do the self-organization. John Stewart Mill advanced the same position. He had the idea that people had to be given, as far as their role would permit, the possibility of doing their own thing, and this would be in the interests of everybody. And gradually we came up against this difficulty that we couldn't show economically, in a market for example, how we would ever get to such a position. I think what happened was on the one hand people became obsessed with proving there was some sort of socially satisfactory situation that corresponded to markets in equilibrium, and on the other hand, there was a lot of effort made, right up to the 1950's, to try to show that a market or an economy would converge on that. But we gave up on that in the 70's when there were results that showed that essentially we couldn't prove it. So the theoreticians gave up but the underlying economic content and all of the ideology behind it has just kept going. We are in a strange situation where on the one hand we say we should leave markets to themselves because if they operate correctly and we get to an equilibrium this will be a socially satisfactory state. On the other hand, since we can't show that it gets there, we talk about economies that are in equilibrium but that's a contradiction because the invisible hand suggests that there is a mechanism that gets us there. And that's what we're lacking–a mechanism. Is that clear more or less?
DSW: Yes, but it was very fast! I want to pull us back to the early times and make a couple of observations. First of all, that the first thinking about laissez faire came at a time when government was monarchy and absolutist rule. The whole struggle of the Enlightenment, to have a more egalitarian and inclusive society, was part of this. Am I right about that?
AK: Absolutely right. There was a social and philosophical revolution, precisely because of that. Men were trying to liberate themselves from a very hierarchical and monarchical organization. And economics tried to go along with that. There were good reasons and I think that even now there is no reason to say that there is anything wrong with the liberal position. On the other hand, what we can't show is that there is anything that would enable a liberal approach like that to get things under control. So you're right. It was a reaction to very autocratic systems that led the whole of the laissez faire and liberal position to develop.
DSW: Right. So laissez faire made a lot of sense against the background of monarchy and controlling church and so on. Now I know that Adam Smith invoked the invisible hand metaphor only three times in the entire corpus of his work and it is said that his first book on moral sentiments is much more nuanced than the popular notion of the invisible hand. Could you speak a little more on Adam Smith? On the one hand he's an advocate of laissez faire but on the other hand he is very nuanced in both of his books but especially in his Theory of Moral Sentiments. What do you have to say about that?
AK: Right. Adam Smith was fully cognizant of the fact that man is motivated by many things. Nowadays, if you take a very primitive version of the invisible hand, people say something like "greed is good". Somehow, if everyone is greedy and tries to serve their own interest, it will get to a good position socially. Adam Smith didn't have that view at all. He had the view that people have other things in mind. For example he said that one of the strongest motivations men have is to be seen to be a good citizen and therefore would do things that would appear to other people to be good. If you have motivations like that then you can be altruistic and you're not behaving like the strict Homo economicus. Adam Smith didn't take the strong position that people left entirely to their own selfish devices will make things OK. He had the view that man is much more complicated and governed by his emotions. He talks a lot about sympathy, which we would now call empathy.
DSW: That's great! Now let's talk about Walras and what his ambitions were to come up with the first mathematical justification for laissez faire, as I understand it.
AK: Actually, Walras himself didn't talk so much about laissez faire. He at that time had a very simple idea, that the amount of goods that people wanted to supply at a given price would be the amount that people would want to buy; i.e, demand at that price, so if those two were equal then that was the equilibrium price. Then he said that if we have many markets, how can we be sure that they will simultaneously be cleared, because after all if you raise the price in one market then that will effect the price in other markets. If you raise the price of bananas then the price of oranges will be effected, and so forth. He said "my problem is to solve the market clearing for all goods", but he was not so interested in the underlying philosophical context. Walras wasn't someone who pushed hard for laissez faire, but he started to build the weapons for trying to understand whether all markets could get into equilibrium. He wasn't so interested, himself, on whether the equilibrium was good for society; in other words, Adam Smith's original position. I would say that Walras was more a person who was worried about the very existence of equilibrium and he tried desperately at various points to show how we might get there. I don't think he was arguing in favor of laissez faire. I wouldn't regard Walras as being strictly in that tradition.
DSW: OK, that's new for me. So what about the rise of so-called neoclassical economics. At what point did it become toward demonstrating what I understand is the first fundamental theorem of economics-laissez faire leads to the common good and that being justified by some mathematical apparatus. Where does that come from, if not from Walras?
AK: We missed a very important step, which is [Vilfredo] Pareto. Pareto was concerned about the idea of the invisible hand himself. He said: "Look, what I want to show you is that the competitive equilibrium is a social optimum. He was the person to define what we now call a Pareto optimum, a situation in which you cannot make one person better off without making somebody else worse off-which is a pretty weak criterion, but still is a criterion for some sort of social efficiency. He was interested in the relationship between the two, so he brought us back on track to what I interpret as the invisible hand. Then, we can make a huge jump it you want to the first theorem of welfare of economics. That, mistakenly, is often referred to as the invisible hand theorem. But it is nothing about the invisible hand. It just says that if you are in a competitive equilibrium, then that will be a Pareto optimum, in the sense that I have just mentioned. You couldn't make someone better off without making someone else worse off. That's all it says. It does not say that if you leave a society alone it will get there, but thousands of people have interpreted it in that way.
DSW: OK. So where do we go from here? Tell me a little about agency theory, which is also something that seems to imply, if I understand it, that the only responsibility of corporations is to maximize their profits. The economy will work well if that's their only obligation.
AK: That's not exactly a sideline but a development where people are worrying about firms in addition to individuals. When you are just dealing with individuals in a simple economy, when they are exchanging goods there is no problem. When you get firms in there you need to ask "What's the objectives of these firms?" The objective, the argument is, is if they maximize profit then they are maximizing their shareholders' benefits and so therefore we get to the idea of increasing the welfare of society as a whole. But there is a huge leap there, because we haven't specified closely in our models who owns these firms and how ownership is transferred between these people. So I think there is a fuzzy area there, which is not completely included in the theory.
DSW: Please give me a thumbnail history of the Mont Pelerin Society and the role it played in advancing economic theory and policy. So this would be Hayek, Friedman and all that.
AK: The great hero of that society was Hayek. He had a different position from Walras & company and he wasn't very consistent in his views. According to Hayek, Walras said that nobody influences prices but take prices as given, and then somebody, not specified, adjusts them until they get to equilibrium. There is some mechanism out there. That was Walras. Hayek said "Not at all!" He said - actually he was a horrid man.
DSW: Wait a minute! Why was he a horrid man? You can't just glide over that!
AK: The reason I say that is-he had very clever ideas-but he was extremely bigoted, he was racist. There is a wonderful interview with him that you can find on You Tube, where he says (imitating Hayek's accent) "I am not a racist! People accuse me of being a racist. Now it's true that some of the Indian students at the London School of Economics behave in a very nasty way, typical of Indian people…" and he carries on like this. So that's one reason he is horrid. A second thing is that if you don't believe he is horrid, David, I will send you his book The Road to Serfdom, which said that if there is any planning going on in the economy, it will inevitably lead you to a fascist situation. When he produced that book it had a big success, particularly in the United States, and what is more, he authorized a comic book version of it, which is absolutely dreadful. One Nobel Prize winner, [Ronald] Coase, said "you are carrying on so much against central planning, you forget that a large part of our economy is actually governed by centrally planned institutions, i.e., big firms, and these big firms are doing exactly what you say they can't do. Hayek shrugged that off, but what he did in his book was say that if any planning goes on then eventually you are all going to wind up in a fascist state where you'll be shot if you don't do what you're told to do. At the end of the book there is some poor guy who's being shot because he wants to be a carpenter or a plumber, or something like that. It's terrible! And the irony of the whole situation is that comic book was issued and financed by General Motors, and GM of course is one of those corporations that Hayek didn't see were centrally planned institutions. That's way I say that Hayek was a dreadful person.
Hayek's idea was, there is no way that people could know what was going on and could know what the prices of goods are. Everyone has a little piece of information of their own, and in acting upon it, this news gets out into the market. So, for example I buy something such as a share, and you say "Oh, Kirman bought a share, so something must be going on there, based on information that he had that I didn't have", and so forth. Hayek's idea was that this mechanism-people watching each other and getting information from their acts, would lead you to the equilibrium that would be a socially optimal state. But again, he never specified closely what the mechanism was. He has little examples, such as one about shortage of tin and how people would adjust, but never really specified the mechanism. He believed that people with little information of their own, like ants, would somehow collectively get it right. It was a very different view of the world than Walras.
DSW: So he was a pioneer in two respects. First of all, he grasped the idea of self-organizing and decentralized processes-that the intelligence is in the system, not in any individual, and secondly cultural group selection, that the reason economic systems were like this is because of some past history of better systems replacing worse systems. The wisdom of the system was the product of cultural group selection, as we would put it today, and that we shouldn't question its wisdom by tampering with it. Is that a fair thing to say?
AK: Yes, that's a fair thing to say and I think it is what Hayek believed. He didn't actually show how it would happen but you're absolutely right-I think that's what he believed and he thought tampering with this system would make it less perfect and work less well, so just leave it alone. I don't think he had in mind, strictly speaking, group-level selection, but that's clearly his idea. A system that works well will eventually come to outstrip other systems. That's why he was advising Thatcher. Just trust the markets and let things go. Get rid of the unions, and so forth. So it's clearly he had in mind that interfering with that system would just lead you to a worse social situation. He was much less naïve than Friedman. Friedman has a primitive natural selection argument that if firms aren't doing better than other firms they'll go bust and just die. That's a summary of Friedman's evolutionary argument! But Hayek is much more sophisticated-you're absolutely right.
DSW: I think Hayek was explicit about cultural group selection, and Friedman-I've paid quite a bit of attention to his 1953 article on positive economics, in which he makes a very naïve evolutionary argument. Friedman and Hayek didn't see eye to eye at all, as I understand it. Hayek was actually very concerned that Friedman and other mathematical economists took over the Mont Pelerin Society, if I understand it correctly, but now let's put Friedman on center stage, and also the society as a whole and the creation of all the think tanks, which caused the society to become politically influential.
AK: Yes, I think that it coincided very nicely with conservative ideology and people who had really strongly liberal-not in the Mills sense (you have to make this distinction particularly in the United States where these words have different meanings), but really completely free market leave-everybody-to-their own-thing libertarian point of view. Those people found it a wonderful place to gather and reinforce themselves. And Hayek was a strong member of that. Another was Gary Becker, but I don't know how directly. Becker had the economics of everything-divorce, whatever. You'd have these simple arguments, but not necessarily selection arguments, often some sort of justification in terms of a superior arrangement. The marginal utility of the woman getting divorced just has to equal the marginal utility of not getting divorced and that would be the price of getting divorced, and that sort of stuff. Adam Smith would have rolled over in this grave because he believed emotions played a strong role in all of this and the emotions that you have during divorce don't tie into these strict calculations.
DSW: This is a tailor-made ideology for powerful interests, powerful people and corporations who simply do want to have their way. Is that a false statement to make?
AK: No, I think that's absolutely right. They can benefit from using that argument to advance their own ends. As someone once said, if you think of saying to firms, we're going to diminish their taxes, no firm in its right mind would argue with that. Even though they might think deep down that there are other things that could be done for society. There are some things which are part of this philosophy which is perfect for firms and powerful interest groups. You're absolutely right. And so they lobby for this all the time, pushing for these positions that are in fact in their own interest.
DSW: So, at the end of the day, "Greed is Good" sounds so simplistic, but what all of this seems to do is to provide some moral justification for individuals or corporations to pursue their own interests with a clear conscience. It's a moral justification for "Greed is Good", despite all of the complexities and all of the mathematics-that's what it seems to come down to. Am I wrong about that?
AK: I think you're absolutely right. What's interesting is that if you look at various economic situations, like today the first thing that people tell you about the Greeks is that they are horrid ideological people. But the people on the other side have an equally strong ideology, which is being justified by the sort of economic models that we are building. Remember that even though we had this discussion about how this became a real difficulty in theoretical economics, in macroeconomics they simply carried on as if these theoretical difficulties hadn't happened. Macroeconomic models are still all about equilibria, don't worry about how we got them, and their nice efficient properties, and so forth. They are nothing to do with distribution and nothing to do with disequilibrium. Two big strands of thought-Keynes and all the people who work on disequilibrium-they're just out of it. We're still working as if underlying all of this, greed-we don't want to call it greed, but something like greed-is good.
DSW: Could I ask about Ayn Rand and what role she played, if any? On the one hand she was not an economist, she was just a philosopher and novelist. On the other hand, she is right up there in the pantheon of free market deities alone with Smith, Hayek and Friedman. Do you ever think about Ayn Rand. Does any economist think about Ayn Rand?
AK: That's an example of my narrowness that I never read Ayn Rand, I just read about her. I think it would be unfair now to make any comments about that because I'd be as uninformed as some people who talk about Adam Smith. What I should do at some point is read some of her work, because she is constantly being cited on both sides as a dark bad figure or as a heroine in the pantheon as you said, with Hayek and everybody else. I just admit my ignorance and I don't know if Rand had a serious position on her own or whether she is being cited as a more popular and easily accessible figure.
DSW: Fine! I'd like to wrap this up with two questions. This has been a wonderful conversation, by the way. Nowadays, you hear all the time about how neoliberal ideology and thought is invading European countries and is undoing forms of governance that are actually working quite well. I work a lot in Norway and Scandinavia and there you hear all the time that Nordic model works and at the same time it is being corrupted by the neoliberal ideology, which is being spread in some sort of cancerous fashion. Please comment on that-Current neoliberalism. What justifies it? Is it spreading? Is that a good thing or a bad thing? Anything you would like to say on that topic.
AK: I think that one obsession that economists have is with efficiency. We're always, always, worrying about efficiency. People like to say that this is efficient or not efficient. The argument is, we know that if you free up markets you get a more efficient allocation of resources. That obsession with efficiency has led us to say that we must remove some of these restraints and restrictions and this sort of social aid that is built into the Scandinavian model. I think that's without thinking carefully about the consequences. Let me tell you my favorite and probably not very funny story about how economists are obsessed with efficiency. There were three people playing golf; a priest, a psychoanalyst, and an economist. The got very upset because the guy in front was playing extremely slowly and he had a caddy to help him. So these guys get very upset and they start to shout and say "Come on, can we play through please! You can't waste all of our afternoon!" They sent the priest up to find out what was going on and he came back absolutely crestfallen and said "You know why that poor guy is laying so slowly? It's because he's blind. I'm so upset because every Sunday I'm preaching to people to be nice to others." He turns to his psychoanalyst friend and say's "Joe, what do you think?" Joe says "I have these guys on my coach every week. I'm trying to help them live with this problem and here I am screaming at this guy. It's horrible!" Then they turn to the economist and say "Fred, what do you think?" Fred says "I think that this situation is totally inefficient. This guy should play at night!" As you can see, this is a very different attitude to how the world works.
I think what has happened is, because of this mythology about totally free markets being efficient, we push for that all the time and in so doing, we started to do things like-for example, we hear all the time that we have to reform labor markets in Europe. Why do we want to reform them? Because then they'll be more competitive. You can reduce unit labor costs, which usually means reducing wages. But that has all sorts of consequences, which are not perceived. In model that is more complex, that sort of arrangement wouldn't necessarily be one that in your terms would be selected for. When you do that, you make many people temporary workers. You have complete ease in hiring and firing so that people are shifting jobs all the time. When they do that, we know that employers then invest nothing in their human capital. When you have a guy who may disappear tomorrow-and we have a lot of these temporary agencies now in Europe–which send you people when you need them and take away people when you don't. Employers don't spend anything on human capital. We're reducing the overall human capital in society by having an arrangement like that. If you're working for Toyota, Toyota knows pretty much that you'll be working all your lifetime, so they probably invest quite a lot in you. They make you work hard for that, but nevertheless it is a much more stable arrangement. Again, the idea that people who are out of work have chosen to be out of work and by giving them a social cushion you induce them to be out of work-that simply doesn't fit with the facts. I think that all the ramification of these measures-the side effects and external effects-all of that gets left out and we have this very simple framework that says "to be competitive, you just have to free everything up." That's what undermining the European system. European and Scandinavian systems work pretty well. Unemployment is not that high in the Scandinavian system. It may be a little bit less efficient but it may also be a society where people are a little bit more at ease with themselves, than they are in a society where they are constantly worrying about what will happen to them next. The last remark I would make is that to say "you've got to get rid of all those rules and regulations you have"-in general, those rules and regulations are there for a reason. Again, to use an evolutionary argument, they didn't just appear, they got selected for. We put them in place because there was some problem, so just to remove them without thinking about why they are there doesn't make a lot of sense.
DSW: Right, but at the same time, a regulation is a like a mutation: for every one that's beneficial there are a hundred that are deleterious. So…
AK: You are an American, deep at heart! You believe that all these regulations are dreadful. Think of regulations about not allowing people to work too near a chain saw that's going full blast, or not being allowed to work with asbestos and so forth. Those rules, I think, have a reason to be there.
DSW: Well of course, but just to make my position clear, the idea of no regulations is absurd. For a system that is basically well adapted to its environment, then most of its regulations are there for a reason, as you say, but one of the things that everyone needs to know about evolution is that a lot of junk accumulates. There is junk DNA and there is junk regulations. Not every regulation has a purpose just because it's there, and when it comes to adapting to the future, that's a matter of new regulations and picking the right one out of many that are wrong. The question would be, how do you create smart regulations? Knowing that you need regulations, how do you create smart ones? That's our challenge and the challenge of someone who appreciates complexity, as you do. How would you respond to that?
AK: I think you're absolutely right. It's absolutely clear that as these regulations accumulate, they weren't developed in harmony with each other, so you often get even contradictory regulations. Every now and then, simplifying them is hugely beneficial. But that doesn't mean getting rid of regulations in general. It means somehow managing to choose between them, and that's not necessarily a natural process. For example, in France when I arrived here it used to take about a day and a half to make my tax return. Now it takes around about 20 minutes, because some sensible guy realized that you could simplify this whole thing and you could put a lot of stuff already into the form which they have received. They have a lot of information from your employer and so forth. They've simplified it to a point where it takes me about 20 minutes a year to do my tax return. It used to take a huge amount of time.
DSW: Nice!
AK: What's interesting is that you have some intelligent person saying "let's look at this and see if we can't make these rules much simpler, and they did. I have conflicting views, like you. These things are usually there for a reason, so you shouldn't just throw them away, but how do you select between them. I don't think that they necessarily select themselves out.
DSW: I would amend what you said. You said that some intelligent person figured out how to make the tax system work better in France. Probably not just a single intelligent person. Probably it was an intelligent process, which included intelligent people, but I think that gets us back to the idea that we need systemic processes to evaluate and select so that we become adaptable systems. But that will be systemic thing, not a smart individual.
AK: You're absolutely right. I shouldn't have said smart individual because what surely happened was that there was a lot of pressure on the people who handle all of these things, and gradually together they realized that this situation was becoming one where their work was becoming almost impossible to achieve in the time available. So there was some collective pressure that led them to form committees and things that thought about this and got it together. So it was a natural process of a system, but it wasn't the rules themselves that selected themselves out, as it were. It was the collectivity that evolved in that way to make it simpler.
DSW: There's no invisible hand to save the day.
AK: (laughs). Joe Stiglitz used to say that we also need a visible hand. The visible hand is sometimes pretty useful. For example in the financial sector I think you really need a visible hand and not an invisible hand.
DSW. That's great and a perfect way to end. I'm so happy to have had this conversation, Alan, and to be working with you at the conference we just staged and into the future.
AK: A pleasure. Always good to talk with you.
Alan Kirman is professor emeritus of Economics at the University of Aix-Marseille III and at the Ecole des Hautes Etudes en Sciences Sociales and is a member of the Institut Universitaire de France. His Ph.D. is from Princeton and he has been professor of economics at Johns Hopkins University, the Universite Libre de Bruxelles, Warwick University, and the European University Institute in Florence, Italy. He was elected a fellow of the Econometric Society and of the European Economic Association and was awarded the Humboldt Prize in Germany. He is member of the Institute for Advanced Study in Princeton. He has published 150 articles in international scientific journals. He also is the author and editor of twelve books, most recently Complex Economics: Individual and Collective Rationality, which was published by Routledge in July 2010.
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Jun 16, 2003 | naked capitalism
Chris Williams, October 12, 2015 at 5:24 pm
As an economist who was taught at the Australian National University in the 1980s, I know, now, that the profession has more in common with PolSci than it has to do with math. Yet, we had all those demand and supply graphs, ISLM, Phillips curves and so on. Very mathy, we even did Economic Stats, Accounting and Comp Sci just to round off the notion that Economic theories were like, say Physics, full of 'laws' that were immutable.
Non economists, most of the rest of you, I hope, can only imagine what it feels like to know that much of what you read and thought about during those years of study was complete crap as the syllabus failed to account for fraud, corruption, how money and debt works in reality etc….
The biggest lie is money and the notion that issuers of fiat currencies, sovereign governments, are like households and need to balance deficit spending by borrowing the shortfall in tax revenues.
Hopefully, the new thinkers in the profession like Steve, can continue to spread their message
Knute Rife, October 13, 2015 at 12:05 am
When I was an undergrad, I took macro and micro in very classical courses. It didn't take long to see the "math" on the board was more conjuring than calculating. In law school I took Law and Economics from an econ prof. There were about three of us in the class who had any decent math. The prof's "calculations" had us constantly looking at one another. One day she finally hit the limit. We pointed out to her that she had the central fraction reversed. She stood back and said (I kid you not), "Oh well, it doesn't matter." I turned down the sound on economic "calculations" in general after that.
Furzy Mouse, October 12, 2015 at 12:42 pm
Keen's talk….cannot read the subtitles….the screen is too small, even when I go to YouTube…
Arthur Wilke,
October 12, 2015 at 1:33 pm
This link may be an aid: https://www.youtube.com/watch?v=x7uITEBqQvMVatch, October 12, 2015 at 1:44 pm
Have you tried your browser's zoom function? This is often CTRL-Plus. CTRL-Minus reduces the size, and CTRL-Zero restores the default size.
low_integer, October 12, 2015 at 2:00 pm
If you put your cursor on the bottom right corner of the video and click, the video will expand into full screen. It is one of the options in the bar that is only visible when your cursor is at the bottom of the video area, from which you can also turn the subtitles on and off. Also, press escape to exit full screen mode. Hope that makes sense
Arthur Wilke, October 12, 2015 at 2:32 pmThe embedded video is selected from this encounter and
is easy to expand to full-screen:
https://www.youtube.com/watch?v=x7uITEBqQvM
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Oct 09, 2015 | economistsview.typepad.com
Robert Shiller continues to phish for book sales:Faith in an Unregulated Free Market? Don't Fall for It: Perhaps the most widely admired of all the economic theories taught in our universities is the notion that an unregulated competitive economy is optimal for everyone. ...The problem is that these ideas are flawed. Along with George A. Akerlof ... I have used behavioral economics to plumb the soundness of these notions. ...Don't get us wrong: George and I are certainly free-market advocates. In fact, I have argued for years that we need more such markets, like futures markets for single-family home prices or occupational incomes, or markets that would enable us to trade claims on gross domestic product. I've written about these things in this column.But, at the same time, we both believe that standard economic theory is typically overenthusiastic about unregulated free markets. It usually ignores the fact that, given normal human weaknesses, an unregulated competitive economy will inevitably spawn an immense amount of manipulation and deception. ...Current economic theory does recognize that if there is an "externality" - say, a business polluting the air in the course of producing the goods it sells - the outcome won't be optimal, and most economists would agree that in such cases we need government intervention.But the problem of market-incentivized professional manipulation and deception is fundamental, not an externality...david said...
"But the problem of market-incentivized professional manipulation and deception is fundamental, not an externality..."
Glad to see Shiller pushing this line.
But that's true of loads of what gets called externality -- that's the trouble with the term, it presumes some idyllic unregulated market with just a few troubling side effects to regulate away. The markets are made so that certain actors gain rewards and others bear costs, fundamentally. Externality suggests tweaks, but to go back to the Stavins bit from a few days ago, we need to be thinking structure and power.
JohnH said...
An unregulated free market is a recipe for oligopoly and monopoly, the very antithesis of a free market.
pgl said in reply to JohnH...
"The problem of market-incentivized professional manipulation and deception is fundamental, not an externality" goes well beyond anti-trust concerns."
Paul Mathis said...
Unregulated Free Markets Never Existed
Nearly 4,000 years ago the Babylonian King Hammurabi carved onto a large stone a code of laws regulating contracts: the wages to be paid to an ox driver or a surgeon, the liability of a builder for a house that collapses, property that is damaged while left in the care of another, etc. – Wikipedia.
Governments have been regulating and enforcing contracts ever since because no economy can function without such regulation and enforcement. And whenever government regulation is absent, businesses collude to fix prices, divide up markets and drive out competitors thereby nullifying any illusion of "free market" competition.
GeorgeNYC said...
Just ask any "free market" advocate if they believe that the stock market is a good example of their vision for a "free market". They will invariably say "yes" as the stock market is the cathedral of religious capitalism.
Point out to them that the "stock market" is actually one of the most highly regulated "markets" with strict disclosure requirements (enforced by the government) and insider trading prohibitions (also enforced by the government), to name but a few, without which much of our faith in the "market" would be completely eliminated (and whose weak enforcement invariably lead to concerns about fraud). Of course, there are also a huge number of "private" regulations that ultimately have the force of the government behind them in that they allow for exchanges to "self-regulate".
Most people do not understand that force is required to maintain the type of transparency needed to allow the proper information flow necessary to actually have a market work with true efficiency. "Free" is a complete misnomer. "Open" would probably be better term although that does not really fully capture the requirements.
likbez said in reply to GeorgeNYC...
That's brilliant: "the stock market is the cathedral of religious capitalism".
The term "free market" became symbol of faith for neoliberalism and obtained distinct religious overtones. Because neoliberalism is in reality a secular religion. That's why neoliberalism is often called casino capitalism.
And at the same time it is powerful instrument of propaganda of neoliberalism, a very skillful deception that masks what is in practice the advocacy of the law of jungle.
Advocates of "free market" (note that they never use the term "fair market") are lavishly paid by Wall Street for one specific purpose: first to restore and now to maintain the absolute dominance of financial oligarchy which now successfully positioned itself above the law. Kind of return to feudalism on a new level.
Bud Meyers said...
Great posts on this topic:
Free Markets are Fraudulent Markets (by Eric L. Prentis)
http://www.economicpopulist.org/content/free-markets-are-fraudulent-markets-5360
Capitalism Requires Government (7 pages: click through the page links near the bottom of each page):
http://www.governmentisgood.com/articles.php?aid=13
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Oct 09, 2015 | www.economicpopulist.org
September 7, 2013 | The Economic Populist
How the Financial Elite Con Us into Wanting the Wrong ThingCompetitive or self-regulating market economies promote dynamic creative destruction and rebirth-led by people's needs, wants and desires, thus properly directing economic progress. Historically, competitive market economies are a relatively new economic system, and while very productive, they are not self-sustaining, are unstable and require significant state support and regulation to function properly.
Nevertheless, self-regulating market economies are superior to other political-economic systems-such as dictatorial fascism or autocratic communism-however, the state can mismanage them.
History of Market Economies
Market economies are nonexistent during primitive times, and even during feudal times, markets trade local goods and remain small, with no tendency to grow. External foreign markets carry only specialty items-such as spices, salted fish and wine. Foreign trade does not begin in feudal societies, between individuals, but is only sanctioned by civic leaders-between whole communities.
During feudal times, markets for local community goods do not mix with markets for goods that come from afar. Local and external foreign markets differ in size, origin and function-are strictly segregated, and neither market is permitted to enter the countryside.
Feudal society transitions into the mercantile society of the 16th to late 18th centuries, where the state monopolizes the economic system, for the state's benefit. Colonies are forbidden to trade with other countries, and workers' wages are restricted. However, mercantilism proves divisive; fostering imperialism, colonialism and many wars between the Great Powers. Market economies have yet to arrive, and would not do so until after 1790.
During the Industrial Revolution, production processes transition from hand crafting methods that supply only the local community, into mechanized manufacturing; thereby vastly increasing production, driving down costs and increasing wealth. The source of a person's income is now the result of product sales to far-off, unknown customers. Private business entrepreneurs are the driving force pushing the state to institute the market economy, thereby protecting the sale of their goods in far-off lands.
Unfortunately, in practice, market economies result in corporate monopolies. Corporations may use a product dumping predatory pricing strategy, by charging less than their cost to produce, in a specific market, in order to drive weaker, smaller competitors out of business, and then significantly raise prices at a later date, in order to gouge the consumer. If the monopoly is in a vital economic area and the company institutes monopoly pricing to overcharge the consumer, only the state has the power to protect the market economy from monopolistic inefficiencies and break up the offending company; thus reinstituting competitive pricing. As a result, government regulations and market economies develop simultaneously.
Laws & Regulations Are Necessary
Leaving business a free hand, especially when dealing with far off customers, leads to misrepresentations, shoddy practices and fraud. The food industry is an example.
Upton Sinclair writes The Jungle (1906), exposing the disgusting unsanitary conditions in the Chicago meatpacking industry, during the early 20th century. Public uproar prompts President Theodore Roosevelt to pass the Pure Food and Drug Act of 1906 and the Meat Inspection Act. Roosevelt says that government laws and regulations are the only way to restrain the arrogant and selfish greed of the capitalist system.
Shocking examples of food fraud in 2013 highlight the need for enforcing government regulations. Inspectors uncover corporations selling horse meat as beef, and routinely mislabeling about 40% of the fish served in U.S. restaurants. Cheap rockfish and tilapia are substituted and sold as expensive snapper, and restaurateurs frequently switch escolar for white tuna, causing diners to suffer indigestion.
Over 70% of the tilapia sold in the U.S. is imported from Asia, and only 2% is inspected by the Food and Drug Administration. Much of this Asian farm raised tilapia is "filthy fish," where pesticides and manure run off into the tilapia raising ponds, causing infections. Or the tilapia is raised in polluted Asian rivers. Americans are impairing their health by unknowingly eating filthy Asian tilapia, fraudulently substituted in U.S. restaurants for the healthy fish ordered.
Other fraudulently mislabeled foods include sausage, organic foods, energy drinks, milk and eggs. Without sanitary food preparation standards, set and fairly enforced by the government-Americans will soon return to naively eating rat droppings-so, unknown to them, CEOs can meet Wall Street earnings expectations.
Departments of Weights and Measures (DWMs) at the state and federal level develop "uniform laws, regulations and methods of practice" that impact about 50% of U.S. GDP-to ensure there is equity between buyers and sellers in commercial transactions.
Because gasoline stations routinely pumped less gas then charged for, DWMs now ensure the accuracy of gasoline pumps, octane levels, labeling and restricting water in gasoline. Butchers used to add lead weights to the chest cavity of the poultry sold, prior to weighing, then noiselessly dumped the weights out into an unseen padded draw before the bird was held up for the customer's inspection, thereby swindling their trusting patrons.
Without the state to step in to punish fraudulent wrongdoers, dishonest business practices would be widespread. Consumer trust, in everyday market transactions, is paramount for market economies to function effectively and efficiently-making government regulations vitally important.
Without regulation and transparency, bad businesses drive out good businesses, following Gresham's Law. The economic system then atrophies, with a loss of trust in the marketplace. What is lost is not just the money on an inferior product or service, in the short run, but more importantly, the bad businesses may use their outsized profits to buy political protection and start changing laws, to make new laws favorable only for them-thereby damaging the market economy and reducing the state's economic growth and welfare.
Competitive Market Economies
An economic market system capable of directing the whole of economic life, without out-side help or interference, is called self-regulating. Once the self-regulating or competitive market economy is designed and implemented by the state, to give all participants an equal opportunity for success, the self-regulating market is to be let alone by the state and allowed to function according to laws and regulations, without after-the-fact government intrusions-regardless of the expected consequences.
Those in Western societies are told that competitive market economies, which have self-regulated prices for land, labor and money, set solely by the market, are normal, and that human beings develop market economies on their own, without help from the state, which is the proof of human progress. Also, that market institutions will arise naturally and spontaneously, if only persons are left alone to pursue their economic interests, free from government control. This is incorrect.
Throughout most of human history, self-regulating markets are unnatural and exceptional. Human beings are forced into the self-regulating market economy, by the state. Look at the following false competitive market economy assumptions.
We are told people naturally bartered goods. Actually, human beings, down through history, have no predilection to barter. Social anthropology says that assuming tribal and feudal men and women bartered are rationalist constructs, with no basis in fact. Market economies are the result of often violent government directives, implemented for society's eventual improvement.
The assumption is man is a trader by nature, and that any different human behavior is an artificial economic construct. By not interfering in human behavior, markets will spring up spontaneously. Social anthropology disproves this.
Neoliberal Economic Theory
Originally, neoliberal economic theory means, "free enterprise, competitive markets, the priority of the market price setting mechanism, and a strong and impartial state-to ensure it all functions properly."
The Mont Pelerin Society, led by Dr. Milton Friedman, supports Hayek's economic theories, based on "free market" ideology and help change neoliberal economic theory by rejecting government regulation-calling it inefficient. In addition, financial economists at the University of Chicago School of Business promote the efficient market hypothesis or theory (EMT), supporting the Mont Pelerin Society's conjecture. Thus, the primacy of deregulated or "free markets" becomes mainstream within academe in the 1970s. Large corporations then use "free market fundamentalism" to their advantage, by lobbying the U.S. Congress to pass legislation beneficial to them.
Some think that "free markets" are a matter of degree, and the practical issues of implementation are paramount. This is incorrect, and will not resolve the current "free market fundamentalism" debate. Instead, the real issue is semantics. Notice how quickly those with a political agenda change the debate from "competitive markets," which require state regulations and are highly productive-to "free markets," which result in fraudulent marketplace behavior, crony capitalism and weak economic growth.
Using the term "free markets" is an Orwellian ruse, designed to change the focus in the public's mind from, "those in authority have to do better" to "those in authority know best, therefore, let them have their way."
Today, neoliberal economic dogma promotes "free market fundamentalism" of reducing the size of government through the privatization of government services, deregulation and globalization. Privatization professes to reduce the state's authority over the economy, but state money is used by private companies to lobby legislators, to change laws, which will increase the government's demand for these same private corporation services. Privatization of government services by corporations does not promote the common good, only corporations' private profits.
Neoliberal "free market" economists have doubled down on the failed liberal economic theory, with the ongoing 2008 credit crisis as the result.
Free Markets Are Impractical
"Free markets" are free from state intervention, i.e., unfettered capitalism. Those who understand how markets function realize this is an impractical view-simply a rhetorical device-using the popular word "freedom" to mask its real purpose.
"Free markets" are a fantasy, far outside the realm of practicality, used by wealthy international corporations to bully governments and labor, to get their way. The reality is a competitive market economy requires powerful complex opposing interests, mediated by government, to produce an efficient and effective economy that supplies the most to the many, which includes the common good.
Free Market Fundamentalism Leads To Economic Disaster
Nowhere is "free market fundamentalism" more highly trumpeted by neoliberal economists than in the financial markets. The foundation of neoliberalism is, "a deregulated financial sector will regulate itself efficiently, making better use of capital, thus ushering in a new age of prosperity."
Tragically, the massive deregulation of the financial markets during the Clinton and Bush presidencies, results in the ongoing 2008 credit crisis-which the U.S. Government Accountability Office reports has cost the U.S. economy about $13 trillion dollars in lost GDP output.
"Free market" apologists ingenuously explain the 2008 credit crisis is not caused by "free markets," but because government regulations are not loose enough. All "free market" failures are dismissed by the financial elite, because of cognitive dissonance. Bankers and neoliberal economists want to believe in what is making them richer and more important. This is the same logic used by those in charge in the USSR, when communism failed, "it wasn't being applied purely enough."
Free Market Ideology in Practice
"Free market," ideology, as practiced today, is the opposite of what is stated. Instead, governments step in to save insolvent banks and large international corporations, when they make bankrupting mistakes, and give the bill to the taxpayer. This transforms the difficult but manageable ongoing 2008 credit crisis, into a much larger and dangerous sovereign bankruptcy crisis, with potentially calamitous political consequences.
"Free markets" usher in unfettered capitalism, unleashing the "law of the jungle" and a "dog-eat-dog world" that fosters fraud and corruption. Human beings, no matter their station in life, cannot be trusted to always do the right thing, especially in a competitive situation. Doing away with laws or regulations so those in power know it is impossible to be caught or penalized does not stop them from acting improperly. Only criminal punishment and public disgrace accomplish that.
The resulting "free market" business jungle includes monopolies, coercion, fraud, theft, parasitism, crony cabals and racketeering. Ironically, unfettered "free markets" are not free, but increase injustice, making the economic system inefficient. Only government laws and regulations can keep markets competitive.
The EMT Supporting Free Markets Is Wrong
New scientific evidence on the efficient market hypothesis or theory (EMT), shows University of Chicago School of Business researchers ask the wrong questions, use erroneous data and an incorrect research method to analyze the data, and then jump to false conclusions, based on half-truths-please read further in my journal articles: link, link and link.
The EMT and "free market fundamentalism" are false gods.
Conclusion
Markets are not efficient, based on the data. Consequently, "free markets" have no theoretical foundation. Therefore, reject the incorrect theory of "free market fundamentalism" It is impractical and dangerous, leading us into the ongoing 2008 credit crisis.
Competitive market economies only function properly by having fair laws and regulations, set up and impartially enforced, by a strong state. Dr. Robert M. Solow, 1987 Nobel Prize Winner in Economics and MIT Institute Professor Emeritus says, "The switch to talk about "free" markets diverts attention from these deficiencies and suggests that any attempts at corrective regulation are instead limitations on freedom."
Neoliberal" free market fundamentalists" in business use "free market" ideology as a negotiation ploy. Do not succumb to this ruse. The U.S. requires "competitive markets for economic growth," not "free markets for fraud."
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Sep 27, 2015 | economistsview.typepad.com
Sep 26, 2015 | Economist's View
From an interview with Olivier Blanchard:
...IMF Survey: In pushing the envelope, you also hosted three major Rethinking Macroeconomics conferences. What were the key insights and what are the key concerns on the macroeconomic front?Blanchard:
Let me start with the obvious answer: That mainstream macroeconomics had taken the financial system for granted. The typical macro treatment of finance was a set of arbitrage equations, under the assumption that we did not need to look at who was doing what on Wall Street. That turned out to be badly wrong.
But let me give you a few less obvious answers:
The financial crisis raises a potentially existential crisis for macroeconomics. Practical macro is based on the assumption that there are fairly stable aggregate relations, so we do not need to keep track of each individual, firm, or financial institution-that we do not need to understand the details of the micro plumbing. We have learned that the plumbing, especially the financial plumbing, matters: the same aggregates can hide serious macro problems. How do we do macro then?
As a result of the crisis, a hundred intellectual flowers are blooming. Some are very old flowers: Hyman Minsky's financial instability hypothesis. Kaldorian models of growth and inequality. Some propositions that would have been considered anathema in the past are being proposed by "serious" economists: For example, monetary financing of the fiscal deficit. Some fundamental assumptions are being challenged, for example the clean separation between cycles and trends: Hysteresis is making a comeback. Some of the econometric tools, based on a vision of the world as being stationary around a trend, are being challenged. This is all for the best.
Finally, there is a clear swing of the pendulum away from markets towards government intervention, be it macro prudential tools, capital controls, etc. Most macroeconomists are now solidly in a second best world. But this shift is happening with a twist-that is, with much skepticism about the efficiency of government intervention. ...
pgl said...
"That mainstream macroeconomics had taken the financial system for granted. The typical macro treatment of finance was a set of arbitrage equations, under the assumption that we did not need to look at who was doing what on Wall Street. That turned out to be badly wrong."
Ah yes - the Efficient Markets Hypothesis (EMH). Nice academic theory but Wall Street exists because they are deviations from EMH. And the scale of operations there - even the slightest deviation can generate huge profits for them. And when the rest of us are not careful - huge costs to the rest of the world.
It is not that these deviations are not known and how to address the downsides of them are that complicated. What is complicated is making sure Congress and not and paid for by the Wall Street crowd. Dodd-Frank was a nice start. It is a same that our expert on everything - Rusty - has joined in the chorus to get rid of Dodd-Frank.
RC AKA Darryl, Ron said in reply to djb...
"now its getting spooky"[Welcome to my world. I have always been ahead of trend, but usually by several decades rather than just a few hours :<)
I would venture that you don't know the half of it yet. Let me elucidate.]
"...Olivier Blanchard will step down as Economic Counsellor and Director of the IMF's Research Department at the end of September.
He will join the Peterson Institute for International Economics in October as the first C. Fred Bergsten senior fellow, a post named for the founder of the influential 35-year-old, Washington-based think tank..."
[Now tell me how that you can imagine anyone to be more mainstream status quo establishment than that in the general spectrum of academic research and study economics? The plot thickens. Like I said earlier today, we have been solidly in a Second Best world practically since FDR died from the perspective of economics as a socio-political discipline exercised for the common good in any manner discernible by the wage class.
The social expression of our anxiety and grief post-2008 is being played out in compartmentalized parallel tracts organized by socio-economic class. We are experiencing denial, anger, bargaining, depression and acceptance all at once now. Since the crisis was caused by the conservative agenda of financial innovation and deregulation then they are expressing most of the denial. People that lost their jobs and homes are expressing much of the anger, but a threatened white male population deeply invested in the emotional capital of white supremacy and chauvinism is even louder in their anger (and they are having a Tea Party to get to know each other and celebrate being white men). Elites are doing the bargaining because they really don't want to lose establishment control to populists. Folk that still don't have a job or a home are expressing the depression. Finally most people that do have a home and a job that do not fall into any of the other groups are expressing the acceptance.
Me? I recently got laid off, but was lucky enough having just turned 66 that with six years service credit taken from my severance benefits added to my pension plus what little I had in 457 and 401 plans then I could retire and still pay my bills including four more years of mortgage and HELOC payments. So, I am a bit cash strapped presently but have time to work on some projects. I have been waiting to get the establishment on the ropes for nearly fifty years. So, I am not healing from grief. I have been released and am looking for an opportunity to get the establishment on its intellectual ropes.
I thought it was getting spooky when I first began to learn about mainstream economic thought regarding capital gains windfalls, corporate mergers, and financial "innovation" in the mid-sixties. For the first time in my life I am beginning to see a tiny glimmer of it starting to get real.]
JohnH said...
"Mainstream macroeconomics had taken the financial system for granted."
It's actually worse than that. Mainstream macroeconomics willfully ignores the impact of rising asset prices on inequality, democracy, and power dynamics between the 1% and the rest.
Cui bono from their willful negligence? The powerful and wealthy, of course!
Amateur said...
I'm a fan of Olivier.
The leaders of the IMF were in a unique position to see new insights into our macro problems because they are largely caused by the globalization of capital flows and labor.
I think he's getting there, but I suspect the old frameworks are still going to be an impediment to mainstream economic thinking.
I'm glad to hear there are more people that we might be aware of that are rethinking macro in this context.
Dan Kervick said...
"The plumbing matters."
Yes, that's it. I hope that is the main lesson the economics profession takes away from the current crisis. It would be nice if we get a new generation of practitioners who think a bit more like engineers and technicians, and less like mathematical physicists.
Paul Mathis
"Some propositions that would have been considered anathema in the past are being proposed by "serious" economists: For example, monetary financing of the fiscal deficit."
Wasn't Keynes a "serious" economist? Monetary financing of the fiscal deficit was his idea 80 years ago. Today's economists are just getting the message.
likbez said...
There is no and never has been "economics". Only political economy. That means that neoliberal "Flat Earth Theories" will be enforced, by force if necessary.
greg said...
Pathetic half measures. No need to question any of the fundamental assumptions underlying the whole sorry mess, eh? Like what is money, really? Or: How does the production of the various sectors actually combine to create value in the whole economy?
Matt Young said...
Macroeconomists are not up to speed? How long has this been going on? Ever since the Kanosian dandy from England. Sick, sick and fraudulent science.
RC AKA Darryl, Ron said in reply to djb...
That is a good start. You just need to get the context switch straight and then you may find yourself in an epiphany (metaphorically speaking). Likbez up thread touches another live wire, but lacks faith in democratic alternatives. Shocking!
Larry said...
No mention of the end of the ZLB? Of NGDP targeting? Of the missing trade-off between inflation and unemployment? Of the abject failures of governments/CBs to respond to the crisis and restore normal times? Of new levers such as reverse repos, QE and IoER? Maybe the excerpt was ill-chosen...
Davis X. Machina said in reply to Larry...
"Of the abject failures of governments/CBs to respond to the crisis and restore normal times?"
"Normal" for whom, and at whose expense?
Squint just right, and this *is* normal.
Paine said...
Blanchard is a pro system guy. A maintainer not a disrupter. When he lauds the thousand schools cacophony, it's simply to spread caution about government macro engineering
We've recently learned doing the right sorts of interventions but too cautiously.
Works more like " Let the markets correct themselves "We need to isolate those who try by various means to minimize state intervention
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Dani Rodrik:Trade within versus between nations: ...economics does not offer unconditional policy prescriptions. Every graduate student learns that depending on the background specifications, any policy x can be good or bad. A minimum wage can lower or raise employment (depending on whether employers have monopsony power); a natural resource discovery can raise or lower growth (depending on the likelihood of the Dutch disease); fiscal consolidation can expand or contract output (depending on the respective strengths of expectational versus Keynesian effects). And yes, the dictum that free trade benefits a nation depends on a long list of qualifying conditions.So the proper response to the question "is free trade good?" is, as always, "it depends." When an economist says "I support free trade" s/he must mean that s/he judges the circumstances under which free trade would not be desirable to be very rare or unlikely to obtain in the context at hand.Many of the conditions under which free trade between nations is guaranteed to be desirable are unlikely to hold in practice. Market imperfections, returns to scale, macro imbalances, absence of first-best policy instruments are ubiquitous in the real world, particularly in the developing world on which I spend most of my time. This does not guarantee that import restrictions will be necessarily desirable. There are many ways in which governments can screw up, even when they mean well. But it does mean that a knee-jerk free trader response is faith-based rather than science-based. ...[He goes on to answer a question about differential support for trade within nations versus trade between nations.]
Posted by Mark Thoma on Friday, September 18, 2015 at 10:50 AM in Economics, International Trade, Market Failure | Permalink Comments (16)
pgl"economics does not offer unconditional policy prescriptions. Every graduate student learns that depending on the background specifications, any policy x can be good or bad."
Thank you Dani! This statement holds in general but in particular on the issue of free trade. I've loved his old post where he admitted he had to endure a class taught by William Kristol and Kristol gave this brilliant man only a C.
DrDick
All conservative economics is faith based (along with everything else they believe). Delusional is another good descriptor.
DrDick -> Paine ...
Fair trade might actually be a good thing, but that is not what "Free trade" generally means. Mostly it means freedom for capital, chains for labor, and devastation for the environment.
Stubborn1:
About the fact that economists do not offer unconditional policy prescriptions, especially when it comes to free trade and "the dictum that free trade benefits a nation depends on a long list of qualifying conditions". One thing I have to strenuously say about that: BULLSHALONEY!
All I heard in my econ classes were the benefits of free trade. EVERYONE drank the kool aid! I even had a prof who had worked in the Council of Economic Advisors and his role was to review trade policies. He told us flat out he would ALWAYS ALWAYS ALWAYS support any and all free trade agreements that came up, without ANY regard to damage done to domestic firms and/or workers. Paul Krugman wrote one of our text books which, like many econ textbooks at the time, had WHOLE chapters dedicated to debunking free trade myths! Now you are going to tell me that economists never take a stand on a policy position as being good or bad?! ARE YOU KIDDING?
Pgl I have seen you post and have agreed with you many times, but not on this one, hell no!
MacAuley -> Stubborn1...You are so right, Stubborn1. I have taken at least six international econ courses, and in every case the prof was strongly in favor of "free trade", usually the more the merrier. Last year, as a refresher I took an internet Int'l Econ course at "Marginal Revolution University", which was surprisingly good except for the relentless free-trade propaganda.
Kenneth said...
Friday, May 15th, 2015, "Details of President Barack Obama's proposed trade deal, the Trans Pacific Partnership, have been kept secret, and the deal itself is kept in a locked room guarded by men with guns, with members of Congress having to schedule an appointment and jump through hoops just to actually read the massive proposed treaty.
Let me tell you what you have to do to read this agreement. Follow this: You can only take a few of your staffers who happen to have a security clearance, because - God knows why - this is secure. This is classified. It's nothing to do with defense," said Boxer.Boxer then described how she was forced to turn over her cell phone and was prevented from even taking notes while looking over the 800-plus page trade treaty.
"So I go down with my staff that I could get to go with me, and as soon as I get there, the guard says to me, 'Hand over your electronics. Okay. I give over my electronics. Then the guard says, 'You can't take notes.' I said, 'I cannot take notes?'" said Boxer.
Some have taken to calling the TPP treaty "Obamatrade," in reference to the secretive nature in which Obamacare was written and how then-House Majority Leader Nancy Pelosi infamously claimed, "We have to pass it to find out what's in it."
At the heart of the TPP is something referred to as a "living agreement provision," which means the treaty can be amended or changed at any time after it is ratified, without congressional approval, essentially handing over U.S. sovereignty and subjugating U.S. businesses and workers to international laws, according to CNS News.While this treaty is being promoted as being about FREE TRADE, it is really just a massive corporatist agreement that gives increased authority to major international corporations, which will hurt both American labor unions and small businesses.
Conservatives need to look past the pleasant sounding platitudes put forward by the Establishment Republicans who are supporting this massive secret deal that only benefits major international corporations, and (gulp) team up with socialists like Sen. Elizabeth Warren to kill this deal, which will only hurt America in the long run.
It's sole purpose is to "level the playing field" - which means taking America down to the same level as everyone else."
http://conservativetribune.com/senator-reveals-obama-deal/Second Best -> Kenneth...
'At the heart of the TPP is something referred to as a "living agreement provision," which means the treaty can be amended or changed at any time after it is ratified, without congressional approval, essentially handing over U.S. sovereignty and subjugating U.S. businesses and workers to international laws, according to CNS News.'
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what's new, this is SOP in the U.S., don't bother to read the fine print, it's out of date before the ink is dry, like hospitals that don't accept same day payment on site, then submit individual bills showing up months later from every damn person within 50 ft of the patient and refuse to confirm if there's more
and Scott Walker is busting up unions with right to work laws so labor can have the same power under a 'living agreement' as hospitals to charge for services provided.
MacAuley -> Kenneth...
Kenneth,
It's not accurate to call TPP "Obamatrade" since the concept was developed and fleshed out in 2007 and 2008 under the Bush Administration. Most of the work was managed at the SES level, since the Bush Administration was pretty lame-duck by then and most of the political appointees were looking for jobs. But the Bush Administration at the cabinet level gave approval for the exploratory discussions and conceptual analysis of a TPP.By the time Obama arrived in 2009 there was a coherent TPP initiative ready for the Obama Administration to consider. I doubt that Obama had heard of TPP before he came to Washington, but it wasn't long before the Obama Administration decided to go forward with it.
Paine said...
Dani is a source of wisdom and shrewdness
A combo rarely combined in one head... ... ...
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I would summarize the Keynesian view in terms of four points:1. Economies sometimes produce much less than they could, and employ many fewer workers than they should, because there just isn't enough spending. Such episodes can happen for a variety of reasons; the question is how to respond.2. There are normally forces that tend to push the economy back toward full employment. But they work slowly; a hands-off policy toward depressed economies means accepting a long, unnecessary period of pain.3. It is often possible to drastically shorten this period of pain and greatly reduce the human and financial losses by "printing money", using the central bank's power of currency creation to push interest rates down.4. Sometimes, however, monetary policy loses its effectiveness, especially when rates are close to zero. In that case temporary deficit spending can provide a useful boost. And conversely, fiscal austerity in a depressed economy imposes large economic losses.Is this a complicated, convoluted doctrine? ...But strange things happen in the minds of critics. Again and again we see the following bogus claims about what Keynesians believe:B1: Any economic recovery, no matter how slow and how delayed, proves Keynesian economics wrong. See [2] above for why that's illiterate.B2: Keynesians believe that printing money solves all problems. See [3]: printing money can solve one specific problem, an economy operating far below capacity. Nobody said that it can conjure up higher productivity, or cure the common cold.B3: Keynesians always favor deficit spending, under all conditions. See [4]: The case for fiscal stimulus is quite restrictive, requiring both a depressed economy and severe limits to monetary policy. That just happens to be the world we've been living in lately.I have no illusions that saying this obvious stuff will stop the usual suspects from engaging in the usual bogosity. But maybe this will help others respond when they do.I would add:
5. Keynesian are not opposed to supply-side, growth enhancing policy. They types of taxes that are imposed matters, entrepreneurial activity should be encouraged, and so on. But these arguments should not be used as cover for redistribution of income to the wealthy through tax cuts and other means, or as a means of arguing for cuts to important social service programs. Not should they be used only to support tax cuts. Infrastructure spending is important for growth, an educated, healthy workforce is more productive, etc., etc. Economic growth is about much more than tax cuts for wealthy political donors.On the other side, I would have added a point to B3:
B3a: Keynesians do not favor large government. They believe that deficits should be used to stimulate the economy in severe recessions (when monetary policy alone is not enough), but they also believe that the deficits should be paid for during good times (shave the peaks to fill the troughs and stabilize the path of GDP and employment). We haven't been very good at the pay for it during good times part, but Democrats can hardly be blamed for that (see tax cuts for the wealthy for openers).Anything else, e.g. perhaps something like "Keynesians do not believe that helping people in need undermines their desire to work"?
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LawsofPhysicsLOL! Almost. You really think that growth can continue forever and ever in a biosphere with finite resources?
Tell us another fairytale and good luck with that!
But yes, let the truly insolvent fucks and worthless fucks go to the guillotine already!
Bro of the Sorrowful
using metrics in economics and applying mathamatical formulas to quantify all aspects of the economy has been a major and far reaching disaster. none worse, perhaps with the exception of unemployment and inflation, than the totally fraudulent metric "GDP". youll notice in von mises' magnum opus human action that there is not a single formula.
were it not for the measurement of the ambiguous "GDP", we would not be so concerned with growth.
pods
We sure as hell would be concerned with growth.
Expansion is what is required by our monetary system.
That is why inflation of 2% is "stable prices" and everyone and their mother talks about growth.
Fraction reserve currency requires expansion (exponential) to function.
No growth=no currency system.
That is why sustainability is a no go right out of the gate.
pods
Bro of the Sorrowful Figure's picture
i was speaking more of an ideal world in which we would be operating under a sound monetary system. my problem with using economic metrics for everything is that it takes the focus off of real problems and gives huge power to the international banking cartel by allowing them to manipulate the numbers without end. we start from a false monetary system, then apply a metric system based on false logic to justify that monetary system, while also making those metrics esoteric enough that the average person simply stops paying attention or freezes up when such metrics are mentioned. that way the economy can be absolute shit, with obvious signs to anyone with eyes, and yet your average person will still say, well GDP is up and unemployment is down so things must be good.
Harry Balzak
Are you implying that reality exists without accounting?
Blasphemy! Burn him!
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EMichael said in reply to Ron Waller, September 07, 2015 at 09:52 AM
Ron Waller said in reply to EMichael, September 07, 2015 at 10:27 AMI see no purpose in comparing the present with a period of time so vastly different from the present.
EMichael said in reply to Ron Waller, September 07, 2015 at 10:35 AMYes the laws of physics change every 35 years too.
The reason the Friedmanian era turned out to be vastly different from the Keynesian era was because the neoclassical economic reforms were colossal failures.
Tax cuts did not pay for themselves or create prosperity, they created skyrocketing government debt. Deregulation didn't create prosperity, but produced numerous disasters including financial meltdowns. Free-trade exported wealth and jobs and killed real income growth. Modern Monetary Theology brought back pre-Keynesian boom-to-bust business cycles, drove down real incomes and the employment rate (now expect a decade before the economy can recover from a recession.)
Nothing in the history of the universe has failed more than neoclassical ideology. If one is to call that failure, one would have to redefined the word failure to include all other failures that pale by comparison.
But according to the Medieval Barbers, their policies were a resounding success. Anyone who questions them is a philistine. Thankfully, these modern high priests aren't able to burn dissenters at the stake like their forebears.
Bruce Webb said in reply to EMichael, September 07, 2015 at 11:02 AMNo, the Laws of Physics do not change.
Economic facts do. Are you trying to state there has not been a sea change in the world economy since the post WWII era?
Sorry, but Japan, China and Europe are an awful lot different than they were in 1950. And that is not saying that I disagree with everything you say. Actually, I agree with a lot of it.
But thinking solutions lie in the policies of the 50s and 60s ignore that the problems that exist did not exist in the 50s and the 60s.
EMichael said in reply to Bruce Webb, September 07, 2015 at 01:33 PM"But thinking solutions lie in the policies of the 50s and 60s ignore that the problems that exist did not exist in the 50s and the 60s."
EMichael there is a logical hole here. I am not sure I disagree with you on the substance but there is a coherent argument that the problems that exist NOW are precisely BECAUSE of changes away from the polices of the 50s and 60s. And that the reason we didn't have the same problems then is that the policies prevented them. And that a change back to those policies would serve to ameliorate them.
What you would need to do to rescue your argument is to prove that current problems could NOT have existed in the 50's and 60's, that there is something unique to today's problems that make them resistant to yesterday's solutions.
I am not saying you couldn't do that. Merely that you haven't attempted it. Instead you present a circular argument. What EXACTLY about today's problems make them incurable by yesterday's solutions?
cm said in reply to Bruce Webb, September 08, 2015 at 09:51 AMThe main thing that did not exist in the US was competition for labor. Free trade is a marvelous thing when you are the only one selling.
Take a look at trade balances from that period and the last couple of decades.
You can almost trace the trade balance changes to the changes(or lack of changes) to the income of the vast majority of Americans.
People in here(and myself) talk about the need for a tighter labor market. And we applaud the actions that create one. But I am almost totally committed to the idea that the only way to create a tight labor market is protectionism. We have to protect our workers.
Of course there is a price to be paid, but I think the increased costs of some goods will be overwhelmed by the benefits to be gained by a tight labor market.
Then again, we would be harming other countries trying to move into a industrialized state. But the last time I looked, none of them were helping me pay for SS; or Medicare; or education; or the keep the street lights working.
I know it is not politically correct, but charity begins at home. Especially in a home which has seen such decline in only three or four decades.
Ron Waller said in reply to EMichael, September 07, 2015 at 11:14 AMEconomic policy doesn't happen in a vacuum. Before the 90's there was no internet. There were its precursors of a sort, e.g. fax and data transmission over the phone, and computer networks/links based on that (90's comms technology existed but only in the lab or at the high end). In the post-WW2 decades, there weren't built out telephone networks at the national and international level, only few high end players could arrange to make instant international calls. Even electrification wasn't completed.
This meant obviously more bottlenecks and more intermediation and control, barriers to globally distributed operations, and in addition everything happened at a slower speed.
In addition most of the world, including large parts of Europe and the US, was agricultural or sparsely populated and un"developed".
In the decades after, the "second" and "third" world invested big time in education and technological development. It really took off when international business logistics and global IT/telecom became ubiquitous, and "first world" companies eagerly "helped" build the offshore know-how.
Peter K. said in reply to EMichael, September 07, 2015 at 01:27 PMGeneralizations don't identify any problems, provide any solutions, justify failed policies or rule out successful policies. Japan and Europe are in hot water because of bad economic policy. (Not demand-side Keynesian economic policy.)
China is in hot water because neoclassical reforms have killed demand in the Western economy. Its economy is founded on importing more and more Western jobs and manufacturing, not to mention GHG emissions.
It's only a matter of time before the entire house of cards collapses. Then people will be looking to the 1930s for policy solutions
EMichael said in reply to Peter KI agree with the others. To say that the economy was different back then is to minimize the manner in which policy has changed for the worse.
I don't think fundamentally the laws of economics have changed that much because of technology or globalization or vague "productivity changes."
This is like being like Martin Feldstein who says we should be happy with what we got. No policy has changed much to the worse since the 1950s and 1960s. For one thing unions have been politically destroyed.
likbez said in reply to Ron WallerNot the laws of economics, the facts. Y'know the old Keynes thing(supposedly):
"When the facts change, I change my mind. What do you do, sir?"
I'll give you one change.
In the 70's China had almost no foreign exchange reserves. Now they have around $4 Trillion.
That is a real fact. And the reasons behind it are obvious.
Reply September 07, 2015 at 01:40 PM"Krugan's free-trade ideology rhetoric shows he's more New Keynesian (neoclassical synthesis) than Keynesian. More neoliberal than liberal."
Very true. Thank you
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September 06, 2015 | Economist's ViewPart of an essay by David Warsh:
... For the old lions, Paul Samuelson and Milton Friedman, the '80s meant a bittersweet departure from the center stage of economics after forty years of dominating the scene. The two had entered their sixties; neither was out of steam. But the leaders of the next generation had become apparent: Lucas, in macroeconomics; Kenneth Arrow in nearly everything else.
The election of Ronald Reagan was a triumph for Friedman; they had known each other since Friedman spent a quarter at the University of California at Los Angeles, shortly after Reagan had been elected Governor of California.He was invited to lecture in China. And the international success of Free to Choose kept Friedman in the public eye.
But Paul Volcker took a different approach to monetary policy from the one Friedman advocated, and Friedman's forecasts became markedly worse. The editorial page of The Wall Street Journal adopted as its champion Friedman's long-time rival in currency matters, Robert Mundell, now teaching at Columbia University, and went all in for Mundell's young associate, consultant Arthur Laffer. A research appointment at the Federal Reserve Bank of San Francisco was not the same platform as the University of Chicago. Friedman still had his membership on the President's Economic Policy Board, but after he "savaged" Volcker to his face before the president in a meeting in 1983, both men lost influence. Pointing a finger at Volcker, Friedman said (according to Newsweek's account), "because of the policies of the Fed under that man we have had an inflationary surge in the money supply that is going to have to be corrected." Volcker was not reappointed. Edward Nelson, of the Federal Reserve Bank of St. Louis is writing a scientific biography of Friedman. It will make interesting reading when it is done.
In March 1981, Friedman wrote his Newsweek column in the form of a letter to Philip Handler, president of the National Academy of Sciences, advocating major cuts in the budget of the National Science Foundation, as a step towards the abolition of the NSF. The Reagan administration had proposed sharp cuts in the economics program. Friedman argued the government shouldn't pay for any scientific research. True, the NSF had funded much good science; but it had paid for much bad science, too, including, he wrote, overmuch mathematical economics. The great scientists of the past had done without NSF funding. Einstein did his work in a government patent office; general relativity might never have made it past a peer-review panel. "The innovative ideas that have stirred controversy in economics since NSF funding of economics began two decades ago owe little or nothing to NSF funding," he wrote.
Thus did Friedman dismiss the agency that Paul Samuelson had brought to life in 1945. Perhaps more important, by extension he dismissed the program of government fellowships, awarded by competitive exam, that had sent Samuelson to graduate school in 1935, all expenses paid – and countless others since, many of them as impecunious as Friedman had been in 1932. The NSF ran similar programs in mathematics and many ciences, and the principle had been extended, by Sen. Jacob Javits (R-NY) to humanities. NSF research grants funding had helped build the Massachusetts Institute of Technology into a powerhouse to rival Harvard, and played a similar role at many other public and private universities.
No Samuelson column followed Friedman's. Samuelson never wrote again for Newsweek . He resigned the column he written for fifteen years. When, many years later, I asked him about his timing, he firmly denied that it had anything to do with Friedman's column, and wrote me a letter for the file the next day repeating what he had said. I have always wondered if he sought to defuse the matter out of habit. That he and Friedman had remained on civil terms for seventy-five years was clearly a source of pride, though privately he grew less tolerant of his rival after 1980.
Samuelson, too, was in mild recession in the '80s. Keynesian economics hadn't yet rebounded from the biting criticism of the New Classicals in the '70s. Tensions were growing within the MIT department over appointments and the direction of future research. Samuelson formally retired in 1985, at 70, to make room for others. He had plenty to engage his professional attention. Commodities Corp., which had discovered such natural traders as Paul Tudor Jones and Bruce Kovner, was winding down, but Samuelson's interest in Warren Buffet's Berkshire Hathaway was gearing up. The Vanguard Group, whose godfather he had been ever since founder John Bogle introduced the first index fund, was thriving. Samuelson's friends and colleagues James Tobin, Franco Modigliani, and Robert Solow received Nobel Prizes.
Young Lions at Large
To the young lions of Keynesian economics in the '80s, rational- expectations macroeconomics and real business cycle theory posed a considerable bar. To work in the new traditions required a considerable investment in new tools and mathematical techniques, and, even fully teched-up, didn't seem to speak very directly to policy. A strong corps of economists went to work to fashion a "new Keynesian" version of the latest general equilibrium economics. But gradually one rising star of saltwater economics after another left academia for a policy job.
Martin Feldstein, of Harvard University, was the first. As something of an acolyte of Milton Friedman, Feldstein was never very high in salinity, but he demonstrated plenty of professional backbone as Chairman of the Council of Economic Advisers under Ronald Reagan for two years in the early days of the controversies over deficits before returning in 1984 to Harvard and his position as president of the National Bureau of Economic Research. Stanley Fischer, of MIT, was next, wrapping up a highly successful research career in order to serve as chief economist of the World Bank (a path that led to leadership positions in the International Monetary Fund, governor of the Bank of Israel and, currently, vice chairman of the Fed). Lawrence Summers, Feldstein's student, served as campaign economist to Democratic candidate Michael Dukakis in the 1988 presidential campaign and succeeded Fischer at the World Bank before joining the Clinton administration, where he advanced to Secretary of the Treasury.
Soon the flood was on: Jeffrey Sachs, Joseph Stiglitz, Olivier Blanchard, Kenneth Rogoff, Gregory Mankiw, Glen Hubbard, and Christina Romer were among those MIT- or Harvard-trained economists who served in government jobs or NGO positions. Paul Krugman retooled as a journalist. Lists of MIT and Harvard graduates in high positions in European, South American, and Asian governments were even longer. Did this differ in kind, and not degree, from the trajectory of academic economists dating back to to the New Frontier, if not the New Deal? I think so.
In 2006, Harvard's Mankiw, in an article for the Journal of Economic Perspectives argued, as I did in a book, that the differences in interests among economists were best understood as being similar to those between scientists and engineers. The early macroeconomists, led by Samuelson and Friedman, had resembled engineers seeking to solve practical problems, Mankiw wrote; macroeconomists of the past several decades, led by Tjalling Koopmans, Jacob Marschak, Kenneth Arrow, and others had been more interested in developing analytic tools and establishing theoretical principles. Their students the '80s had joined teams along similar lines. "Recently Paul Romer, of New York University, introduced a different distinction to elucidate some of the controversies in present-day macro – between bench science and clinical medicine. Both analogies will get plenty of elaboration in future years, for this is what changed in kind in the '80s: economics developed a clinical/engineering wing.
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likbez said...chris herbert said...Due to his role in neoliberal transformation of Chile after Pinochet coup of 1973, Friedman can be viewed as a one of the first economic hitman for multinationals, member of organized crime disguised as an economist. According to the 1975 report of a United States Senate Intelligence Committee investigation, the Chilean economic plan was prepared in collaboration with the CIA. In 1987 45% of Chile's population was below poverty line. From Wikipedia:
==Start of quote ===
Milton Friedman gave some lectures advocating free market economic policies in Universidad Católica de Chile. In 1975, two years after the coup, he met with Pinochet for 45 minutes, where the general "indicated very little indeed about his own or the government's feeling" and the president asked Friedman to write him a letter laying out what he thought Chile's economic policies should be, which he also did.[26] To stop inflation, Friedman proposed reduction of government deficits that had increased in the past years and a flat commitment by government that after six months it will no longer finance government spending by creating money. He proposed relief of cases of real hardship among poorest classes.[2] In October 1975 the New York Times columnist Anthony Lewis declared that "the Chilean junta's economic policy is based on the ideas of Milton Friedman…and his Chicago School".[26]
=== End of quote ===In her book The Shock Doctrine, Naomi Klein criticized Friedman's recipe for neoliberal scheme of the economic rape of the countries under disguise of transformation toward "free" market economics -- the neoliberal restructuring that followed the military coups in several countries using suspiciously similar schemes. She suggested that the primary role of neoliberalism was to be an ideological cover for capital accumulation by multinationals. Chilean economist Orlando Letelier considered that the main driving force behind Pinochet's dictatorship violence toward opponents was the level of opposition to Chicago School policies in Chile.
And Friedman himself was a coward who never personally acknowledged his role in the events. After a 1991 speech on drug legalization, Friedman answered a question on his involvement with the Pinochet regime, saying that he was never an advisor to Pinochet (also mentioned in his 1984 Iceland interview), but that only his students (Chicago boys) were involved.
He was followed by Harvard mafia with their economic rape of Russia in early 90th. Probably also prepared in collaboration with the CIA...
It is interesting that the paper does not mention Galbraith who was important opponent of Friedman (see "Friedman on Galbraith, and on curing the British disease", 1977) . In those two lectures Friedman disagrees with Galbraith's four most popular works: "Countervailing Power," "The Great Crash of 1929," "The Affluent Society," and "The New Industrial State". Friedman consistently repeats the neoliberal dogma that it is unfettered free market, with minimal rules and regulations, is the best economic system.
So it might be useful to distinguish between two instances of Friedman: the first is Friedman before "Capitalism and Freedom" and the second is after. Friedman after Capitalism and Freedom is a pitiful figure of a prostitute to power that be.
bakho said...The best observation was the one by Wojnilower that the animals in the zoo were let out of their cages.. They are still roaming around, not yet put back in their regulatory cages. The list of financial crises beginning in the 1980s looks as bad and as frequent as those of the 1800s. Technology gives a sheen to the past 35 years or so, but underneath there's been immense intellectual damage. A degradation of morals and honesty. Today, greed is good. I'll be gone, you'll be gone (IBGUBG), rules politics and finance today. The animals are still lose, more trouble will visit the Kingdom.
bakho said...Interesting history lesson.
Needs more links.
Friedman's spat with Volcker:In Friedman's view, Volcker was too vulnerable to political pressures from Congress and the White House, Condemned by liberals and conservatives for plunging the country into recession and worried that continued high interest rates would cause massive default by Third World debtors, Volcker in mid-1982 shifted his sights away from the monetarist approach, loosening the Fed's targets for money growth and restoring interest-rate manipulation as a policy tool. In the five months before the November 1984 elections, the Fed increased the money supply to bring down interest rates and thus fuel the recovery to better Reagan's chances at re-election. After Reagan's reelection victor in November, the Fed again tightened the money supply, "This is not monetarist policy," Friedman says, "The key element of monetarism is to define what you are going to do and then stick with it."
For any Fed chairman, Friedman thinks, the temptation to linker with money-supply targets is probably irresistible. According to the monetarist doctrine, the Fed chairman's job is purely technical, "a matter of every month looking at the money base and making sure it increases by about a quarter of one percent," Friedman explains, "If the Fed chairman were to do a good job, he would become an unknown, a faceless bureaucrat."
Cooper, M. H. (1987). Economics after Reaganomics. Editorial research reports 1987 (Vol. II). Washington, DC: CQ Press. Retrieved from http://library.cqpress.com/cqresearcher/cqresrre1987082100
I wonder if so many of the young economist went into policy because the people involved: Volcker, Friedman, Laffer etc were pretty clueless and made bad predictions.
Just how wrong was Friedman?
DARPA turned the internet over to NSF and NSF spun it off into a large commercial engine.NSF funds high risk investment, the kind that most corporations cannot. High risk research means many projects that don'r pan out, a small pool of winners and a handful that hit jackpot. It takes a large organization with very deep pockets to fund enough high risk research over long periods to have a good likelihood of getting a large hit. Industry cannot fund at that level, government can.
Another example: NSF funded obscure biochemistry into esoteric research on enzymes that could degrade DNA. That research became the foundation of genetic engineering. Who could have known?
pgl said in reply to Paine ...
Warsh did write an incredible amount of BS in this silly essay. I didn't think Mundell ever endorsed Laffer's stupid cocktail napkin.
Lafayette said...
REAGANOMICS
From WikiP: {According to Keynesian economists, a combination of deficit spending and the lowering of interest rates slowly led to economic recovery. However, conservatives insist that the significantly lower tax rates caused the recovery. From a high of 10.8% in December 1982, unemployment gradually improved until it fell to 7.2% on Election Day in 1984.}
Even Reagan, a good friend of Friedman, when push-came-to-shove, indulged is stimulus spending to get his presidency out of the deep-doodoo.
Which the Replicants stonewalled in 2010 when a Great Recession was in full sway, but the PotUS was a Democrat ...pgl said in reply to Lafayette...
Wikipedia gets another wrong. It was Reagan's 1981 tax cut (deficit spending) that led Volcker to do round 2 of his tight money. Volcker kept trying to make a deal withe White House - reverse the fiscal stimulus in exchange for lower interest rates. The White House did not even know what was going on. And Wikipedia does not either.
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My recent post on realism in the social realm generated quite a bit of commentary, which I'd like to address here.
Brad Delong offered an incredulous response -- he seems to think that any form of scientific realism is ridiculous (link). He refers to the predictive success of Ptolemy's epicycles, and then says, "But just because your theory is good does not mean that the entities in your theory are "really there", whatever that might mean...." I responded on Twitter: "Delong doesn't like scientific realism -- really? Electrons, photons, curvature of space - all convenient fictions?" The position of instrumentalism is intellectually untenable, in my opinion -- the idea that scientific theories are just convenient computational devices for summarizing a range of observations. It is hard to see why we would have confidence in any complex technology depending on electricity, light, gravity, the properties of metals and semiconductors, if we didn't think that our scientific theories of these things were approximately true of real things in the world. So general rejection of scientific realism seems irrational to me. But the whole point of the post was that this reasoning doesn't extend over to the social sciences very easily; if we are to be realists about social entities, it needs to be on a different basis than the overall success of theories like Keynsianism, Marxism, or Parsonian sociology. They just aren't that successful!
There were quite a few comments (71) when Mark Thoma reposted this piece on economistsview. A number of the commentators were particularly interested in the question of the realism of economic knowledge. Daniel Hausman addresses the question of realism in economics in his article on the philosophy of economics in the Stanford Encyclopedia of Philosophy (link):
Economic methodologists have paid little attention to debates within philosophy of science between realists and anti-realists (van Fraassen 1980, Boyd 1984), because economic theories rarely postulate the existence of unobservable entities or properties, apart from variants of "everyday unobservables," such as beliefs and desires. Methodologists have, on the other hand, vigorously debated the goals of economics, but those who argue that the ultimate goals are predictive (such as Milton Friedman) do so because of their interest in policy, not because they seek to avoid or resolve epistemological and semantic puzzles concerning references to unobservables.Examples of economic concepts that commentators seemed to think could be interpreted realistically include concepts such as "economic disparity". But this isn't a particularly arcane or unobservable theoretical concept. There is a lot of back-and-forth on the meaning of investment in Keynes's theory -- is it a well-defined concept? Is it a concept that can be understood realistically? The question of whether economics consists of a body of theory that might be interpreted realistically is a complicated one. Many technical economic concepts seem not to be referential; instead, they seem to be abstract concepts summarizing the results of large numbers of interactions by economic agents.
The most famous discussion of realism in economics is that offered by Milton Friedman in relation to the idea of economic rationality (Essays in Positive Economics); he doubts that economists need to assume that real economic actors do so on the basis of economic rationality. Rather, according to Friedman this is just a simplifying assumption to allow us to summarize a vast range of behavior. This is a hard position to accept, though; if agents are not making calculating choices about costs and benefits, then why should we expect a market to work in the ways our theories say it should? (Here is a good critique by Bruce Caldwell of Friedman's instrumentalism; link.)
And what about the concept of a market itself? Can we understand this concept realistically? Do markets really exist? Maybe the most we can say is something like this: there are many social settings where stuff is produced and exchanged. When exchange is solely or primarily governed by the individual self-interest of the buyers and sellers, we can say that a market exists. But we must also be careful to add that there are many different institutional and social settings where this condition is satisfied, so there is great variation across the particular "market settings" of different societies and communities. As a result, we need to be careful not to reify the concept of a market across all settings.
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Sep 04, 2015 | Stephen Williamson New Monetarist Economics
So, within economics, is macro unusual? Of course not. Indeed, the whole emphasis of post-1970 macroeconomics is to do it like everyone else. Before 1970, no one would have been discussing macro and Dixit-Stiglitz in the same sentence. Should economics work like physics? Of course not. We're studying very different problems requiring very different methods. Why would you expect economists to behave like physicists?
What's my bottom line? Romer is just leading us through an unproductive conversation - one that's not going to persuade anyone of anything.
Anonymous, September 4, 2015 at 4:42 PM
Anonymous September 4, 2015 at 5:38 PM"Romer is just leading us through an unproductive conversation - one that's not going to persuade anyone of anything."
It's almost as if Romer is wandering around testing the waters seeing how far he can push things before he actually says what he wants to say coherently.
Constantine Alexandrakis, September 4, 2015 at 6:16 PMPersonally, I think he senses that RE/New Classicalism is in decline, not comprehending why, struggling to understand, looking for scapegoats (Solow, tribal behaviour, mathiness) and is essentially mourning its demise.
Henry.
Steve, Solow agrees with you on Romer's contribution.https://www.minneapolisfed.org/publications/the-region/interview-with-robert-solow
Norman, September 5, 2015 at 4:45 AM
Actually, Romer doesn't argue that physicists are not tribalists – he just asserts it, on the basis of a thought experiment based on two particular statements. It may well be true that there is a lot of consensus on the particular physics statements in his post, but no doubt you could also find a couple of statements in economics that most economists agree about. For evidence of tribalism in physics, google "superstring controversy," or at a more personal level, Newton and Hooke, Einstein and Lenard.
Or read Kuhn famous book on The Structure of Scientific Revolutions, in which he argues persuasively (or shows definitively, for those who prefer), that "Competition between segments of the scientific community [tribes?] is the only historical process that ever actually results in the rejection of one previously accepted theory or in the adoption of another," though at the same time, most progress comes from working within an established paradigm. My own intuition is that economics if very much like physics in both those respects.
As to how tribalism has arisen in economics, the answer is easy: economists are people, and people are tribal. Search the psychology of "ingroup bias".
